978-0077606121 Chapter 7 Lecturers

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CHAPTER 7

Intellectual Property and Other Legal Forces

Learning Objectives

LO 7-1 Discuss the complexity of the legal forces that confront international business

LO 7-2 Explain possibilities for international dispute settlement

LO 7-3 Recognize the need and methods to protect intellectual property

LO 7-4 Explain the risk of product liability legal actions

LO 7-5 Discuss some of the U.S. laws that affect international business operations

NOTE:

International business statistics, data, and facts about countries, regions, governments, and companies can

change rapidly and dramatically. We recommend that you update this information regularly.

As an adopter of this text, McGraw-Hill offers you a complementary online resource each month, the

International Business Newsletter. The IB Newsletter gives you an array of timely and relevant articles,

videos, country profiles, teaching suggestions, and data resources to add breadth, depth, and richness to

the ever-changing topic of international business.

iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free video

service for McGraw-Hill adopters that allows you to download breaking news videos onto your desktop

to show in class or online. Updated monthly, these streaming videos are complete with teaching notes and

discussion questions. Key concepts for each video are identified to save you time! Visit

www.mhhe.com/ball13e, or talk to your McGraw-Hill sales representative for more information about

iGlobe or the IB Newsletter.

Overview

The purpose of this chapter is to alert the students to the size and complexity of legal problems facing

international business. They should be aware that there are potential legal problems about which they

should consult experts. Stress to your students that the IB professional is ALWAYS working under at

least two sets of laws, one in the host country(s), and that of their home country. Plus, their home country

might apply laws extraterritorially, just to compound the legal challenge!.

Suggestion and Comments

1. Antitrust law applications may be illustrated by referring to reports of ongoing cases and

investigations in current publications such as Reuters, International Herald Tribune, The Wall

Street Journal, Financial Times, or the financial pages of a good newspaper.

2. Product liability cases are often in the current press.

3. Students will have studied contract enforcement within the United States in their business law

course. Push that understanding into an international context to identify what might change.

4. American patent and trademark protection, is it applied extraterritorially?

Student Involvement Exercises

1. To illustrate the use of taxes for purposes in addition to income, students can research the the

tax portion of the price of a bottle of whiskey, a package of cigarettes, and a gallon of gas.

2. Students can research businesses and labor union demands for tariff protection.

3. Stimulate discussion or debate about the pros and cons of U.S. EEOC law abroad. (For

example, and this often surprises students, the U.S. government holds foreign subsidiaries of

U.S. companies to U.S. employment law for U.S. nationals working in the foreign location.)

What are the advantages and disadvantages for the host country and for the U.S. company?

The U.S. government has also required foreign companies with which it has contracts or who

operate in the U.S. to follow specific U.S. laws, such as the sanctions on Cuba and Iran.

4. Some writers oppose and others defend U.S. policies in antitrust, taxation, foreign corrupt

practices and the Arab boycott of Israel. Discuss these issues.

5. A comparison of differences between the U.S. and UK legal systems may interest students.

England has a split legal profession with barristers and solicitors.

England has no jury for civil court actions.

England allows no contingent fee arrangements.

In England, there may be an award of costs to the winner in civil litigation.

Pre-trial discovery is more restricted in England

NOTE: Suggest students watch a segment of the TV show Law & Order: UK on BBC

America to get a sense of the British Legal System. Bobbies are not allowed to carry guns

and prosecutors wear wigs and robes in court. There is a glossary of British slang and police

terms on the show’s website: http://www.bbcamerica.com/content/411/index.jsp

Guest Lecturers

1. Accountants or lawyers specializing in intellectual property, accounting law, and tax matters

could add to or clarify tax discussion, and probably some of them are knowledgeable about

international tax matters. Though this chapter does not address fully international tax issues, a

mention of tax law will help your students understand the wide range of legal issues

international managers need to keep in mind.

2. Lawyers whose practices are international might be available to speak on antitrust and

restrictive trade practices as they differ in the U.S. and elsewhere.

3. Import-export executives or customs officers could discuss tariffs, quotas and other trade

barriers.

4. Lawyers could speak on contract enforcement and arbitration problems when two or more

countries are involved.

5. Patent agents or lawyers could speak about protection of properties such as patents and

trademarks.

6. If your school offers a course on the international legal aspects of business, you could ask its

professor to speak to your students about some of the salient issues facing international

businesses and international businesspeople.

Worldview

This Worldview is entitled, “Virtually Ripped Off? Intellectual Property Issues in Second Life’s

Virtual World,” and it examines intellectual property issues that have arisen in a virtual world

environment called “Second Life.” As this virtual world has grown, with more than 20 million

users worldwide, brand owners are finding their trademarked products appearing online

without authorization. Creaters of virtual goods for sale in the virtual world also are concerned

with violations of their intellectual property rights. The owner of Second Life has been sued by

entrepreneurs for allowing copyright infringement and counterfeiting. This is creating an

interesting challenge for the courses in the real world, and also for companies in the real world

who may see their intellectual property rights being diminished if they fail to police activity in

the many virtual worlds that are appearing across the globe. This Worldview provides an

unique and stimulating basis for class discussion about intellectual property rights, both in the

real world and in the increasing number of virtual realms. The discussion may be prompted

with questions such as: “What should be the relationship beween rights—and their enforcement

—associated with intellectual property in a virtual world game context and those in a

“real”world?” or “With the proliferation of virtual worlds in cyberspace, how can a company

effectively monitor the variety of different sites in order to effectively protect its intellectual

property rights?”

Global Debate

The focus of this Global Debate, entitled “A Threat to National Sovereignty? America’s Dolphin-Safe

Tuna Labeling versus the WTO,” is the 2011 WTOs decision declaring that the United States’ “dolphin

safe” labelling standards for tuna represented a violation of trade rules. These labeling standards are

voluntary, rather than mandatory, for packers of tuna and they were developed in an effort to counteract

the depletion of dolphin populations due to purse seine fishing method of tuna harvesting. The labeling

program contributed to a dramatic reduction in dolphin deaths and the cost of implementing the labeling

standard was very modest. However, three large tuna processors from Mexico, along with the Mexican

ministries of Agriculture and Economy, challenged the labeling standards beginning in 1980, arguing that

the “dolphin safe” standards imposed unreasonably greater challenges for selling Mexican tuna in the

U.S. and therefor violated trade rules. Although the Americans argued that the labelling for “dolphin safe”

tuna was a standard and was voluntary in nature (tuna harvested in non-“dolphin safe” methods could still

be legally sold in the U.S.), the WTO asserted that it was a technical regulation rather than a standard. The

WTO asserted that anything impeding non-labeled tuna’s “marketing opportunities in the United States”

represents a barrier to trade and that “dolphin safe” labeling violates Article 2.2 of the WTO agreement,

which prohibits technical regulations that are “more trade-restrictive than necessary to fulfill a legitimate

objective.” Therefore, the U.S. must discontinue the “dolphin safe” labeling program or face WTO

sanctions. By overruling U.S. laws and making the WTO agreement “the Supreme Law of the Land; and

the Judges in every State shall be bound thereby,” this ruling is viewed by some as evidence that the WTO

is a threat to national sovereignty, suggesting that this ruling sets a dangerous precedent that can erode a

range of national policies enacted on the basis of public interest and welfare, including environmental

protection or food chain safety. The issue of potential conflicts between public wellbeing and legal

responsibilities associated with international agreements such as the WTO can be explored in class

through such questions as: “Do you think that the WTO should be able to prohibit voluntary labeling

efforts that provide information of potential value to consumers in a particular nation? Why or why not?,”

“Should the WTO be able to overrule nations when national laws are based on sound science? How could

the WTO ensure that the science behind local laws and regulations is sound and not a cover for

protectionism?,” and “Some people have argued that member nations give up national sovereignty rights

by joining the WTO and allowing that organization to make decisions that are not in the best interest of a

particular nation, especially since many WTO meetings are not open to the public. Do you agree with this

interpretation and, if so, what could be done to address the situation?”

The Global Path Ahead

The focus of this The Global Path Ahead explores a student’s efforts to gain international experience,

traveling broadly for personal and professional reasons through a number of continents. He discusses

some of the challenges of receiving an interesting assignment from his employer to go to Brazil, having

only three weeks to prepare for the journey. He highlights both challenges and rewards of understanding

and appreciating a very different culture and bkusiness system during a total immersion experience, and

provides suggestions on how students can better prepare themselves for a successful transition and

learning experience if they have a similar opportunity presented to them. The Global Path Ahead also

includes a range of resources that discuss different aspects of international law and international

intellectual property, which contain useful information for students who are interested in careers related to

international aspects of law, or who may merely be required to understand and operate effectively within

different legal systems during their business and personal ventures.

Mini-Case 7.1, “

This mini-case provides an opportunity for students to consider some of the legal considerations that they

may encounter if they are working with a company that is beginning to venture into international markets

via exporting. The mini-case examines a simple scenario of a California-based company making an

export sale to a customer in Italy. Issues regarding the venue in which legal disputes will be adjudicated

raise some interesting complications for completing this international transaction. The vignette serves as a

starting point for a stimulating class discussion using such questions as, “You are the CEO of the

California company, and you very much want this large export order. You are pleased with the service

your law firm has given, but you know it has no international experience. What are the various forms of

dispute resolution available to your California company? What are the advantages and disadvantages of

each for your company?” and “In deciding whether to only use California law for settling litigation or to

allow the foreign customer’s home nation of Italy as the venue for litigation, would your analysis be any

different if the customer was from China? From Russia? From the United Kingdom? Why or why not?”

Potential answers to these questions would be:

1. You are the CEO of the California company, and you very much want this large export order.

You are pleased with the service your law firm has given, but you know it has no international

experience. What are the various forms of dispute resolution available to your California company?

What are the advantages and disadvantages of each for your company?

Legal impasse is quite common in international contracting, but it can appear daunting if your

business does not work with an attorney with international experience. It is critical to find and consult

international lawyers or have your law firm bring in at least one lawyer of counsel for advice in drafting

this contract and future international contracts.

One solution an attorney might suggest is arbitration of any disagreements. Another option could be

arbitration by a tribunal of one arbitrator chosen by your company, one chosen by the Italian customer and

the third chosen by an independent third party judge. In either event, the decision is nationality-neutral

with the decision being made by a third party who is neither American nor Italian.

2. In deciding whether to only use California law for settling litigation or to allow the foreign

customer’s home nation of Italy as the venue for litigation, would your analysis be any different if

the customer was from China? From Russia? From the United Kingdom? Why or why not?

This question can stimulate discussion from several dimensions. Of course, it is possible that nationalistic

biases may color some students’ responses, causing them to be more reticent about certain nations due to an array of

possible prejudices. However, beyond this possibility, students may raise issues regarding the extent to which

various countries have legal systems based on the rule of law, the nature of the court systems in different

jurisdictions, differences in the laws that may be applied in resolving disputes (e.g., contract law, intellectual

property law, competition laws, torts, bribery and corrupt practices), or even the likelihood that a nation may choose

to apply its laws in an extraterritorial manner. Other students may raise concerns about the ability to enforce legal

decisions, in case one of the parties chooses not to voluntarily comply with legal decisions that it finds onerous. An

important point to emphasize in such a discussion is that legal systems can vary quite a bit from country to country,

so it is important for people to understant the nature and extent of differences between countries – and the potential

implications of these differences. Merely assuming that an approach used in the U.S. legal system will apply in other

nations may be a prescription for a painful and costly learning experience!

Lecture Outline

I. Introductory Vignette: Counterfeit Pharmaceuticals

A. This opening example looks at some of the intellectual property challenges that

pharmaceutical companies face, including counterfeiting by making (1) products that contain

the correct active ingredients but in the wrong proportions, (2) products that do not contain

any active ingredients, and (3) products that contain toxic ingredients or other impurities.

B. Sales of counterfeit drugs were estimated to be $75 billion in 2010, 90% higher than 5 years

before and increasing at twice the rate of legitimate pharmaceutical sales. Globalization of

supply chains has compounded the problem.

C. Counterfeit drugs can be dangerous to users

D. A number of public and private sector organizations are fighting the spread of counterfeit

drugs. Some progress is being made in raising awareness of the problem, developing

appropriate legislative and enforcement efforts, and developing ways to ensure the safety of

pharmaceutical supply chains

II. International Legal Forces

A. Rule of Law: Each sovereign nation is responsible for creating and enforcing laws within its

jurisdiction. Once laws cross international borders, the matter of enforcement is complicated

by the necessity of agreement between nations. The same concepts that apply to domestic

laws do not always apply to international law.

B. What is International Law?

i. Public international law includes legal relations between governments, including laws

concerning diplomatic relations between nations and all matters involving rights and

obligations of sovereign nations.

ii. Private international law includes laws governing transactions of individuals and

companies crossing international borders. For example, private international law would

cover matters involved in a contract between businesses in two different countries.

C. Sources of International Law:

i. International law comes from several sources.

ii. The most important source of international law is found in the bilateral and multilateral

treaties between nations. Treaties are agreements between countries and may also be

called conventions, covenants, compacts, and protocols.

iii. Another source of international law is customary international law. International rules

derived from customs and usage over the centuries form what is called customary

international law.

iv. Extraterritoriality: enforcement of national laws outside of national borders

III. International Dispute Settlement

A. Litigation: The United States has a long tradition of using lawsuits to solve dispute between

parties. Businesses in the U.S. have grown accustom to resolving disputes though litigation.

The United States has well developed court systems that facilitate litigation.

i. Litigation can be extremely complicated and expensive.

ii. In addition to the trial itself, most lawsuits also have lengthy pre-trial activities including

a process called discovery. Discovery is the means of finding facts relevant to the

litigation known to the other side including obtaining documents in possession of the

other side. Some discovery methods can seem quite intrusive since courts grant parties

great latitude in obtaining information in the possession of the opposing side. Indeed,

one reason many people from outside the U.S. dislike litigation in the U.S. is the process

of discovery.

iii. IB contracts should include:

a. Choice-of-law clause – which country’s law governs

b. Choice-of-form clause – where dispute will be settled

B. Performance of Contracts

1. Contract disputes a may go to trial, but no worldwide court has the power to enforce

its decrees. Worldwide courts rely on voluntary compliance for dispute resolution,

but this does not always happen. Enforcing contracts across international lines is

complicated and difficult.

2. United Nations Solutions: UN Convention on International Sale of Goods (CSIG) set

uniform legal rules governing international sales contracts and rights and obligations

of buyer and seller.

3. Private Solutions – Arbitration: Many people outside of the United States dislike the

U.S. system of discovery. For this reason, it is common for U.S. business people

entering into contracts with business people abroad to agree that any disputes will be

resolved by arbitration and not by litigation. Arbitration is a dispute resolution

mechanism that is an alternative to litigation. Arbitration is usually quicker, less

expensive, and more private than litigation. Arbitration is also usually binding on all

parties.

4. International Chamber of Commerce Incoterms (Table 7.1) are universal trade

terminology to aid in avoiding disputes from misunderstandings of trade terms.

C. Despite Legal Uncertainties, International Business Grows.

1. IB professionals are more aware of international laws because of IB growth.

IV. Intellectual Property – patents, trademarks, trade names, copyrights trade secrets, and

intellectual property

A. Patents

1. Patent protection is standardized to some degree under the International Convention for

the Protection of Industrial Property (the Paris Union and the Inter-American

convention.) (Table 7.2)

2. Patent application and protection harmonization has been achieved in Europe by the

European Patent Organization (EPO). A patent filed and granted in any member country

in that country’s language is effective in all member countries.

3. World Intellectual Property Organization (WIPO) is a UN agency administering 24

international intellectual property treaties

4. TRIPS (Trade-Related aspects of Intellectual Property) operates under the World Trade

Organization

5. Smaller nations in the UN have been attacking the exclusivity and length of patent

protection, wanting to shorten protection periods from 15-20 years down to 5 years or

even 30 months

6. “Patent trolls” cash in on loopholes in intellectual property protection by purchasing

patents that were mistakenly granted and then threatening to sue companies using the

patented ideas

B. Trademarks

1. Trademarks are the subject of the Madrid Agreement of 1891 for most of the world, the

General American Convention for Trademark and Commercial Protection for the Western

Hemisphere, and of several bilateral friendship, commerce and navigation treaties. In

1988, the EU instituted a community-wide trademark system.

2. A single European Trade Mark Office known as the Office of Harmonization in the

Internal Market (OHIM) is responsible for recognition and protection of proprietary

marks in all EU countries.

C. Trade Names

1. Trade Names are covered by the International Convention for the Protection of Industrial

Property. Goods bearing illegal trademarks or trade names are subject to seizure at

importation.

D. Copyrights

1. Are protected under the Berne Convention of 1886 (164 countries), the WIPO Copyright

Treaty, and the TRIPS Agreement (all WTO members agree to abide).

V. Standardizing Laws around the World – Global harmonization is progressing slowly

A. Tax conventions are being established between countries.

B. Articles 81 and 82 of the Treaty of Rome are standardizing restrictive trade practices laws

in the EU. There have been proposals to create worldwide agreements on antitrust law.

C. Some agreement exists in international commercial arbitration, including arbitration by

the International Center for Settlement of Investment Disputes at the World Bank.

D. UN Convention on the International Sale of Goods (CSIG) offers uniformity in

international sales agreements among 74 signatory nations.

E. International institutions (UN, OECD, WTO) have harmonizing or standardizing effects

in their areas of operations.

F. Standardizing initiatives include:

UNCITRAL

International Organization for Standardization (ISO)

International Electrotechnical Commission (IEC)

oGovernment and company buyers worldwide are demanding products

which meet the specifications set by these two organizations.

VI. Some Specific National Legal Forces

A. Competition Laws – work against antitrust and monopolies

1. U.S. Laws and Attitudes Are Different – But the Differences Are Narrowing

The antitrust laws of the U.S. are strict and vigorously enforced. The similar type

laws in the Europe Union are called competition policy.

a. Aside from terminology there are differences between U.S. and European

approaches.

b. The United States has been more vigorous in enforcement.

c. The United States has tried to enforce its laws extraterritorially (outside the

United States) against nonresident foreigners. The EU has started

extraterritorial application also.

d. Certain conduct such as price fixing or cartels is illegal per se in the United

States. That is, price fixing or cartels are illegal even though no damage can

be shown. No such concept applies in Europe. If a cartel allows its customers

a fair share of the benefits, it can be legal in Europe.

e. Among industrial countries, the antitrust laws of Japan are the least effective

2. Japan’s “Toothless Tiger”

a. Japan’s Fair Trade Commission (FTC), which is responsible for enforcing

antitrust laws, is viewed as one of the weakest bodies in Japanese

government

b. Most targets are small, foreign or weak; punishment in powerful industries

has been limited

3. Worldwide Application of U.S. Antitrust Laws

a. U.S. government tries to enforce antitrust laws extraterritorially.

4. EU Extraterritorial Application of Its Competition Policy

a. Enforcement is similar to U.S. Department of Justice

5. Criminal Cases

a. U.S. antitrust laws have both civil and criminal penalties.

6. Proposal for Global Antitrust Approval

a. IBs have difficulty complying with the variety of global antitrust laws. WTO

may be the source for worldwide cooperation. U.S. government proposed a

world organization for clearance of antitrust issues.

B. Tariffs, Quotas and Other Trade Obstacles

1. Legal as well as political and financial forces.

2. Discuss examples in Table 7.3

C. Torts – intentional or negligently inflicted injuries on other people

1. Product Liability

a. Manufacturer’s legal liability for faulty or dangerous products and held to strict

liability

b. Liability can be civil and the company must pay money damages

c. Liability can be criminal and fines or imprisonment may be imposed.

d. Both types of liability have been imposed in the U.S., France, and Britain.

e. The EU is moving to standardize and toughen manufacturers’ liability laws.

f. There are features unique to U.S. product liability law that makes it much more

potentially costly to defendants than in other countries: contingency lawyers’

fees, extensive discovery procedures, punitive damages, jury trials

2. Punitive Damages

a. Effects on Medicine – aspect of U.S. product liability laws have caused foreign

firms to keep their medications and health products out of the U.S.

b. Within the country, research of all sorts has declined because drug companies

know a jury may blame the company for alleged damages caused by a new

drug and award huge punitive damages to the plaintiffs.

3. Buyer Beware in Japan

a. Japenese law on product liability requires plaintiffs to prove design or

manufacturing negligence

b. Japanese legal procedures to provide discovery are limited

D. Miscellaneous Laws

When doing business and/or traveling internationally it is necessary to be conscious of and

sensitive to laws of the host country that frequently are very different from those of the home

country.

1. The severity of the punishment may be the main difference. All countries have laws

against production, sale, possession or use of narcotics. Western countries enforce

their laws as best they can, and when a person is convicted the sentence is a fine and

maybe a prison term. Two Australians were executed by Malaysia for possession, and

an Englishman was hanged for trying to smuggle narcotics out of Malaysia, writer

put in jail for 3 years for writing a novel insulting the crown prince, since 2004

Brunei caned 500 foreigners for settling illegally in the sultanate.

2. The laws may be unique to the host country. Some examples are given in the text,

and the students may be encouraged to research for others.

3. Law firms are starting specialty practices in International Legal Defense.

VII. U.S. Laws That Affect The International Business of U.S. Firms

A. Foreign Corrupt Practices Act (FCPA). Revelations during the 1970s of questionable or

“dubious payments by U.S. companies to foreign officials caused Congress to pass the FCPA

effective in 1978.

1. Uncertainties – grease is not outlawed by FCPA

2. Uncertainties regarding accounting standards required for compliance

3. Unlawful to bribe foreign government officials to obtain or retain business

4. The OECD adopted an anti-bribery convention in 1997.

B. Other Anti-bribery or Anti-Corruption Statutes

1. UN Convention against Corruption (UNCAC): 151 countries and EU signed by 2011

2. United Kingdom Bribery Act came into force in 2011.

C. Measuring Likelihood of Bribery Abroad: The Bribe Payers Index

1. Other organizations are beginning to join the U.S. in combating corruption.

Transparency International was founded in 1993. It publishes the Bribe Payers Index

(Table 7.4).

D. Accounting Law

1. Investor confidence in financial institutions, their governance and resorting has been

shattered by financial scandals worldwide.

2. U.S. accounting practices are guided by the SEC and FASB and follow standards

known as GAAP.

3. Foreign countries, including the EU, follow the International Accounting Standards

Board (IASB) known as the International Financial Reporting Standards (IFRS).

4. Standards differ but may lead to some level of convergence in 2015.