A Newsletter from Shumaker, Loop & Kendrick, LLP Fall 2012 - Focus on International Issues

CAN’T YOU HEAR ME KNOCKING?

®

The Dreaded Preference Demand

ou are in your office finishing your morning espresso when you receive an email from the CFO of your company’s U.S. subsidiary. Attached to the email is a letter from a U.S. law firm. Instinctively, you know this can’t be good news. You open it only to find a letter from counsel for a trustee in a Chapter 11 bankruptcy case. Dear creditor, the trustee demands you pay back the payments from the Chapter 11 debtor (your U.S. subsidiary’s customer) over 2 years ago...the dreaded preference demand. But, if you pay 80% today, the letter offers, it will all go away.

Your U.S. CFO has mentioned this aspect of the U.S. Chapter 11 law, but this is the first time you have encountered it. Let me get this straight, under U.S. Bankruptcy law, a Chapter 11 debtor can force the return of money

it paid to our U.S. subsidiary within 90 days prior to the customer’s Chapter 11 filing? Yes, I have seen articles written by American lawyers that my CFO forwarded me, but the former customer wants us to pay back $350,000, which will reduce the contribution from our American subsidiary, will materially alter our profit forecast for the year, and will require us to reserve for a potential loss on our books.

You immediately telephone your CFO to assess the damage. The CFO reports he has reviewed the customer file and the official notices he has received from the U.S. Bankruptcy

Court regarding the Chapter 11 case. The CFO has confirmed that a Proof of Claim for unpaid invoices has been filed with the court. This registers our U.S. subsidiary’s claim, making sure we are in line for payment. Your CFO also reminds you that the subsidiary shipped goods that were received by the customer within 20 days of its bankruptcy filing. Accordingly, your proof of claim also contains an administrative claim for those invoices. Your U.S. counsel has advised that an administrative claim is entitled to a priority in payment, on parity with professional fees, which always seem to be paid.

According to your CFO, the next step is to analyze potential defenses to the customer’s alleged “preference” paid to your U.S. subsidiary. U.S. Bankruptcy law apparently has common vendor defenses of “subsequent new value” and “ordinary course of business.”

You re-read the memo your CFO sent you from the American lawyer. According to the memo, “subsequent new value” means more goods shipped after receipt of the payment at issue. “New value” is an objective defense and easy to prove, usually based on a submission of invoice copies. Trustees for Chapter 11 debtors usually agree to a dollar for dollar credit for new value. The U.S. subsidiary shipped $125,000 worth of goods that count for new value, reducing the exposure from $350,000 to $225,000. Will the “ordinary course of business” defense shield the remaining $225,000?

The ordinary course of business defense seems less certain. The concept is that the payments the trustee seeks to recover were made in the “ordinary course of business,” thus shielding the payments from repayment. However, the “ordinary course of business” defense is more subjective because U.S. Bankruptcy Courts have issued conflicting

5 International Arbitration 6 EB-5 Program 8 Here Comes FATCA12 Expatriate Compensation

14 Micro-Captive Insurance Companies17 Cross-Border Trademark Protection19 Client Spotlight: AccessEast22 Promoting Your Business Online

24 A Decision for the Ages27 SLK News

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U.S. Bankruptcy Courts have issued conflicting rulings on what constitutes whether payments are ordinary or not.

rulings on what constitutes whether payments are ordinary or not. A key question is whether the payments at issue were paid consistently compared to the historical payments the debtor made to our U.S. subsidiary. If during the last year or so, our customer-turned-Chapter 11-debtor has paid us 5 to 10 days slow compared to invoice terms, and the payments in question were also paid 5 to 10 days slow, we should have a solid ordinary course of business defense. The problem here is about 30 days before our customer filed for Chapter 11 protection, we saw it coming. Our CFO changed the terms from net 30 to net 10, and cut the credit line by 50%. We were happy to have reduced our exposure substantially by this move. The downside is the payments in that 30 day period likely won’t be considered “ordinary course of business” because they are not consistent with the historical pattern of payment.

Your CFO pulls the invoices for shipments during the last year or so and analyzes the payment history. Do we have a new value defense? Do we have the ordinary course of business defense? Looks pretty solid except for that last 30 days, so time to call the trustee’s counsel and put this to bed. The trustee agrees to look at our records and consider our defenses for a possible out-of-court settlement. Thus, we email to the trustee’s counsel a PDF showing our subsequent shipments and the payment history. Since the trustee’s 2 year statute of limitations to file a formal preference complaint expires soon, we get a letter back quickly saying that the trustee reviewed the information and agrees to reduce the demand by the amount of the new value shipments. However, the trustee doesn’t buy our ordinary course defense…and we have the burden of proof. The trustee is betting we won’t

spend the money to come to court, and that we will pay more to settle and avoid court. The trustee offers to settle for 80% of $225,000, paid immediately.

As additional “incentive” to encourage our agreement to the proposal, the trustee also insists we are not entitled to any distribution on our unsecured claim, or on our 20 day administrative claim…unless we resolve this preference claim. Translated...the trustee is using his leverage to get more money out of us. You didn’t expect this curve ball. Time to call counsel.

What is the trustee saying and can he do this? Not pay our administrative claim? Not pay our unsecured claim? Please explain.

The trustee is relying on Section 502(d) of the Bankruptcy Code. It says:

...the court shall disallow any claim of any entity...that is a transferee of a transfer avoidable under section....547, 548...unless such entity or transferee has paid the amount...for which such...transferee is liable....

The trustee says that “any claims” clearly includes our unsecured claim and our 20 day administrative claim and they cannot be paid until we reach a settlement on the alleged preference payment. Your counsel advises you of Judge Walrath’s recent Delaware opinion in Giuliano v. Mitsubishi Electronics America, Inc. In that case, Mitsubishi timely filed a proof of claim that included a general unsecured claim of $569,107 and a 20 day administrative claim for $829,393. The debtor operated under the name “Ultimate Electronics” in 46 retail stores, primarily in the U.S. mid-west and western states.

On July 19, 2011, the Trustee for Ultimate Electronics filed a preference action against Mitsubishi to recover $4,744,787, and to also “disallow” Mitsubishi’s general unsecured claim of $569,107 and its 20 day administrative claim for $829,393, both under Section 502(d) above. Mitsubishi filed a motion to dismiss the Trustee’s complaint because the complaint didn’t specify which debtor entity made the alleged preference payments to Mitsubishi,

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and because the Trustee’s attempt to disallow Mitsubishi’s claims was not proper.

The U.S. Bankruptcy Court ruled in favor of Mitsubishi, and dismissed the preference action but gave the Trustee the right to amend its complaint to get the parties right. In doing so, the Court also ruled that Section 502(d) is not applicable unless and until there is a “judicial determination” on the preference complaint. The existence of a potential preference claim alone does not allow a trustee to withhold a distribution on an unsecured claim, or an administrative claim. The Trustee can use Section 502(d) successfully only if the Trustee obtains a judgment on the complaint. It is rare for a preference claim to reach a judgment, as most claims are settled by the parties.

Subsequent to the U.S. Bankruptcy Court ruling in the Mitsubishi case, the Trustee filed an Amended Complaint against Mitsubishi to recover alleged preference payments of approximately $4.8 million. However, unlike the original Complaint, the Amended Complaint does NOT seek to disallow Mitsubishi’s claims against the Chapter 11 debtor under Section 502(d).

It is clear that the U.S. Bankruptcy Court ruling has provided additional leverage to preference defendants worldwide, enhancing the creditor’s ability to defend preference claims without jeopardizing the value of the defendant’s claims for unpaid goods against the Chapter 11 debtor.

On May 4, 2012, the United States District Court for the Southern

District of New York affirmed a 2011 Bankruptcy Court ruling, which enjoined a lawsuit in the Cayman Islands against a Chapter 11 debtor. The case of Bernard L. Madoff Investment Securities, LLC v. Maxam Absolute Return Fund, et al., arises in the Bernie Madoff SIPA liquidation and Chapter 11 proceedings, where the aftermath of the massive Madoff fraud is playing out.

The question in this Madoff case is whether a non-U.S. creditor can maintain a lawsuit in its own jurisdiction against a U.S.-based Chapter 11 debtor. In this instance, can a Cayman Islands registered entity sue a Chapter 11 debtor in the Cayman Islands, and does the automatic stay of Section 362 of the Bankruptcy Code prohibit the lawsuit?

Section 362 provides: . . . this section . . . operates as a stay, applicable to all entities, of . . . the commencement . . . of a judicial . . . proceeding against the debtor . . . or to recover a claim . . . or [added] any act to obtain possession of property of the estate . . .

Section 541 of the Bankruptcy Code defines “property of the estate” as all of the legal or equitable interests of the debtor in property “wherever located”.

Madoff Securities was a member of SIPC, or the Securities Investor Protection Corporation, formed under SIPA, the Securities Investor Protection Act, passed by the U.S. Congress in

*** New York Bankruptcy Court Flexes Global Muscle

1970. SIPA and SIPC were designed to protect customers of failed brokerage firms by providing a specialized liquidation proceeding, known as a SIPA liquidation, which is distinct from a U.S. Chapter 7 liquidation proceeding. Madoff Securities is currently in a SIPA liquidation, and in a Chapter 11 proceeding, both of which have been substantively consolidated. Irving Picard was appointed as the Trustee on behalf of the liquidation estates. The cases are pending in the Southern District of New York. One of Picard’s duties is to recover assets for the benefit of defrauded customers of Madoff Securities, which assets include claims against third parties.

On December 8, 2010, the Madoff Trustee sued MAXAM Capital Management, LLC, MAXAM Absolute Return Fund, LTD and affiliates (“MAXAM”) in the New York Bankruptcy Court to recover preference payments totaling $25 million, allegedly paid to MAXAM within 90 days prior to the Madoff Chapter 11 filing. Briefly, a “preference” arises under Section 547 of the Bankruptcy Code and is a pre-petition payment to creditor made within 90 days prior to a Chapter 11 filing. The U.S. Bankruptcy Code provides for the recovery by the debtor’s estate of payments made on the “eve” of insolvency so that value can be more equitably re-distributed to all creditors. Upon being sued by the Madoff Trustee, the MAXAM defendants filed an answer in the New York preference case, but also filed a declaratory judgment action against the Trustee in the Cayman Islands. The purpose of the declaratory judgment action was to obtain a court order in the Cayman Islands ruling the MAXAM defendants had no preference liability in the U.S. proceedings.

In response to the Cayman Islands lawsuit, the Madoff Trustee filed a

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motion to enjoin the action, on the grounds that the action violated the automatic stay of Section 362 of the Bankruptcy Code, and Section 78 of SIPA, that prohibits legal action against the Trustee, as SIPA reserves exclusive jurisdiction to the U.S. Courts. In a well-reasoned, 21-page opinion, the New York Bankruptcy Court on October 12, 2011, ruled the Cayman Islands action violated the automatic stay of Section 362 and applicable SIPA provisions. The New York Court found the Cayman Islands action to be void, and enjoined the MAXAM entities from taking any further action against the Madoff estate “in any domestic or extraterritorial jurisdiction” without first obtaining permission from the U.S. Bankruptcy Court. In essence, the U.S. Bankruptcy Court viewed the Cayman Islands action as an attempt to usurp the Bankruptcy Court’s jurisdiction over an asset of the Madoff Securities’ estates.

The MAXAM entities appealed the Bankruptcy Court ruling, but the U.S. District Court affirmed the Bankruptcy Court ruling. In the appeal, the MAXAM entities argued that the automatic stay of Section 362 (as well as applicable SIPA provisions) had no extraterritorial effect, and could not apply or be enforced outside the U.S. The MAXAM entities further argued that the U.S. Bankruptcy Court should have deferred to the Cayman Islands court under principles of “comity”. In affirming the Bankruptcy Court ruling, however, the U.S. District Court emphasized several points:

1. Under Section 541 of the Bankruptcy Code, defining “property of the estate”, the filing of Chapter 11 creates a worldwide estate of all of the legal or equitable interests, “wherever located”, with the implication that the Bankruptcy Court has exclusive jurisdiction over “property of the estate” anywhere.

2. The automatic stay (of Section 362) exists to protect the estate from a chaotic and uncontrolled scramble for the Debtor’s assets in a variety of uncoordinated proceedings in different courts, whether domestic or foreign.

3. “Comity” in the legal sense is neither a matter of absolute obligation, on the one hand, nor of mere courtesy and goodwill upon the other. But it is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to the international duty and convenience, and to the rights of its own citizens, or of other persons who are under the protection of its laws. However, the court noted that the principles of comity do not stand for the notion that a U.S. Court can exercise control over a foreign court. Rather, a bankruptcy court can enforce the automatic stay extraterritorially only against entities over which it has personal jurisdiction, including the MAXAM entities.

The court concluded that the U.S. Courts for these purposes has personal jurisdiction over the MAXAM entities. By filing the lawsuit in the Cayman Islands, the MAXAM estates attempted to interfere with the recovery of an asset of the estate, a violation of the automatic stay.

In affirming the New York Bankruptcy Court decision, the U.S. District Court has affirmed the global reach of the automatic stay imposed by Section 362 of the U.S. Bankruptcy Code. The Bankruptcy Court also concluded that principles of international comity did not apply to a foreign action that violated U.S. law and sought to interfere with the exclusive jurisdiction of the

U.S. Bankruptcy Court. This Madoff ruling should not be overstated. It is important to note that recovery actions, such as preference actions, have long been viewed as a key asset of a Chapter 11 estate. The Madoff decisions indicate that U.S. Courts will not permit a direct challenge to its ability to protect such assets of the estate for the benefit of all creditors.

It is clear, however, that U.S. Courts will honor the principles of comity, and defer to foreign courts in appropriate cases. For example in the BTA Bank case, a Chapter 15 proceeding in the Southern District of New York, the Bankruptcy Court refused to extend the automatic stay to a Swiss arbitration proceeding. While the particulars of the BTA Bank case are beyond the scope of this article, it is important to note that U.S. Courts have refused to extend the automatic stay in appropriate cases. However, this Madoff case makes clear that any attempt to interfere with a preference action, in any jurisdiction, will be enjoined.

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International trade is growing at all levels of business, and brings with it the question of how to resolve disputes. As a general rule, the preferred method is international arbitration since few are willing to risk litigation in the other party’s national courts. Although the topic

of international arbitration is broad and complex, a few key points should be kept in mind in considering your options. Arbitration clauses should be far more detailed in an international contract. Generally, the clause should specify the place of the arbitration (often a halfway point in a sophisticated commercial

city), the nationality of the arbitrators, the language of the arbitration, enforcement issues, which international arbitration authority to invoke, which rules to use, and whether

the arbitrator should base the award on the substantive law or on fairness and equity. Most of the international arbitration tribunals have standard clauses that can be used and modified as appropriate.Your legal counsel should understand the treatment of arbitration in the national law of the opposing party, and whether the nation is a signatory to relevant conventions such as the United Nations Convention on the Recognition and Enforcement of

Foreign Arbitral Awards or the Inter-American Convention on International Commercial Arbitration and, if so, the scope of the nation’s implementing legislation.Your counsel should also be familiar with the international arbitration rules and procedures of the various providers, many of which are talked about by their initials as their names are a mouthful. These include:• International Centre for Dispute

Resolution (ICDR)(part of the American Arbitration Association);

• International Chamber of Commerce (ICC);

• London Court of International Arbitration (LCIA);

• Stockholm Chamber of Commerce (SCC);

• Singapore International Arbitration Centre (SIAC);

International Arbitration

• Commercial Arbitration and Mediation Center for the Americas (CAMCA); and

• United Nations rules for arbitration such as United Nations Commission on International Trade Law (UNCITRAL).

Different authorities and different rules may be viewed more or less favorably by parties from different nations.This brief discussion introduces you to special considerations related to arbitration provisions in international contracts. You should consult with a sophisticated ADR practitioner in crafting any international arbitration clause.

Arbitration clauses should be far more detailed in an international contract.

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The Road To Citizenship Less Traveled

ipartisan immigration reform in an election year? And it creates jobs without adding to the deficit? Too good to be true? Well, earlier this year, Sen. Patrick Leahy (D-Vt) introduced legislation—

co-sponsored by five Republicans (Sens. Collins, Grassley, Hatch, Lee & Rubio) and three Democrats (Sens. Conrad, Kohl & Schumer)—to extend the EB-5 Regional Center Program for three years.1 After several amendments, that legislation was passed unanimously by the United States Senate.2 It later passed the House of Representatives by a 412-3 vote and was ultimately signed into law by President Barack Obama. The legislation, as enacted, extends the EB-5 Regional Center Program—which had been set to expire on September 30, 2012—for an additional three years.3

The EB-5 Regional Center Program is part of the Immigrant Investor Program.4 Congress passed the Immigrant Investor Program (known as the EB-5 visa) as part of the Immigration Act of 1990 to

attract foreign investment and stimulate the economy.5 Under the Immigrant Investor Program, the United States Citizenship and Immigration Service (“USCIS”) allocates 10,000 visas

annually for foreign investors who make significant investment in a new, reorganized, or restructured business that will create jobs for qualified workers.6

To qualify for an EB-5 visa under the Immigrant Investor Program, a foreign investor must contribute $1 million to a new (one created after November 29, 1990) or expanded (which is defined as a business that will expand to 140% of its pre-investment number of employees or net worth) commercial enterprise that will create at least 10 jobs.7 If the commercial enterprise is in a targeted employment area (defined as a rural area or an area where the unemployment rate is 150% of the national average),8 then the required initial investment is only $500,000.9 Once the EB-5 visa petition is approved, the foreign investor is granted conditional permanent residence for two years.10 After two years, the foreign investor can seek to have the conditions removed—and, therefore, become a legal permanent resident—if the investor has made the required capital investment and that investment has created or preserved at least ten jobs for qualified workers in the United States.11

Two years after creating the Immigrant Investor Program, Congress created the EB-5 Regional Center Program (also known as the Investor Pilot Program).12 The requirements for the Investor Pilot Program are the same as under the original Immigrant Investor Program, except that the investment under the Investor Pilot Program can be with a “regional center.”13

The EB-5 Program:

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(“GAO”) concluded that only $1 billion had been invested under the program—not the $48 billion predicted.21 The GAO was unable to determine how many jobs had been created under the Pilot Program.22

What was the reason for the less than stellar performance? In its 2005 report, the GAO cites a number of factors leading to the low participation in the program. Those factors—identified in interviews with USCIS officials and immigration lawyers—include (i) the rigorous application process compared to other employment-based visa applications; (ii) lack of expertise among USCIS employees adjudicating EB-5 applications; (iii) the lack of clear guidance; and (iv) the lack of timeliness in adjudicating applications.23 Those factors combined to create uncertainty among foreign investors.

But perhaps the biggest cause of uncertainty was certain “precedent setting decisions.” Those decisions arose out of a series of events beginning in 1996 and 1997. During that time, EB-5 adjudicators determined that a number of EB-5 petitions exhibit questionable financial arrangements. For instance, businesses were financed with debt, not equity. Or in some cases, the foreign investor was not personally at risk for the required investment. In other cases, the full amount of the capital investment was not available for business operations or job creation. In December 1997, the Immigration and Naturalization Service determined that financial arrangements exhibiting any of those characteristics (or other characteristics designed to limit the investor’s risk) did not satisfy the EB-5 requirements. INS later suspended processing over 900 EB-5 applications until it could issue guidance to EB-5 adjudicators. In June and July 1998, the INS issued the “precedent setting decisions” that provided that guidance. These new guidelines were

much more restrictive. And under these new guidelines, the INS determined that most of the 900 applications that had been placed on hold should be denied.24 The result of all of this was that the number of visas peaked in 1997 and then, as a result of the uncertainty among foreign investors, steadily declined through 2003.

Since 2004, however, there has been a steady increase in the number of EB-5 visas issued. And by some accounts, the program has generated over $1 billion capital investments since 2008—about the same amount raised during the first 14 years of the program.25 More and more, state and local government officials are looking to EB-5 regional centers to spur economic growth in targeted sectors, such as renewable energy (currently there are eight regional centers focusing on renewable energy and green jobs).26 And the federal government appears to have made the EB-5 program a priority as well. The President’s Council on Jobs and Competitiveness recently issued an interim report recommending that the current administration enhance the EB-5 program by creating EB-5 review teams with expertise, engaging re-engineering experts to streamline the application process, launching a new premium processing service, and evaluating additional options for maximizing the program’s potential.27

With Congress having extended the EB-5 program for an additional three years, and federal, state, and local government officials looking to the program as a way of encouraging capital investment and creating jobs without adding to the deficit, the EB-5 program may live up to the high hopes its sponsors had after all. And that may provide foreign investors a streamlined avenue to legal permanent residency. Not a bad deal.

See footnotes on page 31.

A “regional center” is a business entity that coordinates foreign investment under the Immigrant Investor Program within a specified geographic area.14 There are currently 90 approved regional centers operating in 34 states.15 There are another 70 proposed regional centers pending before USCIS.

The Investor Pilot Program offers two distinct advantages over the original Immigrant Investor Program. First, the ten jobs that must be created before the investor can become a legal permanent resident can be “direct” or “indirect” jobs—a lower standard than under the Immigrant Investor Program.16 Second, federal law provides that priority should be given to individual petitions under the Investor Pilot Program.17

Sponsors of the Immigrant Investor Program predicted the program would lead to an influx of new capital, which,

in turn, would lead to job creation. According to the sponsors,

4,000 millionaires would apply for EB-5 visas annually,

generating $4 billion in new investments and

creating 40,000 jobs each year.18 Over the 20 years

that the Pilot Program has been in place, that would

mean $80 billion in new investments and 80,000 jobs.

But the impact of the program, at least initially, has been far less

than predicted.

For starters, only 6,204 of the approximately 130,000 visas that had been allocated during the first 12 years of the Pilot Program were actually issued to foreign investors and their dependents.19 And of those 6,204 visas holders, only 653 had met the requirements for obtaining permanent legal status.20 Worse, a 2005 study by the Government Accountability Office

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requirements, FATCA encourages compliance by requiring U.S. persons that make payments to non-compliant FFIs and NFFEs to withhold a 30% penalty tax from the payment. If a U.S. person fails to withhold the penalty tax on a payment to a non-compliant FFI of NFFE, the U.S. person becomes liable for the penalty tax. It is therefore important for U.S. persons and businesses that transfer funds offshore to understand what their obligations are under FATCA. This article focuses on (1) the types of payments that are potentially subject to FATCA withholding, (2) the FFIs and NFFEs that are subject to FATCA withholding and (3) what a U.S. payor needs to do to ensure compliance with FATCA.

he “Foreign Account Tax Compliance Act,” commonly referred to as “FATCA” was enacted by Congress in 2010, and will start to be phased-in beginning January 1, 2013. FATCA is intended to provide

the IRS another, more effective means of preventing U.S. taxpayers from avoiding income tax by failing to report income earned on foreign investments. A robust set of disclosure requirements is already imposed on U.S. individuals and businesses with investments located in foreign countries. Indeed, FATCA bolsters existing reporting obligations by adding Form 8938, Statement of Specified Foreign Financial Assets, to the list of information returns that a U.S. person must file to report interests in foreign investments. Onerous penalties

are imposed on U.S. persons who fail to satisfy these disclosure requirements. However, if a U.S. person nonetheless fails to report the existence of foreign taxable income and investments, it

is often difficult for the IRS to uncover the failure to report income because such investments are outside the U.S. financial payment reporting system.

FATCA takes a novel and unprecedented approach to this perceived problem

Here Comes FATCA

by imposing new reporting requirements on foreign banks, financial intermediaries, investment funds and insurance companies (“foreign financial institutions” or “FFIs”), as well as certain other privately-held, passive investment entities (“non-financial foreign entities” or “NFFEs”). Beginning in 2013, FFIs and NFFEs will be required to provide information concerning their U.S. investors and account holders to the IRS so that it is able to make sure that income and gains are being properly reported by those investors and account holders for U.S. income tax purposes.

Since the U.S. does not have direct jurisdiction over FFIs and NFFEs to enforce FATCA’s reporting

The FATCA withholding requirement potentially applies to a variety of payments made to FFIs and NFFEs from U.S. Sources, which are referred to as “Withholdable Payments.”

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Withholdable Payments. The FATCA withholding requirement potentially applies to a variety of payments made to FFIs and NFFEs from U.S. Sources, which are referred to as “Withholdable Payments.” Such payments include:

- Interest- Dividends- Rents- Royalties- Compensation- Principal payments on

debt obligations- Proceeds from the sale of stock

or debt obligations or any other asset that would give rise to a Withholdable Payment

A grandfathering rule applies that exempts payments on “obligations” that were outstanding prior to January 1, 2013 from the definition of withholdable payments. The term “obligations” encompasses any agreement that results in a Withholdable Payment except: (1) instruments treated as equity, (2) agreements that lack a definitive expiration or term, such as demand deposits and savings accounts, (3) brokerage, custodial and similar agreements to hold financial assets and (4) master agreements that provide general terms pursuant to which a series of transactions will take place between the parties. Examples of “obligations” that qualify for the grandfathering rule include debt instruments, credit facilities, and standard life insurance and annuity contracts. However if an obligation is substantially modified after January 1, 2013, FATCA will apply to payments made after the modification.

Payments that are made in the “ordinary course” for goods and services, or that are effectively connected with the conduct of a trade or business in the U.S. (unless exempt from tax under a treaty)

are also exempted from the definition of “Withholdable Payment.” In addition, payments of interest on debt obligations with a term of 183 days or less are not considered “Withholdable Payments.”

FFIs and NFFEs Subject to Withholding Tax. In order to be subject to FATCA withholding tax, a Withholdable Payment must be made to a non-U.S. recipient that (1) falls within the definition of an FFI or an NFFE, (2) does not qualify for an exemption from FATCA withholding and (3) is not in compliance with the FATCA information reporting requirements. The definitions of an FFI and NFFE and the exclusions from the definitions are the subject of lengthy and complex regulations that defy simple explanation. Generally speaking, an FFI is any non-U.S. entity that (1) engages in banking or a similar business, (2) holds financial assets for the account of others as a substantial part of its business (20% of gross revenue is considered “substantial”), (3) engages primarily in the business of investing, reinvesting or trading in securities (50% of gross income constitutes “primarily”) or (4) is a foreign insurance company. Based on the foregoing, all types of financial institutions are FFIs, including banks, savings banks, commercial banks, savings and loan banks, broker-dealers, clearing organizations, trust companies, mutual funds, private equity funds, venture capital funds, hedge funds and even investment subsidiaries of endowments.

Five categories of entities are expressly excluded from the definition of an FFI: (1) non-financial entities that act as holding companies for subsidiaries engaged in active trades or businesses, (2) start-up companies that invest capital pending commencement of a non-financial business, (3) non-financial entities emerging from bankruptcy or that are liquidating, (4) certain hedging

and financing centers of non-financial affiliated groups and (5) entities that qualify as 501(c)(3) organizations for U.S. federal income tax purposes.

Certain entities, while not excluded from the definition of an FFI, are exempt from FATCA withholding. These include foreign governments, international organizations, foreign central banks and governments of U.S. territories. In addition, certain FFI’s are “Deemed Compliant” and are not required to comply with information reporting. There are two types of Deemed Compliant FFIs: “Registered Deemed Compliant FFIs” and “Certified Deemed Compliant FFIs.” Only certain kinds of FFIs can qualify as Deemed Compliant FFIs. These include small (assets of no more than $175 million) local banks and financial services companies that are government regulated and operate only in their country of organization, members of affiliated groups that identify and transfer all of their U.S. accounts to an affiliated FFI that satisfies the FATCA reporting requirements, non-profit organizations, FFIs with only low value accounts and foreign retirement funds.

Registered Deemed Compliant FFIs are required to register with the IRS and certify that they meet the requirements of one of the categories of entities that qualify for Registered Deemed Compliant status. The IRS will issue a Registered Deemed Compliant FFI a FATCA identification number that it must give to a U.S. payor making a Withholdable Payment in order to establish it is not subject to the FATCA withholding tax. Certified Deemed Compliant FFIs do not register with the IRS and are not issued a FATCA identification number. Instead, a Certified Deemed Compliant FFI must provide documentation directly to the U.S. payor making a Withholdable Payment to establish it is not subject to FATCA withholding tax.

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an alternative to direct reporting by FFIs and NFFEs to the IRS. Under the Joint Framework, foreign governments will pursue implementing legislation that allows FFIs and NFFEs to put in place procedures and obtain the information required by FFI Agreements and report the information to governmental authorities of the foreign country in which the FFI or NFFE is located. The foreign governmental authorities will then transfer the information reported by its FFIs and NFFEs to the IRS by way of an intergovernmental information exchange agreement. This will allow FFIs and NFFEs located in the foreign country to be FATCA compliant without entering into FFI Agreements directly with the IRS.

The first intergovernmental agreement implementing FATCA through intergovernmental exchange of information was signed between the United States and the United Kingdom on September 14, 2012. This will make dealing with Withholdable Payments to United Kingdom FFIs and NFFEs much easier to deal with for U.S. payors that would otherwise be required to withhold the 30% FATCA tax in the absence of an FFI Agreement. Of course, the United Kingdom is only one country and it is unlikely that the U.S. will enter into intergovernmental agreements with all or even most of the foreign countries where FFIs and NFFEs are often located. Therefore it will be necessary for U.S. persons making Withholdable Payments to put procedures in place to document FATCA compliance to avoid liability for failure to withhold on a payment to a non-compliant FFI or NFFE.

In addition to FFIs, Withholdable Payments to NFFEs are also potentially subject to FATCA withholding tax. An NFFE is any foreign entity that is not an FFI, with certain significant exceptions. First, publicly traded companies and their affiliated groups are excluded from the definition. In addition, a foreign entity that derives 50% or more of its gross income from the active conduct of a trade or business, and 50% or more of the assets of which are devoted to the active conduct of a trade or business, is not considered an NFFE. As with FFIs, governments, international organizations and central banks are also excluded from the definition, as are all of the other types of entities excluded from the definition of an FFI. Thus, after taking into account the exclusions from the definition, NFFEs are generally privately held entities that are engaged primarily in holding passive investment assets.

FFI Agreement. If an FFI or NFFE does not qualify for an exclusion, exemption or Deemed Compliant status that eliminates FATCA withholding tax, then to avoid the tax it must enter into a written agreement with the IRS to collect and provide information on its U.S. accounts. Although this requirement is equally applicable to NFFEs, such agreements are commonly referred to as “FFI Agreements.” Under an FFI Agreement, an FFI or NFFE agrees to solicit information from each account holder to determine whether each account is owned by a U.S. person or an entity with substantial U.S. owners. In addition, the FFI or NFFE must implement procedures to identify existing accounts with U.S. ownership. If disclosure of account information is prohibited under local law, the FFI or NFFE must agree to obtain a waiver from U.S. account holders allowing the FFI or NFFE to disclose the required information (see next paragraph) to the IRS. Finally, the FFI or NFFE must

agree to itself withhold the 30% FATCA withholding tax from any Withholdable Payment to: (1) an account holder that does not provide the information required by the FFI Agreement, or that does not waive restrictions on disclosure under local law and (2) an FFI or NFFE that has not entered into an FFI Agreement with the IRS or that has elected to pay withholding tax rather than comply with imposing the tax on non-cooperative account holders.

Beginning in 2013, each year the FFI or NFFE must report certain information to the IRS concerning the U.S. account holder. The information required consists of the name, address and U.S. federal taxpayer identification number of each U.S. account holder, or if the account is held by a U.S.-owned foreign entity, the same information must be provided for each substantial U.S. shareholder. In 2014, the account number and account balance at the end of the year must also be reported to the IRS. U.S. source payments to the account and the gross proceeds of the sale of assets that produce U.S. source income will also be subject to reporting in 2014 and 2015 respectively.

Intergovernmental Approach. After the enactment of FATCA, substantial concerns were raised by foreign financial institutions and their governments concerning the implementation of the information gathering and reporting obligations under FFI Agreements. The obligations were not only viewed as administratively burdensome, but under the laws of many countries providing the information to the IRS would violate financial privacy and bank secrecy laws. Discussions between the U.S. and various foreign governments resulted in the issuance of a Joint Statement earlier this year by the United States, France, Germany, Italy, Spain and the United Kingdom that established a framework for pursuing

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Documentation of FATCA Compliance for U.S. Payors. The IRS recently outlined its plan for an on-line registration system for FFIs and NFFEs. Entities that enter into FFI Agreements with the IRS or that qualify for Registered Deemed Compliant Status will be issued a FATCA identification number. It is also thought that FFIs and NFFEs located in countries that enter into intergovernmental agreements for FATCA information exchange will be issue FATCA identification numbers as well, although this has not yet been determined. The IRS will maintain a list of FATCA compliant FFIs and NFFEs online. Persons making Withholdable Payments will be required to obtain the payee’s FATCA identification number from the payee and check the online list to confirm that the payee is FATCA compliant.

A U.S. payor obtains the FATCA identification number on new Form W8-BEN-E, a draft of which was released by the IRS on May 31, 2012. The new Form W8-BEN-E is somewhat similar to Form W8-BEN, which is used by U.S. payors to document the foreign status of a payee in order to establish exemption from regular U.S. withholding tax. The W8-BEN-E requires the recipient FFI or NFFE to provide identifying information and the reason that Withholdable Payments it receives are not subject to the FATCA withholding tax. If the tax is not applicable because the FFI or NFFE has entered into an FFI Agreement, or is Registered Deemed Compliant, then it will provide its FATCA identification number on the appropriate line of the Form.

If, however, the FFI or NFFE claims exemption from FATCA withholding because it is Certified Deemed Compliant or because it qualifies for one of the exemptions from withholding tax described above, then it must check the appropriate box for the reason

it is exempt, complete the portion of the Form W8-BEN-E applicable to the exemption and provide the documentation required to establish the exemption directly to the U.S. payor. This has the potential for placing a significant burden on the payor, since whether the documentation supplied effectively establishes exemption from FATCA withholding tax will in some instances likely require a qualitative judgment that the payor does not feel qualified to make. For example, as mentioned above, certain foreign retirement plans can qualify to be Certified Deemed Compliant. Part VII of the Form W8-BEN-E requires a number of certifications from a foreign retirement plan to qualify, such as contributions to the plan are limited by reference to earned income, no single beneficiary has a right to more than 5% of the plan’s assets, the plan is sponsored by an employer that is not an FFI and so on. In addition, the retirement plan must provide the U.S. payor an organizational document that “generally supports the certifications made in Part VII.” Making the latter determination will require a review of the organizational documents and an evaluation of whether they in fact generally support the certifications. This will likely lead to a phone call to the payor’s employee benefits attorney for assistance, which adds cost and complexity to the process of making what could be an otherwise routine payment.

Similarly, a Certified Deemed Compliant Non-Profit Organization must supply a letter from its counsel concluding that it meets the requirements listed in Part VIII of the Form W8-BEN-E. This not only requires the recipient organization to engage an attorney, but also likely means that the payor will need to ask its

attorney to evaluate whether the letter from counsel adequately documents satisfaction of the requirements of Part VIII.

The obligation to withhold the 30% FATCA tax on Withholdable Payments to non-compliant FFIs and NFFEs does not become effective until January 1, 2014. As such, there is still time to assess what payments to foreign entities may be subject to FATCA and to develop and implement procedures to ensure the proper documentation is obtained with respect to those payments. Moreover, it is possible that intergovernmental agreements will reduce the number of payments that require U.S. payors to satisfy burdensome documentation requirements. That said, businesses should not wait too long to plan for FATCA withholding lest the need to document FATCA compliance by foreign payees disrupt making necessary payments in the course of day to day business operations

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mployers with business operations outside the U.S. often ask promising managerial or technical employees to accept temporary assignments with their foreign subsidiary. Employers see these

assignments as both improving the integration of the overseas and U.S. operations, and furthering the employee’s career development.

These assignments can, however, impose substantial hardships on the employee. An employer that contemplates frequent overseas assignments must carefully consider the kinds of pay and benefits

arrangements it offers to address these hardships. Developing a policy describing the employer’s standard expatriate compensation package, allows both the employer and employee to fully understand the risks and rewards of a foreign assignment.

A well-crafted expatriate compensation package will include most of the following elements:

• Relocation expenses – Travel and household moving expenses for the employee and her family should be reimbursed (within reasonable limits), as should expenses to return home at the end of the assignment.

• Totalization – An employer with U.S. employees working abroad should, where possible, take advantage of totalization agreements between the U.S. and foreign governments. These agreements address the issue of double taxation – paying both FICA taxes in the U.S.and contributing to the host country’s social welfare plans. These agreements also often allow an American expatriate who has worked in multiple countries to receive credit for his or her entire working career, including overseas assignments.

• Tax equalization benefits – Under a tax equalization benefit, an expatriate employee bears only the cost of income taxes payable to his or her home country, while the employer bears the economic cost of extra

income taxes (if any) due to the host country on compensation earned in that country. The objective is to minimize an expatriate employee’s financial burden as a result of her assignment abroad. There are several distinct approaches to negotiating this kind of arrangement.

• Global medical coverage – U.S. group health insurance plans typically offer only limited benefits for medical services received overseas. Specialized expatriate health insurance coverage can fill in the gaps.

Expatriate Compensation and Benefit Arrangements

An employer that contemplates frequent overseas assignments must carefully consider the kinds of pay and benefits arrangements it offers to address hardships.

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• Cost of living adjustments – Employers often want to keep the relocated employee’s base salary in the same range as the salary levels for equivalent domestic employees, while also providing additional cash to cover the significantly higher costs of living in some foreign countries (e.g., Japan or Scandinavia).

• Housing costs – In China and some parts of Europe, it is often not practical for the employee to purchase a home; and renting a suitable home is frequently much more expensive than equivalent U.S. housing. Employers can provide a housing allowance to cover the additional housing costs. Some expatriate compensation policies also address the costs of selling the employee’s home in the U.S. (sometimes including protection against a loss resulting from forced sale into a depressed market).

• Family issues – Since an employee with children may be reluctant to accept a foreign assignment because of concerns about her children’s education, employers can provide a tuition allowance for international or boarding schools.

• Other Issues – Where appropriate, an expatriate package should also include employer-provided translators, security guards, etc.

These arrangements for expatriate employees are often quite complex. Human resources, tax, and legal staff of employers using U.S. employees abroad can, and should, devote considerable time and effort to developing a policy on expatriate compensation packages appropriate to their company’s situation.

slk insightsAl Windle, assisted by the entire Charlotte Construction Practice Group and others, recently obtained a substantial arbitration award on behalf of an environmental remediation contractor (the “Contractor”) headquartered in Charlotte, North Carolina. Shortly after the explosion of the Deepwater Horizon Drilling Rig in the Gulf of Mexico, the Contractor was contacted by an entity responsible for clean-up operations (the “Adverse Party”) and requested to mobilize to the Gulf and assist in the remediation efforts (the “Project”). Over the following five (5) months, the Contractor deployed thousands of workers and provided a large quantity of equipment in relation to the clean-up efforts. During the course of the Project, disputes arose between the Adverse Party and the Contractor in regard to the invoices submitted by the Contractor in relation to the Contractor’s work on the Project. The Adverse Party contended that, among other things, (1) the Contractor billed for items that it

was not entitled to be paid for; (2) the Contractor billed the wrong amounts for items that it was entitled to be paid for; (3) the Contractor submitted invoices too late; and (4) the Contractor failed to provide adequate supporting documentation with its invoices. After a two (2) week arbitration proceeding in Reston, Virginia, the panel of three (3) arbitrators issued an Award in favor of the Contractor in the amount of $14,594,209.34.

Al Windle would like to thank Bill Sturges, Andy Culicerto, Bonnie Keith Green, Steven Bimbo, Christian Staples, Tonya Stabenaw, Denise Fennelly, Todd Hayes, Michele Carney, and Mike Sanderson for their time and assistance, especially the time spent at night, on weekends, and over holidays.

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ith pressures on both the revenue and expense side of the business, many physicians, other healthcare

professionals, and small business owners are seeking ways to enhance after tax income in the face of projected increases in taxes to deal with the nation’s burgeoning debt.

One attractive approach for established businesses and professional practices is the use of a captive insurance company that meets the requirements of Internal Revenue Code (“Code”) Section 831(b).

Code Section 831(b) applies to small property and casualty insurance companies writing insurance with annual premiums that do not exceed $1.2 million. Code §831(b) is

important because it makes the use and benefits of captive insurance companies available to small businesses, hence the “micro-captive” colloquial term.

There are good reasons why most large corporations and universities have captive insurance companies. If a company self-insures against certain

Micro-Captive Insurance Companies

risks, it does not get a tax deduction for setting aside funds to pay for claims arising from those risks, which makes it more expensive for the company to build up a self-insurance fund. But a captive insurance company (“captive”) enables the company to deduct premiums paid to its captive and the captive to build up its reserves to pay claims without diminution of those reserves by tax liabilities or at least with a much lower tax cost.

Captives are used to insure against all kinds of risks for the primary company, including workers’ compensation, product and service liability, malpractice, regulatory risks, and a variety of other risks.

If a company pays a premium of $1.2 million to a public insurance company and has a valid claim for $700,000, it would still have a loss of the entire $1.2 million. But if the premium was paid to a captive instead, the company’s loss would only be $700,000 because its captive would still have $500,000 (less administrative costs and expenses) in invested reserves that will increase over the following years, subject to claims. If its claims continue to be less than its annual premiums, not unusual for most companies, its captive’s reserves will become strong enough for the captive to begin paying dividends to its shareholders. Property and casualty insurance industry statistics suggest that commercial property and casualty insurance is generally priced at a 50% loss ratio, i.e., 50¢ of each dollar of premium is expected to be paid out on

claims with the other 50¢ available to provide for overhead costs and profit. But one should not forget that the company may have a valid claim for $2 million in the first year of the captive, which is why a captive needs to reinsure some of its risks even though the captive itself incurs a premium expense in so doing.

A company with a captive can exert a much greater degree of control over its insured liabilities than it can with a public insurance company. For example, it can control the quality of the coverage offered by the policy and manage the expenses and the claims-paying process. It can decide whether to settle a claim or try the lawsuit, which is a decision largely out of its hands with public company insurance. With a micro-captive, physcians, for example, can have full control over the design of their malpractice coverage, limits, and deductible; can lay off much of the risk with reinsurance, and can control the response to claims, hire the lawyers and expert witnesses they prefer, and agree to settle or go to trial.

Tax Benefits of a Micro-Captive. The premiums paid by the insured company to its micro-captive are 100% tax deductible as “ordinary and reasonable business expenses under IRC §162. The premiums received by the micro-captive are tax-free under the provisions of Code §831(b) provided the net written premiums for the taxable year do not exceed $1.2 million so long as the micro-captive’s §831(b) election is in effect.

IRC §831(b)

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Yes, that is correct. A company or professional practice, a physician practice for example, can legally shelter up to $1.2 million per year – with no tax shelter disclosure obligation and without having to jump through all the tax shelter hurdles in the Code!

It also means that claims are paid with pre-tax dollars and not subject to recapture as taxable income.

The micro-captive is taxable, however, on its investment income in accordance with the rules applicable to “C” corporation investment income (an §831(b) corporation is required to be taxed as “C” corporation). Previously, it was possible to avoid taxes on all or most of the captive’s investment income as well by using an IRC §501(c)(15) captive. But there were so many abuses, that Congress changed the rules in 2003 to limit a §501(c)(15) captive to $600,000 in gross receipts, 50% of which must be insurance premiums with the result that a §501(c)(15) captive cannot have more than $300,000 in investment income per year, eliminating its use for all but the smallest of insurance companies.

Dividends paid by the micro-captive qualify for the dividend tax rate, which is 15% until December 31, 2012. Thereafter, the rate will be the recipient’s ordinary income tax rate unless Congress further extends the so-called Bush tax-cuts or otherwise enacts legislation to provide a rate for dividends more favorable than ordinary income rates.

Tax-Favored Vehicle for Building an Investment Portfolio. A micro-captive formed in a “light touch” regulatory jurisdiction insuring carefully designed risks with its tax-free premium income can quickly build up a substantial reserve against its insured risks and a substantial investment portfolio in excess of its required

reserves. As such, it can become another retirement fund for its owners, a retirement fund that does not have to be shared with employees and is not subject to the many restrictions imposed on qualified retirement plans. To pursue the objective of using the captive to build wealth in the captive and for its shareholders, the risks to be insured should be actuarially designed so that the anticipated claims ratio will allow the wealth accumulation investment objective as well as the insurance objective to be achieved.

Asset Protection and Offshore. Why would a domestic small business company or physician practice establish a micro-captive offshore instead of as a domestic corporation? The are two reasons: (1) certain offshore jurisdictions are less expensive in which to operate a captive because of less burdensome insurance company regulations and (2) an offshore captive can offer significant asset protection by removing the captive from the reach of U.S. courts (at least for claims not against an insurance policy written by the captive).

A micro-captive established in a “light touch” offshore jurisdiction owned by a properly structured offshore asset protection/estate planning trust will permit up to $1.2 million per year to be transferred tax-free from a domestic company into an asset protected structure that is about as secure as possible from the reaches of creditors of the owner of the business or practice who also owns the offshore captive and is the settlor of the trust. The captive provides a sound defense against a creditor’s fraudulent transfer claim because the payment of the premiums is a legitimate ordinary and necessary expense of the transferor-business. The result of maximizing the planning and structuring of a micro-captive and its ownership structure can (1) enhance the quality of property and/or liability insurance coverage of the owner’s business, (2) give the owner a greater degree of control of how any claim will be handled than is possible with a public insurance company, (3) lower the business owner’s effective cost of property and/or liability insurance

One attractive approach for established businesses and professional practices is the use of a captive insurance company that meets the requirements of Internal Revenue Code (“Code”) Section 831(b).

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coverage, (4) transfer up to $1.2 million per year tax-free from the business to the captive into an asset protected environment (subject to legitimate claims against the insurance policies issued), (5) rapidly build additional wealth, and (6) transfer profits of the insurance company to the owner’s asset protection/estate planning trust at a 15% dividend tax rate, protected from the claims of the owner’s creditors and in an ideal device for transferring wealth from one generation to the next.

An offshore micro-captive may elect under IRC §953(d) to be treated as a domestic insurance corporation, thus allowing it to elect the tax benefits under §831(b), as well as to avoid the federal excise tax on premiums, instead of the undersirable consequences of the controlled foreign corporation rules under IRC §957(a).

A Word of Caution. Of course, for a micro-captive to be treated as an insurance company and for its policy or policies to be treated as insurance policies for tax purposes by the IRS, the policies must qualify as insurance. The primary authority defining “insurance” is a single sentence in an opinion of the U.S. Supreme Court in Helvering v. LeGierse, 312 U.S. 531 (1941), which in essence stated that “insurance” means that (1) a risk is transferred from one party to another party (“risk shifting”) and (2) a risk is distributed over some undefined number of claims (“risk distributing”). Accordingly, (1) a captive cannot insure its parent because there is no risk shifting (but the IRS will allow a subsidiary captive if the parent’s premium comprises no more than 50% of of the total premiums paid to the captive or the risk assumed by the captive) and (2) a captive must issue enough policies to different insureds to sufficiently spread the risk. There is

a safe harbor rule for a brother-sister captive to satisfy the second test: (A) the captive must sell reinsurance to another insurance company or companies and receive a premium in return or (B) a captive must sell insurance to 11 subsidiary or affiliated insureds (Rev. Rul. 2005-40), but entities that are disregarded for tax purposes such as a single member LLC that is not treated as an S corporation or a C corporation for tax purposes are ignored by IRS for purposes of the 11 insureds count. For businesses for which having 11 subsidiary or affiliated insureds is not practical, there are captive third party administrators who can provide access to a carefully selected pool of companies to which a captive can participate in providing insurance and receiving premium income.

There are a myriad of other factors the IRS will consider in determining whether a micro-captive is an insurance company for federal income tax purposes. Those factors are beyond the scope of this brief article. However, those factors make it imperitive that most companies deciding to form a captive retain the services of a well-qualified third party administrator firm that specializes in forming, licensing and administering captives in accordance with an appropriate contract. Further, (1) an attorney should be retained who is qualified to review the work of the third party administrator and assist in the resolution of any issues and (2) a certified public accounting firm that has experience doing the accounting, audit and tax work for captives should be retained by the captive.

welcome

David F. AxelrodColumbus, Litigation

Jeffrey B. FabianTampa, Intellectual Property

Vanessa GoodwinTampa, Litigation

Wyatt J. HollidayToledo, Employee Compensation &

Benefits/Taxation

Lance A. LawsonCharlotte, Intellectual Property

Phillip H. LeeToledo, Corporate

Mara J. RendinaToledo, Health Law/Real Estate

Stathia SferiosTampa, Litigation

Elizabeth J. (Lisa) SichlerToledo, Corporate/REIT

Jon P. SkeltonTampa, Tax/Trust and Estates

Daniel R. StraderSarasota, Employment and Labor/

Litigation

Benjamin J. TimmermanToledo, REIT

Jay B. VeronaTampa, Bankruptcy & Creditors’

Rights/Litigation

17

trademark (or service mark in the case of a mark used in connection with services) is any word, name, symbol, or device, or any combination thereof, used to

identify and distinguish one’s goods (or services) from those of another and to indicate the source of the goods (or services), even if that source is unknown. A common misconception is that trademark rights spring into existence upon registration with either a state trademark office or the United

States Patent and Trademark Office. It is not registration, however, that creates trademark rights and confers priority over others. Trademark rights in the United States, unlike in most civil law

nations, arise from use of a mark. Even though the federal registration scheme permits applications to be filed based on a bona fide intention to use a mark and, upon registration, confers a constructive use priority date of the date of filing, a federal registration will not be granted until such time as the mark is actually used in commerce.

Issues In Cross-Border

Use-based rights in an unregistered mark, so called “common law” rights, are valid and protectable under state and federal law, and existing common law rights are not abrogated by another’s subsequent state or federal registration. That is not to say, however, that state and/or federal registration of marks is insignificant. Registrants possess significant evidentiary presumptions and statutory rights not afforded the owners of unregistered marks. Furthermore, a registrant’s rights may, by virtue of registration, extend to geographical areas in the United States in which they are not actually using their mark, whereas common law rights are enforceable only

in the geographic area into which the user of the mark’s reputation extends and a reasonable zone of natural expansion.

Under principles of territoriality, use of a mark outside the United States will not confer rights to use a mark, or stop others from using a mark, in the United States. However, under a countervailing principle, commonly referred to as the “famous marks” doctrine, some maintain that a mark neither used nor registered in the United States may still be entitled to protection if it is sufficiently famous. The Ninth Circuit recognized the famous marks doctrine as a matter of federal law in Grupo Gigante S.A. de C.V. v. Dallo & Co., 391 F.3d 1088 (9th Cir. 2004). In that

Trademark Protection

Trademark rights in the United States, unlike in most civil law nations, arise from use of a mark.

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case, the court found that the “Gigante” mark -- registered and used by a large chain of grocery stores in Mexico since 1963 -- was sufficiently well known among Mexican-Americans in Southern California to afford it priority over a competing “Gigante” mark used by a separate chain of Los Angeles grocery stores. In resolving this question, the court ruled:

[T]here is a famous mark exception to the territoriality principle. While the territoriality principle is a long-standing and important doctrine within trademark law, it cannot be absolute. An absolute territoriality rule without a famous-mark exception would promote consumer confusion and fraud. Commerce crosses borders. In this nation of immigrants, so do people. Trademark is, at its core, about protecting against consumer confusion and “palming off.” There can be no justification for using trademark law to fool immigrants into thinking that they are buying from the store they liked back home.

Id. at 1094 (footnotes omitted).

More recently, however, the Second Circuit, in ITC Ltd. v. Punchgini, 482 F.3d 135 (2d Cir. 2007), declined to grant judicial recognition of the famous marks doctrine under federal law. While the Second Circuit declined to rule that the famous marks doctrine is not, likewise, a part of the common law of New York, it did certify that question to the New York Court of Appeals, which responded that it does not recognize the doctrine as an independent theory of liability under New York state law. See ITC Ltd. v. Punchgini, 9 N.Y.3d 467, 479 (2007).

The United States Supreme Court has to date declined to review the conflict between the Second and Ninth Circuits,

so for the time being the state of the law in the remainder of the United States remains unsettled. Until such time as the conflict is resolved, the owners of marks used only outside the United States, and neither registered, applied for, nor well-known in the United States, are at risk of finding their marks appropriated in the United States by others. In order to ensure cross-border protection, such parties would be well-served to explore the various options available to them, including filing of an application for registration in the United States based on a bona fide intention to use the mark in the United States or a qualifying foreign registration or pending application, or extending an international registration under the Madrid Agreement or Protocol to the United States.

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Client Spotlight:

onducting business overseas is complicated. Some might think that an internet connection and a few e-mails back and forth to a factory are all you need to conduct

business overseas. Speaking as an owner of AccessEast, a Hong Kong based trading company, nothing can be further from the truth. There are many issues to be aware of and many that need to be addressed before a U.S. enterprise begins the complicated journey to procure offshore manufacturing. To start, you need to consider social compliance issues with respect to the

materials used in production, product safety compliance, protecting intellectual property and trademarks, transfer of ownership, duties and taxes and anti-dumping

regulations, just to name a few. I have highlighted below items that I typically find to be at issue in engaging Asian manufacturers.

Meeting U.S. Standards Many of the products for which we arrange offshore manufacturing are destined to be sold in the U.S. at retail, and the finished product must therefore comply with all U.S. laws. Producing products in the safest possible manner is not a guarantee the product will not be recalled if consumers are ultimately endangered. Therefore, you will need to be well-versed in the regulations

of the U.S. Consumer Product Safety Commission (“CPSC”), which is charged with protecting the public from unreasonable risks of injury or death from thousands of types of consumer products. CPSC fulfills its mission by banning dangerous consumer products, issuing recalls of products already on the market, and researching potential hazards associated with consumer products. CPSC learns about unsafe products in several ways. The agency maintains a consumer hot line and website through which consumers may report concerns about unsafe products or injuries associated with products. The agency also operates the National Electronic Injury Surveillance System (“NEISS”), a probability sample derived from incident reports issued by about 100 hospitals’ emergency rooms. NEISS collects data on consumer product related injuries treated in ERs and can be used to generate national estimates.

For children’s products, the requirements are becoming more stringent. Recently, the CPSC voted to approve new independent third party product testing rules for domestic manufacturers, importers and private labelers. These firms will be required to test and certify that their children’s products comply with U.S. product safety standards as required by the Consumer Product Safety Improvement Act of 2008. In order to meet this requirement for children’s products, the CPSC adopted a framework regarding third party periodic testing to ensure continued compliance. If there is a material change to the product, such as changes in the product design, manufacturing process, or the source of component parts, firms must re-test and and re-certify that the product complies with federal safety standards.

In addition, firms must keep records on the testing and certification for their children’s products. The testing and certification rule will go into effect 15 months after it is published in the Federal Register. Children’s products that comply with the law may bear the label, “Meets CPSC Safety Requirements.” Labeling is voluntary.Today firms are already required to do initial testing on some products, including among others, those with lead in the paint, those with small parts, full size and non-full size cribs, pacifiers and children’s metal jewelry. The new rules will require firms to go beyond initial testing to ensure that their products continue to meet safety standards. All domestic manufactures, importers and private labelers of children’s products will be required to test the products periodically to ensure continued compliance with federal safety standards.

Therefore, your contract with a foreign manufacturer must ensure that the finished products satisfies these standards and testing requirements, and that you receive the paperwork to verify that the requisite testing has been completed in compliance with these laws. If the foreign manufacturer fails to do so, your contract should provide recourse against it, as well as remedies in case the CPSC orders a product recall.

Protecting Your Intellectual Property Since joining the World Trade Organization (“WTO”), China has strengthened its legal framework and amended its laws and regulations to comply with the WTO Agreement on Trade-Related Aspect of Intellectual Property Rights (TRIPs). Despite stronger statutory protection, China continues to be a haven for

Special guest article by Daniel Sackett of AccessEast, a trading company specializing in Asian sourcing.

C

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counterfeiters and pirates. If a product sells, it is likely to be illegally duplicated there.

In 1998, China established the State Intellectual Property Office (“SIPO”), with the vision that it would coordinate China’s IP enforcement efforts by merging the patent, trademark and copyright offices under one authority. However, this has yet to occur. Today, SIPO is responsible for granting patents (national office), and enforcing patents (local SIPO offices), as well as coordinating domestic foreign-related IPR issues involving copyrights, trademarks and patents.

Protection of IP in China follows a two-track system. The first and most prevalent is the administrative track, whereby an IP rights holder files a complaint at the local administrative office. The second is the judicial track, whereby complaints are filed through the court system. (China has established specialized IP panels in its civil court system throughout the country.)

Determining which IP agency has jurisdiction over an act of infringement can be confusing. Jurisdiction of IP protection is diffused throughout a number of government agencies and offices, with each typically responsible for the protection afforded by one statute or one specific area of IP-related law.

China’s courts also have rules regarding jurisdiction over infringing or counterfeit activities, and the scope of potential orders. In most cases, administrative agencies cannot award compensation to a rights holder. They can, however, fine the infringer, seize goods or equipment used in manufacturing products, and/or obtain information about the source of goods being distributed.

Distributor agreements Many companies attempt to draft or modify their existing “standard” distribution contract to be used as a Chinese distribution contract. Though China distribution agreements can have much in common with U.S. distribution agreements, they also have stark and interesting differences.

Standard distribution agreements typically make for an excellent starting point when drafting a Chinese distribution agreement. These standard distribution contracts have usually been honed and customized over the years to match what our client wants and needs from its relationships with its distributors.

But you always need to modify them to make them work for China.

One reason for this is that U.S. contracts generally provide distributors with all sorts of legal protections. These provisions often make it difficult or expensive to terminate a distributor and it is not at all unusual for distributors to sue or threaten to sue when a distribution relationship sours.

Chinese law has no special protections for distributors. In particular, there is no legal requirement in China for payment of any special compensation to a distributor upon termination of the distribution agreement. For these reasons you need to modify China distribution agreements for applying Chinese law. For these same reasons, you need to modify those provisions in your standard distribution contracts devoted to trying to work around distributor protections.

The best way to protect your trademark is to register them properly in China. You should also discuss the best method to protect and register your trademark in China and the best method of licensing exclusive use of trademark

by distributors. A contract should give the distributor use of the trademark but convey no other rights to the trademark, and prohibit the distributor from registering any trademarks in any way related to the client’s trademarks.

One other difference between a Chinese distribution agreement and one used in the United States or Europe is that the signature line in a Chinese distribution contract should provide a place for the distributor to affix its company seal or Chop. Unsealed distribution contracts are arguably not valid under Chinese law.

How are you buying your products? The point at which transfer of responsibility for the product and ownership takes place is determined by the terms of the sale. The Incoterms rules or International Commercial terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) widely used in international commercial transactions. A series of three-letter trade terms related to common sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods. The Incoterms rules are accepted by governments, legal authorities and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretations of the rules in different countries.

Below are the most commonly used Incoterms trade terms when the buyer is controlling the shipment:

EXW – Ex Works (named place) The seller makes the goods available at his premises. The buyer is responsible for all charges.

Client Spotlight:

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FCA – Free Carrier (named place) The seller hands over the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place. This term is suitable for all modes of transport, including carriage by air, rail, road, and containerized / multi-modal transport.

FAS – Free Alongside Ship (named loading port) The seller must place the goods alongside the ship at the named port. The seller must clear the goods for export; this changed in the 2000 version of the Incoterms. Suitable for maritime transport only.

FOB – Free On Board (named loading port) The classic maritime trade term. The seller must load the goods on board the ship nominated by the buyer, cost and risk being divided at ship’s rail. The seller must clear the goods for export. Maritime transport only.

Main carriage paid CFR – Cost and Freight (named destination port) Seller must pay the costs and freight to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods have crossed the ship’s rail. Maritime transport only.

CIF – Cost, Insurance and Freight (named destination port) Exactly the same as CFR except that the seller must in addition procure and pay for insurance for the buyer. Maritime transport only.

CPT – Carriage Paid To (named place of destination) The general/containerized/multimodal equivalent of CFR. The seller pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier.

CIP – Carriage and Insurance Paid (To) (named place of destination) The containerized transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.

Below are most commonly used Incoterms when the seller is controlling the shipment

DAF – Delivered At Frontier (named place) This term can be used when the goods are transported by rail and road. The seller pays for transportation to the named place of delivery at the frontier. The buyer arranges for customs clearance and pays for transportation from the frontier to his factory. The passing of risk occurs at the frontier.

DES – Delivered Ex Ship (named port) Where goods are delivered ex ship, the passing of risk does not occur until the ship has arrived at the named port of destination and the goods made available for unloading to the buyer. The seller pays the same freight and insurance costs as he would under a CIF arrangement. Unlike CFR and CIF terms, the seller has agreed to bear not just cost, but also Risk and Title up to the arrival of the vessel at the named port. Costs for unloading the goods and any duties, taxes, etc. are for the Buyer. A commonly used term in shipping bulk commodities, such as coal, grain, dry chemicals and where the seller either owns or has chartered, their own vessel.

DEQ – Delivered Ex Quay (named port) This is similar to DES, but the passing of risk does not occur until the goods have been unloaded at the port of destination.

DDU – Delivered Duty Unpaid (named destination place) This term means that the seller delivers the goods to the

buyer to the named place of destination in the contract of sale. The goods are not cleared for import or unloaded from any form of transport at the place of destination. The buyer is responsible for the costs and risks for the unloading, duty and any subsequent delivery beyond the place of destination. However, if the buyer wishes the seller to bear cost and risks associated with the import clearance, duty, unloading and subsequent delivery beyond the place of destination, then this all needs to be explicitly agreed upon in the contract of sale.

DDP – Delivered Duty Paid (named destination place) This term means that the seller pays for all transportation costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term “Free Domicile”. The most comprehensive term for the buyer.

Maintaining proper records and customs compliance is often an overlooked issue which results in significant fines.

The Customs Modernization Act amended section 509 of the Tariff Act to set forth special recordkeeping and production requirements for importers (“informed compliance”). If an importer fails to maintain and/or produce such records upon lawful demand, the consequences can be severe. If the failure is considered willful, Customs may assess an administrative penalty not to exceed $100,000 per occurrence. If the failure is deemed a negligent failure, Customs may assess an administrative penalty not to exceed $10,000 per occurrence. Purchase Order Language that is legal and binding is critical.

Daniel Sackett is a principal of AccessEast, LLC, 1070 Commerce Drive, Perrysburg, Ohio. 877.255.0206; dsackett@accesseast.com

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The continuing high unemployment rates from the recent recession, coupled with ever-increasing access to technology due to constant improvements and lower costs, have combined to create a dominant business

virtual world. The experts say that if you have a business and do not have a “virtual” presence, your business will not succeed. Anyone familiar with business or marketing knows that the best promotion and true test of any product or service is to give it away – send it out in the market so that consumers can love it and come

screaming back for more – provide some free supply to create the demand for more supply for which consumers are willing to pay – the supply and demand formula. American corporations have been doing this

outside of the virtual world for decades – think about all of the soft drink, food, restaurant, and clothing giveaways, contests, and games in which you have participated during your life, some of which you hopefully have won.The same concept is being applied in the new dominant business virtual world by all of the new entrepreneurs and by long-

standing, large corporations. Our virtual world is now flooded with video, photo, and other contests, games, sweepstakes, giveaways, raffles, and the like. Well, if it has been and is being done on the Internet, it’s legal, right?! WRONG! Unknown to the majority of individuals and organizations currently conducting them, even the largest corporations, online promotions are heavily regulated at several levels and involve a lot of time and expense to do them right, making the cost-benefit analysis not as easy as it seems. However, done legally and correctly, sponsoring online promotions can become easier and very rewarding for a business of any size.This article will refer to all types of promotions (contests, games, sweepstakes, giveaways, raffles, etc.) generally as “promotions” to avoid confusion. Any promotion, even if conducted online, must comply with all laws and regulations governing offline promotions. Legally, three categories of promotions exist: (1) lotteries, (2) sweepstakes, and (3) games of skill/contests, each with differing levels of regulation. Lotteries are the most regulated and, in most cases, illegal, and contests are the least regulated. The goal for any business is to have any promotion to be considered a game of skill or contest under the law. The three categories are distinguished by their elements. A lottery involves participants providing (a) consideration or something of value in exchange for the (b) chance to win a (c) prize. Once the element of consideration is removed, the promotion becomes a sweepstakes. Replacing chance with skill creates a game of skill or contest.

However, staying outside of the legal boundaries of a lottery is not as easy as it seems. Simply because the rules of a promotion state “No purchase necessary to win” and requires no payment of any amount to enter, does not transform a lottery into a contest legally. “Consideration” refers to much more than just money. Consideration will be considered to exist if a participant has to provide too much personal information (making it likely the non-necessary information will be used for future marketing purposes), download specific software, or subscribe to or become a member of specific website to enter a promotion. In some instances, even the requirement that a participant access the Internet constitutes consideration. Additionally, to be considered a legal contest, winning a promotion must primarily depend upon and be determined according to the actual participants’ skill and not primarily determined by public opinion, which has in some cases been adjudged to be no more than chance. Thus, a promotion determined by public opinion may constitute a sweepstakes under the relevant laws. For example, a photo or video promotion judged by a panel of photographers or videographers is going to more likely constitute a legal contest than a similar promotion for which website visitors can vote for the winner, especially if voters can cast multiple votes.As if the general definitions are not difficult enough to grasp and meet, the laws, especially those of the different States of the United States, have not caught up with the practicalities of the world in which we

Promoting Your Business Online Is Not As Inexpensive Or Easy As You May Think!

By Brandy B. Milazzo

BEWARE

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live. Every State regulates promotions separately and distinctly, all in the name of consumer protection despite much consumer frustration with the regulations. Frequently, lotteries are illegal except when conducted with the permission or in coordination with the applicable State government. Sometimes, even if a promotion is considered a sweepstakes or a contest, the cost of complying with statutory requirements outweigh the business opportunities the promotion is intended to provide for the sponsor. For example, New York and Florida require promoters and sponsors to pre-register and post bonds when the total value of prizes exceeds $5,000, and Rhode Island requires registration of retail promotions with a total value of more than $500.Many States have very specific and differing requirements for the format of the rules governing a promotion and the timing and method of awarding any prizes. The promoter/sponsor should work closely with counsel to determine if the promotion should exclude residents of States with laws and regulations with which it would not make business sense for the promotion to comply. The decision will likely be different for each promotion. Not only is it expensive to comply with these State laws and regulations, but each

promoter or sponsor of a promotion should work with counsel that has experience and knowledge of these laws and regulations so that the promoter or sponsor is not paying someone to learn them.Even after a promoter or sponsor feels confident about having complied with the general and State requirements governing a promotion, there exists a third layer of regulation, the Federal government (which has several layers within it, especially when dealing with online promotions that allow children to participate). The Federal regulations, like State regulations, are aimed at consumer protection.Promoters and sponsors must deal with complicated Federal statutes and regulations like the Federal Trade Commission Act, and the combination of the Lanham Act governing false, unfair, or deceptive advertising and the Copyright Act and the Trademark Dilution Revision Act, both aimed at protecting the intellectual property of parties. If you add the online and child participation aspects to a promotion, the promoter immediately adds the need to comply with the Children’s Online Privacy Protection Act, aimed at protecting children from unfair or deceptive acts or practices in connection with the collection, use, and/or use of their personal information.

Now, coming full circle back to the regulation of online promotions, a promoter or a sponsor may think they have covered all bases – but if they have used one of the new, easiest methods to conduct online promotions, social media (Facebook®, Twitter®, and the like), there is yet a fourth layer of regulation to contend with – the policies and guidelines of each social media site for conducting a promotion via their site. For example, Facebook® currently has over ten different policies that should be reviewed and with which any promotion should comply to be legal on Facebook®. And compliance is no easy task when some of the policies appear to conflict with one another and is impossible until the promoter has spent $10,000,000 with Facebook® to obtain an account representative. Requiring a participant to “Like” your page or connect to a separate website may be against a Facebook® policy and/or constitute consideration which could make an intended contest an illegal lottery. Additionally, the social media sites make it difficult to publish the promotion’s full rules or to obtain the participant’s e-mail address in order to award the prize, both required by the law of many States in order to be legal.While improvements in technology and decreases in its cost provide new entrepreneurs and existing companies of all sizes the opportunity to creatively and efficiently market themselves by conducting promotions online, unless done legally in consultation with counsel with knowledge and experience, such promotions could quickly become inefficient at a minimum and, in the worst case, severely damage a business.

Any promotion, even if conducted online, must comply with all laws and regulations governing offline promotions.

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I. The Conventional Wisdomarlier this year, prior to the oral arguments before the United States Supreme Court (the “Court”) in National Federation of Business, et al. v. Sebelius (“National Federation” case), 132 S.Ct. 2566 (2012), I gave a talk to a business

group on the likely outcome of the National Federation case. In National Federation, the petitioner challenged the constitutionality of the Patient Protection and Affordable Care Act (the “Affordable Care Act”), in which Congress reformed the national market for healthcare products and services. Like many of my fellow bar members, I wanted to handicap the case, which had been the subject of an inordinate amount

of publicity. If you believed the hue and cry, the case represented the “death” (pun intended) of the Republic and the establishment of socialism, tyranny, and totalitarianism. The heart of

the challenge to the Affordable Care Act was an objection to its “individual mandate,” which compels an individual to purchase health insurance on pain of financial penalty.

I prepared for my talk by reviewing all the federal circuit Court of Appeals cases that had ruled on the constitutionality of the Affordable Care Act, focusing specifically on their treatment of the individual mandate. I must admit that at the beginning of this exercise, I was predisposed to the conclusion that the legislation would be upheld under the Commerce Clause of the United States Constitution, U.S. Const. art. I, §8, cl. 3 (“Commerce Clause”), for the following reasons: First, an appellate court, generally, must give great deference when reviewing the constitutionality of legislation. See generally National Federation 132 S. Ct. at 2593. This rule of construction gives appropriate deference to the voice of the people, which is most directly expressed by the legislature and, for the most part, leaves the appellate court in the position of an umpire who rules based on established rules in the process, with minimum leverage to judicially legislate new rules. See generally Senate Hearings 109-158, Hearings on the Nomination of John G. Roberts to be Chief Justice of the Supreme Court of the United States, 109th Cong. (Sept. 2005). Second, I found it inconceivable that the legislative history and related legislative fact-finding accompanying the enactment of the Affordable Care Act would not make the requisite connection between the individual mandate, its effect on the national health care market, and its subsequent effect on interstate commerce. Third and finally, while not a constitutional law expert, I knew that with the demise of Lochner v. New York, 198 U.S. 45 (1905), as established in West Coast Hotel Co. v. Parrish, 300 U.S.

379 (1937), the United States Supreme Court had gotten out of the business of invalidating Congressional legislation regulating business (i.e., economic interests) on the basis of a violation of substantive due process and, by analogy, the Commerce Clause. See generally United States vs. Lopez, 514 U.S. 549, 603 (1995) (Souter, J.) (dissenting, discussing the relationship between substantive due process and the Commerce Clause).

After a couple of hours of reading the cases, my suspicions were confirmed. This was not a hard case at all. Under the Court’s expansive interpretation of the plenary power granted to Congress by the Commerce Clause, and as established by a line of cases commencing in 1937, the Affordable Care Act was clearly constitutional under the Commerce Clause. See generally National Federation, 132 S. Ct. at 2609 (Ginsberg, J., dissenting) (discussing the applicable Commerce Clause precedent).

Thus informed, I handicapped the case as follows: (1) voting to uphold constitutionality, would be Justices Ginsburg, Breyer, Sotomayor, and Kagan (the “Liberal Wing”); (2) voting to declare unconstitutional, would be Chief Justice Roberts, and Justices Thomas, Scalia, and Alito (the “Conservative Wing”); (3) Swing Vote: Justice Kennedy, a moderate conservative, who given the overwhelming precedent in favor of upholding constitutionality under the Commerce Clause, would so vote. My conclusions fell within the conventional wisdom as to how the case would be decided.

A Comment On Chief Justice Roberts’ Majority Opinion

National Federation of Business v. Sebelius:

A Decision For The Ages

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II. Hobson’s ChoiceThe manner in which the results of the National Federation case were communicated by the press was comic but telling. At first CNN reported the legislation had been declared unconstitutional. Presumably, the eager reporter scouring the opinion stopped at the portion of the opinion declaring the legislation unconstitutional under the Commerce Clause. Having continued to read on, the reporter would have found that Chief Justice Roberts found the legislation constitutional under Congress’s plenary power to levy taxes. Const. art 1, §8, cl. 1. As will be discussed, in this bit of indirection lies a clue to the greatness of Chief Justice Roberts’s opinion. CNN quickly corrected itself and announced that the constitutionality of the Affordable Care Act had been upheld.

When I served as a law clerk to the late Justice J. Frank Huskins of the North Carolina Supreme Court, one of

our monthly rituals was to strategize about which cases we would select to be assigned to us for the writing of an opinion. As I recall, each Justice would select a case based on seniority. Justice Huskins referred to the last case as “Hobson’s Choice.” “A ‘Hobson’s Choice’ is a free choice in which only one option is offered. . . The phrase is said to originate with Thomas Hobson, a livery stable owner in Cambridge, England. To rotate the use of his horses, he offered his customers the choice of either taking the horse in the stall nearest the door or taking none at all.” Wikipedia, Hobson’s Choice, http://en.wikipedia.org/wiki/Hobson%27s_choice (last visited October 8, 2012). Thus, as to the final case, the Justice to whom it was assigned actually had no choice at all. When we knew we had “Hobson’s Choice,” we carefully “vetted” our earlier picks, so that when Hobson’s Choice came our way, we would get a case we wanted.

The major surprise in National Federation was Justice Kennedy’s decision to vote in favor of declaring the legislation unconstitutional as an invalid exercise of the Commerce Clause. I contend that Justice Kennedy’s decision left Chief Justice Roberts with a Hobson’s Choice. I further contend that not only did Chief Justice Roberts have the wisdom to recognize he was left with a Hobson’s Choice, but in turn brilliantly inflicted a Hobson’s Choice of his own on the Liberal Wing that wanted to uphold the legislation.

While it is true that Chief Justice Roberts was philosophically and judicially inclined to vote with the Conservative Wing, he had no choice but to vote with the Liberal Wing and assign himself the writing of the opinion to prevent significant damage to the reputation of the Court and to preserve for future adjudication his strong interest in curbing federal intrusion into the economic affairs of businesses and individuals. In effect, by joining the majority, Chief Justice Roberts wisely decided to retreat and live to fight another day. Why do I say this? For the Court to have overruled the Affordable Care Act in the face of such obvious Commerce Clause precedent as established by numerous United States Supreme Court cases dating back to 1937, would have brought the Supreme Court into disrepute and threatened its exercise of its crucial power of judicial review which was established by Chief Justice Marshall in the seminal case of Marbury v. Madison, 5 U.S. 137 (1803). “Edward Levi, distinguished lawyer, legal scholar and legal educator who served as Dean of the University of Chicago Law School once noted that the ‘function of articulated judicial reasoning is to help protect the Court’s moral power by giving some assurance that private views are not masquerading as public views.’” See Rodney A. Smolla, Let Us Now Praise Famous Judges:

The heart of the challenge to the Affordable Care Act was an objection to its “individual mandate,” which compels an individual to purchase health insurance on pain of financial penalty.

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Exploring the Roles of Judicial “Intuition” and “Activism” in American Law. 4 U. of Rich. L. Rev. 39 (2005) (quoting Dean Levi). Clearly, had the Court ruled to strike down the legislation, no amount of legal reasoning would be sufficient to explain why the Court was suddenly abandoning 75 years of clear precedent to overturn the most important Congressional enactment of the new century. It would have been seen as a prime example of the dreaded “disease” of judicial activism with unforeseen consequences for the status and prestige of the Court. Further, the doctrine of judicial review, as established in Marbury v. Madison and which is etched on the wall of the Supreme Court Building: “It is emphatically the province and the duty of the Judicial Department to say what the law is.” Marbury v. Madison, 5 U.S. at 177, would have been put at risk. The primacy and power of Marbury v. Madison would have been threatened.

As mentioned, before Chief Justice Roberts would join the majority, he inflicted a Hobson’s Choice of his own on the Liberal Wing. They would have to accept insertion of language within the majority opinion indicating that the Affordable Care Act was unconstitutional under the Commerce Clause. This language is clearly a reversal of the trend of the Commerce Clause cases and will serve notice that in future cases the Court may not be as lenient in its review of economic regulation by the government. By this brilliant strategy, Chief Justice Roberts has taken the long view and pushed forward a doctrinal change which can bear fruit in future cases. Regardless of one’s position on the scope of the Commerce Clause, Chief Justice Roberts is to be praised and admired for framing the issue of the limits of the Commerce Clause in a manner that can be developed in subsequent cases in a manner consistent with common-

law adjudication. By framing the issue in its proper light, Chief Justice Roberts advanced his own quest to limit the exercise of government power over private economic interests; advanced the constitutional doctrine of Separation of Powers; and preserved and possibly enhanced the prestige of the Court.

III. A Masterpiece of IndirectionThe seminal case of Marbury v. Madison has gained legendary status as a masterpiece of indirection. Richard A. Harris & Daniel J. Tichenor, A History of the U.S. Political System: Ideas, Interests, and Institutions 44 (1st ed. 2010). In Marbury v. Madison, Chief Justice Marshall turned a squabble between outgoing President Adams and Chief Justice Marshall’s cousin, the incoming President Jefferson, over the service of a judicial commission into an opportunity to assert the standing of the Judicial Department in the recently established tripartite constitutional system which went into effect on March 4, 1789, after ratification by the States. In this case, Chief Justice Marshall went out of his way to castigate the Executive Department (i.e., his cousin) by reminding it that ours was a government of laws and not of men (thereby enhancing the Judicial Department). More importantly, Chief Justice Marshall, by adopting the doctrine of judicial review, established the primacy of the Judicial Department in the interpretation of statutory and constitutional law. Adding to the mystique of the case is that under the facts of the case, Chief Justice Marshall, who was serving concurrently as Secretary of State under President Adams, was the individual charged with serving the disputed commission and was blocked in this attempt by his cousin, President Jefferson. Was “bad blood” behind one of the most important cases in U.S. Constitutional history? I will leave that for others to ponder.

Similarly, I believe that Chief Justice Roberts’s majority opinion in National Federation will also be viewed as a masterpiece of indirection. At the same time he handed the forces seeking approval of the Affordable Care Act a major victory, he planted within his majority opinion the seeds of its destruction; embedding, if you will, the equivalent of a “stuxnet” virus in the heart of the opinion.

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Tony Abate was named Chair of the Board of Directors of the Boys and Girls Clubs of Sarasota County.

Erin Smith Aebel received a certificate of recognition of appreciation from The Florida Bar for her work on The Florida Bar Health Law Section Facebook page. Erin joined the American Diabetes Association’s Advocacy Attorney Network. Erin recently presented “Pain Management 101: How State and Local Pain Clinic Laws Affect Your Medical Practice,” to the Tampa Bay Medical Group Management Association.

Erin Smith Aebel and Malinda Lugo were invited to speak on “Risk Management in the Digital Age: Avoiding the Pitfalls of Electronic Health Records” to the Florida Society of Anesthesiologists at their annual meeting in June.

David Axelrod will be a faculty member at the 29th Annual National Institute on Criminal Fraud and the Second Annual National Institute on Tax Controversy in Las Vegas on December 5-7, 2012.

Jeni Belt was re-elected to serve on the Board of Trustees of the Toledo Bar Association. Jeni was also a speaker at the 2012 Joint Fall Conference of the Ohio Society of Healthcare Risk Managers (OSHRM) and The Society of Ohio Healthcare Attorneys (SOHA) on September 14, 2012. Her topic was “Complaints/Grievance.” Jeni also spoke at a seminar on “Medical Records Law in Ohio” in July sponsored by Lorman Education Services.

Neema Bell served as the moderator at a Press Club of Toledo panel discussion on the use of controversial video in news reporting.

Steve Berman was a guest lecturer at the University of Florida College of Law Advanced Bankruptcy Seminar. Only the top bankruptcy judges and lawyers are asked to teach at the Advanced Bankruptcy Seminar.

Will Blair has been elected to the Board of Directors of MacDonald Training Center Properties, Inc.

Cheri Budzynski was a panelist at the Twelfth Annual Great Lakes Water Conference 2012 on November 2, 2012. Cheri’s presentation focused on mercury air emissions polluting the Great Lakes. Cheri was appointed as Social Media Vice Chair for the American Bar Association (ABA) Section of Environment, Energy, and Resources Air Quality Committee for the 2012-2013 term year.

Doug Cherry was featured in a Gulf Coast Business Review article about electronic discovery. Doug presented a CLE course sponsored by the Sarasota County Bar Association and The Florida Bar Business Law Section entitled “The New eDiscovery Amendments to the Florida Rules of Civil Procedure – An Overview and Discussion” on September 12, 2012.

Ron Christaldi and his team at Shumaker were victorious in a recent two-week federal court trial for client ALPS South, LLC. The lawsuit, filed in 2008, began a four year medical device patent infringement battle between two direct competitors: Tampa-Bay based ALPS South, LLC, which employs more than 85 in the Bay area, and the Ohio Willow Wood Company.

Jamie Colner is actively involved in the Kairos Prison Ministry and was part of a team that visited the Marion Correctional Institute on October 25 – 28, 2012 for the 32nd Kairos weekend at that prison. Jamie was the program coordinator at the Foundation of The American Board of Trial Advocates “Masters in Trial” seminar on September 7, 2012. The seminar topic was “Direct Examination of Experts.”

Jennifer Compton moderated an SM2 Regional Workforce Development breakfast series on November 15, 2012 in Sarasota. The SM2 breakfast series brings together leaders from Sarasota and Manatee Counties to share insight on various economic topics with the intended goal of sparking conversation on topics that have potential for regional collaboration.

David Conaway moderated a panel discussion in October on “Trading in Turkey and the Troubled Economies in The Southern Eurozone (Spain and Italy)” at the Association of International Credit and Trade Finance’s ( ICTF’s) annual Credit Symposium. David presented an Executive Summary of Key Bankruptcy Issues to the Association of Corporate Counsel in Charlotte in October.

David Conaway, along with David Coyle, David Grogan and Steve Berman, presented a bankruptcy seminar on October 29, 2012 in Charlotte titled “Staying Ahead of the Curve in Bankruptcy and Insolvency Proceedings.”

Mary Li Creasy has been admitted to the National Academy of Distinguished Neutrals (NADN).

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Duane Daiker received an award in recognition from The Florida Bar for his contribution to the Appellate Practice Section’s Continuing Legal Education programs. Duane has been appointed to serve on the Appellate Court Rules Committee of The Florida Bar for a three year term and has been elected to the Executive Council of the Appellate Practice Section of The Florida Bar. Duane presented “Using Your iPad in Your Practice – a Tool for Professionals” to the Tampa Bay Chapter of the Society of Financial Service Professionals on October 9, 2012. Duane also presented at the Association of Corporate Counsel conference in Longboat Key, a program entitled “Understanding Appellate Practice: What Corporate Counsel Should Know.”

Duane Daiker and Bob Warchola presented at the Northeast Surety & Fidelity Conference held September 20, 2012 in Atlantic City. Shumaker is a co-founder and sponsor of this annual conference.

Brad deBeaubien and Jan Pietruszka spoke to a group of Ybor City business owners for the Ybor City Development Corporation. The title of the seminar was “A Title III ADA Primer for Small Businesses” and addressed the continued threat of “drive-by lawsuits” arising out of Americans with Disabilities Act compliance issues.

Tim Garding has been elected to the Board of Directors of the Raymond James Gasparilla Festival of the Arts.

Tim Garding, Michele Leo Hintson and Maria del Carmen Ramos were speakers at an Employment Law Update seminar sponsored by Shumaker in August.

Bruce Gordon was a presenter at the Pinellas County Estate Planning Seminar on October 17, 2012 in Clearwater, Florida.

Steve Grieco has been elected to the Board of Directors and as a Vice President of the Florida High School Hockey Association, Inc. (“FHSHA”).

Ben Hanan has been named Chair of the Economic Development Council of Sarasota County, Florida.

Mark Hildreth was a panelist at the American Bankruptcy Institute’s 17th Annual Southwest Bankruptcy Workshop and spoke about “Non-Bankruptcy Alternatives to Divesting Assets.”

Michele Leo Hintson has been appointed to the Junior League of Tampa’s 2012-2013 Board of Directors, serving as Chair of the Grants Committee. Michele has been selected to the Leadership Pasco Class of 2013.

Adria Jensen and Hunter Norton were the featured presenters at the Fourth Annual BBT REO Agent Training Seminar in April. They discussed post-foreclosure legal issues, including title issues, Association disputes and Protecting Tenants at Foreclosure Act procedures.

Brian Lambert and Christopher Staine presented Parts I and II of the ABC’s of Florida Construction Lien Law before the Associates Builders and Contractors in May.

Stephen Lee was invited to speak at the retirement celebration/roast for the Honorable Lewis M. Killian, Jr., U.S. Bankruptcy Judge for the Northern District of Florida, in July in Tallahassee. Stephen served as a law clerk to Judge Lewis from 2009-2010.

Malinda Lugo received a certificate of appreciation from The Florida Bar Health Law Section in recognition of her services with The Practice Area Reporter Updates. Malinda presented at the Hillsborough County Bar Association’s Health Law Section’s CLE program in April in Tampa. Malinda discussed “Electronic Health Records: Contracting, Compliance and Liability Hazards.”

Moses Luski presented the Shumaker Legal Minute at the monthly luncheon of the Latin American Chamber of Commerce in Charlotte in August. Moses discussed the National Federation of Independent Businesses v. Sebelius, a Decision for the Ages: A Comment on the U.S. Supreme Court Ruling on the Constitutionality of the Patient Protection and Affordable Care Act. Moses also spoke on renowned artist Chuck Close at the Foundation for The Carolinas in Charlotte, in August.

Gregory Marks received the “Chair’s Special Merit Award” from The Florida Bar Tax Section for his services as the Reporter of The Florida Bar’s Revised LLC Act Drafting Committee.

Ed McGinty spoke to the National Association of Insurance and Financial Advisors (NAIFA) in June in St. Petersburg about asset protection planning.

Brandy Milazzo taught the Transactional Critical Practical Skills class at the Charleston School of Law (Week Two) in August at the request of Dean Abby Edwards Saunders. Brandy presented “Loss Mitigation, Particularly Loan Modifications,” to the South Carolina REALTORS Association. She spoke about Loan Modifications before the Mecklenburg County Bar Association, and has been invited back for a Spring 2013 presentation. She was

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also a speaker at two NBI Business Law Fundamentals courses and taught a Law Review CLE Business Contracts course.

Cate O’Dowd spoke at the Florida Association of Plumbing Heating Cooling Contractors Convention & Trade Show 2012 in July, in Orlando. Cate discussed the Complaint and Disciplinary Process before the Florida Construction Industry Licensing Board.

Kathleen Reres has been named Co-Chair of the 43rd Annual Raymond James Gasparilla Festival of the Arts.

Dick Rogovin organized the first for-profit spinoff company for Edison Welding Institute (EWI), which he serves as Chairman of the Board. The new company is RealWeld Systems, Inc., which manufactures unique welding training equipment utilizing real welding guns as opposed to the virtual welding trainers produced by other manufacturers. Dick serves on the Board of the new company and is also its Secretary-Treasurer.

Peter Silverman co-authored the Annual Franchise and Distribution Law Developments, 2012, published by the American Bar Association.

The Broker-Dealer Litigation and Arbitration practice group, managed by Michael S. Taaffe, achieved confirmation of their landmark victory in Ramazio and Smolchek v. Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Case No. 10-04432. The United States District Court for the Southern District of Florida found no basis for the arbitration award to be vacated, and entered judgment in favor of Shumaker’s clients, Ramazio and Smolchek.

Todd Timmerman has been elected to the Executive Committee of the Outback Bowl. Todd is also on the Board of Directors and Team Selection Committee of the Bowl.

Lou Tosi and the environmental consulting firm, ERM, presented an “Interactive Shale Development Conference: Changing Requirements and Policy Perspective – Developing Ohio’s Shale Resources,” on November 15, 2012 in Columbus. This event hosted Ohio’s key legislative leaders discussing the ongoing debate to balance economic and environmental resources and was moderated by State Senator Mark Wagoner.

Mark Wagoner achieved a landmark victory representing Dayton Heidelberg Distributing Co. on whether MillerCoors could terminate Dayton Heidelberg’s distributorship in Ohio. The United States District Court for the Southern District of Ohio determined that MillerCoors was not entitled to terminate the distributorship agreement under Ohio law. On August 16, 2012, the United States Court of Appeals for the Sixth Circuit affirmed that decision in Dayton Heidelberg Dist. Co. v. MillerCoors, LLC, Case No. 11 3484, in a published decision.

Greg Yadley was one of four participants in a panel presentation, “Everything You Need to Know About Crowdfunding,” in August, at the American Bar Association’s Business Law Section Annual Meeting in Chicago.

Mechelle Zarou has graduated from the 2012 Ohio State Bar Association Leadership Academy, a seven-month program that seeks to assist in preparing young lawyers to become leaders in their communities and in the legal profession. Invitation to the Leadership Academy is made by the President of the OSBA upon nomination.

Kelly Zarzycki is the recipient of the 2012 Hillsborough County Bar Association’s Outstanding Young Lawyer Award for her “exemplary professionalism in the practice of law” and her personal contributions in the community.

www.slk-law.com

congratulationsShumaker was recognized as a Gold Fit-Friendly Company by the American Heart Association for a second year in a row. The American Heart Association’s Fit-Friendly designation recognizes the steps Shumaker has taken in recognizing the importance of a healthy workplace for its employees and in creating a culture of physical activity in the workplace.

Shumaker, Loop & Kendrick, LLP received Metropolitan First-Tier rankings in the 2013 U.S. News - Best Lawyers “Best Law Firms” rankings.

Shumaker’s Charlotte office is the 2012 recipient of the North Carolina Association of Women Attorneys’ (NCAWA) “Balanced Life Workplace Award”. Brandy Milazzo, Karen Stiles and Lisa Hoffman nominated the firm for the award. David Conaway, Jim Culbreth and Brandy accepted the award on behalf of the firm in Asheville at the NCAWA’s annual meeting.

Shumaker’s Sarasota office has been selected by Living on the Suncoast magazine readers as the 2012 Suncoast Select Best Large Law Firm. This selection was based on votes obtained through the website and publication of www.livingonthesuncoast.com for the very best professional firms on the Suncoast.

Two of Shumaker’s practice groups and seven Shumaker attorneys have been recognized in the 2012 Chambers USA Guide to America’s Leading Business Lawyers:• Natural Resources & Environment:

Ohio• Corporate/M&A and Private Equity:

Tampa and Sarasota, Florida

The following attorneys have been selected as “Leaders in their Field”:• Michael E. Born – Natural

Resources & Environment• Douglas G. Haynam – Natural

Resources & Environment• Paul R. Lynch – Corporate/M&A

& Private Equity• William L. Patberg – Natural

Resources & Environment• Darrell C. Smith – Corporate/

M&A & Private Equity• Louis E. Tosi – Natural Resources

& Environment• Gregory C. Yadley – Corporate/

M&A & Private Equity

Florida Trend’s 2012 Florida Legal Elite:Erin Smith AebelSteven J. ChaseRonald A. ChristaldiJonathan J. EllisDarrell C. SmithGregory C. Yadley

Florida Trend’s 2012 Florida Up and Comers:Jason P. StearnsSeth P. Traub

The following were selected by their peers for inclusion in The Best Lawyers in America® 2013 (Copyright 2012 by Woodward/White, Inc., of Aiken, SC).Anthony J. AbateW. Thad AdamsM. Scott AubryJaime AustrichJohn C. BarronNeema M. BellJenifer A. BeltThomas C. BlankMichael E. BornMichael M. BrileyEric D. BrittonJohn H. BursonC. Philip Campbell, Jr.C. Graham Carothers, Jr.Ronald A. ChristaldiDavid H. ConawayThomas A. CotterDavid J. CoyleMary Li CreasyScott G. DellerGary R. DiesingThomas P. DillonEdwin G. EmersonVivian C. FolkJack G. FynesBruce H. GordonCheryl L. GordonWilliam H. GoslineDouglas G. HaynamJohn W. Hilbert, IIW. Kent IhrigJohn S. InglisRegina M. JosephJohn D. KocherKathleen A. KressGregory T. LodgePaul R. LynchJohn N. MacKayGregory M. MarksErnest J. Marquart

31

2013 Best Lawyers in America “Lawyers of the Year”: Thomas C. Blank – Toledo Mergers & Acquisitions LawRonald A. Christaldi – Tampa Health Care Law John N. MacKay – Toledo Banking and Finance Law Michael S. McGowan – Toledo Corporate Law Cynthia L. Rerucha – Toledo Real Estate Law Scott M. Stevenson – Charlotte Medical Malpractice Law - DefendantsTheodore C. Taub – Tampa Land Use & Zoning Law Gregory C. Yadley – Tampa Securities/ Capital Markets Law

Toledo Business Journal’s “Who’s Who in Toledo Area Law 2012”:John C. Barron Jenifer A. BeltMichael M. BrileyThomas P. DillonJohn W. Hilbert, IIJohn N. MacKayMichael S. McGowanBrian N. McMahonJoseph A. RideoutStephen A. RothschildGregory S. ShumakerPeter R. SilvermanMark WagonerDavid F. WatermanThomas I. Webb, Jr.James F. White, Jr.Dennis P. Witherell

Timothy C. McCarthyMichael S. McGowanBrian N. McMahonSteven A. MecklerDonald M. Mewhort, Jr.Michael J. O’CallaghanWilliam L. PatbergMary Ellen PisanelliThomas G. PletzDavid J. RectenwaldCynthia L. ReruchaJoseph A. RideoutJames I. RothschildStephen A. RothschildMichael G. SandersonSteven G. SchemberGregory S. ShumakerJohn J. SicilianoPeter R. SilvermanJoseph S. SimpsonDarrell C. SmithScott M. StevensonJohn L. StraubWilliam H. SturgesWilliam R. SwindleTheodore C. TaubJ. Todd TimmermanLouis E. TosiMichael T. TrockeBarton L. WagenmanMark WagonerDavid F. WatermanThomas I. Webb, Jr.Martin D. WernerJames F. White, Jr.David W. WicklundSteele B. Windle, IIIDennis P. WitherellKathryn J. WoodwardGregory C. YadleyMechelle Zarou

1 S. 3245, 112th Cong. (2011-12).2 AILA InfoNet Doc. 12080343 (posted September

28, 2012).3 Id.4 Id. 5 8 U.S.C. § 1153(b)(5). 6 Id.7 11 U.S.C. § 1153(b)(5)(A)(i)-(ii); 8 C.F.R. § 204.6(f)

(1) (establishing capital requirements); § 204.6(h)(1)-(3) (defining commercial enterprise).

8 8 U.S.C. § 1153(b)(5) (B) (ii) (defining “targeted employment area”).

9 8 C.F.R. § 204.6(f)(2) (establishing capital requirements for “targeted employment areas”).

10 The requirements for an EB-5 visa petition are outlined in 8 C.F.R. § 204.6(j).

11 The requirements for removing the conditions and obtaining permanent legal residency are set forth in 8 C.F.R. § 216.6.

12 Department of State, Justice, and Commerce, the Judiciary and Related Agencies Appropriations Act of 1992, Pub. L. No. 102-395 § 610. 106 Stat. 1828 (Oct. 6, 1992).

13 8 U.S.C. § 1153 note.14 8 C.F.R. § 204.6(e).15 A complete list of approved regional center can

be found at http://www.uscis.gov/eb-5centers.16 8 C.F.R. § 204.6(j)(4)(iii).17 8 U.S.C. § 1153 note.18 “Employment Creation Immigrant Visa (EB-5)

Program Recommendations,” Office of the United State Citizenship and Immigration Services Ombudsman, at 1 n.3 (March 18, 2009).

19 “Immigrant Investors: Small Number of Participants Attributed to Pending Regulations and Other Factors,” United States Government Accountability Office, Report to Congressional Committees GAO 05-526, at 7-8 (April 2005).

20 Id.21 Id. at 16.22 Id.23 Id. at 8-11.24 Id. at 11-14.25 “This Week in Clean Economy,” Inside Climate

News (March 30, 2012), available at http://insideclimatenews.org/news/20120330/this-week-clean-economy-austin-texas-eb-5-immigration-green-jobs-solar-wind-power-china.

26 “EB-5 Visas: A Cleaner, Smarter Plan,” The New Republic, April 4, 2012, available at http://www.tnr.com/blog/the-avenue/102368/eb-5-visas-smarter-cleaner-plan.

27 “Taking Action, Building Confidence: Five Common Sense Initiatives to Boost Jobs and Competitiveness,” President’s Council on Jobs and Competitiveness, at 7, 19 & 35 (October 2011), available at http://files.jobs-council.com/jobscouncil/files/2011/10/JobsCouncil_InterimReport_Oct11.pdf.

Footnotes The EB-5 Program: The Road to Citizenship Less Traveled

© 2012 Shumaker, Loop & Kendrick, LLP

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