chapter ten
Legal Forces
McGraw-Hill/Irwin
International Business, 11/e
Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
 Discuss the complexity of the legal forces that
confront international business
 Recognize the importance of foreign law
 Explain contract devices and institutions that
assist in interpreting international contracts
 Recognize the need and methods to protect your
intellectual properties
10-3
Learning Objectives
 Discuss enforcement of antitrust laws
 Explain the risk of product liability legal actions,
which can result in imprisonment for employees or
fines for them and the company
 Discuss U.S. laws that affect international
business operations
10-4
International Legal Forces
• Rule of law allows foreign
businesses to know interests will
be protected
• Public International Law
– Legal relations between governments
• Private International Law
– Laws governing transactions of
individuals and companies that cross
international borders
10-5
Sources of International Law
• The most important source is found in
bilateral and multilateral treaties between
nations
– Treaties are agreements between countries,
which may be bilateral (between two countries)
or multilateral (involving more than two
countries); also called conventions, covenants,
compacts, or protocols
– United Nation’s International Court of Justice
creates law when it decides disputes
10-6
Extraterritoriality
• A country’s attempt to apply its laws
to foreigners or nonresidents and to
acts and activities that take place
outside its borders
– Not done through force, but by
traditional legal means
10-7
International Dispute Settlement
 Litigation in the United States
 well-developed court systems that facilitate
litigation
One reason many people outside the
U.S. dislike litigation in the U.S. is the
process of discovery
Unlike most other countries, the U.S.
has two major court systems
The federal court system and the
state court systems
10-8
Performance of Contracts
• United Nations Solution
– Many countries, including the U.S., have
ratified the UN Convention on Contracts
for International Sales of Goods (CISG)
– CISG established uniform legal rules to
govern international sales contracts and
the rights and obligations of the buyer and
seller
– CISG is automatically applied to all
contracts
10-9
Performance of Contracts
• Private Solution: Arbitration
– Instead of going to court in any country,
companies may opt for arbitration
• A process, agreed to by parties to a dispute
in lieu of going to court, by which a neutral
person or body makes a binding decision
• Generally faster
• More informal
• Confidential
• Less expensive
10-10
Enforcement of Foreign Arbitration Awards
• The UN Convention on the Recognition and
Enforcement of Foreign Arbitral Awards
– The U.S. and most UN member-countries of
have ratified this convention
– Binds ratifying countries to compel arbitration
when the parties have so agreed in their
contract and to enforce the resulting awards
10-11
Intellectual Property: Patents, Trademarks,
Trade Names, Copyrights, and Trade Secrets
Intellectual property includes
 Patents
 Trademarks
 Trade names
 Copyrights
 Trade secrets
 All result from the exercise of
someone’s intellect
10-12
Intellectual Property
Patents (Protection)
 International Convention for the
Protection of Industrial Property
 European Patent Organization (EPO)
 The World Intellectual Property
Organization (WIPO)
10-13
Intellectual Property
 Trademarks
 Protection varies by country, 10 to 20
years
Madrid Agreement of 1891
General American Convention for
Trademark and Commercial Protection
Bilateral basis in friendship,
commerce, and navigation treaties
10-14
Intellectual Property
 Trade Names
 Protected in countries that adhere to the
Convention for the Protection of Industrial
Property
 Copyrights
– Protection provided under the Berne
Convention of 1886 adhered to by 77 countries
– Universal Copyright Convention of 1954
adopted by 92 countries
10-15
Common Law or Civil Law?
 Common Law
 Jurisdiction has
more power to
expand rules to fit
particular cases
 Civil Law
 Jurisdiction is
bound by the
words in the
code
 Much more
predictable
10-16
Legal System Differences between
Europe and United States
 Europe
 Legislation is rarely amended and
regulations are rarely revised
 Courts are not as often asked to give their
interpretations
 If they are, the decisions are rarely
appealed
 United States
 Laws and regulations are constantly being
amended or revised by legislatures and the
agencies
10-17
Legal System Differences between England
and the U.S.
 England has a split legal profession with
barristers and solicitors
 England has no jury for civil court
actions
 Contingency fees less common in
England
 Award of costs to the winner in civil
litigation standard in England
 Pretrial discovery differs
10-18
Standardizing Laws
• Many attempts have been made to standardize
laws among various countries
• International business flows much better with a
uniform set of rules
• Attempts include
– Tax conventions and treaties
– Antitrust cooperation
– International Center for Settlement of
Investment Disputes
– UN Convention on International Sale of Goods
– International Organization for Standardization
(ISO)
– International Electrotechnical Commission (IEC)
10-19
Taxation
• Nonrevenue tax purposes
– To redistribute income, discourage
consumption of products such as tobacco
and alcohol, and encourage purchase of
domestic rather than imported products
10-20
National Tax Approach Differences
• Tax Levels
– Range from relatively high in some
Western European countries to zero in
tax havens
– Some countries have capital gains taxes,
and some do not
• Capital gain is realized when an asset
is sold for an amount greater than its
cost
10-21
National Differences of Approach
• Tax Types
– Capital gains tax
– Income tax
• Common in industrialized countries
– Value-added tax
• Tax based on the value of goods and
services
• Used in Europe
– Unitary tax
10-22
Taxation
10-23
Tax Laws and Regulations
• Complexity of national tax systems
differs
– Many consider tax laws and regulations of the
U.S. the most complex
• Compliance with tax laws and their
enforcement vary widely
– Germany and U.S. strict, Italy and Spain
relatively lax
• Other differences include
– Tax incentives, exemptions, costs,
depreciation allowances, foreign tax credits,
timing, and double corporate taxation
10-24
Taxation
 Tax Treaties or Conventions
– Treaties between countries that bind the
governments to share information about
taxpayers and cooperate in tax law
enforcement, often called tax conventions
– The U.S. has tax treaties with over 50
countries
10-25
Taxation
• National Tax Jurisdiction
– A tax system for expatriate citizens of a
country whereby the country taxes them on
the basis of nationality even though they live
and work abroad
• Territorial Tax Jurisdiction
¯ Expatriates are exempt from their country’s
taxes
10-26
Antitrust Laws
• Antitrust laws
– Laws to prevent price fixing, market sharing,
and business monopolies
• Competition policy
– The European Union equivalent of antitrust laws
• The U.S. and the EU have attempted to
enforce their antitrust laws extraterritorially
• Japan’s Fair Trade Commission
– the “toothless tiger”
– Japanese companies are incorporating antitrust
thinking into strategy
10-27
Tariffs, Quotas, and Other
Trade Obstacles
 Purposes of
tariffs
 To raise revenue for
government
 To protect domestic
producers
 Quotas limit the
number or
amount of imports
 For protection
 Other trade
obstacles include
 Health requirements
 Packaging
requirements
 Language
requirements
 Weak patent or
trademark protection
 Quarantine periods
 Voluntary Restraint
Agreements
10-28
Torts
 Product Liability
– Standard that holds a company and its officers and
directors liable and possibly subject to fines or
imprisonment when their product causes death,
injury, or damage
 Strict Liability
– Standard that holds the designer or manufacturer
liable for damages caused by a product without the
need for a plaintiff to prove negligence in the
product’s design or manufacture
10-29
U.S. Laws That Affect U.S. Firms’
International Business
• Federal Employment Laws
– Title VII of the CRA of 1964
– ADEA and ADA
• Foreign Corrupt Practices Act (FCPA)
– U.S. law prohibits making payments to
foreign government officials for special
treatment
– Congress passed FCPA outlawing bribery,
but not “grease” payments
10-30
2002 Bribe Payers Index
10-31
Accounting Law
• Sarbanes-Oxley Act (SOX)
– Brings major changes to the regulation of
corporate governance and financial practice
• New reporting requirements
• Officer and director responsibilities
• Auditor independence
– Applies to any company, domestic or foreign,
that has securities registered or is required to
file reports under the Securities Exchange Act
of 1934
10-32