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5 The Political, Legal, and Regulatory Environments

Learning Objectives

1. 5-1 Understand the elements of a country’s political environment that can impact global marketing activities.

2. 5-2 Define international law and describe the main types of legal systems found in different parts of the world.

3. 5-3 Understand the most important business issues that can lead to legal problems for global marketers.

4. 5-4 Describe the available alternatives for conflict resolution and dispute settlement when doing business outside the home country.

5. 5-5 In general terms, outline the regulatory environment in the European Union.

Case 5-1 Travis Kalanick and Uber

Travis Kalanick is an entrepreneur who has achieved a level of success and notoriety rarely matched in the modern era. Kalanick is cofounder of Uber Technologies, the parent company of the wildly popular Uber ride-sharing service.

Kalanick, along with friend and cofounder Garrett Camp, launched the Uber service in San Francisco in 2010. By now, most people are familiar with the way Uber works: Customers download the Uber app to a smartphone and set up an account that includes mobile payment information. Then, when the customer needs a ride, he or she opens the app and types in a destination. The app’s GPS identifies the customer’s current location and calculates an estimated fare, distance, and trip time to the destination. If the fare is acceptable, the customer then requests a car and driver.

By the end of 2014, Uber had raised venture capital that valued the company at nearly $40 billion! The service was available in more than 250 cities worldwide, and some industry observers hailed the company as a prime example of digital technology disrupting an established industry. Uber’s rapid growth was another example that the “sharing economy,” also known as “collaborative consumption,” was gaining traction, as evidenced by the success of Lyft (an Uber competitor), room rental service Airbnb, and others.

However, Uber has encountered resistance as its popularity has grown. In London and other major cities, drivers have staged demonstrations and mass protests against what they claim is unfair competition from unregulated drivers. Several cities, including Brussels, Miami, and Las Vegas, have banned Uber. In Brussels, a court fines drivers who use the service. Uber has been paying the fines and providing legal support. Regulators in Germany succeeded in obtaining a temporary injunction banning the service; after a series of appeals and counter-appeals, the injunction was lifted.

The European Commission, the executive arm of the EU, conducted an inquiry to determine whether Uber was an “information-society service company,” as Uber maintained, or the equivalent of a taxi service, as the French government alleged (see  Exhibit 5-1 ).

Exhibit 5-1

Protests against Uber have been staged in Spain, France, the United Kingdom, and other countries.

Source: Lora Grigorova/NEWZULU/CrowdSpark/Alamy Stock Photo.

Kalanick’s company provides a case study of the impact that the political, legal, and regulatory environments can have on international trade and global marketing activities. Each of the world’s national governments regulates trade and commerce with other countries and attempts to control the access outside enterprises have to their country’s national resources. Every country has its own unique legal and regulatory system that affects the operations and activities of the global enterprise, including the global marketer’s ability to address market opportunities and threats. Laws and regulations constrain the cross-border movement of products, services, people, money, and know-how. The global marketer must attempt to comply with each set of national—and, in some instances, regional—constraints. The fact that laws and regulations are frequently ambiguous and continually changing hampers these efforts. And, in the case of Uber, new technologies are evolving at a faster pace than laws and regulations can follow.

In this chapter, we consider the basic elements of the political, legal, and regulatory environments of global marketing, including the most pressing current issues, and offer some suggestions for dealing with those issues. Some specific topics—such as rules for exporting and importing industrial and consumer products; standards for health and safety; and regulations regarding packaging, labeling, advertising, and promotion—are examined in later chapters devoted to individual marketing mix elements.

5-1 The Political Environment

1. 5-1 Understand the elements of a country’s political environment that can impact global marketing activities.

Global marketing activities take place within the  political environment  of governmental institutions, political parties, and organizations through which a country’s people and rulers exercise power. As we saw in  Chapter 4 , each nation has a unique culture that reflects its society. Each nation also has a political culture that reflects the relative importance of the government and legal system and provides a context within which individuals and corporations understand their relationship to the political system. Any company doing business outside its home country should carefully study the political culture in the target country and analyze salient issues arising from the political environment. These issues include the governing party’s attitude toward sovereignty, present and future levels of political risk, tax policies, the threat of equity dilution, and the risk of expropriation.

Nation-States and Sovereignty

Sovereignty  can be defined as supreme and independent political authority. A century ago, U.S. Supreme Court Chief Justice Melville Fuller said, “Every sovereign state is bound to respect the independence of every other sovereign state, and the courts in one country will not sit in judgment on the acts of government of another done within its territory.” The late Richard Stanley, founder and former president of the Stanley Foundation, offered the following concise description:

A sovereign state was considered free and independent. It regulated trade, managed the flow of people into and out of its boundaries, and exercised undivided jurisdiction over all persons and property within its territory. It had the right, authority, and ability to conduct its domestic affairs without outside interference and to use its international power and influence with full discretion. 1

Government actions taken in the name of sovereignty occur in the context of two important criteria: a country’s stage of development, and the political and economic systems in place in the country.

As outlined in  Chapter 2 , the economies of individual nations may be classified as industrialized, newly industrializing, or developing. Many governments in developing countries exercise control over their nations’ economic development by passing protectionist laws and regulations. Their primary objective is to encourage economic development by protecting emerging or strategic industries in the home country, but government leaders can also engage in cronyism and provide favors for family members or “good friends.”

Conversely, when many nations reach advanced stages of economic development, their governments declare that (in theory, at least) any practice or policy that restrains free trade is illegal. Antitrust laws and regulations are established to promote fair competition. Advanced-country laws often define and preserve a nation’s social order; these laws may extend to political, cultural, and even intellectual activities and social conduct.

In France, for example, laws forbid the use of foreign words such as le weekend or le marketing in official documents. Also, a French law that went into effect in 1994 required that at least 40 percent of the songs played by popular radio stations be in the French language. The rationale? To protect against an “Anglo-Saxon cultural invasion.” In 2016, the quota was reduced to 35 percent, as Daft Punk and other French recording artists released music with English-language lyrics to appeal to a global audience. Companies that may be affected positively or negatively by legislative acts sometimes use advertising as a vehicle for expressing their positions on issues (see  Exhibit 5-2 ).

Exhibit 5-2

Many global companies use corporate advertising to advocate their official position on trade-related issues. In the mid-1990s, Mobil mounted an advocacy campaign that addressed a number of topics of public interest, including trade issues, clean air, alternative fuels, and health care reform. This op-ed urged the U.S. Congress to approve GATT.

Source: Courtesy of Exxon Mobil Corporation.

We also noted in  Chapter 2  that most of the world’s economies combine elements of market and nonmarket systems. The sovereign political power of a government in a predominantly nonmarket economy reaches quite far into the economic life of a country. Cuba is a case in point. By contrast, in a capitalist, market-oriented democracy, that power tends to be much more constrained. A current global phenomenon in both nonmarket and market structures is the trend toward privatization, which reduces direct governmental involvement as a supplier of goods and services in the country’s economy. In essence, each act of privatization moves a nation’s economy further in the free market direction.

This trend can be traced to the late Margaret Thatcher’s economic policies in the 1980s when she was British prime minister. British Airways, British Petroleum, British Steel, and Rolls-Royce were some of the companies that were privatized under so-called Thatcherite economics. The policy was highly controversial: Some pilloried the prime minister for visiting misery on Great Britain, while others hailed her for taking bold steps to spur the economy. More recently, the economic crisis in the EU prompted Italy’s government to sell 5.7 percent of its stake in Enel, the country’s largest power utility. The Italian government is also considering selling part of its stake in Eni, an energy company. Italy’s debt totals more than $2 trillion, and the government is seeking ways to raise millions of euros.

Some observers believe global market integration is eroding national economic sovereignty. Economic consultant Neal Soss noted, “The ultimate resource of a government is power, and we’ve seen repeatedly that the willpower of governments can be overcome by persistent attacks from the marketplace.” 2  Is this a disturbing trend? If the issue is framed in terms of marketing, the concept of exchange comes to the fore: Nations may be willing to give up sovereignty in return for something of value. If countries can increase their share of world trade and increase national income, perhaps they will be willing to cede some sovereignty.

“The country may lag behind in some respects, but it has a 1,000 year history, and Russia will not trade its sovereignty for anything.” 3

Russian President Vladimir Putin

In Europe, individual EU countries gave up the right to have their own currencies, ceded the right to set their own product standards, and have made other sacrifices in exchange for improved market access. The Brexit issue can be viewed as a mandate by Britons to regain some of what their nation lost to the “collective sovereignty” of the EU28.

Separatist and secessionist movements are also undercutting the traditional sovereignty of the nation-state. Within Italy, for example, voters in the Lombardy and Veneto regions in the wealthy north are increasingly reluctant to provide the tax base for subsidizing the poorer south. 4  Such intra-country regionalism is also seen Spain, where Catalonia has sought greater economic independence and the right to become a sovereign state. Meanwhile, in Scotland, calls for independence from the United Kingdom continue to be heard.

“What we will no longer do is enter into large trade agreements that tie our hands, surrender our sovereignty, and make meaningful enforcement practically impossible.”

“Trump Pitches ‘America First’ Trade Policy at Asia-Pacific Gathering”, The New York Times Company (November 10, 2017)

Political Risk

Political risk  is the possibility of a change in a country’s political environment or government policy that would adversely affect a company’s ability to operate effectively and profitably. As Ethan Kapstein, a professor at INSEAD, has noted:

Perhaps the greatest threats to the operations of global corporations, and those that are most difficult to manage, arise out of the political environment in which they conduct their business. One day, a foreign company is a welcome member of the local community; the next day, opportunistic politicians vilify it. 5

Political risk can deter a company from investing abroad. Put another way, when a high level of uncertainty characterizes a country’s political environment, the country may have difficulty attracting foreign investment.

As Professor Kapstein has pointed out, executives often fail to conceptualize political risk because they have not studied political science—which means they have not been exposed to the issues that students of politics ask about the activities of global companies. (A strong argument for a liberal arts education!) The modern corporation is coming under increasing scrutiny from business and government leaders as well as the general public; the same is true of free-market capitalism in general. This trend can be viewed as contributing to political risk.

Without a doubt, current events must be part of the corporate information agenda; for example, business managers need to stay apprised of the formation and evolution of political parties as well as the public’s perception of political institutions. The emergence of far-right parties such as the Alternative for Germany (AfD), whose success in the 2017 national elections has been described as a “political earthquake,” is a case in point. 6  Other potential disruptors of continental Europe’s established political order include Austria’s Freedom Party, France’s National Front, and the Party for Freedom in the Netherlands.

“If you want to be in growing markets you have to assume and expect some volatility. You can’t be in growth markets without presuming there will be risks.” 7

Jørgen Buhl Rasmussen, CEO, Carlsberg

Valuable sources of current-events information include the Financial Times, The Economist, and other daily and weekly business periodicals. The Economist Intelligence Unit (EIU;  www.eiu.com ), the Geneva-based Business Environment Risk Intelligence (BERI;  www.beri.com ), and the PRS Group ( www.prsgroup.com ) publish up-to-date political risk reports on individual country markets. Note that these commercial sources vary somewhat in the criteria they consider to constitute political risk. For example, BERI focuses on societal and system attributes, whereas the PRS Group focuses more directly on government actions and economic functions (see  Table 5-1 ).

Table 5-1 Categories of Political Risk

Source: Adapted from Llewellyn D. Howell, The Handbook of Country and Political Risk Analysis, 2nd ed. (East Syracuse, NY: The PRS Group, 1998). Reprinted by permission.

As noted in  Case 5-2 , the political maneuverings of the Russian government create a high level of political risk for companies that seek to do business in that country. During his first two terms as Russia’s president (2000–2008), Vladimir Putin implemented reforms in an effort to pave the way for Russia’s membership in the World Trade Organization (WTO) and to attract foreign investment. He also created an environment of uncertainty for foreign companies. In 2010, Paul Melling, a partner at the law firm of Baker & McKenzie, explained, “Many multinationals are thinking long and hard about how big their company in Russia ought to be—the bigger the company, the bigger the risk.” 8  In 2018, Putin was elected to a fourth term as president, and the level of political risk remains elevated owing to tense relations between the White House and the Kremlin.

Meanwhile, the current political climate in the rest of Central and Eastern Europe is still characterized by varying degrees of uncertainty. In the Economic Intelligence Unit’s Political Instability Index rankings, Hungary, Albania, and Latvia are identified as having moderate levels of risk. Hungary and Latvia have already achieved upper-middle-income status. Now that Latvia has joined the euro zone, it is expected that lower interest rates will promote further economic growth. Moreover, political winds continue to shift in in the region: Poland and Hungary are two examples of countries that have recently elected populist governments. Common themes include opposition to adopting the euro, concern about welcoming migrants, and resistance to deeper integration with the EU.

Albania’s progress in transitioning to a market economy has attracted investment from abroad. Moreover, products that are labeled “Made in Albania” are finding acceptance in global markets. The evidence can be seen in the success of DoniAnna, a shoe manufacturer that was founded by Albanian entrepreneur Donika Mici. 9  Diligent attention to risk assessment throughout the region should be ongoing to determine when the risk has decreased to levels acceptable to management.

Companies can purchase insurance to offset potential risks arising from the political environment. In Japan, Germany, France, Britain, the United States, and other industrialized nations, various agencies offer investment insurance to corporations doing business abroad. The Overseas Private Investment Corporation (OPIC;  www.opic.gov ) provides various types of political risk insurance to U.S. companies; in Canada, the Export Development Corporation performs a similar function.

Taxes

Governments rely on tax revenues to fund social services, to support their military forces, and to cover other expenditures. Unfortunately, government taxation policies on the sale of goods and services frequently motivate companies and individuals to profit by not paying taxes. For example, in China, import duties have dropped since the country joined the WTO. Even so, many goods are still subject to double-digit duties plus a 17 percent value-added tax (VAT). As a result, significant quantities of oil, cigarettes, photographic film, personal computers, and other products are smuggled into China. In some instances, customs documents are falsified to undercount goods in a shipment; the Chinese military has allegedly escorted goods into the country as well.

Ironically, global companies can still profit from the practice; it has been estimated, for example, that 90 percent of the foreign cigarettes sold in China are smuggled in. For Philip Morris, this means annual sales of $100 million to distributors in Hong Kong, which then smuggle the smokes across the border. 10  High excise and VAT taxes can also encourage legal cross-border shopping as consumers go abroad in search of good values. In Great Britain, for example, the Wine and Spirit Association estimates that, on average, cars returning from France are loaded with 80 bottles of wine.

The diverse geographical activity of the global corporation also requires that special attention be given to tax laws. The issue is especially acute in the tech sector; many companies make efforts to minimize their tax liability by shifting the location in which they declare income. Facebook, Amazon, Google, and Apple are some of the companies that have shifted profits earned from intellectual property to low-tax jurisdictions such as Ireland and Luxembourg. In addition, tax minimization by foreign companies doing business in the United States costs the U.S. government billions of dollars each year in lost revenue. After the 2016 U.S. presidential election, companies looked to the Trump administration for broad-based tax reform. They were rewarded with a major tax cut that was passed in December 2017.

The Cultural Context

EU to Global Companies: “Pay Your Taxes!”

As Benjamin Franklin famously said, “In this world nothing can be said to be certain, except death and taxes.” For global companies, the taxation issue is complicated by the fact that corporate tax rates vary widely around the world. Until recently, the United States had one of the world’s highest corporate taxes: 35 percent. When combined with state and local taxes, the rate for businesses rose to 39.1 percent. By contrast, Ireland’s corporate tax rate is only 12.5 percent.

Corporate tax reform was just one item on the agenda of U.S. President Donald Trump. Authorities have been stepping up their efforts to collect taxes from a range of global companies, including Amazon, Apple, Fiat Chrysler Automotive (FCA), and Starbucks. Members of the Organisation for Economic Co-operation and Development (OECD) and the Group of Twenty (G-20) are also working to reform tax rules.

In fall 2017, Margrethe Vestager, the EU’s competition commissioner, announced that Amazon would have to pay €250 million in back taxes after the European Commission ruled that the online giant’s Luxembourg operations had benefited from illegal state aid over a 10-year period. In 2004, Amazon had shifted certain intellectual property (IP) into a non-taxable holding company in Luxembourg that collected IP royalties from operations in Europe and then paid the parent company. The Brussels-based Commission alleged that the arrangement allowed Amazon to shift as much as three-fourths of its European profits into the holding company, thereby reducing its tax bill. As Vestager explained, under EU law, individual EU states cannot selectively grant tax benefits to some global companies but not others. Not surprisingly, Amazon denied any wrongdoing.

The previous year, in 2016, the Commission ruled that Ireland had granted Apple illegal tax advantages, and ordered the country to recover €13 billion in back taxes. Both Apple and Ireland disagreed with the Commission’s findings; Apple CEO Tim Cook called the investigation and the resulting ruling “total political crap.” After Apple refused to pay, the Commission referred the case to the European Court of Justice (ECJ; see  Table 5-5 ).

In the United Kingdom, where the corporate tax rate is 19 percent, legislation passed in 2015 was aimed at cracking down on transfer pricing—that is, intra-corporate transfers among different units of the same company. One of the first targets was Google, which had been investigated for diverting profits to its European headquarters in Ireland. The United Kingdom is the tech giant’s second-largest market (the United States is number 1), and Google was found to have paid only £20.5 million in taxes on 2013 revenues of £5.6 billion. Although Google was not accused of tax evasion, the company was ordered to pay £130 million in back taxes. Even so, George Osborne, the authority who crafted the deal that became known as the “Google tax,” faced considerable backlash from critics who felt Google had gotten off lightly (see  Exhibit 5-3 ).

Exhibit 5-3

Europeans have responded negatively to some of the policies of tech firms such as Uber and Airbnb. Protests have also erupted over allegations that Apple and other firms have not paid their fair share of taxes.

Source: Anthony DEPERRAZ/NEWZULU/CrowdSpark/Alamy Stock Photo.

With corporate tax structures and policies becoming high-profile political issues on both sides of the Atlantic, Netflix and eBay also got caught up in the controversy. For example, eBay was found to have reported one set of 2016 revenue figures to U.K. tax authorities, while recording different figures in its U.S. filings. As for Netflix, €22 million in fees from its 6.5 million U.K. subscribers were posted as 2016 revenue to parent company Netflix International BV in the Netherlands. According to an outside analysis, the streaming giant’s 2016 U.K. revenues actually amounted to more than $500 million.

In fall 2017, data compiled by Her Majesty’s Revenue & Customs (HMRC) were made public; they indicated that global companies had avoided 2016 tax obligations of as much as £5.8 billion. That amount was 50 percent higher than had previously been assumed.

Meanwhile, the U.S. Congress was hard at work hammering out a tax reform bill for President Donald Trump to sign before the end of the year. One of the measures would impose an excise tax of 20 percent on transfer payments, referring to cross-border purchases by a U.S. company from any of its foreign subsidiaries. Transactions with subsidiaries in the United States would not be subject to the levy; the measure reflected Trump’s pronouncements about putting “America First.” Several European finance ministers denounced the proposed tax as discriminatory and a potential violation of WTO rules.

Sources: Madison Marriage, “Tax Lost to Multinationals Shifting Profits Overseas Climbs to £5.8bn,” Financial Times (October 25, 2017), p. 1; Rochelle Toplensky, “Tech Giants Hit by EU Tax Crackdown,” Financial Times (October 5, 2017), p. 17; Tom Fairless and Shayndi Raice, “Firms Drawn to U.K. for Tax Deals,” The Wall Street Journal (July 29, 2014), p. C3; Kiuz Hoffman and Hester Plumridge, “Race to Cut Taxes Fuels Urge to Merge,” The Wall Street Journal (July 14, 2014), pp. A1, A2; Hester Plumridge, “EU Tax Inquiry Adds to Deals Buzz,” The Wall Street Journal (June 16, 2014), p. B8; Michelle Hanlon, “The Lose–Lose Tax Policy Driving Away U.S. Business,” The Wall Street Journal (June 12, 2014), p. A15; Vanessa Houlder and Vincent Boland, “The Irish Inversion,” Financial Times (April 30, 2014), p. 9.

Seizure of Assets

The ultimate threat that a government can impose on a company is seizing its assets. Expropriation  refers to governmental action to dispossess a foreign company or investor. Compensation is generally provided, albeit often not in the “prompt, effective, and adequate” manner provided for by international standards. If no compensation is provided, the action is referred to as confiscation . 11  International law is generally interpreted as prohibiting any act by a government to take foreign property without compensation.  Nationalization  is generally broader in scope than expropriation; it occurs when the government takes control of some or all of the enterprises in a particular industry. International law recognizes nationalization as a legitimate exercise of government power, as long as the act satisfies a “public purpose” and is accompanied by “adequate payment” (i.e., payment that reflects fair market value of the property).

In 1959, for example, the newly empowered Castro government nationalized property belonging to American sugar producers in retaliation for new American import quotas on sugar. Castro offered compensation in the form of Cuban government bonds, which was adequate under Cuban law. Because Cuban-owned sugar producers were not nationalized, the U.S. State Department viewed this particular act as discriminatory and the compensation offered as inadequate. 12  More recently, the late Venezuelan President Hugo Chávez nationalized Electricidad de Caracas, a utility company, and CANTV, a telecommunications provider. The Venezuelan government paid AES Corporation $739.3 million for Electricidad de Caracas; Verizon Communications received $572 million for its stake in CANTV. 13

Short of outright expropriation or nationalization, the phrase creeping expropriation has been applied to limitations on economic activities of foreign firms in particular countries. These limitations have involved repatriation of profits, dividends, royalties, and technical assistance fees from local investments or technology arrangements. Other issues include increased local content requirements, quotas for hiring local nationals, price controls, and other restrictions affecting return on investment. Global companies have also suffered discriminatory tariffs and nontariff barriers that limit market entry of certain industrial and consumer goods, as well as discriminatory laws on patents and trademarks. Intellectual property restrictions have had the practical effect of eliminating or drastically reducing protection of pharmaceutical products.

In the mid-1970s, Johnson & Johnson (J&J) and other foreign investors in India had to submit to a host of government regulations to retain majority equity positions in companies they had already established. Many of these rules were later copied in whole or in part by Malaysia, Indonesia, the Philippines, Nigeria, and Brazil. By the late 1980s, after a “lost decade” in Latin America characterized by debt crises and low gross national product (GNP) growth, lawmakers reversed many of these restrictive and discriminatory laws. The goal was to again attract foreign direct investment and badly needed Western technology. The end of the Cold War and the restructuring of political allegiances contributed significantly to these changes.

When governments expropriate foreign property, a number of impediments can limit actions to reclaim that property. For example, according to the U.S. Act of State Doctrine, if the government of a foreign state is involved in a specific act, the U.S. courts will not get involved. Instead, representatives of expropriated companies may seek recourse through arbitration at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). It is also possible to buy expropriation insurance from either a private company or a government agency such as OPIC.

The expropriation of copper companies operating in Chile in the early 1970s shows the effect that companies can have on their own fate. Companies that strenuously resisted government efforts to introduce home-country nationals into the company management were expropriated outright; those companies that made genuine efforts to follow Chilean guidelines were allowed to remain under joint Chilean–U.S. management.

5-2 International Law

1. 5-2 Define international law and describe the main types of legal systems found in different parts of the world.

International law  may be defined as the rules and principles that nation-states consider binding upon themselves. International law pertains to property, trade, immigration, and other areas that have traditionally been under the jurisdiction of individual nations. International law applies only to the extent that countries are willing to assume all rights and obligations in these areas. The roots of modern international law can be traced back to the seventeenth-century Peace of Westphalia. Early international law was concerned with waging war, establishing peace, and handling other political issues such as diplomatic recognition of new national entities and governments.

Although elaborate international rules gradually emerged—covering, for example, the status of neutral nations—the creation of laws governing commerce proceeded on a state-by-state basis in the nineteenth century. International law still has the function of upholding order, although in a broader sense than laws dealing with problems arising from war. At first, international law was essentially an amalgam of treaties, covenants, codes, and agreements. As trade grew among nations, order in commercial affairs assumed increasing importance. The law had originally dealt only with nations as entities, but a growing body of law rejected the idea that only nations could be subject to international law.

Paralleling the expanding body of international case law in the twentieth and twenty-first centuries, new international judiciary organizations have contributed to the creation of an established rule of international law: the Permanent Court of International Justice (1920–1945); the International Court of Justice (ICJ;  www.icj-cij.org ), which is the judicial arm of the United Nations and was founded in 1946; and the International Law Commission, established by the United States in 1947 (see  Exhibit 5-4 ). Disputes arising between nations are issues of public international law, and they may be taken before the ICJ (also known as the World Court), located in The Hague. As described in the supplemental documents to the United Nations Charter, Article 38 of the ICJ Statute concerns international law:

Exhibit 5-4

Located in The Hague, the International Court of Justice (ICJ) is the judicial arm of the United Nations. The court’s 15 judges are elected to 9-year terms. The primary function of the ICJ is to settle disputes among different countries according to international law. The ICJ also offers advice on legal issues submitted by various international agencies.

Source: Ankor Light/Shutterstock.

The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply:

a. international conventions, whether general or particular, establishing rules expressly recognized by the contesting states;

b. international custom, as evidence of a general practice accepted as law;

c. the general principles of law recognized by civilized nations;

d. subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.

Other sources of modern international law include treaties, international customs, judicial case decisions in the courts of law of various nations, and scholarly writings. What happens if a nation allows a case against it to be brought before the ICJ and then refuses to accept a judgment against it? The plaintiff nation can seek recourse through the United Nations Security Council, which can use its full range of powers to enforce the judgment.

Common Law versus Civil Law

Private international law is the body of law that applies to disputes arising from commercial transactions between companies based in different nations. As noted, the laws governing commerce emerged gradually, leading to a major split in legal systems among various countries. 14  The story of law in the Western world can be traced to two sources: Rome, from which the continental European civil-law tradition originated, and English common law, from which the U.S. legal system originated.

A  civil-law country  is one in which the legal system reflects the structural concepts and principles of the Roman Empire in the sixth century.

For complex historical reasons, Roman law was received differently and at vastly different times in various regions of Europe, and in the nineteenth century each European country made a new start and adopted its own set of national private-law codes, for which the Code Napoleon of 1804 was the prototype. But the new national codes drew largely on Roman law in conceptual structure and substantive content. In civil-law countries, the codes in which private law is cast are formulated in broad general terms and are thought of as completely comprehensive, that is, as the all-inclusive source of authority by reference to which every disputed case must be referred for decision. 15

“To understand stare decisis, you have to understand English common law. To understand English common law, you have to understand where England came from—the Norman Conquest, the Vikings, the Romans … “ 16

U.S. Supreme Court Justice Clarence Thomas

In a  common-law country , many disputes are decided by reliance on the authority of past judicial decisions (cases). A common-law legal system is based on the concept of precedent, sometimes called stare decisis. Precedent is the notion that past judicial decisions on a particular issue are binding on a court when that same issue is presented later. This description is somewhat cryptic, because it is easier to observe the operation of precedent than to define it. Nevertheless, precedent and stare decisis represent the fundamental principles of common-law decision making.

In its origins, the legal system of the United States was substantially influenced by English law. The English and American systems are common law in nature; that is, the law is pronounced by courts when there are no statutes to follow. Common-law systems are distinguishable from the civil-law systems found in much of Europe. Although much of contemporary American and English law is legislative in origin, the law inferred from past judicial decisions is equal in importance to the law set down in codes. Common-law countries often rely on codification in certain areas—the U.S. Uniform Commercial Code (UCC) is one example—but these codes are not the all-inclusive, systematic statements found in civil-law countries.

The UCC, which has been fully adopted by 49 U.S. states, codifies a body of specifically designed rules covering commercial conduct. (Louisiana has adopted parts of the UCC, but its laws are still heavily influenced by the French civil code.) The host country’s legal system—that is, common or civil law—directly affects the form a legal business entity will take. In common-law countries, companies are legally incorporated by state authority. In civil-law countries, a contract between two or more parties who are fully liable for the actions of the company forms a company.

The United States, 9 of Canada’s 10 provinces, and other former colonies with an Anglo-Saxon history founded their systems on common law. Historically, much of continental Europe was influenced by Roman law and, later, the Napoleonic Code (see  Exhibit 5-5 ). Asian countries are split on this issue: India, Pakistan, Malaysia, Singapore, and Hong Kong are common-law jurisdictions, whereas Japan, Korea, Thailand, Indochina, Taiwan, Indonesia, and China are civil-law jurisdictions. The legal systems in Scandinavia are mixed, displaying some civil-law attributes and some common-law attributes. Today, the majority of countries have legal systems based on civil-law traditions.

Exhibit 5-5

Civil-law systems rely more heavily on statutes and codes, such as the Napoleonic Code of 1804, in deciding cases. From these code provisions, abstract principles are recognized and then applied in specific cases. By contrast, common-law courts find abstract principles in particular cases and then generalize what the law is from those principles.

Source: L F File/Shutterstock.

As various countries in Eastern and Central Europe have wrestled with establishing legal systems in the post-Communist era, a struggle of sorts has broken out, with consultants representing both common-law and civil-law countries trying to influence the process. In much of Central Europe, including Poland, Hungary, and the Czech Republic, the German civil-law tradition prevails. As a result, banks not only take deposits and make loans, but also engage in the buying and selling of securities.

In contrast, in Eastern Europe, and particularly in Russia, the U.S. system has had greater influence. Germany has accused the United States of promoting a system so complex that it requires legions of lawyers to interpret it. The U.S. response: The German system is outdated. 17  In any event, the constant stream of laws and decrees issued by the Russian government creates an unpredictable, evolving legal environment. Specialized publications such as Anatoly Zhuplev’s Doing Business in Russia: A Concise Guide are important resources for anyone doing business in Russia or in the 11 other nations that comprise the Commonwealth of Independent States.

Islamic Law

The legal system in many Middle Eastern countries is identified with the laws of Islam, which are associated with “the one and only one God, the Almighty.” 18  In  Islamic law , the sharia is a comprehensive code governing Muslim conduct in all areas of life, including business. The code is derived from two sources. First is the Koran, the Holy Book written in Arabic that is a record of the revelations made to the Prophet Mohammed by Allah. The second source is the Hadith, which is based on the life, sayings, and practices of Muhammad. In particular, the Hadith spells out the products and practices that are haram (forbidden). The orders and instructions found in the Koran are analogous to code laws; the guidelines of the Hadith correspond to common law. Any Westerner doing business in Malaysia or the Middle East should have, at minimum, a rudimentary understanding of Islamic law and its implications for commercial activities. Brewers, for example, must refrain from advertising beer on billboards or in local-language newspapers.

5-3 Sidestepping Legal Problems: Important Business Issues

1. 5-3 Understand the most important business issues that can lead to legal problems for global marketers.

Clearly, the global legal environment is very dynamic and complex, so the best course to follow is to get expert legal help. Nevertheless, the astute, proactive marketer can do a great deal to prevent conflicts from arising in the first place, especially concerning issues such as establishment, jurisdiction, patents and trademarks, antitrust, licensing and trade secrets, bribery, and advertising and other promotion tools.  Chapter 13  and  Chapter 14  discuss regulation of specific promotion activities.

Jurisdiction

Company personnel working abroad should understand the extent to which they are subject to the jurisdiction of host-country courts.  Jurisdiction  pertains to global marketing insofar as it concerns a court’s authority to rule on particular types of issues arising outside of a nation’s borders or to exercise power over individuals or entities from different countries. Employees of foreign companies working in the United States must understand that U.S. courts have jurisdiction to the extent that the company can be demonstrated to be doing business in the state in which the court sits. The court may examine whether the foreign company maintains an office, solicits business, maintains bank accounts or other property, or has agents or other employees in the state in question.

One trade-related dispute in which jurisdiction played an important role pitted Volkswagen AG against General Motors. After Volkswagen hired GM’s worldwide head of purchasing, José Ignacio López de Arriortúa, in 1992, his former employer accused him of taking trade secrets to his new company. Volkswagen accepted U.S. court jurisdiction in the dispute, although the company’s lawyers requested that the U.S. District Court in Detroit transfer the case to Germany.

“We have confidence in international law. When you invent something, it is necessary immediately to defend your creativity with intellectual patents. Italy has one of the poorest records in Europe with regard to patents. We need to educate businessmen about this.” 19

Mario Moretti Polegato, chairman, Geox (Italy’s biggest shoe company)

Intellectual Property: Patents, Trademarks, and Copyrights

Patents and trademarks that are protected in one country are not necessarily protected in another, so global marketers must ensure that all forms of intellectual property are registered in each country where business is conducted. A  patent  is a formal legal document that gives an inventor the exclusive right to make, use, and sell an invention for a specified period of time. Typically, the invention represents an “inventive leap” that is “novel” or “nonobvious.” A  trademark  is defined as a distinctive mark, motto, device, or emblem that a manufacturer affixes to a particular product or package to distinguish it from goods produced by other manufacturers (see  Exhibit 5-6  and  Exhibit 5-7 ). A  copyright  establishes ownership of a written, recorded, performed, or filmed creative work.

The Champagne region in France is world famous for producing sparkling wines. In some countries, including the United States, the use of the word “Champagne” is permitted on labels of sparkling wines that are not produced in the region. Due to international trade agreements, consumer rights laws, and legal precedents, more than 110 countries require wines labeled “Champagne” to come exclusively from Champagne. Such protection assures consumers about the origin and authenticity of the products they buy; in other words, a wine labeled “Champagne” would only come from Champagne, France.

In 2005, representatives from several wine regions in the United States and the EU signed a Joint Declaration to Protect Wine Place & Origin. The organization now has members from more than nine countries spanning North America, Europe, and Australia. A 2006 Wine Accord signed by the United States and EU bans the misuse of 16 region names, including Champagne, by wine producers that request the use of these names on labels after March 2006 for wines that do not originate in those places. Wine producers that misused these region names prior to that date are still permitted to do so.

Exhibit 5-6

Kimberly-Clark Corporation markets Kleenex brand tissues and is the registered trademark owner. Trademarks and other forms of intellectual property are valuable assets; this ad, which appeared in Advertising Age magazine, serves notice that Kimberly-Clark is protecting its investment in the Kleenex brand name. Companies take this type of action to prevent brand names from becoming generic terms.

Source: Courtesy, Kimberly-Clark Corp. All Rights Reserved.

Exhibit 5-7

The Champagne region in France is world famous for producing sparkling wines.

Learn more at www.champagne.com.

Source: Champagne, USA.

Infringement of intellectual property can take a variety of forms.  Counterfeiting  is the unauthorized copying and production of a product. An associative counterfeit, or imitation, uses a product name that differs slightly from a well-known brand but is close enough that consumers will mistake it for the genuine product (see  Exhibit 5-8 ). Another type of counterfeiting is piracy, the unauthorized publication or reproduction of copyrighted work. Counterfeiting and piracy are particularly important in industries such as motion pictures, recorded music, computer software, and textbook publishing. Companies in these industries produce products that can be easily duplicated and distributed on a mass basis.

Exhibit 5-8

Many counterfeit products produced in China have garbled English names, such as clothing from “Hugo Bsos,” a “Haiyatt Hotel,” and “Spoony,” a misspelling of the popular Peanuts character.

Source: Greg Baker/AP Images.

The United States, in particular, has a vested interest in intellectual property protection around the globe, because it is home to many companies in the industries just mentioned. However, the United States faces significant challenges in countries such as China. As one expert has noted:

Current attempts to establish intellectual property law, particularly on the Chinese mainland, have been deeply flawed in their failure to address the difficulties of reconciling legal values, institutions, and forms generated in the West with the legacy of China’s past and the constraints imposed by its present circumstances. 20

In the United States, where patents and trademarks are registered with the federal Patent and Trademark Office, the patent holder retains all rights for the life of the patent even if the product is not produced or sold. The Trademark Act of 1946, also known as the Lanham Act, covers trademarks in the United States. President Ronald Reagan signed the Trademark Law Revision Act into law in November 1988; this act makes it easier for companies to register new trademarks. Patent and trademark protection in the United States is very good, and U.S. law relies on the precedent of previously decided court cases for guidance.

To register a patent in Europe, a company has the option of filing on a country-by-country basis or applying to the European Patent Office in Munich for patent registration in a specific number of countries. A third option will soon be available: The Community Patent Convention will make it possible for an inventor to file for a patent that is effective in the 27 signatory nations. Currently, patent procedures in Europe are quite expensive, in part because of the cost of translating technical documents into all the languages of the EU countries; as of mid-2004, the translation issue remained unresolved. 21  In July 1997, in response to complaints, the European Patent Office instituted a 19 percent reduction in the average cost of an eight-country patent registration.

The United States recently joined the World Intellectual Property Organization (WIPO). Governed by the Madrid agreement of 1891 and the more flexible 1996  Madrid Protocol , the WIPO system allows trademark owners to seek protection in as many as 74 countries with a single application and fee (see  Exhibit 5-9 ).

Exhibit 5-9

Headquartered in Geneva, Switzerland, the World Intellectual Property Organization (WIPO) is one of 16 specialized subunits of the United Nations. WIPO’s mission is to promote and protect intellectual property throughout the world. WIPO views intellectual property as a critical element in economic development; it has created illustrated booklets that explain trademarks, copyright, and other intellectual property issues in a straightforward, easy-to-understand manner. Local agencies can access and print the booklets directly from WIPO’s Internet site.

Source: Trademarks Comic Book (2004). World Intellectual Property Organization.

Companies sometimes find ways to exploit loopholes or other unique opportunities offered by patent and trademark laws in individual nations. Sometimes, individuals register trademarks in local country markets before the actual corporate entity files for trademark protection. For example, Starbucks filed for trademark protection in 1997 in Russia but did not open any cafés there. Sergei Zuykov, an attorney in Moscow, filed a petition in court in 2002 to cancel Starbucks’ claim to the brand name because it had not been used in commerce. Technically, Zuykov was merely taking advantage of provisions in Russia’s civil code; even though he has been denounced as a “trademark squatter,” he was not violating the law. Zuykov then offered to sell Seattle-based Starbucks its name back for $600,000! 22

The U.S. Patent and Trademark Office recently granted the Cuban government a trademark for Havana Club rum. This has resulted in a legal dispute between two global distilled-spirits marketing giants (see  Exhibit 5-10 ). Bacardi Ltd., which is based in the Bahamas, was once a Cuban company. Bacardi sells its own Havana Club liquor in the U.S. market; this rum is produced in Puerto Rico. Bacardi acquired the rights to the brand from the Arechabala family, who fled Cuba in 1960 with the original recipe after Fidel Castro nationalized their company.

Exhibit 5-10

Americans may soon be able to buy “Made in Cuba” Havana Club rum following a ruling by the U.S. Patent and Trademark Office. An ongoing legal dispute pits Bacardi Ltd. against Pernod Ricard; both claim rights to the Havana Club brand.

Source: ADALBERTO ROQUE/AFP/Getty Images.

Since 1993, France’s Pernod Ricard has operated a 50-50 joint venture with the Cuban government to produce Havana Club in Cuba, from Cuban sugar cane, for sale outside the United States. Pernod Ricard argues that its brand is authentic because it is a product of climate and growing conditions unique to Cuba, where the Havana Club logo is found in a variety of non-alcoholic products, including drinking glasses, T-shirts, and souvenirs. The new ruling opens the way for Cuban-made Havana Club rum, which ranks number 1 in global rum consumption, to be marketed in the United States. 23

International concern about intellectual property issues in the nineteenth century resulted in two important agreements. The first is the International Convention for the Protection of Industrial Property. Also known as the Paris Union or Paris Convention, the convention dates to 1883 and is now honored by nearly 100 countries. This treaty facilitates multicountry patent registrations by ensuring that once a company files in a signatory country, the company will be afforded a “right of priority” in other countries for 1 year from the date of the original filing. A U.S. company wishing to obtain foreign patent rights must apply to the Paris Union within 1 year of filing in the United States or risk a permanent loss of patent rights abroad. 24

In 1886, the International Union for the Protection of Literary and Artistic Property was formed. Also known as the Berne Convention, this landmark agreement focuses on copyright protection. References to the convention pop up in some unexpected places. For example, sharp-eyed fans of The Ellen DeGeneres Show on the CBS television network will see the following message appear as the final credits roll:

Country of publication United States of America. WAD Productions, Inc. is the author of this film/motion picture for purposes of Article 15 (2) of the Berne Convention and all national laws giving in effect thereto.

Two other treaties deserve mention. The Patent Cooperation Treaty (PCT) has more than 100 contracting states, including Australia, Brazil, France, Germany, Japan, North Korea, South Korea, the Netherlands, Switzerland, the Russian Federation and other former Soviet republics, and the United States. The members constitute a union that provides certain technical services and cooperates in the filing, searching, and examination of patent applications in all member countries.

The European Patent Office administers applications for the European Patent Convention, which is effective in the EU and Switzerland. An applicant can file a single patent application covering all the convention states; the advantage is that the application will be subject to only one procedure of grant. Although national patent laws remain effective under this system, approved patents are effective in all member countries for a period of 20 years from the filing date.

In recent years, the U.S. government has devoted considerable diplomatic effort to improving the worldwide environment for intellectual property protection. For example, China agreed to accede to the Berne Convention in 1992; on January 1, 1994, China became an official signatory of the PCT. Now, more than two decades later, Chinese companies are aggressively building their own patent portfolios. In 2015, two of the top three companies filing applications under the PCT were Chinese (see  Table 5-2 ). Significant numbers of patents often signal that a company is a leader in innovation: As illustrated in  Exhibit 5-11 , DuPont has more than 7 million patents.

Exhibit 5-11

New products and innovations are the lifeblood of DuPont.

Source: Courtesy of DuPont.

Table 5-2 Companies Filing the Most International Patent Applications under PCT, 2015

Source: World Intellectual Property Organization.

Effective June 7, 1995, in accordance with the General Agreement on Tariffs and Trade (GATT), new U.S. patents are granted for a period of 20 years from the filing date. Previously, patents were valid for a 17-year term that began after they were granted. Thus, U.S. patent laws are now harmonized with those in the EU as well as Japan. Even with the changes, however, patents in Japan are narrower than those in the United States. As a result, companies such as Caterpillar have been unable to protect critical innovations in Japan because products very similar to those made by U.S. companies can be patented without fear of infringement. 25

Another key issue is global patent protection for software. Although copyright law protects the computer code, it does not apply to the idea embodied in the software. Beginning in 1981, the U.S. Patent and Trademark Office extended patent protection to software. In the United States alone, Microsoft has tens of thousands of patents, of which the majority are software related. In Europe, software patents were not allowed under the Munich Convention; in June 1997, however, the EU indicated it was ready to revise patent laws so they would cover software. 26

In 2011, the U.S. government overhauled the patent system once again with the passage of the American Innovation Act. This act addressed the problem of so-called patent trolls who file multiple patent applications with the intent of getting large tech companies such as Facebook, Apple, and Google to pay large sums to settle patent claims. A new entity, the Patent Trial and Appeal Board, was created to expedite the process of resolving patent infringement cases. Some observers have noted that the push-back on patent protection has led to a decline of U.S. investment in life sciences and software. 27

Antitrust

Antitrust laws in the United States and other countries are designed to combat restrictive business practices and to encourage competition. Agencies such as the U.S. Federal Trade Commission, Japan’s Fair Trade Commission (FTC), and the European Commission enforce antitrust laws (see  Exhibit 5-12 ). Some legal experts believe that the pressures of global competition have resulted in an increased incidence of price-fixing and collusion among companies. As then FTC Chairman Robert Pitofsky said, “For years, tariffs and trade barriers blocked global trade. Now those are falling, and we are forced to confront the private anticompetitive behavior that often remains.” 28

Exhibit 5-12

Advanced Micro Devices (AMD) is the world’s second-largest supplier of microprocessors for PCs and servers and is recognized as a technology innovation leader. The dominant market leader, Intel, has held a constant market share, in the 80–90 percent range, over the years. AMD filed a lawsuit against Intel in U.S. Federal Court, claiming Intel uses its dominant market power to stifle or exclude competition and engage in anticompetitive behavior around the globe. Full-page ads were deployed to describe Intel’s conduct.

Source: Advanced Micro Devices (AMD).

A recent rash of antitrust actions brought in the United States against foreign companies has raised concerns that the United States is violating international law as well as the sovereignty of other nations. The U.S. antitrust laws are a legacy of the nineteenth-century trust-busting era and are intended to maintain free competition by limiting the concentration of economic power. The Sherman Act of 1890 prohibits certain restrictive business practices, including fixing prices, limiting production, allocating markets, and engaging in any other scheme designed to limit or avoid competition. The law applies to the activities of U.S. companies outside U.S. boundaries as well as to foreign companies conducting business in the United States.

In a precedent-setting case, a U.S. court found Nippon Paper Industries guilty of conspiring with other Japanese companies to increase fax paper prices in the United States. The Japanese government denounced the U.S. indictment of Nippon Paper in December 1995 as a violation of international law and Japan’s sovereignty. The meetings at which pricing strategies were allegedly discussed took place outside the United States; a U.S. federal judge struck down the indictment, ruling that the Sherman Act does not apply to foreign conduct. However, a federal appeals court in Boston reversed the decision. In his opinion, U.S. Circuit Judge Bruce Selya wrote, “We live in an age of international commerce, where decisions reached in one corner of the world can reverberate around the globe.” 29

For the past four decades, the competition authority of the European Commission has had the power to prohibit agreements and practices that prevent, restrict, and distort competition. The Brussels-based Commission has jurisdiction over European-based companies as well as non-European-based ones that generate significant revenues in Europe, such as Google and Microsoft. For example, the Commission can block a proposed merger or joint venture, approve it with only minor modifications, or demand substantial concessions before granting approval. The Commission begins with a preliminary study of a proposed deal; serious concerns can lead to an in-depth investigation lasting several months.

Since the mid-1990s, when Mario Monti became Europe’s antitrust chief, the Commission has taken an increasingly activist approach (Monti’s nickname was “Super Mario”). In 2009, for example, Intel was fined $1.2 billion for antitrust violations. In 2017, following a seven-year investigation, competition commissioner Margrethe Vestager fined Alphabet Inc.’s Google unit €2.42 billion ($2.72 billion) for abusing its dominance in search (see  Exhibit 5-13 ). Specifically, the Commission accused the tech giant of stifling competition by promoting its own Google Shopping comparison-shopping service over alternative services offered by rivals such as Foundem.co.uk. 30  Meanwhile, the Commission has two other antitrust cases pending against Google.

Exhibit 5-13

Margrethe Vestager is the European Commissioner for Competition. Summing up her core beliefs, she says, “Politics should give all people opportunities and enable them to make free choices.”

Source: Alexandros Michailidis/Shutterstock.

There have also been calls on both sides of the Atlantic for regulators to challenge the dominance of online retailing giant Amazon. For example, during the 2016 U.S. presidential campaign, candidate Donald Trump singled out the company for criticism, complaining, “Amazon is controlling so much.” Amazon’s admirers point out that, despite—or perhaps because of—its size, Amazon is a “consumer first” company that offers low prices on some 400 million different products. The broader question is whether existing antitrust laws and regulations need to be revised to reflect the Internet age. Some observers want companies such as Facebook and Google to be regulated as public utilities!

Table 5-3  summarizes some recent joint ventures, mergers, and other global business deals that have been subject to review by antitrust authorities in various regions of the world.

Table 5-3 Antitrust Rulings

Source: Compiled by the authors.

Entrepreneurial Leadership, Creative Thinking, And The Global Startup

James Dyson, Dyson

Sir James Dyson is a British entrepreneur (see  Exhibit 5-14 ). He has developed a wide range of innovative products, started a company to manufacture and market them, and built a global brand. By applying the basic tools and principles of modern marketing, Dyson has achieved remarkable success. In fact, he was knighted in 2006!

Exhibit 5-14

James Dyson. One of Dyson’s newest products is the Airwrap, a curling iron with a detachable head that can be swapped out with attachments for curling, drying or smoothing.

Source: The Asahi Shimbun/Getty Images.

As is true with many entrepreneurs, Dyson’s original idea was based on his recognition of a problem that needed to be solved and his own needs and wants. Simply put, he was frustrated with the way traditional vacuum cleaners functioned: As disposable bags filled with dust, the units lost suction. He said to himself, “There has to be a better way.”

With this point in mind, Dyson developed a bagless vacuum; the first model, called the G-Force, was priced at $2,000. After the vacuum was awarded the 1991 International Design Fair Prize in Japan, Dyson was in business.

Fast-forward to today, and Dyson employs 9,000 people and generates nearly $3 billion in revenue each year. Over the last quarter century the company has launched a steady stream of premium-priced new products, including hair dryers, the AirBlade line of electric hand dryers, and variations on the original bagless vacuum cleaner.

The road has not always been smooth; some new product launches have not panned out. For example, the company stopped manufacturing its CR01 Contrarotator washing machines due to high production costs. According to Dyson, there is no stigma attached to failure: “As long as you are learning something,” he says. One thing he learned from the washing machine experience: Charge higher prices!

In 2011, Dyson’s company introduced a handheld, bagless, cordless vacuum, even though market research did not show a need for such a product. The technology involved required nearly 200,000 hours to develop and resulted in more than 100 patents. Dyson says, “You can’t ask your customers to tell you what to do next. They don’t know. That’s our job.” Armed with that insight, the company now offers a whole range of handheld vacuums, including the V6 Mattress vacuum (“removes allergens and bacteria”) and the 360 Eye robot vacuum.

Although the United States is Dyson’s top market, Asia accounts for more than half of the company’s profits. Japan is Dyson’s number 2 market, and China is showing rapid growth. The market opportunity in the latter case is due in part to the aspirations and spending habits of China’s growing middle class. Also, ownership of domestic appliances in China is currently in the low single digits. Because Asian homes typically have hard floors rather than carpet, Dyson developed the V6 Fluffy cordless vacuum with a rotating fabric head for the market. In true “Think local, act global” fashion, the Fluffy is now a best-seller in the West as well.

Thanks to Dyson’s core competencies in high-speed motors and batteries, the company recently announced that it will develop an electric vehicle (EV). The estimated cost? About £1 billion to develop the battery technology, and another £1 billion to develop the car, including the chassis.

Industry observers expect that Dyson will eventually leverage its battery expertise to use solid-state batteries in its EV program. Compared to lithium ion batteries, the advantages of using this technology include faster charging and longer driving range. Even so, it is anticipated that the first vehicle, which has a planned product launch in 2020 or 2021, will be powered by lithium batteries. A manufacturing site in the United Kingdom is under consideration, as are sites in China, Malaysia, and Singapore.

Sources: Alexandra Wolfe, “Weekend Confidential: James Dyson,” The Wall Street Journal (December 9–10, 2017), p. C11; Michael Pooler and Peter Campbell, “Dyson Makes Dust Fly with Electric Vehicle Plans,” Financial Times (September 30–October 1, 2017), p. 19; Michael Pooler and Peter Campbell, “Dyson Looks to Extend Midas Touch to Tomorrow’s Vehicles,” Financial Times (September 28, 2017), p. 18; Tom Hancock, “Dyson Aims to Build on Sales with R&D Center in China,” Financial Times (May 26, 2017), p. 17; John Gapper and Tanya Powley, “‘All Inventors Are Maniacs,’” Financial Times (April 11–12, 2015), pp. 17–18.

Because the interstate-trade clause of the Treaty of Rome applies to trade with third countries, a company must be aware of the conduct of its affiliates. The European Commission also exempts certain cartels from Articles 85 and 86 of the treaty in an effort to encourage the growth of important businesses. The intent is to allow European companies to compete on an equal footing with Japan and the United States. In some instances, individual country laws in Europe apply to specific marketing mix elements. For example, some countries permit selective or exclusive product distribution. However, European Community law can take precedence.

In one case, Consten, a French company, had exclusive French rights to import and distribute consumer electronics products from the German company Grundig AG. Consten sued another French firm, charging the latter with bringing “parallel imports” into France illegally; that is, Consten charged that the competitor had bought Grundig products from various foreign suppliers without Consten’s knowledge and was selling them in France. Although Consten’s complaint was upheld by two French courts, the Paris Court of Appeals suspended the judgment, pending a ruling by the European Commission on whether the Grundig–Consten arrangement violated Articles 85 and 86 of the Treaty of Rome. The Commission eventually ruled against Consten on the grounds that “territorial protection proved to be particularly damaging to the realization of the Common Market.” 31

In some instances, companies or entire industries have been able to secure exemption from antitrust rules. In the airline industry, for example, OneWorld and Star Alliance are separate alliances in which competing airlines can share computer codes and set prices jointly. Similarly, the European Commission permitted United International Pictures (UIP), a joint venture between Paramount, Universal, and MGM/UA, to cut costs by collaborating on motion picture distribution in Europe. However, in 1998, the commission reversed itself and notified the three studios that they had to distribute their films independently in Europe. 32

A  cartel  is a group of individual companies that collectively set prices, control output, or take other actions to maximize profits. For example, the group of oil-producing countries known as Organization of the Petroleum Exporting Countries (OPEC) is a cartel. In the United States, most cartels are illegal. One notable exception, however, has a direct impact on global marketing: A number of the world’s major shipping lines, including the U.S.-based Sea-Land Service and Denmark’s A. P. Moller/Maersk line, have enjoyed exemptions from antitrust laws since the passage of the Shipping Act of 1916. This law was originally enacted to ensure reliability; today, it has been estimated that the cartel results in shipping prices that are 18 percent higher than they would be if shippers set prices independently. Attempts in recent years to change the law have been unsuccessful. 33

Licensing and Trade Secrets

Licensing is a contractual agreement in which a licensor allows a licensee to use patents, trademarks, trade secrets, technology, or other intangible assets in return for royalty payments or other forms of compensation. U.S. laws do not regulate the licensing process per se as do technology-transfer laws in the EU, Australia, Japan, and many developing countries. The duration of the licensing agreement and the amount of royalties a company can receive are considered a matter of commercial negotiation between licensor and licensee, and there are no government restrictions on remittances of royalties abroad. Important considerations in licensing include which assets a firm may offer for license, how to price the assets, and whether to grant only the right to “make” the product or the rights to “use” and to “sell” the product as well. The right to sublicense is another important issue. As with distribution agreements, decisions must also be made regarding exclusive or nonexclusive arrangements and the size of the licensee’s territory.

To prevent the licensee from using the licensed technology to compete directly with the licensor, the latter may try to limit the licensee to selling only in its home country. The licensor may also seek to contractually bind the licensee to discontinue use of the technology after the contract has expired. In practice, host-government laws and even U.S. antitrust laws may make such agreements impossible to obtain. Licensing is thus a potentially dangerous action: It may be instrumental in creating a competitor. For this reason, licensors should be careful to ensure that their own competitive positions remain advantageous—which requires constant innovation.

As noted, licensing agreements can come under antitrust scrutiny. In one case, Bayer AG granted an exclusive patent license for a new household insecticide to S. C. Johnson & Sons. The German firm’s decision to license was based in part on the time required for obtaining approval for the insecticide from the U.S. Environmental Protection Agency (EPA), which had stretched to 3 years. Bayer decided it made better business sense to let the U.S. firm deal with regulatory authorities in return for a 5 percent royalty on sales. However, a class-action suit filed against the companies alleged that the licensing deal would allow Johnson to monopolize the $450 million home insecticide market.

At this point, the U.S. Justice Department stepped in, calling the licensing agreement anticompetitive. In a statement, Anne Bingaman, then head of the Justice Department’s antitrust unit, said, “The cozy arrangement that Bayer and Johnson maintained is unacceptable in a highly concentrated market.” Bayer agreed to offer licenses to any interested company on better terms than the original contract with Johnson. Johnson agreed to notify the U.S. government of any future pending exclusive licensing agreements for household insecticides. Further, if Bayer was party to any such agreements, Bayer agreed that the Justice Department had the right to veto them. The reaction from the legal community was negative. One Washington lawyer who specializes in intellectual property law noted that the case “really attacks traditional licensing practices.” As Melvin Jager, president of the Licensing Executives Society, explained, “An exclusive license is a very valuable tool to promote intellectual property and get it out into the marketplace.” 34

What happens if a licensee gains knowledge of the licensor’s trade secrets? Trade secrets are confidential information or knowledge that has commercial value and is not in the public domain and for which steps have been taken to keep it secret. Trade secrets may include manufacturing processes, formulas, designs, and customer lists. To prevent disclosure, the licensing of unpatented trade secrets should be linked to confidentiality contracts with each employee who has access to the protected information. In the United States, trade secrets are protected by state law rather than federal statute; most states have adopted the Uniform Trade Secrets Act (UTSA). The U.S. law provides trade secret liability against third parties that obtain confidential information through an intermediary. Remedies include damages and other forms of relief.

The 1990s saw widespread improvements in laws pertaining to trade secrets. Several countries adopted trade secret statutes for the first time. Mexico’s first statute protecting trade secrets became effective on June 28, 1991; China’s first trade secret law took effect on December 1, 1993. In both countries, the new laws were part of broader revisions of intellectual property laws. Japan and South Korea have also amended their intellectual property laws to include trade secrets. In addition, many countries in Central and Eastern Europe enacted laws to protect trade secrets.

When the North American Free Trade Agreement (NAFTA) became effective on January 1, 1994, it marked the first international trade agreement with provisions for protecting trade secrets. This milestone was quickly followed by the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), which resulted from the Uruguay Round of GATT negotiations. The TRIPs agreement requires signatory countries to protect against acquisition, disclosure, or use of trade secrets “in a manner contrary to honest commercial practices.” 35  Despite these formal legal developments, in practice, enforcement is the key issue. Companies transferring trade secrets across borders should seek information about not only the existence of legal protection but also the risks associated with lax enforcement.

Bribery and Corruption: Legal and Ethical Issues

History does not record a burst of international outrage when Charles M. Schwab, head of Bethlehem Steel at the beginning of the twentieth century, presented a $200,000 diamond and pearl necklace to the mistress of Czar Alexander III’s nephew. 36  In return for that consideration, Bethlehem Steel won the contract to supply the rails for the Trans-Siberian railroad. Today, in the post-Soviet era, emerging opportunities in Central and Eastern Europe are again luring global companies. However, in Poland, Hungary, and elsewhere, nationalist governments are increasingly hostile to foreign companies. When awarding state contracts, for example, politicians in the region sometimes favor powerful local businesspeople with close ties to the government. Which kind of ties? In some cases, bribery may be involved.

Bribery  is the corrupt business practice of demanding or offering some type of consideration—typically in the form of cash payments—when negotiating business deals. While most countries have anticorruption laws that prohibit bribery, enforcement is often lax. That is not the case in the United States. Employees of U.S. companies in particular are constrained by U.S. government policies of the post-Watergate age. Transparency International ( www.transparency.org ) compiles an annual report ranking countries in terms of a Corruption Perceptions Index (CPI), where the “cleanest” score is 100. The 2016 ranking of countries with the highest and lowest CPI scores is shown in  Table 5-4 .

Table 5-4 2016 Corruption Rankings

Note: Transparency International’s Corruption Perceptions Index (CPI) scores countries on their perceived levels of public-sector corruption on a scale from 0 (highly corrupt) to 100 (very clean).

Source: Adapted from 2016 Corruption Rankings. Copyright 2016 Transparency International: the global coalition against corruption. Used with permission. For more information, visit  www.transparency.org .

In the United States, the  Foreign Corrupt Practices Act (FCPA)  is a legacy of the Watergate scandal during Richard Nixon’s presidency. In the course of his investigation, the Watergate special prosecutor discovered that hundreds of American companies had made undisclosed payments to foreign officials, totaling hundreds of millions of dollars. Congress unanimously passed the act, which President Jimmy Carter signed into law in 1977.

Administered by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), the FCPA is concerned with disclosure and prohibition. Regarding disclosure, the act requires publicly held companies to institute internal accounting controls. The prohibition part makes it a crime for U.S. corporations to bribe an official of a foreign government or political party to obtain or retain business. Payments to third parties are also prohibited when the company has reason to believe that part or all of the money will be channeled to foreign officials.

The U.S. business community immediately began lobbying for changes to the FCPA, complaining that the statute was too vague and so broad in scope that it threatened to severely curtail U.S. business activities abroad. President Ronald Reagan signed amendments to the statute into law in 1988 as part of the Omnibus Trade and Competitiveness Act. Among the changes were exclusions for “grease” payments to low-level officials to cut red tape and expedite “routine governmental actions” such as clearing shipments through customs, securing permits, or getting airport passport clearance to leave a country.

Convictions for FCPA violations carry severe jail sentences and substantial fines. The law is worded quite broadly and has plenty of gray areas; even so, in 2009 and 2010 the U.S. Justice Department collected $2 billion in fines and penalties. 37  A company cannot pay or reimburse fines incurred by “rogue” employees; the rationale is that individuals commit such crimes. As noted on the Justice Department’s Web site:

The following criminal penalties may be imposed for violations of the FCPA’s anti-bribery provisions: corporations and other business entities are subject to a fine of up to $2,000,000; officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Moreover, under the Alternative Fines Act, these fines may be actually quite higher—the actual fine may be up to twice the benefit that the defendant sought to obtain by making the corrupt payment. You should also be aware that fines imposed on individuals may not be paid by their employer or principal. 38

In addition, this law does not let a person do indirectly (e.g., through an agent, joint venture partner, or other third party) what it prohibits directly.

Rolls-Royce (the aircraft engine manufacturer, not the luxury car brand) is one well-known company that has run afoul of antibribery laws in the United States and elsewhere. The U.K.-based firm has businesses in a variety of sectors, including civil aviation. Its energy business was sold to Germany’s Siemens in 2014, but prior to the sale, there was evidence of multiple offenses that occurred in Brazil, Kazakhstan, Nigeria, and Russia. Rolls-Royce agreed to pay a £671 million ($919 million) fine to the United Kingdom, the United States, and Brazil. In exchange, the company was not prosecuted on criminal charges. However, several former Rolls-Royce employees charged by the U.S. Department of Justice with conspiring to violate the FCPA ultimately pleaded guilty. 39

Some critics of the FCPA decry it as a regrettable display of moral imperialism. At issue is the extraterritorial sovereignty of U.S. law. It is wrong, according to these critics, to impose U.S. laws, standards, values, and mores on American companies and citizens worldwide. As one legal expert pointed out, this criticism has one fundamental flaw: There is no nation in which the letter of the law condones bribery of government officials. Thus, the standard set by the FCPA is shared, in principle at least, by other nations. 40

“Corruption is probably the most immediate threat and difficulty that any business faces in Russia—and the trend is increasing.” 41

Carlo Gallo, business risk consultant

Another criticism of the FCPA is that it puts U.S. companies in a difficult position relative to foreign competitors, especially those in Japan and Europe. Several opinion polls and surveys of the business community have revealed the widespread perception that the act adversely affects U.S. businesses overseas. In contrast, some academic researchers have concluded that the FCPA has not negatively affected the export performance of U.S. industry. However, a U.S. Commerce Department report prepared with the help of U.S. intelligence services indicated that in 1994 alone, bribes offered by non-U.S. companies were a factor in 100 business deals valued at $45 billion. Foreign companies prevailed in 80 percent of those deals. 42  Although accurate statistics are hard to come by, the rankings shown in  Table 5-4  highlight some areas of the world where bribery is still rampant.

The existence of bribery as a fact of life in world markets will not change just because the U.S. Congress condemns it. Bribery payments are considered a deductible business expense in many European countries. According to one estimate, the annual price tag for illegal payments by German firms alone is more than $5 billion. Still, increasing numbers of global companies are adopting codes of conduct designed to reduce illegal activities. Moreover, in May 1997, the OECD adopted a formal standard against bribery by drafting a binding international convention that makes it a crime for a company bidding on a contract to bribe foreign officials. The OECD’s antibribery convention (officially known as the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions) went into effect in 1999. The OECD is also working on a smaller scale to create so-called islands of integrity. The goal is to achieve transparency at the level of an individual deal, with all the players pledging not to bribe. 43

Investigative reporters often file stories regarding bribery or other forms of malfeasance. In emerging countries, journalists may themselves become targets if they criticize the rich or powerful (see  Case 5-2 ). When companies operate abroad in the absence of home-country legal constraints, they face a continuum of choices concerning company ethics. At one extreme, they can maintain home-country ethics worldwide with absolutely no adjustment or adaptation to local practice. At the other extreme, they can abandon any attempt to maintain company ethics and adapt entirely to local conditions and circumstances as company managers perceive them in each local environment. Between these extremes, one approach that companies may select is to utilize varying degrees of an extension of home-country ethics. Alternatively, they may adapt in varying degrees to local customs and practices.

What should a U.S. company do if competitors are willing to offer a bribe? Two alternative courses of action are possible. One is to ignore the expectation for bribery and act as if it does not exist. The other is to recognize the existence of bribery and evaluate its effect on customers’ purchase decisions as if it were just another element of the marketing mix. The overall value of a company’s offer must be as good as, or better than, the competitor’s overall offering, bribe included. It may be possible to offer a lower price, a better product, better distribution, or better advertising to offset the value added by the bribe. The best line of defense is to have a product that is clearly superior to that of the competition. In such a case, a bribe should not sway the purchase decision. Alternatively, clear superiority in service and in local representation may tip the scales in the company’s desired direction.

5-4 Conflict Resolution, Dispute Settlement, and Litigation

1. 5-4 Describe the available alternatives for conflict resolution and dispute settlement when doing business outside the home country.

The degree of legal cooperation and harmony in the EU is unique and stems, in part, from the existence of code law as a common bond. Other regional organizations have made far less progress toward harmonization. As a result, countries vary in their approach toward conflict resolution. The United States has more lawyers than any other country in the world and is arguably the most litigious nation on earth. In part, this is a reflection of the low-context nature of American culture and the spirit of confrontational competitiveness. Other factors can contribute to differing attitudes toward litigation. For example, in many European nations, class-action lawsuits are not allowed. Also, European lawyers cannot undertake cases on a contingency fee basis. Change is now in the air, though, as Europe experiences a broad political shift away from its traditional embrace of “the welfare state.” 44

Conflicts inevitably arise in business everywhere, but they are especially likely when different cultures come together to buy, sell, establish joint ventures, compete, and cooperate in global markets. For American companies, the dispute with a foreign party is frequently in the home-country jurisdiction. Such an issue can be litigated in the United States, where the company and its attorneys might be said to enjoy “home-court” advantage. Litigation in foreign courts is a vastly more complex undertaking, partly because of differences in language, legal systems, currencies, and traditional business customs and patterns.

In addition, problems may arise from differences in procedures relating to discovery. In essence, discovery is the process of obtaining evidence to prove claims and determining which evidence may be admissible in which countries under which conditions. A further complication is the fact that judgments handed down in courts in another country may not be enforceable in the home country. For all these reasons, many companies prefer to pursue arbitration before proceeding to litigation.

Alternatives to Litigation for Dispute Settlement

In 1995, the Cuban government abruptly canceled contracts with Endesa, a Spanish utility company. Rather than seek restitution in a Cuban court, Endesa turned to the International Arbitration Tribunal in Paris, seeking damages of $12 million. Endesa’s actions illustrate how alternative dispute resolution (ADR) methods allow parties to resolve international commercial disputes without resorting to the court system. Formal arbitration is one means of settling international business disputes outside the courtroom.  Arbitration  is a negotiation process that the two parties have, by prior agreement, committed themselves to using. It is a fair process in the sense that the parties using it have created it themselves. Generally, arbitration involves a hearing of the parties before a three-member panel; each party selects one panel member, and those two panel members in turn select the third member. The panel renders a judgment that the parties agree in advance to abide by.

The most important treaty regarding international arbitration is the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Also known as the New York Convention, the treaty currently has 157 signatory countries, including China. The framework created by the New York Convention is important for several reasons. First, when parties enter into agreements that provide for international arbitration, the signatory countries can hold the parties to their pledge to use arbitration. Second, after arbitration has taken place and the arbitrators have made an award, the signatories recognize and can enforce the judgment. Third, the signatories agree that there are limited grounds for challenging arbitration decisions. The grounds that are recognized are different from the typical appeals that are permitted in a court of law.

Some firms and lawyers inexperienced in the practice of international commercial arbitration approach the arbitration clauses in a contract as “just another clause.” However, the terms of every contract are different and, therefore, no two arbitration clauses should be the same. Consider, for example, the case of a contract between an American firm and a Japanese one. If the parties resort to arbitration, where will it take place? The American side will be reluctant to go to Japan; conversely, the Japanese side will not want to arbitrate in the United States. An alternative, “neutral” location—Singapore or London, for example—must be considered and specified in the arbitration clause. In which language will the proceedings be conducted? If no language is specified in the arbitration clause, the arbitrators themselves will choose.

In addition to location and language, other issues must be addressed in relation to the arbitration process. For example, if the parties to a patent-licensing arrangement agree in the arbitration clause that the validity of the patent cannot be contested, such a provision may not be enforceable in some countries. Which country’s laws will be used as the standard for invalidity? Pursuing such an issue on a country-by-country basis would be inordinately time-consuming. In addition, there is the issue of acceptance: By law, U.S. courts must accept an arbitrator’s decision in patent disputes; in other countries, there is no general rule of acceptance.

To reduce delays owing to disputed issues, one expert suggests drafting arbitration clauses with as much specificity as possible. To the extent possible, for example, patent policies in various countries should be addressed; arbitration clauses may also include a provision that all foreign patent issues will be judged according to the standard of home-country law. Another provision could forbid the parties from commencing separate legal actions in other countries. The goal is to help the arbitration tribunal zero in on the express intentions of the parties. 45

For decades, business arbitration has also been promoted through the International Court of Arbitration at the Paris-based International Chamber of Commerce (ICC;  www.iccwbo.org ). The ICC recently modernized some of its older rules. However, because it is such a well-known organization, it has an extensive backlog of cases. Overall, the ICC has gained a reputation for being slower, more expensive, and more cumbersome than some arbitration alternatives. As U.S. involvement in global commerce grew dramatically during the post–World War II period, the American Arbitration Association (AAA) also became recognized as an effective institution within which to resolve disputes. In 1992, the AAA signed a cooperation agreement with China’s Beijing Conciliation Center.

Another agency for settling disputes is the Swedish Arbitration Institute of the Stockholm Chamber of Commerce. This agency frequently handles disputes between Western and Eastern European countries and has gained credibility for its evenhanded administration. However, a favorable ruling from the arbitration tribunal is one thing; an enforced ruling is another. For example, Canada’s IMP Group took its case against a Russian hotel development partner to Stockholm and was awarded $9.4 million. When payment was not forthcoming, IMP’s representatives took matters into their own hands: They commandeered an Aeroflot jet in Canada and released it only after the Russians paid up! 46

Other arbitration alternatives have proliferated in recent years. In addition to those already mentioned, active centers for arbitration exist in Vancouver, Hong Kong, Cairo, Kuala Lumpur, Singapore, Buenos Aires, Bogotá, and Mexico City. A World Arbitration Institute was established in New York; in the United Kingdom, the Advisory, Conciliation and Arbitration Service (ACAS) has achieved great success in handling industrial disputes. An International Council for Commercial Arbitration (ICCA) was established to coordinate the far-flung activities of arbitration organizations; it meets in different locations around the world every four years.

The United Nations Commission on International Trade Law (UNCITRAL;  www.uncitral.org ) has also been a significant force in the area of arbitration. Its rules have become more or less standards, as many of the organizations just named have adopted them with some modifications. Many developing countries, for example, long held prejudices against the ICC, AAA, and other developed-country organizations. Representatives of developing nations assumed that such organizations would be biased in favor of multinational corporations. For this reason, developing nations insisted on settlement of disputes in national courts, which was unacceptable to many multinational firms. This was especially true in Latin America, where the Calvo Doctrine required disputes arising with foreign investors to be resolved in national courts under national laws. The growing influence of the ICCA and UNCITRAL rules, coupled with the proliferation of regional arbitration centers, has contributed to changing attitudes in developing countries and resulted in the increased use of arbitration around the world.

5-5 The Regulatory Environment

1. 5-5 In general terms, outline the regulatory environment in the European Union.

The  regulatory environment  of global marketing consists of a variety of governmental and nongovernmental agencies that enforce laws or set guidelines for conducting business. These regulatory agencies address a wide range of marketing issues, including price control, valuation of imports and exports, trade practices, labeling, food and drug regulations, employment conditions, collective bargaining, advertising content, and competitive practices. As noted in The Wall Street Journal:

Each nation’s regulations reflect and reinforce its brand of capitalism—predatory in the U.S., paternal in Germany, and protected in Japan—and its social values. It’s easier to open a business in the U.S. than in Germany because Germans value social consensus above risk-taking, but it’s harder to hire people because Americans worry more about discrimination lawsuits. It’s easier to import children’s clothes in the U.S. than [in] Japan because Japanese bureaucrats defend a jumble of import restrictions, but it’s harder to open bank branches across the U.S. because Americans strongly defend state prerogatives. 47

In most countries, the influence of regulatory agencies is pervasive, and an understanding of how they operate is essential to protect business interests and advance new programs. Executives at many global companies are realizing they need to hire lobbyists to represent their interests and to influence the direction of the regulatory process. For example, in the early 1990s, McDonald’s, Nike, and Toyota didn’t have a single representative in Brussels—but today these and other companies have several people representing their interests to the European Commission. U.S. law firms and consulting firms also have sharply increased their presence in Brussels; in an effort to gain insight into EU politics and access to its policymakers, some have hired EU officials. In all, there are currently approximately 15,000 lobbyists in Brussels representing some 1,400 companies and nonprofit organizations from around the world. 48

Regional Economic Organizations: The EU Example

The overall importance of regional organizations such as the WTO and the EU was discussed in  Chapter 3 . The legal dimensions are important, however, and will be briefly mentioned here. The Treaty of Rome established the European Community (EC), the precursor to the EU. This treaty created an institutional framework in which a council (the Council of Ministers) serves as the main decision-making body, with each country member having direct representation. The other three main institutions of the community are the European Commission, the EU’s executive arm; the European Parliament, the legislative body; and the European Court of Justice.

The 1987 Single European Act amended the Treaty of Rome and provided strong impetus for the creation of a single market beginning January 1, 1993. Although technically the target was not completely met, approximately 85 percent of the newer recommendations were implemented into national law by most member states by the target date, resulting in substantial harmonization. A relatively new body known as the European Council (a distinct entity from the Council of Ministers) was formally incorporated into the EC institutional structure by Article 2 of the 1987 act. Composed of heads of member states plus the president of the European Commission, the European Council’s role is to define general political guidelines for the union and provide direction on integration-related issues such as monetary union. 49  Governments in Central and Eastern European countries that hope to join the EU are currently getting their laws in line with those of the EU.

The Treaty of Rome contains hundreds of articles, several of which are directly applicable to global companies and global marketers. Articles 30 through 36 establish the general policy referred to as “Free Flow of Goods, People, Capital and Technology” among the member states. Articles 85 through 86 contain competition rules, as amended by various directives of the 20-member EU Commission. The Commission is the administrative arm of the EU; from its base in Brussels, it proposes laws and policies, monitors the observance of EU laws, administers and implements EU legislation, and represents the EU to international organizations. 50  Commission members represent the union rather than their respective nations.

The laws, regulations, directives, and policies that originate in the EU Commission must be submitted to the European Parliament for an opinion and then passed along to the European Council for a final decision. Once the Council approves a prospective law, it becomes union law, which is somewhat analogous to U.S. federal law. Regulations automatically become law throughout the EU; directives include a time frame for implementation by legislation in each member state. For example, in 1994 the Commission issued a directive regarding use of trademarks in comparative advertising. Individual member nations of the EU worked to implement the directive; in the United Kingdom, the 1994 Trade Marks Act gave companies the right to apply for trademark protection of smells, sounds, and images and also provided improved protection against trademark counterfeiting.

With the rise of the single market, many industries are facing new regulatory environments. The European Court of Justice (ECJ) is the EU’s highest legal authority (see  Exhibit 5-15 ). As the sole arbiter of EU law, it is responsible for ensuring that EU laws and treaties are interpreted uniformly throughout the union. Based in Luxembourg, it consists of two separate tribunals. The senior body is known as the Court of Justice; a separate entity, the Court of First Instance, hears cases involving commerce and competition (see  Table 5-5 ).

Exhibit 5-15

The European Court of Justice (ECJ) is one of three courts that make up the Court of Justice of the European Union (CJEU).

Source: EQRoy/Shutterstock.

Table 5-5 Recent Cases before the European Court of Justice/General Court of the European Union 51

Although the European Court of Justice plays a role similar to that of the U.S. Supreme Court, there are important differences. The European court cannot decide which cases it will hear, and it does not issue dissenting opinions. The court exercises jurisdiction over a range of civil matters involving trade, individual rights, and environmental law. For example, the ECJ can assess damages against countries that fail to introduce directives by the date set. The court also hears disputes that arise among the EU’s 28 member nations on trade issues such as mergers, monopolies, trade barriers and regulations, and exports. In addition, the ECJ is empowered to resolve conflicts between national law and EU law. In most cases, EU law supersedes national laws of individual European countries.

Marketers must be aware, however, that national laws should always be consulted. National laws may be stricter than EU law, especially in such areas as competition and antitrust. To the extent possible, EU law is intended to harmonize national laws to promote the purposes defined in Articles 30 through 36. The goal is to bring the lax laws of some member states up to designated minimum standards, but more restrictive positions may still exist in some national laws.

For example, Italy recently introduced the Reguzzoni-Versace Law, which is intended to regulate trade in textiles, leather, and footwear. It states that if at least two stages of production—there are four stages altogether—occur in Italy, a garment can be labeled “Made in Italy.” In addition, the country or countries in which the remaining production stages take place must be identified. Reguzzoni-Versace was supposed to enter into force October 1, 2010, but Brussels objected on the grounds that the law conflicts with Article 34, which prohibits national measures providing restrictions to trade in the EU. In the view of EU regulators, the Reguzzoni-Versace Law is “protectionist” and more stringent than EU law, which requires only that one main production stage take place in Europe. 55

Another recent case in Italy involved the University of Florence, which was sued by a lecturer from Belgium on grounds of discrimination. The Italian court was required to determine whether the facts of the case indicated that Italian law had been applied equally to both Italian and foreign academics. If the court found national law had, in fact, been applied equally, the case would end there. If not, the case would go on to the ECJ, which would make a ruling based on EU laws prohibiting discrimination on the basis of nationality.