Chapter 46
INTERNATIONAL BUSINESS LAW
A. The International Environment
1. International Court of Justice
2. Regional Trade Communities
a. European Union
b. NAFTA
3. International Treaties
B. Jurisdiction Over Actions of Foreign
Governments
1. Sovereign Immunity
2. Act of State Doctrine
3. Taking of Foreign Investment Property
C. Transacting Business Abroad
1. Flow of Trade
2. Flow of Labor
3. Flow of Capital
4. International Contracts
a. CISG
b. Letters of Credit
5. Antitrust Laws
6. Securities Regulation
7. Protection of Intellectual
Property
8. Foreign Corrupt Practices Act
9. Employment Discrimination
D. Forms of Multinational Enterprise
1. Direct Export Sales
2. Foreign Agents
3. Distributorships
4. Licensing
5. Joint Ventures
6. Wholly Owned Subsidiaries
Cases in This Chapter
Saudi Arabia v. Nelson Morrison v. National Australia Bank, Ltd.
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Describe the purposes and major features of regional trade communities
(especially the European Union and North American Free Trade Agreement
[NAFTA]) and the World Trade Organization (General Agreement on Tari%s and
Trade [GATT]).
Explain sovereign immunity, the act of state doctrine, expropriation, and
con*scation.
Explain the legal controls imposed on the +ow of trade, labor, and capital
across national borders.
Explain the international dimensions of antitrust law, securities regulation,
and the protection of intellectual property.
List and describe the forms in which a multinational enterprise may conduct
its business in a foreign country.
TEACHING NOTES
Today’s economy is a global one and failure to compete —at home or abroad — may
mean failure in the world of business. Conducting international business, however,
brings a complicated set of rules since business laws vary from nation to nation. A
basic understanding of international business law is essential.
A. THE INTERNATIONAL ENVIRONMENT
International law deals with the conduct and relations between nation-states and
between international organizations, as well as some of their relations with
individuals; it generally cannot be enforced because international courts do not have
compulsory jurisdiction.
International Court of Justice
The United Nations has a judiciary branch called the International Court of Justice
(ICJ), consisting of *fteen judges, no two of whom may be from the same nation or
other sovereign state. The ICJ can hear only those cases brought by nations (not
individuals or corporations), and has jurisdiction only over parties who agree to be
bound by its decision. Countries displeased with an ICJ decision may simply ignore
it.
*** Chapter Outcome***
Describe the purposes and major features of regional trade communities;
especially the European Union and NAFTA and the World Trade Organization (GATT).
Regional Trade Communities
European Union — In 1993, the Treaty on European Unity changed the name of the
European Community to the European Union (EU) and established its objectives,
which include economic and monetary unity, a common foreign and security policy,
stronger protection of citizens’ rights, and cooperation among members on issues of
justice and home a%airs.
Until May 2004, the EU had *fteen members: Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
Spain, Sweden, and the United Kingdom. In May 2004 ten eastern and southern
European countries joined the European Union. The new members are Cyprus, the
Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak
International Treaties
A treaty is an agreement between or among independent nations having the force of
law. Nations use treaties to facilitate and regulate trade, protect national interests,
serve as constitutions of international organizations, establish general international
law, transfer territory, settle disputes, secure human rights, and protect
investments.
Probably the most important multilateral trade treaty is the General Agreement on
Tari%s and Trade (GATT), which the World Trade Organization (WTO) replaced as an
international organization. The WTO oGcially commenced on January 1, 1995 and
has at least 159 members accounting for over 97% of world trade. (Approximately
twenty-*ve other countries are observers and are seeking membership.) Its basic
B. JURISDICTION OVER ACTIONS OF FOREIGN GOVERNMENTS
In this section, we will focus on a sovereign nation’s power — and limitations on that
power — to exercise jurisdiction over a foreign nation or to take over property owned
by foreign citizens. More specifically, we will examine state immunities (the
principle of sovereign immunity and the act of state doctrine) and the power of a
state to take foreign investment property.
*** Chapter Outcome***
Explain sovereign immunity, the act of state doctrine, expropriation and con*scation.
Sovereign Immunity
Every nation has absolute and total authority over what goes on within its own
territory. In order to maintain international relations and trade, however, a host
country must refrain from imposing its laws on a foreign sovereign nation present
within its borders. This immunity from the courts of a host country is known as
sovereign immunity; it applies only to public acts, such as those concerning
diplomatic activity, internal administration, or armed forces. When a foreign nation
engages in trade or other commercial acts, it is under the jurisdiction of the host
country’s courts. Congress enacted the Foreign Sovereign Immunities Act in order to
establish when immunity would be extended to foreign nations in the United States.
CASE 46-1
SAUDI ARABIA v. NELSON
Supreme Court of the United States, 1993
507 U.S. 349,113 S.Ct. 1471,123 L.Ed.2d 47
http://scholar.google.com/scholar_case?q=507+U.S.
+349&hl=en&as_sdt=2,34&case=15997705832480823650&scilh=0
Souter, J.
[The Kingdom of Saudi Arabia owns and operates King Faisal Specialist Hospital in Riyadh (Hospital). The
Hospital Corporation of America, Ltd. (HCA), an independent corporation existing under the laws of the
Cayman Islands, recruits Americans for employment at the Hospital under an agreement signed with Saudi
Arabia in 1973. HCA placed an advertisement in a periodical seeking applicants for a monitoring systems
engineer position at the Hospital. Scott Nelson saw the ad in September 1983 while he was in the United
States. After interviewing for the position in Saudi Arabia, Nelson returned to the United States, where he
signed an employment contract with the Hospital, satisfied personnel processing requirements, and attended an
orientation session that HCA conducted for Hospital employees. In December 1983, Nelson went to Saudi
Arabia and began work at the Hospital. In March 1984, he discovered safety defects in the Hospital’s oxygen
and nitrous oxide lines that posed fire hazards. Nelson repeatedly advised Hospital officials of the safety
defects and reported the defects to a Saudi government commission. On September 27, 1984, the Saudi
government arrested him. Agents transported Nelson to a jail cell, where they shackled, tortured, and beat him
and kept him for four days without food. Government agents forced him to sign a statement written in Arabic,
which language Nelson did not know. Two days later, government agents transferred Nelson to the Al Sijan
Prison to await trial. Nelson was confined in an overcrowded cell infested with rats, where he had to fight other
prisoners for food and from which he was taken only once a week for fresh air and exercise. Only after the
personal request of a U.S. senator did the Saudi government release Nelson, thirty-nine days after his arrest.
* * *
We * * * observed that the statute “largely codifies the so-called ‘restrictive’ theory of foreign sovereign
immunity first endorsed by the State Department in 1952.” [Citation.] We accordingly held that the meaning of
“commercial” for purposes of the Act must be the meaning Congress understood the restrictive theory to
require at the time it passed the statute. [Citation.]
Under the restrictive, as opposed to the “absolute,” theory of foreign sovereign immunity, a state is
immune from the jurisdiction of foreign courts as to its sovereign or public acts (jure imperii), but not as to
those that are private or commercial in character (jure gestionis). [Citations.] We explained in Weltover,
[citation], that a state engages in commercial activity under the restrictive theory where it exercises “only those
powers that can also be exercised by private citizens,” as distinct from those “powers peculiar to sovereigns.”
Put differently, a foreign state engages in commercial activity for purposes of the restrictive theory only where
it acts “in the manner of a private player within” the market. [Citation.]
Act of State Doctrine
The Act of State Doctrine provides that courts should not question the validity of
actions taken by a foreign government in its own country. In the United States, there
are several possible exceptions to the act of state doctrine. Some courts hold (1)
that a sovereign may waive its right to raise the act of state defense and (2) that the
doctrine may be inapplicable to commercial activities of a foreign sovereign. In
addition, by Federal statute, the courts will not apply the act of state doctrine to
claims to property based on the assertion that a foreign state con*scated the
property in violation of the principles of international law, unless the President of the
United States determines that the doctrine should be applied in a particular case.
Taking of Foreign Investment Property
An expropriation or nationalization occurs when a government seizes foreign owned
property or assets for a public purpose and pays the owner just compensation for
what is taken. Con*scation is the term used when no payment (or inadequate
payment) is given in exchange for the seized property, or when the property is
countries and countries in transition from nonmarket to market economies. OPIC,
which charges market-based fees for its products, accomplishes this by helping U.S.
businesses to invest overseas by complementing the private sector in managing
risks associated with foreign direct investment. Currently, OPIC services are
available for new and expanding business enterprises in more than 150 countries
worldwide. To date, OPIC has supported more than $200 billion of investment in over
4,000 projects, generated an estimated $75 billion in U.S. exports, and supported
*** Chapter Outcome***
Explain the legal controls imposed on the +ow of trade, labor, and capital across
national borders.
C. TRANSACTING BUSINESS ABROAD
Business abroad may involve selling goods, information or services, or investing
capital or arranging for movement of labor.
Flow of Trade
A tari% is a duty or tax imposed on goods moving into or out of a country. Tari%s
raise the price of imported goods, making it harder to compete against domestically
produced items.
Nontari% barriers include unilateral or bilateral import quotas, import bans,
restrictive safety or manufacturing standards, complicated customs procedures and
subsidies to local industry.
Export controls, such as quotas, tari%s, or total prohibitions, are often associated
with national defense, foreign policy, or the protection of scarce national resources,
such as technologically advanced goods and data. At the same time they are
attempting to limit some exports, countries generally encourage many other exports
through export incentives and export subsidies.
Flow of Labor
Almost all countries require foreigners to obtain passports before entering their
borders. Visas may be issued to foreign citizens permitting them to enter a country
Flow of Capital
In 1945 the International Monetary Fund (IMF) was established to encourage the
expansion and balanced growth of international trade, to help eliminate foreign
exchange restrictions, and to facilitate the international balance of payments
between the members of the fund. Currently, more than 185 countries are members
of the IMF.
International Contracts
International contracts usually involve issues beyond the legal requirements inherent
in domestic commercial contracts. These issues include differences in language,
customs, legal systems, and currency. It is important for international contracts to:
• specify the oGcial contract language and include definition of all signiticant
legal terms,
• specify the acceptable currency(ies) and method of payment,
• include a choice of law clause designating what law will govern any breach or
dispute,
• include a choice of forum clause specifying whether the parties will resolve
disputes through one nation’s court system or through third-party arbitration,
and
currency are risks particular to international trade. The best way to manage these
risks is the irrevocable letter of credit. The buyer enters into a contract with a local
bank, called an issuer, calling for the bank to pay the agreed price upon presentation
of specified documents. This commitment by the buyer’s bank is the letter of credit.
Typically, a correspondent or paying bank located in the seller’s country makes
payment to the seller.
*** Chapter Outcome***
Explain the international dimensions of antitrust law, securities regulation,
and the protection of intellectual property.
Antitrust Laws
Section 1 of the Sherman Act provides for a broad, extraterritorial reach of the U.S.
antitrust laws. Recent amendments to the Sherman Act and the Federal Trade
Commission Act limit their application to unfair methods of competition that have a
direct substantial, and reasonable foreseeable effect on U.S. domestic commerce,
import commerce or export commerce. The U.S. Supreme Court has held that where
price-*xing conduct signiticantly and adversely affect customers outside and inside
the United States, but the foreign injury is separate from the domestic injury, the
Sherman Act does not apply to a claim based solely on the foreign injury.
CASE 46-2
MORRISON v. NATIONAL AUSTRALIA BANK LTD.
Supreme Court of the United States, 2010
561 U.S.__, 130 S.CT. 2869, 177 L.ED.2D 535
http://scholar.google.com/scholar_case?
case=3519216444119666685&hl=en&as_sdt=2&as_vis=1&oi=scholarr
Scalia, J.
[Respondent National Australia Bank Limited (National) was the largest bank in Australia. Its ordinary shares
(common stock) are not traded on any exchange in the United States. National’s American Depositary Receipts
(ADRs), which represent the right to receive a specified number of National’s ordinary shares, however, are
listed on the New York Stock Exchange. In February 1998, National bought respondent HomeSide Lending,
Inc., a mortgage servicing company headquartered in Florida. HomeSide’s business was to receive fees for
servicing mortgages. The rights to receive those fees, so-called mortgage-servicing rights, can provide a
valuable income stream. How valuable each of the rights is depends, in part, on the likelihood that the
mortgage to which it applies will be fully repaid before it is due, terminating the need for servicing. HomeSide
and three HomeSide executives in the United States District Court for alleged violations of Sections 10(b) and
20(a) of the Securities and Exchange Act of 1934. According to the complaint, HomeSide and three of its
executive officers had manipulated HomeSide’s financial models to make the rates of early repayment
unrealistically low in order to cause the mortgage-servicing rights to appear more valuable than they really
were. The complaint also alleges that National and its CEO were aware of this deception by July 2000, but did
Before addressing the question presented, we must correct a threshold error in the Second Circuit’s
analysis. It considered the extraterritorial reach of § 10(b) to raise a question of subject-matter jurisdiction,
wherefore it affirmed the District Court’s dismissal * * *. [Citation.] * * *
* * * The District Court here had [subject-matter] jurisdiction * * * to adjudicate the question whether
§10(b) applies to National’s conduct.
* * * Since nothing in the analysis of the courts below turned on the mistake, * * * we proceed to
address whether petitioners’ allegations state a claim.
It is a “longstanding principle of American law ‘that legislation of Congress, unless a contrary intent
appears, is meant to apply only within the territorial jurisdiction of the United States.’” [Citation.] This
* * *
Rule 10b-5, the regulation under which petitioners have brought suit, was promulgated under §10(b),
and “does not extend beyond conduct encompassed by §10(b)’s prohibition.” [Citation.] Therefore, if §10(b) is
not extraterritorial, neither is Rule 10b-5.
On its face, §10(b) contains nothing to suggest it applies abroad. * * *
* * *
[Contrary to the argument of the petitioners and the Solicitor General, a general reference to foreign
commerce in the definition of “interstate commerce” does not defeat the presumption against
extraterritoriality.]
* * * [W]e think that the focus of the Exchange Act is not upon the place where the deception
originated, but upon purchases and sales of securities in the United States. Section 10(b) does not punish
deceptive conduct, but only deceptive conduct “in connection with the purchase or sale of any security
* * *
* * * The probability of incompatibility with the applicable laws of other countries is so obvious that if
Congress intended such foreign application “it would have addressed the subject of conflicts with foreign laws
and procedures.” [Citation.] Like the United States, foreign countries regulate their domestic securities
exchanges and securities transactions occurring within their territorial jurisdiction. And the regulation of other
countries often differs from ours as to what constitutes fraud, what disclosures must be made, what damages
are recoverable, what discovery is available in litigation, what individual actions may be joined in a single suit,
what attorney’s fees are recoverable, and many other matters. * * *
* * *
Securities Regulation
Foreign securities issuers who issue securities in the United States must follow the
procedures of the 1933 Act. Those whose securities are sold in the secondary
markets must register under the 1934 Acts. Most courts *nd US jurisdiction where
there is either conduct or effects in the United States relating to a violation of
Federal security laws. . In the 2010 case of Morrison v. National Australia Bank Ltd.
(see Case 46-2), the U.S. Supreme Court rejected these cases, holding that Section
10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 do not apply
extraterritorially but only reach the use of a manipulative or deceptive device or
contrivance in connection with (1) the purchase or sale of a security listed on a U.S.
stock exchange or (2) the purchase or sale of any other security in the United States.
SEC to study the extent to which private rights of action under the antifraud
provisions of the 1934 Act should be governed by these new standards. On April 11,
2012 the SEC delivered to Congress its “Study on the Cross-Border Scope of the
Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934”,
which provides several options but no specific recommendations. To date Congress
has not taken any action. Thus the Dodd-Frank Act restores to the SEC and the
Department of Justice—but not private litigants—the right to bring proceedings to
enforce the antifraud provisions of the U.S. securities laws in cases with an
Protection of Intellectual Property
US laws protecting intellectual property do no apply in other countries. Owners of
intellectual property rights must comply with each country’s requirements. The
United States belongs to multinational treaties such as the Paris Convention for the
Protection of Industrial Property and the Patent Cooperation Treaty. International
treaties protecting trademarks are the Paris Convention, the Trademark Law Treaty,
the Arrangement of Nice Concerning the International classification of Goods and
Services, and the Vienna Trademark Registration Treaty. In 2002 Congress enacted
legislation implementing the Madrid Protocol, a procedural agreement allowing U.S.
trademark owners to *le for registration in any number of over sixty-*ve member
Foreign Corrupt Practices Act
In 1977, Congress enacted the Foreign Corrupt Practices Act (FCPA) which makes it
unlawful for any U.S. person, and certain foreign issuers of securities, or any of its
oGcers, directors, employees, or agents to o%er or give anything of value directly or
indirectly to any foreign oGcial, political party, or political oGcial for the purpose of
(1) in+uencing any act or decision of that person or party in his or its oGcial
not involving the discretion of the oGcial, such as obtaining permits or processing
applications. This exclusion does not cover any decision by a foreign oGcial whether,
or on what terms, to award new business or to continue business with a particular
party. The amendments also added an aGrmative defense for payments that are
lawful under the written laws or regulations of the foreign oGcial’s country.
Employment Discrimination
Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, and the
Age Discrimination in Employment Act, discussed in Chapter 43, apply to U.S.
citizens employed abroad by U.S. employers or by foreign companies controlled by
U.S. employers. Employers must comply unless compliance would violate the law of
the foreign country in which the workplace is located.
*** Chapter Outcome***
List and describe the forms in which a multinational enterprise
may conduct its business in a foreign country.
D. FORMS OF MULTINATIONAL ENTERPRISES
Factors to be considered in determining the form of a multinational business
enterprise (MNE) include financing, tax consequences, legal restrictions imposed by
the host country, and the degree of control over the business sought by the MNE.
Direct Export Sales
Under a direct export sale, the seller contracts directly with the buyer in the other
country. This is the simplest form of MNE.
Foreign Agents
An agency relationship is often used by MNEs seeking limited involvement in an
international market. The principal *rm appoints a local agent to either enter into
contracts in the agent’s country on the principal’s behalf or to solicit and take orders
only.
