McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

The International Legal Environment:

Playing By the Rules

Chapter 7

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Learning Objectives

LO1 The four heritages of today’s legal systemsLO2 The important factors in the jurisdiction of legal disputesLO3 The various methods of dispute resolutionLO4 The unique problems of protecting intellectual property rights

internationallyLO5 How to protect against piracy and counterfeitingLO6 The many issues of evolving cyberlawLO7 The legal differences between countries and how those differences can affect international marketing plansLO8 The different ways U.S. laws can be applied to U.S. companies

operating outside the United StatesLO9 The steps necessary to move goods across country borders

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Introduction

• No single, uniform international commercial law governing foreign business transactions exists

• International marketers must comply with the laws of each country within which it operate

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Bases for Legal Systems

• Common Law• Civil or Code Law• Islamic Law• Commercial Legal System in Marxist-Socialist

economies or states

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Bases for Legal Systems

• Common law, derived from English law and found in England, the United States, Canada, and other countries once under English influence

• The basis for common law is tradition, past practices, and legal precedents set by the courts through interpretations of statutes, legal legislation, and past rulings.

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Bases for Legal Systems

• Civil or code law, derived from Roman law and found in Germany, Japan, France, and in non-Islamic and non- Marxist countries

• Code law is based on an all-inclusive system of written rules (codes) of law.

Common Law

Based on tradition, past practices and legal precedents set by courts through interpretation of past rulings/statutes,

etc.

Not All-Inclusive

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Common Law

Ownership is determined by use

Agreements may be binding so long as proof of the agreement

can be established.

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Common Law

Impossibility of performance does not excuse non-compliance with the

provisions of the contract, unless it was an act of God.

Common Law countries are codifying Commercial Law.

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Bases for Legal Systems

• Islamic law, derived from the interpretation of the Koran and found in Pakistan, Iran, Saudi Arabia, and other Islamic states

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Islamic Law

The Koran forms the basis for the Shari’ah (Islamic law) It includes issues such as property rights, economic decision

making, and types of economic freedom The overriding objective of the Islamic system is social justice Islamic law prohibits the payment of interest or “riba” It describes secular aspects of the law regulating human acts. It describes specific patterns of social and economic behavior

for all individuals.

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Commercial Law in Marxist Economies A commercial legal system in the Marxist–socialist economies

of Russia and the republics of the former Soviet Union, Eastern Europe, China, and other Marxist–socialist states• Legal system centered on the economic, political, and social policies of

the state As each country moves toward its own version of a free

market system and enters the global market, a commercial legal system is also evolving from Marxist–socialist tenets.

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Jurisdiction in InternationalLegal Disputes Determining whose legal system has jurisdiction when a

commercial dispute arises is another problem of international marketing.

The World Court at The Hague and the International Court of Justice resolve international disputes between sovereign nations of the world rather than between private citizens.• Legal disputes can arise in three situations:

1. between governments, 2. between a company and a government,3. and between two companies

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Jurisdiction in InternationalLegal Disputes

• The World Court can adjudicate disputes between governments, but disputes in situations 2 and 3 must be handled in the courts of the country of one of the parties involved or through arbitration.

• When international commercial disputes must be settled under the laws of one of the countries concerned, the paramount question in a dispute is: Which law governs?

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Jurisdiction in InternationalLegal Disputes

Jurisdiction is generally determined in one of three ways, on the basis of: 1. jurisdictional clauses included in contracts 2. where a contract was entered into, or 3. where the provisions of the contract were

performed

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International Dispute Resolution• Conciliation • Arbitration • Litigation

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Conciliation

• Conciliation or mediation is a non-binding agreement between parties to resolve disputes by asking a third party to mediate differences.

• Discussion between parties and mediator are confidential and statements made by either party may not be used in future litigation or arbitration.

• It is not legally binding.

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Arbitration

• Parties select a disinterested and informed party as a referee to determine the merits of the case and make a judgment both parties agree to honor.

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Litigation

• Fear of creating a poor image• Fear of unfair treatment in a foreign court• Difficulty in collecting a judgment• Cost and time• Loss of confidentiality

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Protection of Intellectual Property:Counterfeiting and Piracy Firms spend millions of dollars establishing brand names or

trademarks to symbolize quality and design only to be counterfeited and pirated

Piracy and counterfeiting leads to lost sales from the unauthorized use of U.S. patents, trademarks, and copyrights which amount to about $60 billion annually as well as lost jobs

Counterfeited pharmaceutical drugs can also lead death and bad publicity

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Intellectual Property Rights: Inadequate Protection

• There is inadequate protection from products being counterfeited or pirated as many countries do not recognize trademarks and patents registered in other countries

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• In the United States, a common-law country, ownership of intellectual property rights is established by prior use

• In many code-law countries, ownership is established by registration rather than by prior use– For example, a trademark in Jordan belongs to

whoever registers it first in Jordan so there are “McDonald’s” restaurants, “Microsoft” software, and “Safeway” groceries all legally belonging to a Jordanian

Intellectual Property Rights:Prior Use vs. Registration

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International Conventions

Many countries participate in international conventions designed for mutual recognition and protection of intellectual property rights• The three major international conventions include:

• The Paris Convention for the Protection of Industrial Property, commonly referred to as the Paris Convention, includes the United States and 100 other countries

• The Inter-American Convention includes most of the Latin American nations and the United States.

• The Madrid Arrangement, which established the Bureau for International Registration of Trademarks, includes 26 European countries.

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Other Managerial Approaches

The traditional, but weak remedies for American companies operating in countries such as China are several• prevention, that is, engage local representation and

diligently register IP with the appropriate agencies• pursue negotiation and alternative dispute resolution• complain to the Chinese authorities• complain to the U.S. government and World Trade

Organization (WTO). Multinational companies such as Microsoft, Philips and warner

Brothers are coming up with other alternative approaches based on the factors that motivate consumers to engage in piracy

Cyberlaw: Unresolved Issues

Existing internet law is vague or does not completely cover such issues as the protection of domain names, taxes, jurisdiction in cross-border transactions, and contractual issues `

The European Union, the U.S. and many other countries are drafting legislation to address the myriad legal questions not clearly addressed by current law

Laws being considered deal with Cybersquatters—those who buy and register descriptive nouns, geographic names, ethnic groups, pharmaceutical substances and other similar descriptors and hold them until they are sold at an inflated price

No other issue in e-commerce concerns the collection of taxes on sale of products, i.e., when taxes should be collected, where they should be collected, and by whom, are all issues under consideration by countries around the world

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Cybersquatting

• The practice of registering a domain name that is the trademark of another person or company– Cybersquatters hope that the owner of the

trademark will pay huge dollar amounts to acquire the URL

– Some Cybersquatters misrepresent themselves as the trademark owner for fraudulent purposes

– Microsoft.pt, Yahoo.pt, Altavista.pt, Shop.pt, Shopping.pt!

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Taxes

A typical tax system relies on knowing where a particular economic activity is located

But the Internet enables individual workers to operate in many different countries from a computer

When taxes should be collected, where they should be collected, and by whom are all issues under consideration by countries around the world.

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Jurisdiction of Disputes andValidity of Contracts Since existing laws relating to commerce do not always clearly

address the uniqueness of the Internet, a body of cyberlaw is being created.

Two of the most troubling areas are:• determining whose laws will prevail in legal disputes between parties

located in different countries • establishing the contractual validity of electronic communications

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Commercial Law within Countries:Marketing Laws When doing business in more than one country, a firm must

comply with different marketing laws All countries have laws regulating marketing activities in

promotion, product development, labeling, pricing, and distribution channels

In Austria, premium offers, free gifts, or coupons are considered as cash discounts and are prohibited

Premium offers in Finland are allowed as long as the word free is not used

French law permits sales only twice a year, in January and August

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Green Marketing Legislation

Multinational corporations also laws on environmental issues such as industrial pollution, hazardous waste disposal, and rampant deforestation

Green marketing laws focus on environmentally friendly products and on product packaging and its effect on solid waste management

Germany has passed the most stringent green marketing laws that regulate the management and recycling of packaging waste

Patent Law

USA• Operates under

“first to invent” rule• Protects individual inventors• Patent applications secret • Patents granted in up to 24

months• Patents valid for 17 years

from application date issued

Japan• Operates under

“first to register” rule• Promotes technology sharing• Patent applications public• Patents granted in 4 to 6

years• Patents valid 20 years from

application date issued

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Foreign Countries 'Antitrust Laws The European Community, Japan, and many other countries

have begun to actively enforce their antitrust laws patterned after those in the United States

Antimonopoly, price discrimination, supply restrictions, and full-line forcing are areas which lead to less competition and higher prices for consumers

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U.S. Laws Apply in Host Countries• Leaving the boundaries of a home country

does not exempt a business from home-country laws

• What is illegal for an American business at home can also be illegal by U.S. law in foreign jurisdictions for the firm, its subsidiaries, and licensees of U.S. technology

U.S. Laws Apply in Host Countries

(1) Foreign Corrupt Practices Act (FCPA)

• Makes it illegal for companies to pay bribes to foreign officials, candidates, or political parties• Stiff penalties can be assessed against company officials found guilty of paying a bribe

(2) National Security Laws

• U.S. firms, their foreign subsidiaries, or foreign firms that are licensees of U.S. technology cannot sell a product to a country which could affect national security of the U.S.

• The control of the sale of goods that have a strategic and military value was prohibited to communist countries that were viewed as major threats to U.S. security

(3) Antitrust Laws

• Protects American consumers from actions that restricts competition • Protects American export and investment opportunities against any privately imposed restrictions to compete on

merit

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Export Restrictions

• National Security Laws• Determining Export Regulations• Electronic services: ELAIN, STELA, ERIC and

SNAP