Legal Strategies: Exporting

w w w . k e g l e r b r o w n . c o mwww.keglerbrown.com

by Martijn StegerKegler Brown Hill & Ritter Co., LPA

To GlobalTargetCollege of Business and Innovation

The University of ToledoMarch 2, 2012

Legal Strategies: Exporting

www.keglerbrown.com2 www.keglerbrown.com2

Options to Enter Overseas Markets


One Shot / Occasional Sales Orders

• Nature of Relationship– Tenuous at first, but can grow

• Advantage– Can test potential sales agent/distributor

• Disadvantage– Less certainty

• Considerations– How much to invest in these relationships?– How evaluate future growth prospects?


Agency• Nature of Relationship

– Acts for and speaks for the manufacturer– Within the parameters of authority– Solicits and facilitates sales within the target country– If truly an independent agent, no authority to conclude

contracts in the name of the manufacturer

• Advantages– Least expensive mode of entering an overseas market– Good way to “test the waters”– Local agent familiar with customs, language and market norms

of the target country


Agency

• Disadvantages– Agent's level of loyalty– Might be somewhat dependent on agent as sole source for

information– Potential misuse and manipulation of proprietary

information (trademarks, methods, etc.)– Historically, many countries have more protective

termination laws for agents than distributors


Agency

• Considerations– Define the scope of agent's authority: Define actual authority; monitor

apparent authority; normally, do not permit use of letterheads, business cards, etc. with your company name on it. Might be somewhat dependent on agent as sole source for information• Too much authority without supervision is not good, given the distance

between the two countries and the fast pace of change in the marketplace

• Agent with virtually no authority may not be able to help "close the deal" in a timely manner

• Exclusivity: company's sole agent versus agent for competitors alsoNote: Non exclusivity might make it easier and less expensive to

terminate


Agency

• Considerations– Watch out for dependent agent being a “de facto” employee– Consider local law governing duties owed to an agent,

including permissible means for, and restrictions upon, termination of agent


Distributorship

• Nature of Relationship– Distributor purchases U.S. manufacturer's products– Resells into overseas market

• Advantages– More vested interest with U.S. company than agent– Distributor becomes both a debtor of manufacturer, as well

as a seller of its products


Distributorship

• Disadvantages– Collection of payment, return of product;

• Unlike agent, distributor receives product for resale • U.S. manufacturer must then collect payment from distributor and/or

retrieve unsold product if no payment

– Other countries' protection of distributors might be as strong as the protection afforded agents

– Potential misuse and manipulation of proprietary information (trademarks, methods, etc.)• distributors more familiar with product/technology -- especially if perform

repairs.


Distributorship

• Considerations– Exclusivity or non-exclusivity and other territorial rights:

• Contracts must contain specific definitions of distributor's – Territory– Its authorized products– Its obligation, if any, not to sell or manufacture competing products

• Watch out for restrictions on post-contract non-competition covenants in E.U. and elsewhere.

– Terms of payment and product retrieval:• Pre-payment? Consignment?• Letters of credit.


Distributorship

• Considerations– Termination

• How much notice is required under local law?• Payment (“indemnity”) to distributor required on termination?

– might depend on whether for cause or not. – Key: spell out minimum sales requirements– Or, provide for termination without cause (if permissible)


Joint Venture

• Nature of Relationship– Usually -- Partnership arrangement with local entity– Costs, profits and losses shared in some way

• Advantages– Limitation of risk -- risk of failure or losses are shared– Greater vested interest in and allegiance to U.S. company – Limitation of investment -- permits joint venturers to

participate in deals that would be beyond their individual financial resources


Joint Venture

• Advantages– Combines skills -- success of the project might depend on

sharing of technology or personnel skills– U.S. company not dependent on independent person for

information about local market– Control by overseas entity and use of its name may remove

any badge of foreign stigma


Joint Venture

• Disadvantages– Greater commitment of resource and limitation on profits

shared– U.S. company might not be permitted to achieve or to

maintain majority ownership of joint venture– Might be restrictions on repatriation of profits– Joint ventures often fail: Over 50 percent in first 5 years


Joint Venture

• Considerations– U.S. company's control and influence over the co-venturer

• Shareholder percentage and voting rights• Director positions• Access to revenues• Voice in management

• Caution: Some countries have severe restrictions - e.g., low cap on royalty amounts (e.g., 5 % )

– Others might not permit payments based solely on a percentage of sales for non-patented items

• Note: Many countries have a withholding tax on royalties: factor it into pricing


Joint Venture

• Considerations– Complex taxation issues. – Miscellaneous considerations:

• Restrictions on overseas participation (as investor, officer, director)• Amount, timing and type of initial capital• Mechanism for provision of additional capital• Consider issue of third-party loans


Joint Venture Alternatives

• Can also operate internationally by setting up a branch or wholly-owned subsidiary. Can be a corporation or limited liability company

• Consider technology licensing arrangements with or without a joint venture.

• Teaming Agreements can be contractual arrangement not constituting a partnership (clauses include confidentiality, sharing of expenses and exclusivity)


Branch

• Nature of Relationship– E.g., employee providing sales of goods or services– Usually not incorporated under other countries’ laws

• Advantages– More control than with agent or distributor

• Disadvantages– More tax issues than with agent or distributor– Consider tax treaties and “permanent establishment”


Branch

• Considerations– Permanent establishment -- usually fixed place of business

including office, place of management, factory, workshop, ora representative / employee who has authority to conclude contracts on behalf of company • Results in tax considerations

– If no permanent establishment -- usually avoids or limits other country’s tax on profits


Subsidiary

• Nature of Relationship– Usually incorporated under other country’s law– May be wholly or partly owned by non-U.S. person

• Advantages– More control

• Disadvantages– More tax issues than with agent or distributor

• Considerations– Tax-driven, for the most part. Consider tax treaties– Size of market; need for high-level presence in market


Contracts for the Sale of Goods


The Uniform Commercial Code (“U.C.C.”)

• Recognition– Sales of "goods" in the U.S.– The U.C.C., in some form, is adopted by all U.S. States

• Definition of “Goods”– Things which are movable. Includes tangible goods, but

generally not services


The Uniform Commercial Code (“U.C.C.”)

• Purpose– Promotes commonality and a reasonable set of standards to encourage

interstate commerce– Provides a series of "gap fillers" for unaddressed issues in the contract

• E.g., in absence of specific price provision, "Reasonable Price."

• Governing Law– One State’s version of the U.C.C. becomes the "governing law" for the

sale of goods among domestic merchants and possibly in an international transaction


The United Nations Convention on Contracts for the International Sale of Goods (CISG)

• Recognition– Endorsed by the United Nations and adopted in some form

by over 75 countries (including the U.S.).

• Definition of “Goods”– Most products, but not intangibles; not sales of goods to

consumers and not sales of services.


The United Nations Convention on Contracts for the International Sale of Goods (“CISG”)

• Purpose– Promote commonality of trade practices to bridge the gap

between developed and lesser developed countries– Provide source of "gap fillers" for unaddressed issues in sales

contracts• E.g. provision regarding revocation;• E.g. notice provision regarding non-conforming goods.

• Governing Law– Is "governing law" for contracts entered into between companies

located in member states, unless specifically excluded.


U.C.C. and CISG

• Products Liability– The CISG specifically "does not apply to the liability of the seller for death or personal injury

caused by the goods to any person." (Article 5).– Neither does the UCC, but other product liability laws, e.g., Ohio, might apply. Other

country’s law might be better on this issue.

• "Parol Evidence": Evidence not within the four corners of the written contract.

– CISG gives greater weight to parol evidence than does U.C.C.– Note: Interpret in light of other agreements, including Terms and Conditions of Sale or

Purchase

• CISG does not require that contracts for goods valued above $500 be in writing. (Article 11), but dangerous to rely on oral contracts

– Note: Letter of Credit is a contract too


Considerations in Drafting Sales Agreements

• Cover all important issues in written agreement• Keys to reduce risk of litigation:

– If important, propose and negotiate it– If important, put it in writing

• Clear, precise language– Do not rely on ambiguity, if the issue is important– Most litigation is over ambiguous or omitted terms– You have a right to expect clear, precise language from your

lawyer; not “legal mumbo jumbo” as opposed to legal terms of art



• Description of goods or services– Be complete; quantity; quality.– Be careful of ambiguous short-hand descriptions– Itemize separately (might limit dispute to one type of good sold)

• Price– Price goods and services separately (maybe even separate contracts):

services performed in other country might be taxed there.– Specify currency– CISG -- Article 50 -- permits buyer to decrease price for non-conforming

goods.



• Delivery– Specify if partial deliveries require separate payments. Otherwise,

you will get payment when full delivery is made– If use terms of art (e.g.: EXW, FCA, etc.) refer to definition -- e.g.

INCOTERMS

• Taxes– Normally -- each party pays own taxes (vs. imputed income)– Note: Usually no income taxes by other country if no permanent

establishment, but common requirement to withhold taxes on royalty payments



• Insurance– Delivery terms, e.g. INCOTERMS - define when risk of loss passes

to the buyer– Make sure shipment is insured -- regardless of who pays and when

risk of loss passes• Limitations on liability

– Consider limiting damages to the purchase price (if permissible)• Normally, seller wants to avoid liquidated damages

– Exclude consequential damages – define as lost profits, etc.– Limit time within which damages recoverable



• Scope of any Warranty– Spell out any warranties and limitations / exclusions– E.g., if repair warranty, where done? Who pays for shipment

if repairs not on-site?

• Good faith– Reasonableness and fairness is critical to long-term

relationships– Required by UCC and CISG– Usually required by courts in practice anyway



• Confidentiality– Clearly identify information as confidential (e.g. software,

trade secrets, etc.)– Specify: confidentiality obligations survive termination– Some countries render confidentiality clauses ineffective

after X number of years

• Intellectual property rights– IPR are crucial & discussed later



• Compliance with laws and standards– Make buyer responsible for compliance with its own laws, regulations, permits, etc. – Provide for buyer to indemnify you for any failure to comply with its country's laws– Note: Indemnification = private insurance

• Duration and Termination– Normally start with short duration– Enforceability of termination clause under local law is key. Allow U.S. lawyer to

consult with local counsel– Often very protective legislation– Note: EU Directive: Agent gets at least same minimum notice as principal

• Compensation / Indemnity Payments



• Force Majeure– Should specify:

• Acceptable impediments• Means to certify their existence and• Consequences of their existence (delay performance; void contract,

etc.?) must be specified in some countries

– Boilerplate is dangerous

• Remedies– Specify consequences of breach clearly– Consider “notice” and “opportunity to cure” provisions



• Choice of Law– CISG: Companies in member states not wishing to apply the CISG

to the contract must specifically reject implementation of the CISG.

– Note: Just stating that Ohio law will apply is often not sufficient. The CISG is Ohio law for a contract between Ohio company and company in "member country" (e.g., Canada, China, but not India).

– Note: Choose governing language.– Note: To discourage litigation, consider a clause that says whoever

files a suit or arbitration, the law of the other side's country governs (and must be filed in their forum). This is very controversial and can be a disadvantage to the U.S. company.



• Choice of Forum– Usually same state/country as choice of law.– Often omitted– Can be critical to discourage litigation

• Dispute Resolution– Can choose

• an accountant to resolve accounting type issues• an arbitrator for certain other issues and • litigation for even other issues (e.g., when injunctive relief required – such as

for violation of trade secrets.)


Export Control Lawsand Other Laws Relevant

to Exporters


Foreign Corrupt Practices Act (“FCPA”)

• FCPA makes into U.S. crimes the commission of foreign corrupt practices– Anti-bribery provisions apply to U.S. entities, individuals and

to persons acting on their behalf, including overseas affiliates and agents of U.S. entities

– Accounting provisions apply to entities subject to the Securities and Exchange Commission


Office of Foreign Assets Control (“OFAC”)

• Administered by U.S. Department of Treasury.• OFAC acts to prevent “prohibited transactions” --

primarily “trade or financial transactions” -- with countries and persons against whom sanctions and embargoes are in place

• U.S. persons may not trade or have other dealings with them unless authorized by OFAC or expressly exempted by statute


Antiterrorism Laws

• 1996 Antiterrorism and Effective Death Penalty Act and the 2001 USA Patriot Act make it a crime for a person to provide “material support” to a foreign organization engaged in terrorist activity

• “Material Support” defined broadly • Some organizations with innocent-sounding names

may mask terrorist activities. Check the relevant lists


Trade with the Enemy Act (“TWEA”)

• TWEA restricts U.S. entities and persons trading with countries hostile to the U.S.

• Law gives President power to oversee or restrict any and all trade between the U.S. and its enemies in times of war


International Traffic in Arms Regulations (“ITAR”)

• ITAR is an export control law administered by the U.S. Department of State (“DOS”)

• ITAR governs “export” of any “defense articles” and “defense services”

• “Defense articles” are identified in the U.S. Munitions List (Part 121 of ITAR)


International Traffic in Arms Regulations (“ITAR”)

– “Defense services” broadly defined to include furnishing assistance to foreign persons in the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, demilitarization, destruction, processing or use of a “defense article”

– License from the DOS is required before any defense service or article may be “exported”

– “Export” includes showing controlled information, data or products to a “foreign person,” whether in US or elsewhere.


Export Administration Regulations (“EAR”)

• Administered by U.S. Commerce Department. • EAR governs U.S.-origin, dual-use items, meaning those

can be used for both commercial and military applications

• Apply to the transfer/export of all such products, data and services by U.S. persons

• Must check the Commerce Control List (“CCL”).


U.S. Antitrust Laws

• Pursuant to U.S. antitrust laws, U.S. asserts antitrust jurisdiction over certain actions, even if they take place outside U.S. borders.

• The primary test is whether they have “intended or actual,” “substantial or foreseeable” effects within the U.S.


Summary: Export Control and Related Laws

• Overall, enforcement has increased in recent years• Penalties are very severe, including prison sentences

and financial penalties, including as much as $500,000 per violation

• Laws are very complex and relevant lists are updated periodically, so do not rely on historical knowledge


Intellectual Property


Protect Your Intellectual Property Against Misuse by Your Overseas “Partner”

• Must be provided for in your written agreement– Often, missing or inadequate in “form contracts”– Critical because usually intellectual property is often a very

valuable part of a company’s business– U.S. Courts have extended protection of U.S. trademark law,

for example, to violations by companies acting outside of U.S., so long as some effect on U.S. Commerce.


Protect Your Intellectual Property Against Misuse by Your Overseas “Partner”• Related considerations:

– Specify injunctive relief to prevent continued misuse once it is discovered Often, damages are too little too late

– A non-competition clause is usually appropriate and can provide powerful protection along with a clause forbidding misuse of IP

– Require overseas representative to use only your Trademarks on your goods

– Consider separate license agreements (some countries require them)– Make sure restrictive provisions are permissible & make sure any “magic

words” are incorporated• Caution: Some countries require transfer of some or all IP rights to local

representatives after certain period of time.


Protect Your Intellectual Property From Misuse by Others in Overseas Markets

– Must take steps to protect your IP rights in any current market and those in which you expect to sell in near future-- Register before first product shipped.

– Protection, if properly obtained, can help you both against overseas companies and U.S. companies acting in those markets

– E.g., you have a U.S. patent for technology that will be sold in other countries, which are members of an International Patent Convention. You can gain certain important benefits by applying for registration of your patent in those countries within a certain time frame


Protect Your Intellectual Property From Misuse by Others in Overseas Markets

• Considerations– Particularly with products difficult to reverse engineer,

formal patent protection may not be desirable -- because the patent application is public and patent protection in most countries is only 15 to 20 years

– Tip: Determine quickly whether your IP needs protection via registration in overseas markets. • If so, promptly take the necessary legal steps• If not, consider implementing “trade secret” steps


Dispute Resolution


Dispute Resolution

• KEY: Must consider these issues before and during contract negotiations– Do not let the excitement of Your Impending “Business

Marriage” Cloud Your Judgment!


Mediation

• What is it?– Usually an informal process, with few established rules– Often uses independent mediator, who may or may not be

experienced in the particular business sector– Technically not binding

• Advantages– Can be least expensive method of dispute resolution– Even though not binding, might be effective because of the

threat of costly arbitration or litigation


Mediation

• Disadvantages– Can be hard to know what the ground rules are, or to define them in

advance– Can simply add another level of expense to ultimate arbitration or

litigation, if mediation is not successful– Depending upon the relationship of the parties at the time of the

dispute, can be entirely a waste of time– Mediators can act like “Solomon” and seem arbitrary

• Considerations– Selection of mediator– Choice of ground rules


Arbitration

• What is It?– More formal procedure than mediation – Usuallygoverned by the parties’ choice of rules of, for

example, the American Arbitration Association or some overseas arbitral body.-- E.g., The Hague; London; Hong Kong


Arbitration

• Advantages– Might less expensive than litigation, but is more expensive

than mediation– Might be quicker than litigation– Its greater informality, compared to litigation, can make the

process less of a drain on the company's employees, especially if discovery is limited

– If properly chosen, arbitration judgments are enforceable in many countries, particularly those that have signed the U.N. Convention for Enforcement of Foreign Arbitral Awards (the “1958 New York Convention”)


Arbitration

• Disadvantages– Expenses, such as filing fees and fees for arbitrators, in

overseas arbitrations, particularly can be quite high• E.g., International Chamber of Commerce Rules

– Some greater risk of an arbitrary result– Depending on the court (which could have been selected

in place of arbitrator), arbitration is not always quicker


Arbitration

• Considerations– Select location of arbitration– Select number and qualifications of arbitrator(s)– Determine if the overseas party is from a country that is a

signatory of the 1958 New York Convention– Determine likely fees and weigh advantages and disadvantages

versus mediation and litigation– Will the arbitration decision be final or appeals allowed?– Enforceability. Key question is where are the assets against

which any decision would be enforced?


Litigation

• What is It?– Most of you are familiar with U.S. litigation

(unfortunately), but litigation in other countries can be radically different

– Examples: Unavailability of legal remedies, such as lost profits, punitive damages

– Also, procedures such as discovery or cross examination at trial are often severely limited

– Often, no jury


Litigation

• Advantages– Depending on country, relief a court may award could be broader

than by an arbitrator– Court rules are usually clearer and more consistently applied.

• This can result in fewer fights over what rules should be applied and how they are interpreted

– If you are plaintiff, and you are in a court with a fast track, justice can occasionally be fairly swift

– Sometimes, discovery can reveal critical "smoking guns" which you may never learn about in a mediation or arbitration• This can be critical in fraud cases, for example.


Litigation

• Disadvantages– Cost– Disruption to employees from discovery– Time to get a decision, especially with appeals– Potential unenforceability (in other countries) of judgments,

particularly those including certain forms of relief, such as punitive damages

• Considerations– Same considerations as above concerning mediation and

arbitration.


Hague Convention on Discovery

• Must be Considered If Litigation is Chosen• Practical Pointer

– If you chose litigation in U.S. Courts, and the overseas party complies with that provision and sues in the U.S. Courts, you may be able to force them to bring their employees to the U.S. for deposition

• Hague Convention Can Help, and Occasionally Hinder, Discovery of Documents and From Witnesses Abroad


Hague Service Convention

• Scope– Most industrialized countries are signatories, but many of

them have exceptions to overseas service of process– Tip: Provide for agreed-upon easy methods of service of

process in the agreement


Choice of Law

• Importance– Relief available varies greatly from country to country– Often, form contracts, such as purchase orders, will

contain choice-of-law provisions. Pay attention to them– Usually try to avoid “Battle of the Forms”


Choice of Forum

• Importance– This is often overlooked, but can be more important than

choice of law.– If choice of law is made, without choice of forum, it can

create a legal battle over where the dispute will be resolved

• Home Court Advantage


Miscellaneous Legal Considerations


Timing Of Use of U.S. Counsel

• Business Planning Stage– KEY: Define your Goals!– Legal considerations can radically affect your business plan

• Negotiations Stage– If you wait until the end of negotiations to bring in legal

counsel to draft the agreement, it can be very difficult tochange provisions agreed upon orally

– Written agreements– What is a contract?


Timing Of Use of U.S. Counsel

– Written agreements can make disputes less likely and reduce the costs of them.

– Importance of writing clearly and in plain English. • Your lawyer should write in clear English

• Need for concise legal documents, especially in overseas transactions


Use of Overseas Legal Counsel

• Work Through Your U.S. Counsel– For example, Kegler Brown has relationships with overseas counsel

in major industrial centers around the world.

• Use U.S. Counsel Experienced in Working with OverseasCounsel as a “Reality Check”– U.S. Counsel can help to frame relevant questions and interpret the

answers

• Importance of Overseas Law even if Ohio law governs– You must be able to enforce any judgment in the other country

unless the other party has sufficient assets are in the U.S. to satisfy any judgment in your favor and those assets are not easily moved


Conclusion


Conclusion

• Exporting is not just a small change from domestic/U.S. transactions

• You cannot use the same contract terms for both• Always define, question and refine your goals and

strategies


Thank YouPlease Note: Information in this Power Point is intended to give the reader an overview of many of the issues involved in the negotiation and performance of international transactions. It cannot be considered as legal advice, in part because the relevant facts and applicable law will vary from one transaction to another. Your lawyer should be consulted on the issues relating to your particular international transaction.

Copyright 2012 - S. Martijn StegerKegler Brown Hill & Ritter Co., LPA

Direct Dial: 614 462 5495Email: [email protected]

Web: www.keglerbrownglobal.com

mailto:[email protected]

http://www.keglerbrownglobal.com/

Legal Strategies: Exporting

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