Week 5 Discussion 2

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Chapter Overview

15.1 International Law and Business • Sources of International Law • Some Basic Principles of International Law • Conducting Business in the International Arena • The International Business Contract • Doing Business Internationally Within the

Limits of U.S. Law

15.2 Environmental Law and Business • Types of Environmental Law • Air Quality Regulation • Water Quality • Toxics and Waste

15.3 Chapter Summary • Focus on Ethics • Case Study: Arc Ecology v. U.S. Dept. of Air Force • Case Study: Karuk Tribe of California v. United States

Forest Service • Critical Thinking Questions • Hypothetical Case Problems • Key Terms

Edi_Eco/iStock/Thinkstock

15 Learning Objectives

After studying this chapter, you will be able to:

1. Describe the sources of international law.

2. Explain some of the major principles of international law.

3. Discuss major concerns for U.S. companies doing international business.

4. Describe the major areas of environmental regulation and the statutes that regulate them.

International and Environmental Law

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Business today exists in a global environment. Even if your company only sells in the United States, it is still potentially affected by competition from overseas. If you seek to expand your markets beyond the borders, there are many issues to be consid- ered. What kind of regulations must you deal with, both in your own country and in the foreign country? Where would disputes be settled, and under whose law? Do U.S. laws still apply when your company is acting outside U.S. borders? A basic understanding of international business law is important for the business student.

Increasingly important, too, is the state of that globe, the planet on which we live and do business. An awareness of environmental issues and laws is relevant not just from the standpoint of compliance with regulations and avoiding liability, but also because we face in the 21st century a stark necessity of working to preserve our limited resources of fresh air and water, or dealing with ever worsening consequences.

15.1 International Law and Business

International law is in many ways very different from the law you studied earlier in this book. Until now, we have been examining law in the context of its being rules enforced by the government. If someone commits a crime, the government prosecutes. If some- one breaches a contract, the other party can use the courts to enforce it. With international law, enforcement is less likely, because there is no powerful international entity that can do so to the same degree an individual country can within its own borders. Nonetheless, international law does still exist, and in this section we shall examine its sources and some of its basic principles.

Sources of International Law

Treaties and Agreements A treaty is an agreement or contract between two (bilateral) or more (multilateral) nations that must be authorized and ratified by the government of each nation. Some notable examples of treaties relating to business are the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT). Both are the subject of considerable disagreement as to whether they are good or bad for the U.S. economy.

NAFTA, which originally took effect in 1994, is an agreement between the United States, Canada, and Mexico to eliminate most trade barriers between these countries. It has resulted in much more trade among these countries, but some charge that because Ameri- can manufacturers must compete with Mexican companies with much lower labor costs, NAFTA has caused jobs to leave the United States. Others counter that the United States benefits from the expanded market.

The European Union (EU) is a similar agreement among 28 countries as of 2016, includ- ing Great Britain, France, Germany, and most of Europe (Switzerland being a notable

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holdout). However, in 2016 Great Britain voted to leave the EU, a process which, if com- pleted, could take up to two years. Most of the countries in the EU share a common cur- rency, the Eurodollar, and have cooperated to facilitate increased trade among nations and (to a lesser extent) to coordinate fiscal policy. The economic recession that began in 2008 has, however, strained EU relations in recent years, with countries such as Ireland and Greece experiencing financial crises and needing much aid from the EU.

GATT, which began in the 1940s, has done much to lower trade barriers between the sig- natory nations by decreasing tariffs, which are taxes on imported goods, from 40 percent to an average of 4 percent for manufactured goods. One effect is that consumers tend to see lower prices from increased competition among manufacturers. GATT also led to creation of the World Trade Organization, or WTO, which may hear and adjudicate trade disputes among signatory nations.

Example 15.1. Brazil claimed that U.S. government subsidies for its domes- tic cotton industry violated trade agreements and were distorting the mar- ket, since U.S. manufacturers were able to offer cotton at a lower price (because the government was in effect paying part of their costs for them). In 2004 the WTO agreed with Brazil. The usual remedy the WTO offers is that of “retaliation,” meaning that Brazil could legally tax U.S. goods at a higher level. But the WTO went a step further, and allowed Brazil “cross- retaliation,” which meant lifting intellectual property protection of U.S. products. This would mean that patents and copyrights could be ignored by Brazil; for example, it could legally pirate Hollywood movies and make knock-offs of U.S. patented drugs. To avoid Brazil’s retaliation without ending the cotton subsidies, the U.S. government agreed in 2010 to pay $150 million a year to support Brazilian cotton farmers.

International Organizations There are many organizations created by the agreement of member nations. Some are primarily military in focus, such as the North Atlantic Treaty Organization (NATO), but some, such as the United Nations, deal with a wide variety of international issues. The UN has fostered increased uniformity in trade regulations with the 1980 Convention on Con- tracts for the International Sale of Goods (CISG), which is similar to the Uniform Com- mercial Code’s Article 2.

Some Basic Principles of International Law

Comity The principle of comity means that a nation will defer to and give effect to the laws and judicial rulings of another country, to the extent that they are consistent with the law and public policy of the accommodating nation.

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Example 15.2. Buyer in Great Britain contracts with Seller, a U.S. company, for certain goods. The goods are shipped and paid for, but unfor- tunately turn out to be defective. Buyer sues in English courts and wins a judgment against Seller. However, because Seller’s assets are in the United States, Buyer will need the coopera- tion of the U.S. courts to enforce the judgment. Will the United States honor the British court’s judgment? Probably yes, because it is unlikely that there is any conflict with American law or public policy.

Example 15.3. Under French law, fashion designs are protected by very strict copyright laws. An American company that published photographs of original French fashions on a website without permission of the designer could be held liable under French law for infringement. But if the French designer sought to enforce the judgment in the United States, the U.S. court might find that French law conflicts with the First Amend- ment right to freedom of expression, and refuse to enforce the judgment.

Sovereign Immunity The doctrine of sovereign immunity means that one nation cannot sue another. In the United States, a spe- cific federal law, The Foreign Sovereign Immunities Act (FSIA) of 1976, provides that a foreign nation cannot gen- erally be sued, but there are exceptions where the foreign state has:

• Waived its immunity; • Engaged in commercial rather than political activity; or • Committed a tort in the United States or violated specific international laws.

Example 15.4. Canada contracts to buy 15 airplanes from U.S.-based Boe- ing Co. Canada breaches the contract. Since this is commercial activity, Canada can be sued in the United States.

The Doctrine of “The Act of State” The legal principle of respecting an act of state means that courts in one nation will not question public acts committed by a recognized foreign government within its own bor- ders. One situation where this can arise is with regard to expropriation, which is the seizure of private assets or business for the public good. This occurs when a government seeks to nationalize an industry, as Great Britain did with coal mining after World War II. If just compensation is provided, this is considered legal.

Under French law, images of Paris fashion designs are protected, which in some cases has led to a conflict with the U.S. Constitution’s First Amendment right to freedom of expression. When a U.S. company violated French law by publishing pictures on its website, the designer was unable to enforce a French court’s judgment in the United States.

Jodi Jones/Associated Press

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Example 15.5. A U.S. company has an oil refinery in an African nation. After an election where a different political party comes to power, the Afri- can country’s new government decides to nationalize the oil industry. If the nation pays the company for the refinery, this is legal expropriation. If the government simply seizes the refinery and does not pay fair compensa- tion, this is called confiscation and violates international law.

Obviously acts of state such as expropriation represent a significant risk of doing business in other countries. Companies may want to invest in insurance to cover such risks. While not cheap, such insurance can nonetheless remediate otherwise catastrophic losses.

In the Media: 9/11 Families Seeking Justice Through International Law

FSIA protects a foreign government from being sued in Ameri- can courts under most circumstances, with limited exceptions. The statute (16 U.S.C. §§ 1601–1611) is a legislative version of what American common law provided, going as far back as a U.S. Supreme Court case in 1811, The Schooner Exchange v. M’Fadden, and it establishes under what conditions a foreign sovereign nation can be brought under the jurisdiction of the American legal system.

After the 9/11 attacks on America, hundreds of families whose loved ones were murdered sued the kingdom of Saudi Arabia and members of the Saudi royal family for over $100 trillion, alleging that the Saudis helped fund the Al Qaeda terrorists behind 9/11. The evidence was compelling, and even as late as 2012 two for- mer U.S. Senators who were privy to secret information the U.S. government gathered following the September 11 attacks filed affidavits. One of the senators even stated under oath that he was “convinced that there was a direct line between some of the terrorists . . . and the government of Saudi Arabia.”

In 2005, the federal district judge who had jurisdiction over the suit dismissed it because of the Foreign Sovereign Immunities Act. That dismissal also applied to the Saudi royal family members, because they are part of the Saudi government. The families then appealed to the 2nd Circuit Court of Appeals, which affirmed the trial court’s decision in 2008. Finally, the families sought an appeal of that deci- sion before the U.S. Supreme Court. The primary argument of the 9/11 families was that an exception added in 1996 to the FSIA applied, namely, that a government that sponsors terrorism loses the pro- tection of the FSIA. While the Supreme Court was considering whether to take the case, the Obama administration filed a legal brief with the Supreme Court (a brief written by then Solicitor General Elena Kagan, who would become a Supreme Court justice in 2009), arguing that the 2nd Circuit’s decision should be upheld.

After the attacks on the World Trade Center in 2001, family members of victims filed a $100 trillion lawsuit against the Saudi Arabian royal family. After it was determined that Saudi Arabia does not sponsor terrorism, the FSIA protected the royal family from the suit.

Lawrence Jackson/Associated Press

(continued)

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In the Media: 9/11 Families Seeking Justice Through International Law (continued)

The gist of the Obama administration’s argument was that the terrorism exception didn’t apply because Saudi Arabia was not on the State Department’s list of governments that sponsored or financed ter- rorism. That legal argument infuriated the 9/11 families who had brought the suit. In June 2009, the Supreme Court refused to take the appeal. But in 2010, it ruled in the case Samatar v. Yousuf that an individual foreign official sued for actions taken in his official capacity is not protected by the FSIA, which, in effect, seemed to reopen the debate all over again.

In 2013, the Second Circuit Court of Appeals reversed its 2008 ruling and reinstated Saudi Arabia as a defendant in the case. Saudi Arabia appealed the ruling to the United States Supreme Court. In 2014, the Supreme Court declined to hear the appeal, clearing the way for the case to proceed in federal district court. In 2015, Saudi Arabia was again dismissed as a defendant by Federal District Court Judge George Daniels, who ruled that the plaintiffs did not present enough evidence that Saudi Arabia was involved in the 9/11 attacks to overcome its sovereign immunity. Meanwhile, Congress had been considering legislation that would make it easier for the 9/11 plaintiffs to sue Saudi Arabia. They passed the Justice Against Sponsors of Terrorisms Act in September 2016, but President Obama vetoed the bill shortly after.

Sources: http://www.cnn.com/2002/LAW/08/15/attacks.suit/ http://www.cbsnews.com/2100-201_162-5051884.html

http://www.nytimes.com/2009/06/30/us/30victim.html

http://www.scotusblog.com/case-files/cases/samantar-v-yousuf/ http://articles.philly.com/2014-07-02/business/51005807_1_saudi-arabia-saudi-government-cozen-o-connor

http://www.bbc.com/news/world-us-canada-34405451

http://www.cnn.com/2016/05/17/politics/senate-9-11-saudi-arabia-bill/

https://www.govtrack.us/congress/bills/114/s2040/text/enr#compare=es

http://www.usnews.com/news/articles/2016-09-20/9-11-families-protest-at-white-house-ask-obama-to-

sign-bill-allowing-them-to-sue-saudi-arabia

Conducting Business in the International Arena

Suppose your company wants to take advantage of overseas markets. One of the first things you will have to do is make sure that you are allowed to export, or sell outside the United States, your goods. Exports are regulated by a number of different laws, including those designed to protect national security. For example, if you manufacture ballistic mis- sile systems, you would probably expect there to be restrictions. But what if you manu- facture lie-detector equipment? Sometimes restrictions are based on not just what is being sold, but where it is being sold.

Example 15.6. Polyglot Polygraph Inc. plans to sell polygraph equipment to Honduras. This export is regulated and a license will be required. But if Polyglot is selling the same equipment in Iceland, a license is not required.

Often a U.S. company will find an agent to act for them in the foreign country, and the agent will receive the exported goods and arrange for their sale. Sometimes a company will instead decide to do the actual manufacturing overseas. Alternatively, the company may elect to work overseas through a licensing or franchising scheme.

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Example 15.7. If Polyglot decided to instead license a Honduras company to make the machines according to Polyglot’s design, and in exchange the Honduras company pays Polyglot a percentage of the sales on the machines, this would be a licensing arrangement.

There are also restrictions on importing, or bringing goods into the country that were made in foreign countries. While in many cases imports are desirable for a nation, there is also a fear that too much importing can hurt domestic businesses, as discussed earlier in relation to treaties such as NAFTA. One way in which countries restrict imports is by the imposition of tariffs, or duties, which, as mentioned earlier, are basically a tax on goods entering the country.

Example 15.8. Polyglot now has gone into the general security business, and is looking to import burglar alarms from France. Polyglot will need to find out if there are any restrictions on such imports, and if they are allowed, how much the tariff will be. The costs of tariffs should be factored into the cost of acquiring the product.

Tariffs can vary widely, depending on the type of goods and the country from which one is importing. For example, there are generally no tariffs on trade between Canada and the United States.

Dumping refers to a foreign company selling its goods in the United States at a cost less than fair value, usually in an attempt to dominate the market and be able to raise prices in the long run.

Example 15.9. A Chinese company was selling solar panels in the United States at less than the cost of production, putting U.S. companies at a com- petitive disadvantage. The U.S. government then assessed additional anti- dumping tariffs of 30 percent and higher on the Chinese solar panels.

Of course, there is always a risk that the manufacturing country will then raise its tariffs in retaliation, and thus cause what is sometimes known as a trade war to break out, where countries act in an increasingly protectionist fashion and grant preference to manufactur- ers in their own countries. Governments have to strike a careful balance, seeking to keep good trading relationships while not disadvantaging business within their borders.

The International Business Contract Obviously much of what you have already learned about contracts is equally applicable in the international setting, but when contracting across international borders, there are some additional considerations to take into account. What language should the contract be written in? For example, the law of France requires that some types of contracts be in French. If disputes arise, what country will have jurisdiction? What law will be applied? How will payment be made, and whose currency will be used? These are all matters that should be spelled out in the contract.

Example 15.10. Cargo Four, a U.S. shipping company, decides to contract with a Swedish company for a shipment of sweaters. The parties agree that the language should be English, but that Swedish law will apply and

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that the choice of forum (where any lawsuits will be brought) is Sweden. Payment will be in U.S. dollars, and the payment method will be wire transfer from the Swedish company’s bank to Wells Fargo, which is Cargo Four’s U.S. bank. Because Cargo Four is a company that routinely engages in international business and they are familiar with Sweden, Cargo is not concerned about the choice of law and forum. The Swedish company, on the other hand, is a small boutique business that was not willing to risk an international lawsuit.

Doing Business Internationally Within the Limits of U.S. Law One of the difficult issues confronting those doing business in an international environ- ment is combining compliance with U.S. law with the differing customs of other nations. Nowhere is this more highlighted than when one considers the impact of the Foreign Cor- rupt Practices Act (FCPA). Passed by Congress after investigations discovered U.S. compa- nies were paying millions of dollars in bribes (payments made to influence the decision of a public official in performance of public duties) to foreign officials, the law is intended to preserve confidence in the free market system. However, the companies complain that in fact it puts them at a competitive disadvantage, given that bribes are “business as usual” in much of the world. Even in countries where such payments are illegal, there is often little enforcement. One confusing aspect of the FCPA is that while bribery is illegal, grease payments (which are made not to influence an official’s decision, but to expedite a pro- cess) are not.

Example 15.11. Can-do Inc. pays a Mexican official to award Can-do a con- struction contract for a new highway. This is an illegal bribe.

Example 15.12. Can-do pays an official to move its application to the front of the line, so that it gets looked at six months earlier than it would other- wise. This is a legal grease payment.

Another significant issue relates to whether U.S. employment laws that protect against discrimination apply extraterritorially (outside the United States). Generally, courts have held that the laws do apply to U.S. companies with regard to employees who are U.S. citi- zens, except when it would break the law of the foreign country (such as with mandatory retirement ages), or if there is a bona fide occupation qualification or BFOQ (discussed previously under employment law).

Example 15.13. In Saudi Arabia, women cannot drive vehicles on public roads, so there would be a valid BFOQ for a delivery driver to be male.

15.2 Environmental Law and Business

Businesses must be fully aware of environmental regulation, as they are expected to operate within its constraints. If an energy company does not comply with design and inspection standards when it builds an oil drilling platform, it may end up paying billions of dollars in damages when a catastrophic oil spill occurs, as British Petro- leum (BP) did after the Deepwater Horizon spill in the Gulf of Mexico in 2010. A factory

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that dumps waste containing toxic chemicals may end up being liable for increased cancer rates and other health problems in the community, as happened with Hooker Chemical Company in Love Canal, New York, in the 1970s and W.R. Grace in Woburn, Massachusetts, through the 1980s (the latter became the subject of a book and movie, A Civil Action).

But environmental issues are not just a matter of busi- ness compliance and costs. The state of the environment has profound consequences for every living thing on the planet, and without effective regulation we can all expect to pay a heavy price in the form of our health and that of future generations.

As individuals, we all have little control over the quality of the air we breathe, the water we use, or the soil in which our food is grown. Yet clearly we are affected deeply and directly by polluted air and water and soil. Even when we seek to make healthy choices, there is often too little information available (or so much it becomes hopelessly confusing) or no way to protect ourselves.

Example 15.14. Organic brown rice has long been a staple of healthy diets. In 2012 it was found that it absorbs arsenic, often found in agricultural land even when chemicals have not been used on crops, at an especially high concentration. Syrup made from brown rice is a common ingredient in energy bars and baby formula.

A famous story, “The Tragedy of the Commons” by Garrett Hardin, illustrates one of the difficulties of regulating the environment. At the center of a community is a pasture, which is a “common,” that is, property that belongs to no particular person. Members of the community use the pasture to graze their cows and sheep. This works well as long as no one puts too many animals on the pasture. But one day, a farmer decides to add more cows. His neighbor sees this, and she decides that if he is going to use more graz- ing, so should she and she puts out more sheep. Before long, everyone in the community is crowding the common pasture with livestock. Each person thinks there is no point to being the one to withdraw their animals, since the others will only continue to graze the land. In time, the animals have eaten all the grass and the former pasture is barren ground. The problem is that for the individual farmer, the benefit of giving his cows more grazing is obvious and immediate, while the down side of overgrazing is a problem longer in the making, and shared by all.

Air and water are clearly commons, and the tragedy is that people use them in the way that is convenient, without having to bear the costs. Thus a factory may find it makes sense to dump pollutants in a river, because it’s a cheap disposal method. The long-term effects of the pollution are not borne by the factory’s owners, but potentially by everyone downstream. This is an example of an externality, a cost that is not factored into that of

The 2010 explosion on the Deepwater oil rig set off a chain of litigation against both British Petroleum and its contractors.

Gerald Herbert/Associated Press

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the goods the factory produces. The factory has little incentive to install pollution control equipment as a result. Compounding the problem is the fact that corporate law often rein- forces that the duty of management is to increase the value to the company’s shareholders. Even a socially responsible, ecologically concerned manager may find it difficult to make decisions that benefit society but cost the company profits.

Another problem with achieving effective regulation is that when lawmakers do cost/ benefit analyses, the environment is often left out of the equation. It is much easier to calculate the economic benefits of drilling for oil in a wildlife refuge than it is to know the cost of an animal species becoming extinct. Scientists have long recognized that the planet is a complex, interrelated system that exists in a delicate state of balance, but the ramifica- tions of upsetting that balance are not always known. Compounding the problem is the fact that lawmakers are generally politicians who act in response to fairly short (in the United States, two to six years) election cycles. Generally, the effects of pollution, of global warming and climate change, and even of exposure to toxic substances are longer term, making it easy for lawmakers to keep putting off until some indefinite point in the future the need to regulate and enforce environmental protections.

Free markets and personal ethics cannot protect the environment from degradation; the job is left to the law. In this section we will examine the primary types of regulations and analyze their effectiveness.

Types of Environmental Law Much environmental law is statutory, such as the federal Clean Air Act and Clean Water Act. The Environmental Protection Agency (EPA), created in 1970, has the primary respon- sibility for passing rules to implement such laws and for bringing actions against those who violate the law. States also regulate in this area; for example, many of the laws that require recycling are state or local in origin.

The common law also plays a role. For example, an agricultural worker exposed to dan- gerous chemicals who later developed lung disease might sue the manufacturer for neg- ligence because of inadequate warnings. Homeowners with riverfront property whose beaches are fouled by a factory’s discharge might sue for trespass. In what are known as toxic tort cases, multiple plaintiffs may bring lawsuits for personal injuries caused by dangerous substances, such as the situation where a company’s dumping of a chemical pollutes a town’s water supply. But many people injured by pollution lack the resources to bring a lawsuit, and proving that a particular defendant’s activities caused specific dam- age can be extremely difficult.

Example 15.15. After Hurricane Katrina devastated the Gulf Coast, a law- suit was brought by people in those wrecked communities against pol- luters alleged to have discharged greenhouse gases, which contributed to climate change, which made the storm worse than it would otherwise have been. Although a court ruled the plaintiffs had standing to sue, clearly the difficulties of meeting their burden of proof are considerable!

There are several different approaches to statutory regulation. Sometimes the law sets standards for air or water quality and leaves it up to the individual as to how to obtain compliance.

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Example 15.16. A factory discharges water that has been heated into a nearby stream. Because the warm water can affect the ecology of the stream in a negative manner, the change in water temperature is consid- ered a form of pollution. The factory is ordered to keep discharged water within certain temperature limits, but the factory is free to decide whether to hold the water in tanks until the temperature comes down or to install cooling equipment.

Another method is the command-and-control model, such as requiring that power plants install certain emissions control equipment.

One problem with both these type of rules is that they are only effective to the extent they are enforced.

Example 15.17. Suppose a utility company has failed to reduce emissions to the proper level. The company may actively lobby for the rules to be changed, or it may contribute to the political campaign of a presidential candidate who will seek a smaller budget for the EPA and cut its personnel. In some cases, companies simply find it cheaper to pay an occasional fine than to follow the law.

Some statutes authorize criminal prosecutions as well as civil lawsuits for damages. For example, under the Clean Air Act (42 U.S.C. § 7401 et seq. (1970)), not only the company may be fined, but corporate officers who knowingly violate the law (for example, by falsely reporting information) may be subject to fines up to $1 million and imprisonment up to two years. The same law authorizes citizen suits, which give private individuals some ability to enforce the law even if the government doesn’t act. However, in many situations polluters have sufficient political clout that authorities may take a hands-off approach to enforcement, and citizens may not have the resources to bring private suits.

Example 15.18. An area known as the Chemical Corridor in Mississippi and Louisiana was home to operations of several major companies, who were polluting with highly toxic substances. Residents of the Corridor were suffering from many often fatal health problems, but they were primarily low-income minorities who could not afford lawyers. After a law clinic at Tulane Law School stepped in to represent them and took effective action on their behalf, the governor of Louisiana threatened to withdraw funding from the school, and the Louisiana Supreme Court (which is elected and thus subject to political concerns) barred the clinic from representing resi- dents in suits against the chemical industry.

Other types of legal mechanisms include taxes on pollution and market-based regula- tion, which seeks to turn the external cost of pollution into an internal cost. Cap and trade systems, where, for example, a factory must buy a credit for every ton of emissions it produces, mean that businesses have incentive to reduce emissions. Since there are a limited number of credits available, and typically such systems reduce the credits over time so that the cost goes up, polluters face rising costs and will become less competitive in their business as they pass the cost on to consumers. Furthermore, the money raised by the sale of the pollution credits can go to environmental programs. An example of such

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an emissions trading program can be found in the sulfur dioxide part of the 1990 Clean Air Act Amendments, although it was weakened by subsequent court decisions and EPA rules.

Air Quality Regulation Air pollution is known to have effects on human health ranging from unpleasant to fatal. The Clean Air Act, along with its subsequent amendments, regulates emissions from sources both stationary (power plants, factories) and mobile (cars). For stationary sources, the EPA sets the maximum limits for various pollutants, but states have the first respon-

sibility for planning how to achieve those standards. Substances regulated include carbon monoxide, nitrogen dioxide, mer- cury, asbestos, particulate matter (dust, soot), and ozone (smog, not to be confused with the ozone layer in the atmosphere, which prevents harmful rays from the sun from penetrating to the surface), among others. In setting limits the EPA does not have to consider the cost of compliance to a factory or industry, and one of the goals of the law is to prevent deterioration of air quality in places with clean air.

Acid rain is a type of pollution caused by sulfur dioxide emissions, which largely emanate from coal-burning plants located in the Midwest and eastern states such as Ohio and Pennsylvania. One problem is that the pollutants are carried on the wind to other states and countries such as

Canada, where the precipitation falls and the damage is done to forests, crops, lakes, and ponds. The states with the plants may have little incentive to demand costly equip- ment be installed, since they are not suffering the harm. Another problem is that older power plants were not covered by the law unless they undergo major renovation, so that power companies have little reason to clean up existing plants or build newer, more efficient ones.

Mobile sources of emissions (primarily cars) are regulated primarily through require- ments on auto manufacturers that call for reducing pollutants over time. For example, beginning with 2004 models, makers had to cut nitrogen oxide emissions by ten percent by 2007. Other regulations require cleaner burning gasoline, primarily in urban areas. As technology advances, the EPA updates regulations. For example, in 2012 the agency announced that it would phase out the requirement that service stations use vapor cap- ture mechanisms on gas pumps, since modern cars are designed to eliminate most of that vapor anyway.

The Clean Air Act put regulations in place to try to reduce carbon emissions and improve smog in urban areas like Los Angeles, California.

Purestock/Thinkstock

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CHAPTER 15Section 15.2 Environmental Law and Business

Despite some of its weaknesses, the Clean Air legislation has undoubtedly been effective in reducing some pollutants and their negative consequences for human health. The EPA estimates that by the year 2020, regulations will save 230,000 lives in the United States.

Water Quality The Clean Water Act (CWA), 33 U.S.C. § 1251 et seq. (1972), and its subsequent amend- ments, regulate discharge of pollutants into navigable waters. Originally this definition was broadly interpreted, but more recently the courts have excluded wetlands, intermit- tent streams, ponds, or lakes that do not connect to open water, and waterways within a single state. While the EPA has a permitting system for point source discharges, such as those from a factory, an animal feedlot, or a municipal sewage treatment plant, it is largely left to the states to oversee regulation for non-point sources, such as agricultural or urban runoff, a significant source of water pollution. The CWA also sets water quality standards, which vary with the intended use of the body of water. For example, a lake used for swim- ming and fishing would have tougher standards than a pond used for irrigation. The minimum standards are initially based on the Best Available Technology that could be used to control pollution, but the CWA includes antidegradation policies as well.

Another provision requires a permit before a wetland can be dredged and filled, in an attempt to prevent real estate developers from eliminating these natural filtering systems and wildlife habitats. Wetlands policy is intended to result in no net loss, but in practice this has not proved to be the case. Environmentalists point to the aftermath of Hurri- cane Katrina as an example of the consequences of wetland destruction. Draining of the swamps around New Orleans meant elimination of the natural “overflow” that histori- cally prevented much flooding. The result was that large sections of the city were ren- dered uninhabitable. Years later, much of the New Orleans displaced population has not returned to the city.

The Safe Drinking Water Act (SDWA) applies to public drinking water systems and requires the EPA to set standards and oversee implementation by the states. It also requires that community water systems send consumers an annual report disclosing the level of contaminants in drinking water. Unfortunately, no standards have been set (and thus no testing done) for the vast majority of chemicals (upwards of 70,000) in the United States, many of which may be leaching into groundwater, and so the real level of contamination in drinking water is unknown. In a recent high profile case, city officials in Flint, Michigan have been charged with violation of the SDWA due to high levels of trihalomethanes and lead in the city’s water supply. Congressional hearings have called into question the EPA’s effectiveness in administering the SDWA in Flint.

Other federal laws governing water are the Ocean Dumping Act of 1972, which prohibits waste disposal without a permit, and the Oil Pollution Act of 1990, which regulates ships. Tankers using U.S. ports are required to have double hulls to help prevent leakage and minimize spills, and the law imposes significant fines and cleanup costs in the case of an oil spill.

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Toxics and Waste The Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) required pesticides to be registered with the EPA, but the only required testing was to validate the substance’s “kill power”—that is, that it will eradicate the species it claims to. There was no preliminary testing for safety with regard to either human health or that of the environment. Although Congress in 1972 directed the EPA to test for safety, the backlog and inadequate funding mean that only a small percentage of the over 50,000 pesticides already registered have been tested for health effects.

There are two major laws that deal with toxic waste. The Resource Conservation and Recovery Act (RCRA) deals with disposal of present waste, both household and toxic, set- ting standards for landfills and mandating processes and recordkeeping for disposal of dangerous substances. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) imposes joint and several liability on toxic polluters and on any owner of polluted property.

Example 15.19. Lola buys pastureland in 2000. Five years later, when she decides to sell the property, the prospective buyer’s surveyor discovers that twenty years before Lola bought the property, a chemical company owned the property and used it to dump barrels of toxic waste, which they then bulldozed over before selling the property. Even though she had nothing to do with the pollution and did not even know of the previous owner’s conduct, Lola could still be held liable for cleanup costs, which may be mil- lions of dollars.

This expansive liability for property owners has always been controversial, but the law was attempting to solve a practical problem: too often it is difficult to finance cleanups that occurred long ago, and the public interest in having the toxics removed is too great to finance only through liability on parties that may have disappeared or gone out of business.

In the case of “orphan” polluted sites, where no responsible party can be found or sued, cleanup is financed by the Superfund, a pool of money made available for the purpose through taxes on oil companies, among others. However the funding for the Superfund has been depleted by enormously expensive cleanups, and the taxes that funded it have in some cases been eliminated, and so the future of the Superfund—and of contaminated property—is uncertain.

15.3 Chapter Summary

Business in the 21st century takes place on a world stage, requiring the astute busi-nessperson to have knowledge of international law and practices. If a company is exporting its goods, it must comply with any possible restrictions on shipping out- side the United States. If it is importing, it needs to investigate possible tariffs. In draft- ing international sales contracts, issues such as choice of law, forum, currency, and even language should be agreed upon in advance by both parties to avoid future misunder- standings. Additionally, as multinational business becomes the norm, many companies

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will need to make decisions on whether to operate internationally through subsidiaries or licensing arrangements, or whether they wish to operate directly in a foreign country.

Compliance with environmental regulations should also be a major concern. Much of the law focuses on preventing, or at least limiting, pollution with regard to air and water qual- ity and disposal of waste. As the world population grows and industrialization increases, businesses and individuals alike will face the challenge of dwindling resources, including the basic necessities of fresh air and water and unpolluted land. The choices made now will affect the state of the world in the decades to come.

Focus on Ethics

To what extent should a U.S. company be responsible for the conduct of a foreign firm doing its business? Sportswear and equipment company Nike came under fire in the 1990s for contracting with overseas manufacturers described as sweatshops, located in countries including China, Vietnam, Pakistan, and Indonesia. Labor advocates charged that the companies vio- lated minimum wage and other worker protection laws. In 1998 Nike, in response to pressure, pledged to eliminate child labor for Nike products and to improve conditions for workers in overseas companies to meet U.S. stan- dards. However, it did not address wage issues. In 2001, the use of child labor again became an issue. In 2011, there were reports of physical abuse at factories in Indonesia. Examples included workers being punched and kicked and made to stand for hours in the sun when they failed to make production quotas. Nike issued a statement saying that while they regret- ted the abuse of workers, there was little they could do to stop it. In 2012, a settlement with an Indonesian labor organization was announced, where Nike agreed to pay $1 million to compensate about 4,000 workers for over 593,400 unpaid overtime hours worked over two years. (The workers’ unpaid labor went back further than that, but Indonesian law only applied to the two-year window).

Questions for Discussion

1. Is Nike’s response enough? Do you think they are acting ethically by continuing to use contrac- tors who commit human rights abuse?

2. Consumers benefit from the lower prices of Nike shoes and other products, which the com- pany achieves in part by using cheaper overseas labor. One of the reasons that labor is so cheap is that there are many fewer restrictions on employers when it comes to employee well- being. Would you be willing to pay more for consumer goods manufactured by workers in bet- ter conditions? How much more?

3. Do you think it’s ethical for U.S. companies to use overseas labor at all? Should they be using American workers instead? Or is it up to consumers to “vote with their wallets” by choosing to buy products manufactured in the United States?

In 2000, members of United Students Against Sweatshops protest outside the Niketown store in New York.

Tina Fineberg/Associated Press

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Cases Study: Arc Ecology v. U.S. Dept. of Air Force

411 F.3d 1092 (9th Cir. 2005)

Facts: A decade after the United States vacated its occupation of Clark Air Force Base and Subic Naval Base in the Philippines, the plaintiffs, citizens and residents of the Philippines who live near the bases, sued under CERCLA to compel the U.S. government to perform an assessment and cleanup of alleged contamination.

Issue: Does CERCLA have extraterritorial application, allowing plaintiffs outside the United States to sue for environmental harm in the Philippines?

Discussion: The plaintiffs pointed to CERCLA’s definition of the “United States,” which refers to the several States of the United States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, the Commonwealth of the Northern Marianas, and any other territory or possession over which the United States has jurisdiction. The United States argued that the term “possession” instead refers to U.S. property that does not rest within the territory of another sovereign nation.

However, the court looked at the fact that even if Clark and Subic should be considered possessions of the United States, the property had been under control of the Philippines for ten years prior to the plaintiffs filing their lawsuit, and thus was not a possession at the time of the lawsuit. It was thus unlikely that Congress, in enacting CERCLA, envisioned that the United States would undertake clean- ups on foreign soil without a specific treaty or other international agreement.

Holding: CERCLA and the Superfund do not apply; the plaintiffs’ case is dismissed.

Questions for Discussion

1. What is the international law principle at the center of the case? 2. What environmental law did the plaintiffs attempt to use to bring their claim? 3. If you were a judge deciding the case, how would you interpret the term “possession” of the

United States? Would it include a present, rather than past, military base? If a U.S. base in Germany was found to be contaminated, harming nearby German residents, should the Ger- man plaintiffs be able to sue? What would be the arguments for, and against, such lawsuits?

4. From an ethical standpoint, do you think the result in this case is fair? Should a foreign country be responsible for its pollution in these circumstances?

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Cases Study: Karuk Tribe of California v. United States Forest Service

681 F.3d 1006 (9th Cir. 2012)

Facts: Since “time immemorial,” the Karuk Tribe has inhabited what is now northern California and depended on coho salmon in the Klamath River for cultural, religious, and subsistence uses.

In 1997, coho salmon in the river were listed as “threatened” under the Endangered Species Act (ESA). The Klamath River also contains gold, and as a result recreational mining there is regulated by the U.S. Forest Service. If mining activities “might cause” disturbance of surface resources, a person proposing such activities must submit a Notice of Intent (NOI) to operate. In 2004, the Karuk Tribe representatives warned the Forest Service about the harmful effects of mining on fisheries in the Klamath River, but the Forest Service approved four NOIs. The Karuk Tribe sued the Forest Service for the violation of the ESA by approving of mining activities in a critical habitat of coho salmon without consulting first with other federal wildlife agencies, as seemed to be required by Section 7 of the ESA. The tribe asked the court for injunction—to prohibit mining activities approved by the Forest Service. The trial court ruled for the Forest Service, and the Karuk Tribe appealed.

Issue: Did the Forest Service violate the Endangered Species Act by allowing recreational mining in a critical habitat of coho salmon without first consulting with federal wildlife agencies?

Discussion: The 9th Circuit Court of Appeals noted that “the heart” of the ESA (Section 7) requires federal agencies to ensure that none of their activities “will jeopardize the continued existence of listed species or adversely modify a species’ critical habitat.” The purpose of consultation with federal wildlife agencies is to obtain an expert’s opinion on the possible adverse effects of proposed activities. Under Section 7, an agency must consult only when it makes an authorization or an “affirmative act.” In this case, the mining regulations and actions of the Forest Service proved that the agency “affirmatively authorized private min- ing activities” at the Klamath River area when it approved four NOIs. The letters from the Forest Service to the miners expressly granted permission for mining. Therefore, the Forest Service’s approval of the four NOIs at issue here constituted an agency action under the Section 7. Finally, the appellate court noted that the agency must consult with federal wildlife agencies if it’s action “may affect” a listed species or a criti- cal habitat. The Forest Service’s regulations require miners to submit NOIs when mining activities “might cause” disturbance of surface resources, and the phrase “might cause” means that proposed mining “may affect” critical habitat of coho salmon. Thus, the court concluded that the Forest Service violated Section 7 of the EPA when it approved four NOIs without first consulting with federal wildlife agencies.

Holding: The appellate court reversed the trial court’s decision and remanded the case for entry of judgment in favor of the Karuk Tribe.

Questions for Discussion

1. Why was protection of the coho salmon habitat in the Klamath River area so important for the Karuk Tribe?

2. What agency regulates mining activities in the Klamath River area? What are the prerequisites for obtaining a permit for recreational mining?

3. Why did the Karuk Tribe argue that the Forest Service violated the Endangered Species Act? What did the Karuk Tribe asked the trial court to do?

4. Why did the court conclude that the Forest Service performed an “affirmative action”? 5. What is your opinion on recreational mining in National Forests? Do you think that the govern-

ment should absolutely prohibit any activity that may adversely affect critical habitats?

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Critical Thinking Questions

1. How do the laws governing tariffs affect an individual business? How do they affect the national economy?

2. Why hasn’t environmental regulation been more effective? 3. In what way is environmental regulation an international issue? Try researching

the subject online. Would you say the United States has been a good world citizen in this regard?

Hypothetical Case Problems

Case 1. Kare Inc. is a U.S. company that manufactures electronic components. The company is interested in expanding into overseas markets, and has already been approached by defense contractors in Great Britain and Russia. Kare is also looking at buying raw materials from a company in South Africa, since it appears they would be cheaper than the supplier in Colorado that Kare is currently using.

A. What legal considerations must Kare look at before selling overseas? B. What issues may arise with regard to using the South African supplier?

Case 2. Ace Apparel LLC is a U.S. company that imports clothing wholesale from the Philippines. An assistant minister of trade in the Philippines has suggested to an Ace representative that if a cash payment of $10,000 was made, a recent application by Ace for setting up a new factory in Manila might receive favorable treatment. Ace can easily afford the $10,000, and the Ace rep in Manila advises management that such payments are common to “make things happen.” What issues should Ace consider before making a decision on the payment?

Case 3. Vortex Inc. manufactures Big Gro, an herbicide and nutrient enhancer for corn crops. Their main factory is located on the Catatachee River in Mis- sissippi. The factory discharges treated wastewater into the river. Vortex’s manufacturing process results in a certain amount of inorganic waste sludge, which is put into barrels and taken away by a garbage contractor. Other waste is burned by Vortex’s onsite incinerator. Describe the different environ- mental laws that would apply to Vortex’s activities.

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act of state An act of a public nature com- mitted by a recognized foreign govern- ment within its own borders.

bribe An illegal payment made to a public official, intended to influence the perfor- mance of the official’s duties.

cap and trade A type of pollution regu- lation that provides that polluters must buy credits for a certain unit of pollution generated.

comity A legal doctrine that states that a nation will defer to and give effect to the laws and judicial rulings of another country, to the extent that they are consis- tent with the law and public policy of the accommodating nation.

command-and-control A type of regula- tion that mandates specific behavior.

dumping Selling goods in another coun- try at less than fair value, usually in an effort to dominate the market before rais- ing prices.

export Taking and often selling goods outside the country of manufacture.

expropriation The seizure of privately owned assets for the public good.

externality A cost of a practice that is imposed on the public in general, rather than borne by the party engaging in the practice.

extraterritoriality The application of a nation’s laws outside its boundaries.

grease A legal payment made to a foreign official to expedite or simplify a process.

import Bringing goods made in a foreign country into the home country.

sovereign immunity A legal principle that provides that one nation cannot sue another, except under limited circum- stances such as where the defendant state has waived its immunity, engaged in com- mercial activity, violated certain interna- tional laws, or committed a tort within the plaintiff country.

tariffs A tax on imported goods, also called a duty.

treaty An agreement or contract between two (bilateral) or more (multi-lateral) nations that must be authorized and rati- fied by the government of each nation.

Key Terms

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