I n t e r n a t i o n a l M a r k e t i n g

The International Legal Environment:Playing by the Rules

Chapter 7

1 4 t h E d i t i o nP h i l i p R. C a t e o r a

M a r y C. G i l l yJ o h n L . G r a h a m

McGraw-Hill/IrwinInternational Marketing 14/e

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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What Should You Learn?• The four heritages of today’s legal systems• The important factors in jurisdiction of legal

disputes• Issues associated with jurisdiction of legal

disputes and the various methods of dispute resolution

• The unique problems of protecting intellectual property rights internationally

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What Should You Learn?• How to protect against piracy and counterfeiting• The legal differences between countries and

how the differences can affect international marketing plans

• The different ways U.S. laws can be applied to U.S. companies operating outside the United States

• The many issues of evolving cyberlaw

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Global PerspectiveThe Pajama Caper

• No single, uniform international commercial law governs foreign business transactions – The international marketer must pay particular attention to the

laws of each country

• Laws governing business activities within and between countries – An integral part of the legal environment of international

business

• Securing expert legal advice is a wise decision• The foundation of a legal system

– Profoundly affects how the law is written, interpreted, and adjudicated

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Bases for Legal Systems

• Four heritages form the basis for the majority of the legal systems of the world– Common law – Civil or code law– Islamic law– Marxist-socialist tenets

• Even though a country’s laws may be based on the doctrine of one of the four legal systems its individual interpretation may vary significantly

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Lawyers per 100,000 People in Selected Countries

Exhibit 7.1

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Common and Code Law

• Common law – Seeks interpretation through the past decisions of higher courts which

interpret the same statues – Applies established and customary law principles to a similar set of facts– Are recognized as not being all-inclusive – Ownership is established by use

• Code law – Legal system is generally divided into three separate codes

► Commercial ► Civil► Criminal

– Ownership is determined by registration – Considered complete as a result of catchall provisions found in most

code-law systems

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Islamic Law• The basis for Islamic law is interpretation of the Koran• Islamic law defines a complete system that prescribes

specific patterns of social and economic behavior for all individuals– Property rights– Economic decision making– Types of economic freedom

• Among the unique aspects of Islamic law is the prohibition against the payment of interest

• The Islamic system – Places emphasis on the ethical, moral, social, and religious dimensions

to enhance equality and fairness for the good of society

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Marxist-Socialist Tenets• Socialist countries are now more directly involved

in trade with non-Marxist countries – Necessitated the development a commercial legal system that

allowed engagement in active international commerce

• Pattern for development varies among countries– Each has a different background – Development of market-driven economies at different stages

• Premise is that law is strictly subordinate to prevailing economic conditions – Fundamental propositions as private ownership, contracts, due

process, and other legal mechanisms have had to be developed

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Jurisdiction in International Legal Disputes

• No judicial body exists to deal with legal commercial problems arising between citizens of different countries– Legal disputes can arise in three situations

► Between governments► Between a company and a government► Between two companies

• Jurisdiction is generally determined on the basis of:– Jurisdictional clauses included in contracts– Where a contract was entered into– Where the provisions of the contract were performed

• Most clear-cut decisions can be made:– When contracts or legal documents supporting a business transaction

include a jurisdictional clause

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International Dispute Resolution – Conciliation

• Conciliation is a nonbinding agreement between parties to resolve disputes by asking a third party to mediate differences– Sessions are private – All conferences between parties and the mediator are

confidential

• Although conciliation may be the friendly route to resolving disputes– It is not legally binding– An arbitration clause should be included in all conciliation

agreements

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International Dispute Resolution – Arbitration

• Conducted under the auspices more formal domestic and international arbitration groups – Organized specifically to facilitate the resolution of commercial disputes

• The popularity of arbitration has led to a proliferation of arbitral centers – Established by countries, organizations, and institutions

► Inter-American Commercial Arbitration Commission► Canadian-American Commercial Arbitration Commission (for disputes

between Canadian and U.S. businesses)► London Court of Arbitration (decisions are enforceable under English law

and English courts)► American Arbitration Association► International Chamber of Commerce (select Arbitration)

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International Dispute Resolution – Arbitration

• Contracts and other legal documents should include clauses specifying the use of arbitration to settle disputes

• Arbitration clauses require agreement on two counts– To arbitrate in the case of a dispute according to the rules and

procedures of some arbitration tribunal– To abide by the awards resulting from the arbitration

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International Dispute Resolution – Litigation

• The best advice is to seek settlement

• Deterrents to litigation– Fear of creating a poor image and damaging public relations– Fear of unfair treatment in a foreign court– Difficulty in collecting a judgment that may otherwise have been

collected in a mutually agreed settlement through arbitration– The relatively high cost and time required when bringing legal

action– Loss of confidentiality

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Protection of Intellectual Property Rights – A Special Problem

• Companies spend millions of dollars establishing brand names or trademarks– To symbolize quality and design– To entice customers

• Millions are spent on research – To develop products, processes, designs, and formulas

• Intellectual or industrial properties are among the most valuable assets

• New technologies developed to prevent piracy

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Counterfeiting and Piracy

• Lost sales from the unauthorized use of U.S. patents, trademarks, and copyrights – Amount to more than $100 billion annually

• The piracy industry has grown so sophisticated– Many counterfeit goods are indistinguishable from original

• Piracy actually can serve come companies– Microsoft

• Counterfeit pharmaceuticals – 2% of the $327 billion worth of drugs sold each year

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Piracy Rates for Computer Software Top and Bottom 20

Exhibit 7.2

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Inadequate Protection

• Failing to adequately protect intellectual property rights can lead to the legal loss of rights in potentially profitable markets

• There have been many cases where companies have legally lost the rights to trademarks and have had to buy back these rights or pay royalties for their use– McDonald’s in Japan

• Many businesses fail to take proper steps to legally protect their intellectual property

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Prior Use Versus Registration• Prior Use – whoever can establish first use is

typically considered the rightful owner

• Registration – the first to register a trademark or other property right is considered the rightful owner

• A company that believes it can always establish ownership in another country by proving it used the trademark or brand name first is wrong and risks the loss of these assets

• It is best to protect intellectual property rights through registration

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International Conventions• Three major international conventions

– Paris Convention for the Protection of Industrial Property– Inter-American Convention– Madrid Arrangement

• World Intellectual Property Organization (WIPO)– Responsible for the promotion of the protection of intellectual property

and for the administration of the various multilateral treaties through cooperation among its member states

• Patent Cooperation Treaty (PCT)• European Patent Convention (EPC)• The Trade-Related Aspects of Intellectual Property

Rights (TRIPs)

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Marketing Laws

• All countries have laws regulating marketing activities– Promotion– Product development– Labeling– Pricing– Channels of distribution

• Discrepancies across markets cause problems for trade negotiators – particularly for managers and their firms– U.S. does not allow the buying or selling of human organs– Some countries only have a few marketing laws with lax enforcement– Others have detailed, complicated rules that are stringently enforced

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Marketing Laws

• There often are vast differences in enforcement and interpretation among countries having laws covering the same activities– Laws governing sales promotions in the European community

• Censorship of advertising is a constant concern

• For many U.S. products with markets in Europe, meeting EU standards is less expensive than designing products especially for Europe

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Green Marketing Legislation• Green marketing laws

– Focus on environmentally friendly products and – Focus on product packaging and its effect on solid waste

management

• Antitrust– For better part of the 20th century antitrust laws

► Nonexistent ► Not enforced in most of the world’s countries ► U.S. was exception

– EU has dealt severe penalties for antimonopoly, price discrimination, supply restrictions, and full-line forcing

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Green Marketing Legislation• The U.S. intervenes when non-U.S. companies attempt

to acquire American companies

• At times, companies are subject to antitrust charges in more than one country– Nestle’s proposed acquisition of Dreyer’s Grand Ice Cream– Microsoft

• Enforcement of antitrust in Europe almost nonexistent until the early stages of EU established legislation

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U.S. Laws Apply in Host Countries• Foreign Corrupt Practices Act

– Makes it illegal for companies to pay bribes to foreign officials, candidates, or political parties

• National security laws– Prohibit a U.S. company, its subsidiaries, joint ventures, or

licensees to sell controlled products without special permission from the U.S.

• Antitrust laws– Enforcement has two purposes in international commerce

► Protect American consumers► Protect American exports and investments against any private restrictions

– The question of jurisdiction and how U.S. antitrust laws apply► Sections I and II of the Sherman Act

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U.S. Laws Apply in Host Countries

• Antiboycott law– U.S. companies are forbidden to participate in any unauthorized

foreign boycott– Required to report any request to cooperate with a boycott

• Extraterritoriality of U.S. laws– Especially important to U.S. multinational firms– Foreign governments fear the influence of American government

policy on their economies through U.S. multinationals► When U.S. laws conflict with those of host country► When U.S. Justice Department restricts of forbids ventures because of

anticompetitive effects

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Cyberlaw – Unresolved Issues

• Domain names and cybersquatters– Cybersquatters (CSQs) buy and register descriptive nouns, geographic

names, and names of ethnic groups and pharmaceutical substances, and other similar descriptors and hold them until they can be sold at an inflated price

• Other cybersquatting abuses that can pose a serious threat to business include parody sites, protest sites, and hate sites– www.walmartsucks.org

• The Internet is not a libel-free zone– Lawsuits involving libel, defamation, and product liability cause

companies to voluntarily restrict their Web sites to selected countries

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Cyberlaw – Unresolved Issues

• Taxes– In the past, a company was deemed to have a taxable presence

in a country if it had a permanent establishment there– The EU Commission

► Proposes value-added tax (VAT)

• Jurisdiction of disputes and validity of contracts– The EU Commission has adopted an e-commerce directive that

will permit online retailers to trade by the rules of their home country unless the seller had enticed or approached the consumer by way of advertising

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Summary• Businesses face a multitude of problems in their

efforts to develop successful marketing programs– Varying legal systems of the world and their effect on business

transactions

• Political climate, cultural differences, local geography, different business customs, and the stage of economic development must be taken into account

• Legal questions must also be considered– Jurisdictional and legal recourse in disputes– Protection of intellectual property rights – Extended U.S. law enforcement– Enforcement of antitrust legislation by U.S. and foreign governments

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Summary

• The Internet creates a new set of legal entanglements

• The freedom that now exists on the World Wide Web will only be a faint memory before long

• Prudent path to follow at all stages of foreign marketing operations is one leading to competent counsel, well versed in the intricacies of the international legal environment