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C. Employment-Related Regulations
Social responsibility principles such as those in the U.N. Universal Declaration of Human Rights set
aspirational goals for countries and business managers, but they are not enforceable laws. In the
absence of enforceable global labor standards, MNEs are left with the obligation to apply substantially
varying laws to their employees in different jurisdictions, as well as perhaps having to adhere to their
home country laws that have extraterritorial application, such as Title VII for U.S. companies.
Globalization has transformed workplace governance worldwide, both for good and for ill. A
government seeking to improve domestic labor conditions can look to policies and practices that have
been successful in other countries, but a government more focused on developing a competitive
advantage may specifically exploit its lower labor standards, such as low wages, to attract direct
investment by foreign businesses, as seems to be the case for Bangladeshi garment workers.
Even within countries with protective labor regimes, responsible MNEs may be challenged by legal
compliance requirements. For example, as a result of the recent global recession, an MNE might
reasonably determine that a reduction in force across its operations is prudent. Similar issues can face
MNEs involved in international mergers or acquisitions.
Compulsory Retirement
In late 2007, the European Court of Justice ruled that the European Framework Directive on Equal
Treatment, which prohibits unjustified age discrimination in the workplace, applied to national laws
requiring age-based compulsory retirement. The case challenged a Spanish law permitting
employers to impose a compulsory retirement age. Although the Court held the Directive applied to
the Spanish law, it nevertheless ruled that the Spanish legislation was a lawful, appropriate means
of achieving a legitimate government aim.
D. Intellectual Property Regulations
Intellectual property, most broadly, refers to creations of the mind. It refers more specifically to
creations of the mind for which legal protection is given, especially trade secrets, trademarks, patents,
and copyrights. It is a form of personal property or personalty, which is the legal term used to denote
all forms of property, both tangible and intangible, other than real property or realty. Realty is
comprised only of land or real estate and items permanently affixed to the land, such as buildings.
Theft of intellectual property has also grown tremendously; dollar losses amount to hundreds of billions
annually. Clearly then, understanding the legal protections available for intellectual property is of
significant importance to business managers. The greatest losses are suffered by U.S., European, and
Japanese business; the largest threats originate from China, India, and Russia.
Trademarks
A trademark distinguishes the source of a particular good or service, whether that is accomplished
by a trade name, packaging, logo, or other distinguishing mark. When the law protects a trademark,
it grants to the holder of the mark a limited monopoly: No one else may use that mark without the
holder’s permission. Under the Tariff Act of 1930, it is unlawful to import goods bearing a trademark
registered with the Patent and Trademark Office that is “owned by a citizen of, or by a corporation
or association... organized within the United States” without the permission of the mark holder. This
provision safeguards a U.S. trademark holder’s rights in the United States from infringement by
foreign actors. Each country has distinct trademark regulations and offers different levels of
protection to marks registered in other countries.
As of this writing, 174 countries including the United States are parties to a treaty that provides
protection for trademarks, known as the Paris Convention. It was originally signed by 11 countries
in 1883. According to the Paris Convention, subject to several exceptions, member countries
ensure trademark protection to marks registered in other member countries. The convention also
provides for national treatment, which requires that any individual claiming infringement must have
the same protection as would a national of that country.
Another treaty, the Madrid Agreement Concerning the International Registration of Marks, attempts
to create an international trademark system. If a holder registers a trademark with the World
Intellectual Property Organization (WIPO) in Switzerland, that mark is protected in all member
countries requested by the holder. The United States is a party to the Protocol but has not acceded
to the Agreement.
Patents
A patent is a monopoly on a product, process, or device where the item or process claimed is an
innovation, unique and inventive, and useful. The Paris Convention covers patents as well as
trademarks; however, it does not establish a network of protection, even among member countries.
The convention does establish a right of priority, which gives a patent applicant filing in one
member nation one year from the original filing to file in other member countries and have the
subsequent filings treated as if made on the date of the first filing.
Copyrights
A copyright is a government grant giving the copyright holder exclusive control over the
reproduction of a literary, musical, or artistic work. Most developed nations provide copyright
protection within their borders, but many also belong to international copyright protection pacts. The
Berne Convention of 1886 and the Universal Copyright Convention (UCC) of 1952 provides a
measure of international protection against the unauthorized reproduction of books, photos,
drawings, movies, and the like. Copyright protection extends for a period provided by national law.
For example, in the United States a copyright currently spans the author’s life plus 70 years. The
United States is a party to the UCC and the Berne Convention.
Legal Briefcase: Golan v. Holder 132 S.Ct. 873 (2012)
Agreement on Trade-Related Aspects of Intellectual Property
A solid international system for effective protection of intellectual property does not yet exist. That
said, the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) agreement
mentioned by the Court in Golan v. Holder is having a positive effect.
As one of the foundation agreements to which all WTO member countries must subscribe, the
provisions of TRIPS are enforceable through the WTO Dispute Settlement Body. TRIPS establishes
certain minimum levels of protection for copyrights, trademarks, and patents, and also requires
WTO members to adopt effective enforcement measures.
E. Regulation of Multinational Enterprises (MNEs)
Precisely because MNE operations span the globe, regulating their activities has become quite
difficult. In the absence of effective international regulatory regimes, which do not currently exist,
MNEs also face challenges in trying to comply with many different overlapping, often contradictory,
national regulatory schemes. One of the growing issues impacting the effective regulation of MNEs is
the growth of state-owned companies, both in number and size. Many are effectively monopolies at
home; many are very active abroad. How they will and can be effectively regulated outside of their
home countries is unknown.
There are five additional areas of governmental oversight: securities regulation, imposition of financial
accounting and auditing standards, anticompetitive restraints of trade, mergers, and import and export
restrictions.
Securities Regulation
In the United States, the Securities and Exchange Commission (SEC) has long played a major role
in uncovering and pursuing financial corporate wrongdoing. The SEC has a broad reach because
of its jurisdiction to regulate all companies that choose to list their equity or debt securities on any
U.S. securities market, such as the New York Stock Exchange. The SEC has a broad reach
because of its jurisdiction to regulate all companies that choose to list their equity or debt securities
on any U.S. securities market, such as the New York Stock Exchange. But its reach has long been
thought to stretch even further, through the extraterritorial application of the fraud provisions in U.S.
securities laws. In a 2010 case, the Supreme Court held the fraud provisions were only intended to
apply within the United States. Within a month, however, Congress passed the Dodd–Frank Act,
making clear the extraterritorial enforcement powers of the SEC and the U.S. Department of
Justice.
Accounting Standards
An important component of securities regulation is the establishment of the financial accounting
standards that underlie financial statements provided to the public. In the United States, accounting
standards are under the authority of the SEC. In 2001, one set of such standards, the
International Financial Reporting Stands (IFRS), was offered for adoption by the International
Accounting Standards Board (IASB) based in London. Over 100 countries, including the entire
European Union, have implemented these standards, although many have adopted local variations.
In 2006, the IASB and the SEC initiated a harmonization project between U.S. Generally Accepted
Accounting Principles (GAA) and the IFRS. The process was intended to eliminate major
differences so that investors could more readily make comparative evaluations among companies
regardless of their home country. However, the European Union permits U.S. companies to file
GAAP financial statements without requiring reconciliation to IFRS, and the SEC permits foreign
corporations to file IFRS financial statements (so long as there are no local variations), without
reconciliation to GAAP.
The establishment of accounting standards is only one aspect necessary for reliable disclosure to
make it into the hands of current and future investors. Independent audits of companies’ books also
need to be done and by auditors with appropriate credentials. This is not difficult for American
companies with audit firms that practice in the United States. However, when foreign companies
are listed on a U.S. stock exchange, U.S. investors need to know that the financial statements of
those companies are reliable.
Choice of Nationality?
In today’s world, a corporation is generally free to choose its “nationality”—that is, its home country,
the country in which it will establish its legal existence or, using U.S. terminology, the country in
which it will incorporate. That nation’s laws will govern the relationship between the entity and its
owners—that is, the corporate governance rules it must follow—as well as the accounting
standards with which it must comply. If incorporated outside of the United States, it will only
become subject to U.S. securities laws if it chooses to list its securities on a U.S. exchange. Unlike
other countries, the United States taxes U.S. corporations on their worldwide income, not just the
income earned in the United States. Thus, if a business incorporates outside the country, it may
avoid significant U.S. taxes, substantial U.S. regulation, and the extraterritorial application of U.S.
laws.
Consider too a company’s choice of place of incorporation for its subsidiaries. For some
businesses, a significant source of profits derives from royalty and licensing fees generated by its
intellectual property. Thus, a common tax strategy is to incorporate subsidiaries to hold valuable
intellectual properties, like patents, in low-tax jurisdictions. Thus, Apple has subsidiaries in Ireland,
the Netherlands, Luxembourg, and the British Virgin Islands.
Anticompetitive Restraints
Many countries regulate anticompetitive behaviors such as collusion among competitors and abuse
of monopoly power. Two prominent examples involve Microsoft and Google, both of which have
been challenged for anticompetitive behaviors in both the United States and Europe.
Microsoft has repeatedly been charged with abusing its monopoly market power in computer
operating systems (Windows) to provide an advantage for its browser (Internet Explorer), media
player, and servers. In the United States alone, Microsoft faced three successive bouts of litigation
brought by the U.S. Department of Justice, as well as numerous suits by private plaintiffs.
Microsoft’s actions have also been scrutinized by the European Commission for violations of the
EU’s Competition Law. In 2008, the Commission opened another investigation, which was settled
when Microsoft agreed to load a ballot box on all new Windows 7 computers sold in Europe that
would allow purchasers to select any one of twelve competing browsers. Four years later, the
Commission fined it $732 million for failure to live up to the agreement.
From the standpoint of fines, Google has fared much better than Microsoft, but it still had to
undergo two years of investigation by the Federal Trade Commission and a hearing before the
Senate antitrust panel over whether it had abused its dominant position in Internet search engines,
in part by giving more prominent placement to its own services over its competitors in returning
search results.
Mergers
It is not uncommon for merger regulators to require accommodations to address antitrust national
concerns before providing the required approval. Such national-level reviews and negotiations can
be a significant cost for mergers and acquisitions involving MNEs. The approximately 70 countries
with merger review systems as yet do not have an agreement coordinating their processes—not
even at the level of coordinating review thresholds, timetables, and required filings.
F. Regulation of Trade
Imports Tariffs
The General Agreement on Tariffs and Trade (GATT), now governed by the WTO, regulates import
duties among signatory countries to reduceeduce barriers to trade and to ensure fair treatment
among member countries. Without GATT, it is argued, countries with stronger markets would be
able to secure better deals on imports than would other countries. In addition, countries with strong
market economies could use the threat of higher import taxes as a bargaining chip in other
negotiations. To limit such discriminatory practices, the concepts of MFN status and national
treatment are integral to GATT, just as they are to GATS.
Thus, under GATT, a reduced tariff offered to one WTO member country must be offered to all
WTO members and, once a good has been imported, it must be treated just as domestic goods are
treated. That, at any rate, is the ideal. In practice GATT has not actually done away with
nonconforming tariffs. Rather, it prohibits countries from moving further away from the ideal, while
providing successive rounds of multilateral trade negotiations to encourage countries to collectively
move forward on achieving these goals.
A Closer Look at U.S. Tariffs
In addition to the fact that the imposition of any tariffs runs counter to the avowed goal of free trade,
little logic or defense seems to exist for the disparities across tariffs imposed by particular
countries. For example, in the United States, an 8.5 percent duty is imposed on imported women’s
wool suits, but no duties are imposed on men’s suits. Furthermore, when a broader view is taken
that incorporates whether U.S.-imposed tariffs hit imports from all countries fairly or evenly, it is
readily evident that they do not.
Export Restrictions
Whereas imports are regulated to protect American businesses, exports by these business may be
regulated for several purposes. The U.S. Export Administration Act of 1979 permits restrictions on
goods and technology where exportation would harm national security or where restriction would
significantly advance U.S. foreign policy, prevent an excessive drain of scarce materials, or reduce
serious inflationary impacts from foreign demand.
Rare Earth Elements
China controls 93 percent of the production of rare earth elements—metals less scarce than
precious metals but still relatively rare. Many of these metals have turned out to be important to a
wide range of green technologies, such as those used in wind turbines and in the electric motors
for the Toyota Prius and Chevrolet Volt. They are also used in the electric motors in some U.S.
missile guidance systems. China has been reducing production and exports of such metals to
ensure it has an adequate supply for its own needs and to reduce environmental damage from the
mines. In 2011, a WTO panel held China’s export control impermissible. It noted that the proffered
environmental concerns had not resulted in reduced mine production. The panel’s decision was
affirmed on appeal in 2012.
Fair Trade Regulations: Dumping and Subsidies
To promote fair trade the WTO the practice of dumping. Dumping occurs when a manufacturer sells
its goods in a foreign country for less than their normal value. A firm may want to dump its goods in
a foreign market for two reasons. First, its home market may be saturated and cannot support any
further supply. Second, a firm might sell its goods in a foreign market at a price below other
competitors and support that price with higher prices in its home country in an effort to establish
itself and perhaps drive other firms out of the foreign market. GATT permits retaliatory duties to be
imposed on countries that have dumped goods in other member countries.
The WTO also prohibits the payment of unfair subsidies by governments. This occurs when a
government, perhaps in an effort to encourage growth in a certain industry, offer subsidies to
producers in that industry. The producers are therefore able to sell their goods at a price lower than
the prices of their worldwide competitors. Subsidies are considered unfair when governments use
them to promote export trade that harms another country. When unfair subsidization is found, the
WTO permits the harmed country to impose countervailing duties on those products in an amount
sufficient to counteract the effect of the offending subsidy.
VIII. Trade Restrictions—A Tangled Web
International trade has never been free of national barriers in modern times. WTO negotiations start with
existing historical protections and member countries agree not to increase barriers and commit to
participating in multilateral trade negotiations with the goal of lessening restrictions over time. New
countries are admitted to the WTO only after sometimes prolonged negotiations with existing members
over modifications of their existing trade-related barriers deemed necessary before they can be admitted.
Every country has companies and industries that benefit directly from existing barriers, businesses whose
profits rely on, and sometimes depend on, protection. Each of these businesses in turn have employees,
suppliers, and communities that indirectly benefit from those protections. Thus, any change in a nation’s
trade policies will have a negative effect on some segment of its economy, even if it can be demonstrated
that a change would produce a positive effect on the total economy.
IX. International Dispute Resolution
International business relationships are highly complex. Disputes are inevitable.Three significant
international dispute resolution bodies presently in existence: the International Court of Justice, the
European Court of Justice, and the WTO Dispute Settlement Body.
International Court of Justice
The only court devoted entirely to hearing cases of international public law is the International Court
of Justice (ICJ) in the United Nations. The ICJ is made up of 15 judges from 15 different member
countries. It may issue two types of decisions. It has advisory jurisdiction where the United Nations
asks the court for an opinion on a matter of international law. These opinions do not bind any party.
It has contentious jurisdiction where two or more nations (not individual parties) have consented to
its jurisdiction and have requested a binding opinion. Such opinions are not, however, precedent for
the ICJ in later cases.
How Binding Are ICJ Decisions?
Just how binding an ICJ contentious case decision actually is on U.S. state and federal courts has
been called into question by the 2008 U.S. Supreme Court decision in Medellin v. Texas. The
Court, in a 6–3 decision, held that a Texas court did not have to give effect to an ICJ ruling in spite
of the fact that the case was submitted to the ICJ pursuant to a treaty obligation specifying that the
ICJ has “compulsory jurisdiction” for all “disputes arising out of the interpretation or application” of
the treaty. In the view of the majority, the “most natural reading” of the “compulsory jurisdiction”
language is “as a bare grant of jurisdiction.... The [treaty] says nothing about the effect of an ICJ
decision and does not itself commit signatories to comply with an ICJ judgment.”
European Court of Justice (ECJ)
The European Court of Justice (ECJ) hears cases involving European Community law. Although
not required, one judge from each member nation traditionally sits on the ECJ. At first glance, the
ECJ may not seem a particularly important court for American business. But in an age of MNEs, its
decisions can be very important.
WTO Dispute Settlement Body
Although the WTO Dispute Settlement Body (DSB) is not a true court, it is a significant forum for
the resolution of international trade disputes between WTO members. The DSB is made up of all
member governments, usually represented by ambassadors or the equivalent. The DSB
establishes a panel to hear a particular dispute brought by a member state. The panel then reports
back to the DSB, which can either accept or reject the panel’s findings. Either side can then appeal
to the WTO Appellate Body. Again, the DSB can either accept or reject the appeals report. If a WTO
member fails to comply with the final decision of the DSB, the opposing party may seek
compensation. If compensation is not agreed on between the parties within 20 days, the
complaining party can seek authorization for retaliation—that is, the suspension of favorable trade
concessions to the noncompliant party.
Other International Fora
In addition to the three institutions just discussed, particular treaties may implement specific dispute
resolution processes for disputes arising under that treaty between its signatories. For example,
NAFTA provides for special tribunals before which corporations can, and have, brought complaints
against governments for actions perceived to be unfair or inequitable to them as foreign investors.
Of concern to some commentators is that a tribunal under NAFTA can, as a practical matter,
operate as a further review of a decision of a domestic court.
National courts also rule on matters of international law and on matters involving business in
international settings. In fact, because of the absence of any international courts of general
jurisdiction, national courts are where most international business disputes are heard.
The Long Road through Court
In the summer of 2007, 12 banana plantation workers from Nicaragua got their day or, rather, their
four months in a California federal district court. The workers were employed by Dole Food Co. on
banana plantations in Nicaragua, where a pesticide known as DBCP, manufactured by Dow
Chemical Co., was used to increase the weight of the banana harvest and help with rodent and
pest control. In 1977 the U.S. government suspended the use of the chemical after complaints
arose of sterility in California workers. When Dow informed Dole that it would no longer be
producing the chemical, the two companies agreed that Dow would sell to Dole, for use in Central
America, the more than 500,000 gallons that had been returned to it by other purchasers. The
plaintiffs were some of the workers who were exposed to DBCP while working for Dole in
Nicaragua, workers who then became sterile.
After lengthy delays and, ultimately, a change in Nicaraguan law to facilitate the DBPC lawsuits, in
2002 a Nicaraguan court awarded nearly $490 million in damages and other judgments followed.
But so far Dole and Dow have successfully blocked all enforcement of the judgments in U.S.
courts. The new laws in Nicaragua have meant, however, that Dole and Dow have ceased invoking
the forum non conveniens argument against new suits in the United States.
A. Arbitration
In light of the difficulty of litigation between parties of diverse nationalities and the desire for more
certainty and expediency in business transactions, parties to an international contract may prefer to
insert a clause that calls for the international arbitration of any dispute. Arbitration is a nonjudicial
means to settle a conflict where the parties agree to a hearing in front of a neutral third party who will
issue a binding award decision.
X. Government Defenses
Even where government action is the source of the wrong, two additional doctrines, accepted as general
principles of international law, may pose barriers to the judicial enforcement of a party’s rights: the act of
state doctrine and the doctrine of sovereign immunity.
A. Act of State Doctrine
The act of state doctrine holds that a judge in one country does not have the authority to examine or
challenge the acts of another country within that country’s borders. One government action that has
caused a great deal of dispute in connection with the act of state doctrine is expropriation.
Expropriation is the taking by a national government, without adequate compensation, of property
and/or rights of a foreign person within that government’s borders. The United States contends that
international law requires compensation for the taking. Not all governments agree with the United
States’ position.
B. Doctrine of Sovereign Immunity
The doctrine has been codified in the United States by the Foreign Sovereign Immunities Act of 1976,
which provides that foreign countries may not be sued in American courts, subject to several
exceptions. Accordingly, U.S. citizens usually would not be allowed to sue Britain in the U.S. courts,
unless the claim falls into one of the following FSIA exceptions:
The foreign country has waived its immunity (that is, it has consented to be sued in another
country’s courts).
The legal action is based on commercial activity of the foreign country in the United States or
outside the United States but having a direct impact in the United States.
The legal action is based on personal injuries “caused by an act of torture, extrajudicial killing,
aircraft sabotage, hostage taking, or the provision of material support or resources” for such
acts.
Thus, a country that conducts a commercial activity in a foreign country may not hide behind sovereign
immunity if sued, while a country acting on its own behalf and not for a commercial purpose would be
able to avail itself of the protection. In 2010 the Supreme Court further clarified the FSIA, holding that it
provides immunity only to a foreign state and not to a foreign official, even if that official is acting on
behalf of the state. The “restrictive theory of immunity” recognized and applied by the United States is
to be contrasted with the policies of some countries that contend that immunity is absolute—no
exceptions exist.
Legal Briefcase: Butters v. Vance International, Inc. 225 F.3d 462 (4th Cir. 2000)
Subjecting MNEs to Compliance with the Law of Nations
The largest MNEs have economic strength equaling or exceeding that of some countries. In this
chapter, we have seen how challenging it can be to effectively regulate their activities. That makes it
worth asking whether MNEs should be held liable if, in furtherance of their economic objectives, they
either (1) take advantage of foreign government actors willing to subdue a local population or (2) are
complicit in a foreign government’s perpetuation of its own dominance where the action of the foreign
government violates the law of nations.
XI. Enforcement of Decisions
Even if a harmed party in an international dispute successfully initiates a judicial proceeding, many
procedural hurdles are likely to be encountered. Particularly in those cases where the losing defendant
has insufficient or no assets located in the same jurisdiction as the court awarding the plaintiff monetary
relief, the plaintiff may need to present the judgment to a court in a country where assets of the defendant
are located and seek local enforcement.
Enforcing Foreign Judgments
When a plaintiff is successful in a California court, but the defendant’s assets are in New York, the
plaintiff may have to seek enforcement from a New York court. In that situation, the U.S.
Constitution requires the New York court to give “full faith and credit” to the decision of the
California court. No such broad policy exists in U.S. law with respect to decisions of foreign courts;
nor does such a broad policy exist in international law. Instead, the court from which enforcement is
being requested is likely to consider whether the original foreign judgment violates local notions of
justice and morality, or is otherwise contrary to public policy, so as not to be entitled to enforcement.
Enforcing U.S. Judgments
Similar problems can arise when a U.S. citizen obtains a judgment from a U.S. court against a
foreign national, which judgment is then sent for enforcement to the home courts of the foreign
national.
