INTERNATIONAL BUSINESS TRANSACTIONS

Wisconsin has adopted the 2005 Uniform Foreign-Country Money Judgment Recognition Act.

DOCUMENTARY SALES TRANSACTIONS

Sau-Sages Co., a U.S. company based in Milwaukee, Wisconsin, sells specialized equipment for the production of sausages. The founder and CEO of Sau-Sages, Salvatore “Sal” Lami, has recently invented a new machine, the Super Sausage Stuffer, or “S3,” that he believes has the potential to revolutionize the global sausage industry. Sau-Sages has patented the S3 in the United States, and has begun a limited production run of first-generation S3s at its factory in Milwaukee. Sal is eager to bring the S3 to market, and has reached out to wholesalers and distributors in Europe, the primary international market for sausage, to solicit interest in Sau-Sages newest machine. Sal and Sau-Sages have not previously engaged in any significant overseas transactions.

A few days after announcing the availability of the S3, Sal receives, in his office in Milwaukee, an email from Brett Vurst, who identifies himself as an agent for Baden’s Best, an Austrian company based in Baden, Austria (just outside Vienna), that produces high-end sausage for the Austrian and EU market. The email expresses the company’s interest in purchasing two S3 machines, “CIF Vienna, Austria,” and requests a price quote from Sau-Sage. Excited, Sal googles “CIF,” and uses a template he finds online an invoice. Sal quotes a price of $30,000 for “Two (2) Super Sausage Stuffer (S3) Machines, CIF Vienna, Austria;” he leaves in place template language requesting a “confirmed, irrevocable letter of credit,” stating that “the law of the Seller’s jurisdiction shall apply in the case of any dispute arising out of this transaction,” and providing for mandatory, binding arbitration as the sole manner of dispute resolution. The next day, he receives an email attaching a purchase order from Brett adopting the price Sal quoted, and requesting Sal’s bank information. A few days later, after identifying his bank as Second Milwaukee Bank, Sal receives a call from Second Milwaukee confirming that Baden’s Best has set up a letter of credit in his favor through its bank, Baden Federated Bank.
Sal contacts a local shipping company, Connie’s Crazy Carrier Co., and arranges to have the two S3 machines shipped to Vienna. He delivers the two machines, in one shipping container, to Connie’s agent at the Port of Milwaukee, and receives in return a negotiable bill of lading, and a notarized “Confirmation of Inspection” stating that the goods appeared to be as described by the shipper. Second Milwaukee tells him that he needs to show certain documents to get his money, including Baden’s Best’s purchase order. When he prints it out, he realizes that the PDF has a second page with lots of terms in eight-point font. These include: (1) a seller’s warranty clause; (2) a provision that all disputes shall be settled in a court of competent jurisdiction in Austria; and (3) a provision stating that the terms of the purchase order cannot be modified or altered. Sal is concerned that these provisions look different from what was in his invoice, and is especially worried that he could be sued in Austrian court! He calls his attorney.
Question 1: You are Sau-Sage Co.’s outside counsel (they do not have in-house counsel). You know that Wisconsin has adopted, without modification, the Uniform Commercial Code (UCC), and that both the United States and Austria are parties to the Convention on the International Sale of Goods (CISG). [1A] With reference to the terms that you know about from the invoice and purchase order, what do you tell Sal are the relevant terms of the contract, if any, between Sau-Sage and Baden’s Best? [1B] Does it make a difference what court or other body may be called upon to make that determination in the case of a dispute? [1C] What do you tell Sal about the likelihood of a suit proceeding in Austrian court?

Regardless of your advice, Sal hopes for the best, and in any case has more immediate concerns. He prints and gathers the rest of the documents Second Milwaukee said it needed, and goes to the bank to draw on the letter of credit. The bank clerk reviews the documents, and says that they look good to him. He then tells Sal to sign his name in the “Indorsement” section of the bill of lading, which Sal does, and then transfers $30,000 dollars drawn on the letter of credit into the Sau-Sage Co. account. The next day, a Thursday, the clerk transmits the documents through banking channels to Baden Federated Bank, requesting payment against them to satisfy Second Milwaukee’s fulfillment of the letter of credit. In Baden, they are received by a clerk at Baden Federated, who is leaving for a long weekend and decides to wait until Monday of the following week to review them. When she finally gets to them, she notices some discrepancies that she wants to run by her supervisor.

Following the supervisor’s review, Baden Federated sends a response to Second Milwaukee on Wednesday regretting to inform them that it must dishonor the presentation of documents, and noting the following discrepancies: (1) The letter of credit describes the goods as “Two (2) Super Sausage Stuffer Machines,” whereas the bill of lading describes the goods as “2 S3 Machines;” (2) the letter of credit identifies the beneficiary as “The Sausage Company,” whereas the invoice and bill of lading presented identify “Sau-Sage Co.;” (3) the letter of credit calls for an “independent third-party inspection certificate,” whereas Sal has provided the “Confirmation of Inspection” from Connie’s agent.

Second Milwaukee is concerned that it may not get its money, and is uncertain how to proceed. They call their lawyer.

Question 2: You are Second Milwaukee’s in-house counsel. You note that the letter of credit agreement states that it is governed by the Uniform Custom & Practices (UCP) 600. [2A] What arguments could Second Milwaukee make to Baden Federated to convince them to honor the documents as presented? How strong are those arguments? [2B] Without prejudice to the strength of the arguments that Second Milwaukee advances, assume that Baden Federated is un-moved. What reasonable next-steps are available to Second Milwaukee? How do you advise that they proceed?

INTELLECTUAL PROPERTY

After getting his feet wet in the international market, Sal is considering expanding his operations. He has received numerous inquiries regarding the S3 from Germany, but thinks that international shipping is very confusing. Instead, he thinks it might be better to just make the S3’s overseas. Because Sau-Sage is a small company with most of its capital already invested in production of the S3 in Milwaukee, Sal wants to find a German partner to make and sell the S3 in the European market. Turning again to Google, Sal finds a couple German companies that he thinks might be good candidates. The first company, Machen AG, is a large, publicly-traded company that specializes in the manufacture of commercial appliances. Because of its size, Machen also has a marketing and distribution arm, though that is not the company’s main source of revenue. The second company, Verkaufen GmbH, is a smaller, private company that specializes in the marketing and distribution of commercial appliances. Through a network of affiliates, it also has the ability to manufacture its own goods. Sal’s brother-in-law, Link Casing, tells Sal that he can sell his U.S. patent on the S3 to as many foreign companies as he wants, and that it will be a great way to make money. (Link attended the Georgetown University Law Center for one semester, before dropping out to work in the sausage-stuffing industry.) Sal thinks that’s probably right, but that he should check with his lawyer.

Question 4: As Sal’s counsel, what legal action, if any, he should take before making any agreements with these or any other foreign companies? Sal has asked for references to the appropriate legal authorities, so that he will sound smart when he talks to Link.

Sal acts according to your guidance, and is ready to negotiate with the German companies. Both Machen and Verkaufen are interested in licensing the S3. Sal thinks that Machen would be a better partner for manufacturing the S3, but Verkaufen would probably be better at marketing. In addition, he’s wondering if he’s going to have to find partners in every country that he wants to make or sell the S3. He thinks his lawyer might be able to help him.

Question 5: As Sal’s counsel, how do you advise him on his options, in terms of dealing with his intellectual property, for partnering with foreign firms? What do you advise is his best option for dealing with Machen and Verkaufen?

EXPORTS AND TAXATION
After considering your advice, but regardless of your ultimate recommendation, Sal chooses to enter into a partnership with Verkaufen GmbH. Verkaufen intends to open a factory in Munich to produce the S3. Verkaufen is also considering opening a second production facility in Ukraine to service the Eastern European sausage-manufacture market. Most of the necessary assembly line equipment is available from suppliers in the European Union; however, there is one machine, a computerized milling tool, that can only be imported from the United States. Because Verkaufen does not have a great deal of experience with commercial imports from outside the EU, they have asked Sal to help them figure out how to import the computerized mill. Sal consults with Sau-Sage Co.’s engineers, who tell him that the
milling tool has been classified by the Commerce Department’s Bureau of Industrial Security as “2B001.b.” Sal puts that number into Google and hopes for the best, but quickly finds himself confused. He decides to call his lawyer, who always seems to be able to help him with these types of problems.

Question 6: As Sal’s counsel, please advise him on what licenses, if any, may be necessary to send this computerized milling tool to Germany and Ukraine. You have done some additional research, and discovered that, because of recent events, Ukraine is the subject of an executive order issued under the International Emergency Economic Powers Act, E.O. 13999, which is identical to E.O. 13582 except that it replaces “Syria” with “Ukraine.”1

1 For purposes of this exam, assume that this is the only executive order issued in relation to Ukraine. .

Sal is also exploring other international opportunities: he thinks the British and Brazilian markets could be very profitable for sales of the S3 machines. With regard to the United Kingdom, Sal wants to sell S3s made in the United States, but he is unsure if it should use Sau-Sage Co.’s sales representatives from the United States, or instead should open up an office and employ representatives from London to handle the sales effort (he is concerned about possible double taxation of the company’s income). With regard to Brazil, Sal wants to open a Sau-Sage Co. office in São Paulo and start a Brazilian sales operation. Sal’s research shows that Brazil has a much higher rate of income tax than the United States, but Link says he shouldn’t worry, because Sau-Sage Co. will receive a foreign tax credit from the IRS for the income taxes paid in Brazil. In addition, with regard to Sau-Sage Co.’s partnership with Verkaufen, Link says that Sau-Sage Co. should sell all the components to the S3 machine to the German partnership at or below cost, to shift income outside of the United States and thereby slash U.S. income taxes on the transactions. Sal is curious, but isn’t sure he wants to structure the transaction in this fashion. He calls his lawyer.

Question 7: As Sal’s lawyer, you know that the United States has income tax treaties with the United Kingdom and Germany, but not with Brazil. Please advise Sal on the following questions: [7A] What is the impact of Sau-Sage co. opening an office in the United Kingdom versus selling with representatives based in the United States? [7B] How much, if any, foreign tax credit can Sau-Sage claim for the income taxes imposed by Brazil on its operations there? [7C] What is the effect on U.S. income taxes of selling goods to a related entity at or below cost? What should Sal be concerned about with this shifting of profits outside the United States?

TRADE AND INVESTMENT

Despite the initial hiccups, Sal’s international activities prove to be a success over the years. His partnership with Verkaufen led to that company to become one of the leading manufacturers/distributors of the S3 in Europe. With the help of product developers at Verkaufen, Sal developed his own version of the computerized milling tool, which eventually attracted the attention of the U.S. military because it offered a way to drill through plastic explosives, making disabling certain improvised explosive devices, or IEDs, much simpler and safer. As a result, Sau-Sage diversified, forming a subsidiary, Robo-Sau-Sage Inc., which entered into a classified contract to manufacture the tools for the U.S. Department of Defense. Robo-Sau-Sage also has sales contracts with the UK defense ministry, for which it has obtained the appropriate licenses from the State Department to export this sensitive military equipment. Similarly, Sal’s Brazilian sales office expands from São Paolo to Rio de Janeiro and his machines become very popular, displacing a locally produced machine that was not as technologically advanced and was also more expensive than the S3. Based on the Brazilian success, Sal expanded his operations into Paraguay, where he established a locally incorporated factory, in which 75 percent is owned by Sau-Sage and 25 percent is owned by Verkaufen, to build the S3 equipment. Sal decided it would be cheaper to manufacture directly in Paraguay given the lower labor costs. Because his business has expanded so much, however, Sal decided to put his brother-in-law Link in charge of the Brazilian and Paraguayan operations because Link had traveled throughout South America after his semester of law school.

One of Verkaufen’s competitors, Verklempt, recently approached Sal about acquiring Robo-Sau-Sage, for $90 million. Sal’s contact at DOD cautions him to look into the potential acquirer because the U.S. government might be able to block the deal if it’s not in the national interest. Sal has asked you, his trusted international counsel, to conduct due diligence on Verklempt. He also wants you to find out what his DOD contact was talking about. In your research, you learn that Verklempt, while private company incorporated in Germany, has a shareholder named Viktor Krimea, a Russian energy mogul, who is close to Kremlin leadership and is suspected of illegal arms sales to the Taliban in Afghanistan and Pakistan (he has not, however, been designated by the U.S. government under EO 13660). Krimea only holds 10 percent of the company’s shares; however, he retains the right to appoint 50 percent of Verklempt’s board of directors and block any sales or mergers of the company. You also learn that Sal’s DOD contact was referring to potential review by the Committee on Foreign Investment in the United States, or CFIUS.

Question 8: As Sal’s legal counsel, and given what you know about CFIUS, [8A] explain to Sal whether his potential deal with Verklempt would be subject to CFIUS jurisdiction and why, and [8B] what, if any, national security concerns does the transaction raise and are there any ways in which they can be addressed?

When the UK defense ministry heard about the possible sale of Robo-Sau-Sage, Inc. to Verklempt, there was a political uproar about the prospects of this military technology falling into the hands of the Taliban. In response, the UK defense ministry canceled its remaining orders and refused to pay for its last shipment, citing grave national security concerns as grounds to cancel the contract, given its position as a government agency. Sal does not believe that the contract permits cancelation on these grounds and wants to sue in Wisconsin state court to get the outstanding payments, plus possible damages for the unjustified early cancelation.

Question 9: As his lawyer, Sal has asked you what his options are for litigating this breach of contract, including which court he should sue in and whether the UK defense ministry has any defenses as a foreign agency.
Despite initial success, Sal’s South American activities have started going “south.” First, the local sausage-making machine manufacturers that compete with the wildly popular S3 in Brazil have successfully lobbied for a 75 percent tariff on Sal’s imported machines, which will effectively cripple sales to almost nothing. Publicly, Brazil is justifying the action based on the need to raise additional funds to offset the health care costs of rising obesity in Brazil and to address concerns about the machine’s detrimental effects on a small fish, the endangered “ipanema,” that resides in the waters of Brazil’s Atlantic coast. Apparently, Brazilian users of S3s have been using a type of local lubricant to keep the machine working that unfortunately creates a residue that is poisonous to the fish, and the S3 users have been illegally dumping the residue into drains that run to Brazil’s coast. No such fees, however, are imposed on domestically produced machines, which Link tells Sal is unfair and violates the WTO’s MFN obligations because “clearly, Brazilian sausages cause the same problems!”

Question 10: Sal asks you, as his trusted legal counsel, to analyze the tariff situation in Brazil and find out if Link is right and whether Brazil’s actions are permissible under the WTO, which provisions they violate, and what remedies, if any are needed, are available for Sau-Sage.

Frustrated by this turn of events, Link decides to approach an official in the Brazilian customs office, Marco Pobre, to see if he can get the tariffs suspended while he tries to figure out whether he has any legal recourse to avoid the tariffs. Pobre says that he has no authority to formally waive the tariffs, but he could postpone collection of them indefinitely if Link does helps him with a personal problem. Pobre needs Link to help him arrange a visit to the Mayo Clinic in Rochester, Minnesota, for Pobre’s ailing grandmother, who desperately needs a bone marrow transplant and to advance him him approximately $500, 000 to cover the airline tickets and the first few months of treatment. Link recalls from his year in law school something about the Foreign Corrupt Practices Act (FCPA) and thinks that maybe, because there is a humanitarian aspect to Pobre’s request for medical help, that he might be okay – in fact, Link thinks he’d help out Pobre even if he weren’t asking him to help with his tariff problem. Link also thinks that maybe he can just put the expenses down in his books as a “product trip” for Pobre, if he also adds a visit by Pobre to the home plant in Wisconsin during the stay. He starts making arrangements to transfer funds to Pobre’s account, but figures he should tell Sal about it first. Sal tells Link to hold off until he has a chance to talk with their legal counsel.

Question 11: Sal asks you for a legal memo analyzing the potential risks, if any, that Link’s plan raises under FCPA, including any potential defenses that the company might have available.

Sal’s South American woes continue when, one night in Rio de Janiero, a group of angry students, shouting anti-American slogans, break into the sales office and loot the place. Link promptly reported the crime to the local police, but is told that, because it would be impossible to identify the culprits, the police will not investigate the crime. Link then receives a $100,000 fine for leaving his property “in disarray,” and is told that if he did not pay the fine, the office would be confiscated and no court challenges were permitted until after the 2016 Olympics because the purpose of the fine and confiscation is to clean up dilapidated parts of Rio for the Olympic events. Link recalls something from his time in law school that the U.S. government is responsible for U.S. investors overseas, so he drafts a letter to the U.S. Embassy in Brasília, seeking the U.S. government’s help.

At around the same time, the operations in Paraguay ran into problems with government officials in a number of areas. First, the Paraguayan government told Link that his company’s management was structured in violation of a law requiring that all senior managers of a foreign owned company, except the CEO, to be Paraguayan, within one year of the company’s establishment. Sau-Sage has been operated in Paraguay for two years. Second, the government informed Link that, due to a looming foreign exchange shortage in Paraguay, all dividends to foreign shareholders would be banned indefinitely. Third, Link received a notice from the Paraguayan Ministry of Labor, informing Link that his companied owed $75 million in back labor insurance contributions and that, because this was his third and final notice, failure to pay would require him to forfeit the company to a receivership that would be operated by a new board comprised of officials appointed by the government and representatives of the company’s labor union. Link is flabbergasted; he is certain he never received any notices before and that this is his first notice, not his third. Fourth and finally, when Link approached his local counsel about how he could seek to challenge these restrictions, he was told that these types of restrictions could not be challenged by foreigners in Paraguay’s local courts because Paraguayans couldn’t challenge them either and foreigners could not have greater rights than local investors. At this point, Link decides he will draft another letter to the U.S. Embassy in Asunción, once again requesting the U.S. State Department’s help.

Question 12: Link asks you to research what legal grounds and remedies Sau-Sage has as an U.S. investor overseas. While doing so, you learn that the United States does not have a bilateral investment treaty (BIT) with Brazil, but does have a BIT with Paraguay, which is exactly the same as the U.S.-Rwanda BIT.2 [12A] What protections and remedies exist for Sau-Sage in Brazil? [12B] What protections and remedies exist for Sau-Sage in Paraguay? [12C] What advice would you offer Link and Sau-Sage regarding any potential claims?

2 Although the U.S. does not have a BIT with Paraguay, assume that it does for purposes of the exam and this question.

DISPUTE SETTLEMENT IN U.S. COURTS

Meanwhile, in Paraguay, local environmental activists are also raising concerns regarding environmental damage caused by Sau-Sage’s operations there. Specifically, the activists allege that chemicals released in the manufacturing process were causing painful seizures in a significant fraction of children living within five miles of the facility. One group of activists, Paraguayans Organized for Responsible Corporate Operations, or PORCO, organizes frequent demonstrations outside Sau-Sage’s facilities, causing major disruptions. Link is extremely frustrated and worried that the Paraguayan factory will miss its quarterly production targets and cost him his bonus. Link calls the state governor of the state in which Sau-Sage’s factory is located, and asks him if he can “take care of” the PORCO protestors. The governor, who depends in significant part on Sau-Sage for tax revenues, says that he’ll see what he can do. The next day, as PORCO demonstrators rally around the Sau-Sage factory, state police in riot gear suddenly appear, using force to round them up and arrest them. The PORCO activists are detained in state police facilities for over six-months without charges ever being filed against them or any opportunity to contest their detention. They are eventually released when the state comes under pressure from the Paraguayan federal government.

Following their release, the detained PORCO activists file a lawsuit against Sau-Sage Co. in U.S. Federal District Court, in the Eastern District of Wisconsin (which is in the Seventh Circuit). Their complaint alleges violations of the law of nations under the Alien Tort Statute. First, the complaint alleges that Sau-Sage is responsible for acts of “environmental torture,” for causing seizures in local children. For support, they cite Article one of the United Nations Convention Against Torture, of which the United States is a signatory, which provides:

1. For the purposes of this Convention, the term “torture” means any act by which severe pain or suffering, whether physical or mental, is intentionally inflicted on a person for such purposes as obtaining from him or a third person information or a confession, punishing him for an act he or a third person has committed or is suspected of having committed, or intimidating or coercing him or a third person, or for any reason based on discrimination of any kind, when such pain or suffering is inflicted by or at the instigation of or with the consent or acquiescence of a public official or other person acting in an official capacity. It does not include pain or suffering arising only from, inherent in or incidental to lawful sanctions.

Second, the complaint alleges that Sau-Sage is complicit in their arbitrary arrest and detention. For support, they cite Article nine of the International Covenant on Civil and Political Rights, which provides:

1. Everyone has the right to liberty and security of person. No one shall be subjected to arbitrary arrest or detention. No one shall be deprived of his liberty except on such grounds and in accordance with such procedure as are established by law.

And Article nine of the Universal Declaration of Human Rights, which provides: “No one shall be subjected to arbitrary arrest, detention or exile.”

Sal is understandably disturbed by this lawsuit, and wants to know how he should defend himself. He calls his lawyers.

Question 13: As Sal’s lawyer, what arguments are available in his defense against these claims? How do you expect the court would rule on each of these arguments?

Separately, a different group of PORCO activists bring a lawsuit against Sau-Sage Co. in Paraguayan federal court for various environmental torts. The suit is prosecuted under special Paraguayan procedural rules that apply to all environmental claims against companies with headquarters outside Paraguay. The special procedures allow cases to proceed even if the defendant does not appear, by providing a court-appointed advocate to stand in for the defendant; limit the objections that defendants may raise to discovery requests; establish a rebuttable presumption of causation between proven environmental damage and statistically significant health effects within a reasonable radius of the damage; and require defendants who lose at trial to post a bond of 1% of the judgment, or $10,000, whichever is greater, in order to stay the judgment pending any appeal. Link decides not to dignify the proceedings by responding to local service of process (which was duly executed under Paraguayan law upon filing of the complaint and 90 days prior to the first required appearance). The Paraguayan court therefore appoints a well-respected Paraguayan lawyer to represent Sau-Sage in absentia, and allows the trial to proceed. The court finds in favor of the PORCO plaintiffs, entering a judgment against Sau-Sage Co. for $10 million. The court-appointed advocate lodges an appeal on several grounds, but because Sau-Sage does not pay the required bond (which would be $100,000), the judgment is not stayed and is considered enforceable under Paraguayan law. Because Sau-Sage has few liquid assets in Paraguay, the PORCO plaintiffs seek to have the judgment recognized and enforced in the United States by filing in U.S. District Court in the Eastern District of Wisconsin. Sal is concerned that he may be forced to pay against this judgment, which he considers illegitimate, and calls his lawyer for advice.

Question 14: As Sal’s lawyer, you know that Wisconsin has adopted the 2005 Uniform Foreign-Country Money Judgment Recognition Act. How do you advise Sal on the arguments he can make against recognition of the Paraguayan judgment? How do you expect the court to rule?
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