Snell & Wilmer
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June 28, 2013

 

Dear Friend of Snell & Wilmer,

In today’s global marketplace, companies need to be aware of foreign laws and practices that impact, or may potentially impact, their businesses. They also need to stay apprised of the latest changes in the regions they serve, in order to mitigate problems and maximize opportunities. This edition of Global Connection offers insight into European privacy rules, the first sale doctrine and “gray-market” goods, and enforcing foreign arbitral awards in China. It also discusses opportunities for the Southwest presented by Russia’s membership in the World Trade Organization.

We hope this edition of Global Connection proves useful as you continue to seek out new opportunities at home and abroad. Please feel free to contact me if you have ideas for future articles or topics for the Global Connection or if you would like to be included in future international events hosted by the Firm.

Best regards,

Lindsey E. Martínez
Editor

 

Enforcing Foreign Arbitral Awards in China: Commercial International Arbitration Clauses in U.S.-China Contracts

Computers 3000, Inc. is a California corporation that manufactures personal computers in the United States. It enters into a multi-million dollar contract with Tech Parts, Ltd., a company located and operating in China, to purchase microchips. The contract does not contain any provisions regarding the resolution of disputes between the parties, whether by litigation or alternative dispute resolution. When Tech Parts fails to deliver the microchips, Computers 3000 files a lawsuit against Tech Parts in California for breach of contract. Computers 3000 wins a judgment for damages against Tech Parts, but Tech Parts fails to comply with the judgment. Computers 3000 seeks to have the Chinese courts enforce the judgment in China, but the Chinese courts refuse. As a result, Computers 3000 loses millions of dollars in lost revenue and costs from having to find a replacement supplier.

The above scenario may seem extreme, but some variation of this scenario likely happens more often than many would like. What could Computers 3000 have done differently to prevent or mitigate this loss? Though there are many options available to Computers 3000, one option would have been to include in the contract an international arbitration clause that conforms to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly referred to as the “New York Convention.” The inclusion of such a clause would have required the parties to resolve any disputes through arbitration and allowed Computers 3000 to have a U.S. arbitral award enforced in China.

What is the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
On June 10, 1958, the United Nations Conference on International Commercial Arbitration prepared and opened for signature the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The goal of the New York Convention was to adopt a more uniform set of rules on the recognition and enforcement of foreign arbitral awards, and it has since become one of the most successful international treaties to date, with over 147 countries adhering and with enforcement of foreign arbitral awards being granted in over 90% of cases. Prior to the New York Convention, a company would be out of luck if it won an arbitral award in one country but sought enforcement in another country where the assets were actually located, as many courts were unwilling or even unable to legally grant an order enforcing a foreign arbitral award.

The United States acceded to the treaty in 1970, with the reservations that it will apply the New York Convention only to recognize and enforce awards made in the territory of another contracting state and that with regards to awards made in the territory of non-contracting states, it will apply the New York Convention only to the extent to which those states grant reciprocal treatment.

China acceded to the treaty in 1987, with the reservations that it will apply the New York Convention only to recognize and enforce awards made in the territory of another contracting state and that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, that are considered commercial under Chinese national law. China has declared that the Convention will apply to a variety of commercial relationships, including those involving economic rights and obligations resulting from contracts involving the sale of goods.[1]

What Does the New York Convention Say?
The New York Convention imposes on signatory countries conditions regarding the recognition and enforcement of foreign arbitral awards, such as requiring a contracting state to recognize foreign arbitral awards as binding and prohibiting a country from imposing more onerous conditions or fees on the enforcement of foreign arbitral awards than would be required for domestic arbitral awards. It also sets forth requirements and limitations on the availability and methods of enforcement. For example, a party seeking enforcement must provide to the court both (a) the duly authenticated original award, or a certified copy of such award, and (b) the original agreement containing the arbitration clause, or a certified copy of such agreement.

The New York Convention does not, however, guarantee that a foreign arbitral award will be enforced by a contracting state. A court may refuse to recognize or enforce an arbitral award under limited circumstances, including the incapacity of a party or invalidity of an arbitral award under the agreement’s governing law, problems with due process, or concerns of public policy. Though there is limited data on how often countries invoke an exception, the information that is available suggests that countries do so infrequently.

Nonetheless, inclusion of an international arbitration provision pursuant to the New York Convention has many advantages, and if the contract that Computers 3000 and Tech Parts signed had included an international arbitration clause, Computers 3000 would likely have been able to enforce an arbitral award issued in the United States in China.

What Should Be Included in an International Arbitration Clause?
If parties to a contract decide to include a clause on international arbitration, there are some steps they can take to maximize the likelihood of enforceability, particularly in China. The following is a list of the types of provisions that parties may want to include in an international arbitration clause as well as considerations that parties should keep in mind when trying to enforce a foreign arbitral award in China:

  • Require that all disputes involving the contract be resolved through arbitration
  • Identify the jurisdiction where the arbitration should take place
  • Identify an arbitral body that will conduct the arbitration and the rules that will govern the arbitration: Identification of a standing arbitral body is significant if the arbitration is to be enforced in China. Although the New York Convention requires that China accept ad hoc arbitration, i.e., arbitration not conducted by a standing arbitration commission, Chinese law may allow a judicial body to invalidate a foreign arbitral award if the parties chose the law of China as the governing law but failed to name a specific arbitral body to administer the arbitration.
  • Identify the location for submittal of an application to enforce a foreign arbitral award: Under Chinese law governing the enforcement of foreign arbitral awards, parties may submit an application for enforcement in only three locations: (1) a domicile or residence if one or more parties is a natural person; (2) the principal executive office of a legal person if the party is a legal person; or (3) the location of the property if the party has no domicile, residence, or principal executive office in the territory.
  • File an application with the Intermediate Court within one year if one or both parties are individuals or within six months if both parties are enterprises, institutions, government organs or other organizations
  • Consider obtaining local counsel to aid in the representation of an application: China generally bars foreign lawyers from appearing in its courts as lawyers. In a few cases, however, foreign lawyers were able to act as agent ad litem for their clients, i.e., act on behalf of their clients by court appointment.
  • Pay the non-refundable fee of 500 Yuan, plus additional fees if granted enforcement as set forth in the Measures for the Charging of Court Costs by People’s Courts
  • Be patient: Although Chinese law suggests that the Intermediate Court render a ruling within two months of receiving an application, enforcement may take one or more years due to China’s automatic appeal process whereby any refusal to enforce a foreign arbitral award is automatically reviewed by a higher court.

With the high success rate in attaining enforcement of foreign arbitral awards under the New York Convention, international arbitration clauses have proven to be useful to many companies that enter into international contracts, particularly in China.[2] Whether or not a company ultimately choses to include international arbitration clauses, it is still worthwhile to consider them as an option.

________________
Notes

[1] Other contracts to which China will apply the Convention include, but are not limited to, contracts involving the lease of property, project contracting, processing, technology assignment, joint business ventures, exploration and development of natural resources, credit, labor service, consultation services, marine/civil/aviation/railway/road passenger and cargo transportation, and product liability.  [back]

[2] See New York Arbitration Convention, Court Decisions, available at http://www.newyorkconvention.org/court-decisions/ (last visited June 20, 2013); United Nations, UNCITRAL, New York Convention Guide, available at http://www.newyorkconvention1958.org/ (last visited June 20, 2013).  [back]

 

Why Google Could Start a Trade War over Europe's Privacy Rules

It is not often that a law governing privacy of personal information stimulates international controversy, but that is what has happened with the European Union's proposed data protection law. The regulation, which was announced with fanfare in January 2012, would further increase the already strict restrictions on the collection and use of personal data in the E.U. through a uniform law applying to all twenty-seven EU member states

The law would also give Europeans a “right to be forgotten” which would allow them to request erasure of personal data, even if the data is in the hands of a third party. As E.U. Justice Commissioner Viviane Reding has stated, the right to be forgotten is designed to give Europeans greater control over their own data so as to avoid the “huge impact” that “even tiny scraps of personal information,” such as postings on social networking sites, may have on personal privacy.

A recent proposed amendment to the regulation from the European Parliament Committee on Civil Liberties, Justice and Home Affairs, headed by German Green Party Member Jan Albrecht, would further tighten consumer control over personal data. Under Albrecht's proposal, companies would not be allowed to rely on consumer consent to use data if they were in a “dominant market position with respect to the products or services offered.”

The Albrecht report would also prohibit the use or sale of personal data for purposes such as online advertising based on consumer preferences and behavior without explicit consent of the individual concerned. The amendments, which would extend to many U.S. based Internet companies, could cut off such familiar practices as targeting advertisements based on individual browsing histories.

Different approaches
The proposed European privacy regulation is starkly different from U.S. privacy laws. Unlike Europe, the U.S. has no comprehensive privacy law governing collection and processing of personal data. The U.S. instead has laws governing certain types of personal information, such as health care or financial data, or particular segments of society, such as children under thirteen.

Although the Obama administration in 2012 proposed a Consumer Privacy Bill of Rights that would provide baseline privacy protections for the online world, the proposal has yet to be embodied in legislation and may face an uphill battle in Washington. There is also considerable resistance to European-style privacy legislation in the U.S. on the grounds that it is overly prescriptive and hampers innovation.

It is thus not surprising that U.S. technology and software companies have been among the chief critics of the E.U. proposal. For example, the Industry Coalition for Data Protection, which represents the interests of leading business organizations in Europe, charged that amendments proposed by the Albrecht committee would undermine “innovation and entrepreneurship in Europe.”

Facebook's head of E.U. policy, Erika Mann, similarly criticized the report as contrary to “a flourishing European digital single market and the reality of innovation on the Internet—which is inescapably global in nature.”

The Obama Administration has also weighed in on the proposed E.U. regulation, expressing concern that the law would erect barriers to the free flow of information between the U.S. and E.U. Speaking at a conference celebrating European Data Protection day in Berlin on January 28, 2013, a U.S. embassy official stated that the European Union's proposed regulation, including the “right to be forgotten,” could potentially kindle a trade war between Europe and the United States by hampering the free flow of billions of Euros worth of data.

ACLU supports Europe's approach
The proposed European regulation does have its supporters, including U.S. consumer and civil liberties organizations, such as the American Civil Liberties Union. In a February 4, 2013 letter to the U.S. Attorney General and other officials, a coalition of these groups stated that “Europeans and Americans have very similar concerns about the need for privacy protection” and urged that privacy laws in both the U.S. and Europe be updated to increase consumers’ rights.

There is also some evidence to support the view that U.S. consumer attitudes are not that different from those of their European counterparts in regard to privacy. A recent study by the global analyst firm Ovum indicates that 77 percent of U.S. Internet users would choose a “do-not-track” option when using a search engine to inhibit targeting based on personal information, as compared to 81 percent of French, 71 percent of United Kingdom, and 69 percent of German Internet users.

Consumer attitudes do not translate into action, particularly where consumers obtain free services in return for providing personal information to Internet companies. But these attitudes indicate that the debate over the advisability of European style privacy laws will continue to play out not only in the E.U., but in this country.

 

‘First sale’ Doctrine Applies to Gray Market

Timothy J. Toohey's article entitled “‘First sale’ Doctrine Applies to Gray Market” appeared in the Thursday, April 4, 2013 issue of the Los Angeles Daily Journal. Read it here.

 

Russia as a New Comrade to Business in the American Southwest

Introduction
Companies in the American Southwest are likely to have a new business comrade soon: Russia. In August 2012, Russia acceded to membership in the World Trade Organization (WTO) after almost two decades of negotiations—a span of time marked by Russia’s two wars with Chechnya and one with neighboring Georgia, its emergence as a global energy superpower and ongoing political chess playing with the U.S. and Europe. By joining the WTO and lowering its barriers to trade, Russia, the current chair of the Group of 20 (G-20) and host of next year’s Winter Olympics, made the most significant impact on the international trade community since China joined the trade union in 2001.

The U.S., however, lagged in normalizing trade relations with Russia and seizing Russia’s untapped economic opportunity due primarily to an outdated, Soviet-era law, the Jackson-Vanik Amendment, which denied the Soviet Union favorable trade status because it deprived Jewish citizens of their right to emigrate. After the Obama administration and a conglomerate of U.S. companies like Caterpillar, Inc., Boeing Co., and General Electric Co. successfully highlighted the lucrative economic realities of a normalized U.S.-Russia trade relationship, the U.S. Congress repealed the Jackson-Vanik Amendment in December 2012.

Less than a year has passed since Russia became a card-carrying WTO member and normalized trade relations with the U.S., yet its broad economic imprint on several prevalent sectors in the American Southwest has already become apparent. From cattle farming to computer software, American companies in Arizona, California, Colorado, Nevada and Utah can take advantage of opportunities both to export their own goods to Russia and invest in the Russian economy.

Sector-Specific Opportunities
AGRICULTURE
Russian WTO membership opens dynamic and growing markets for American agricultural companies in the Southwest. While Russia imported less than $15.8 billion worth of agricultural goods in 2005, in 2010, the value of those imports jumped to $31.7 billion.[1] Moreover, in 2010, the United States was the third largest supplier of goods to the Russian agriculture market, with U.S. agricultural exports to Russia valued at $1.3 billion.[2] Russian retail food and beverage sales are forecasted to increase from $200 billion in 2012 to $240 billion in 2014, a 20 percent jump in two years.[3] Furthermore, given that Russian domestic nut production is limited to pine nuts, the Russian consumer market is entirely dependent on imports for tree nuts such as almonds and pistachios.[4] Indeed, the U.S. is a large exporter of nuts to Russia, with the California almond a particularly popular product in the Russian market.[5] American almonds currently constitute more than 90 percent of Russia’s almond imports, providing a potential springboard to meet growing Russian demand for pistachios, pecans and other tree nuts.[6]

Russian WTO membership allows U.S. companies to access these Russian agricultural markets more easily and cost-effectively. For example, as part of its WTO market access agreement, Russia will reduce its tariff on grapes from 10 percent to 5 percent, bind its tariff on almonds at 5 percent and reduce the tariff rate on certain commercially significant U.S. dairy products from 25 percent to 15 percent within three to four years. Russia will similarly decrease import duties on apples, cherries and soybeans.[7]

The integration of the Russian economy into the world trade market should also benefit American meat producing and cattle ranching states like Nevada, Utah, Colorado and California, which exported $500 million in beef and pork exports to Russia in 2012. This figure is set to rise dramatically in the coming years due to Russia’s implementation of a U.S. country-specific tariff-rate quota of 60,000 tons on frozen beef with an in-quota of 15 percent.[8] [9] Russia also agreed to bind its maximum tariff on live pig products at 5 percent, drastically reducing the pre-WTO tariff of 40 percent.[10]  

Despite Russia’s economic promise and trade liberalization, American companies must be wary of this new WTO member’s political posturing against the U.S. that can still create artificial barriers to efficient trade. In December 2012, for example, the Russian government stepped up enforcement of its zero-tolerance policy for residue of livestock feed additive ractopamine, and on February 11, 2013, the Russian government officially banned all U.S. meat imports on that basis.[11] While the Kremlin has insisted that the ban is based on health concerns, U.S. Agriculture Secretary Tom Vilsack and President of the American University in Moscow Edward Lozansky joined a chorus of scholars, policymakers and companies in accusing Russia of political protectionism.[12]

It remains to be seen whether the Russian ban on U.S. meat is legal under Russia’s WTO treaty obligations, which also provide the U.S., as well as all other WTO member states, with legal recourse before a WTO adjudicative body if the U.S. selects such a course of action.[13] It is worth noting that a WTO legal forum in which to adjudicate trade disputes is an alternative previously not available to the U.S. and the other WTO member states.

INFORMATION TECHNOLOGY
Information technology (IT) is another sector that stands to grow in parallel with U.S.-Russia trade relations because of Russia’s WTO membership. The Russian market for IT products is growing, especially since the Russian government under former President Dmitri Medvedev devoted significant resources and capital to tap into Russia’s highly educated, tech-savvy workforce by developing Russia’s IT infrastructure, entrepreneurial climate, and educational opportunities through such initiatives as the Skolkovo Innovation Center.[14] Russia’s annual IT spending is forecasted to grow to $39 billion in 2016.[15] Though yet to be ratified, Russia has also acceded to the Information Technology Agreement, committing itself to lowering tariffs on information technology products to zero within three years.[16] After full implementation of Russia’s WTO accession commitments, Russia’s tariff on all IT products will be bound at an average rate of 4.0 percent, down from the current average tariff of 6.7 percent.[17] With the U.S. exporting an average of $733 million in IT-related products a year from 2008-2010,[18] Russia could provide new economic avenues for technology companies in California, Arizona, and Colorado in the form of knowledge transfers and a relatively cheap, yet highly skilled software coding force.[19]

The promise of Russia’s IT sector, however, can be overshadowed by Russia’s difficulties with enforcement of intellectual property rights, which presented a point of contention in WTO negotiations. As a result of bilateral negotiations with the United States and other WTO Working Party members, Russia has made commitments to improve its intellectual property rights enforcement regime, and has brought Russia’s laws in compliance with the WTO’s Trade-Related Intellectual Property Rights (TRIPS) agreement.[20] Russia has also enacted legislation to impose criminal penalties to deter piracy and counterfeiting, and it has been shutting down websites that illegally distribute copyrighted works. However, it remains to be seen whether Russia will sustain and improve upon its efforts to enforce its intellectual property rights obligations for domestic and foreign owners of intellectual property,[21] an uncertainty highlighted by the Office of the United States Trade Representative consistently identifying Russia as a “priority watch list” country.[22]

Thus, while obstacles to IT market penetration in Russia remain, companies in the American Southwest may find navigating these obstacles a small price to pay to access the increasingly open Russian IT markets and its skilled labor force.

AEROSPACE
In addition to agriculture and IT, Russia’s mature aerospace industry presents yet another potential business market for aerospace companies, avionics suppliers and distributors and electronics suppliers and distributors in the American Southwest. While the Soviet Union gave rise to a formidable Russian space program and domestic aerospace industry that manufactured commercial airplanes, much of the Russian aerospace industry today is in need of modernization and investment. To that end, over the next two decades, Russia is expected to need more than 1,000 new passenger airplanes valued at approximately $95 billion.[23]

As the Russian aerospace industry modernizes its capacity to manufacture locally, U.S. aerospace manufacturers, suppliers and distributors in Arizona, Colorado and California, among others, will be able to export to Russia large civil aircraft, aircraft engines, small civil aircraft, helicopters, navigation equipment and radar equipment, in addition to smaller aircraft components that would feed authentic parts into the Russian supply chain.[24] This export potential is especially true given Russia’s agreement under the WTO guidelines to reduce and bound its tariffs on aerospace products from as high as 20 percent down to a less cost-prohibitive 8.3 percent.

Conclusion
Russia’s membership in the WTO and the normalization of trade relations between the U.S. and Russia present new market potential and investment opportunities for companies in the American Southwest. Although politically motivated trade barriers and weakness in the rule of law persist in the Russian economy, there is no doubt that Russia’s rapid trade liberalization as a result of WTO membership has set the stage for greater bilateral trade between the U.S. and Russia. Thus, companies in the American Southwest should assess the market potential created by lower Russian tariffs and other WTO trade measures in sectors ranging from agriculture and aerospace to IT and natural resources.

________________
Notes

[1] U.S. Export Opportunities from Russia’s Membership in the WTO: Agricultural Products. United States Trade Representative. http://www.ustr.gov/webfm_send/3211.  [back]

[2] Id.  [back]

[3] Id.  [back]

[4] Svetlana Ilyina, Russia Going Nuts Over Almonds, USDA Foreign Agricultural Service, http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Russia%20Going%20Nuts
%20Over%20Almonds_St.%20Petersburg_Russian%20Federation_4-20-2011.pdf
 [back]

[5] Id.  [back]

[6] Id.  [back]

[7] Id.  [back]

[8] Theopolis Waters and K.T. Arasu, Russia Set to Halt Import of U.S. Beef, Pork, Reuters, (Dec. 7, 2012) http://www.reuters.com/article/2012/12/07/us-usa-russia-beef-idUSBRE8B611420121207.  [back]

[9] U.S. Export Opportunities from Russia’s Membership in the WTO: Agricultural Products. United States Trade Representative. http://www.ustr.gov/webfm_send/3211.  [back]

[10] Id.  [back]

[11] Joe Shuele, U.S. Beef Industry Working to Regain Beef Access in Russia, Beef Magazine, (May 9, 2013), http://beefmagazine.com/markets/us-beef-industry-working-regain-beef-access-russia.  [back]

[12] Dina Gusovsky, Russia’s US Meat BanL What’s the Beef? CNBC, http://www.cnbc.com/id/100470892.  [back]

[13] Report on WTO Enforcement Actions: Russia, United States Trade Representative, http://www.ustr.gov/sites/default/files/06192013%20Russia%20WTO%20Enforcement%20Report.pdf.  [back]

[14] See, e.g., Russian Times, Skolkovo to Receive More than $600 mn in Investment – top official (June 21, 2013), http://rt.com/business/skolkovo-projects-investment-forum-077/.  [back]

[15] Tech Sector Welcomes Russia to the WTO, Information Technology Industry Council, http://www.itic.org/media/news-releases/tech-sector-welcomes-russia-to-the-wto.  [back]

[16] Id.  [back]

[17] Id.  [back]

[18] California: Opportunities from Russia’s Accession to the WTO, International Trade Administration, http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_003536.pdf.  [back]

[19] California: Opportunities from Russia’s Accession to the WTO, International Trade Administration, http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_003536.pdf; New Mexico: Opportunities from Russia’s Accession to the WTO, International Trade Administration, http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_003561.pdf; Arizona: Opportunities from Russia’s Accession to the WTO, International Trade Administration, http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_003534.pdf.  [back]

[20] Id.  [back]

[21] Id.  [back]

[22] William H. Cooper, Russia’s Accession to the WTO and Its Implications for the United States, Congressional Research Service, http://www.fas.org/sgp/crs/row/R42085.pdf.  [back]

[23] Doing Business in Russia: 2012 Country Commercial Guide for U.S. Companies, U.S. Foreign Commercial Service and U.S. Department of State, 2012; The Boeing Company.  [back]

[24] Russia’s Accession to the WTO, Opportunities for the US Services Sector, Office of the United States Trade Representative, http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/
tg_ian_003455.pdf
.  [back]

 

 

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