When you are expanding your business abroad through contractual agreements with foreign parties you need to consider risks arising from U.S. laws applying to international business, relevant foreign law, and practical issues that impose additional liability that you may not have considered.
U.S. Export Laws Apply Even to Your U.S. Sales
Many companies are unaware of certain U.S. laws that only come into play when you begin selling overseas or if others sell your products overseas. A prime example is export control laws. When you are selling products to your franchisee or distributor or shipping orders arranged by your commercial agent abroad, you are exporting U.S. goods and/or services. That means you have all of the compliance obligations of an exporter and you are bearing the risk in the case of noncompliance. These obligations include, for example, measures to ensure that your exports are not going to prohibited destinations or prohibited end users.
The agreement with your agent or distributor (even if they are in the U.S.) should include explicit prohibitions on exporting, re-exporting or transferring any products contrary to U.S. law. If this is your first time exporting, you need to ensure that you do not need any export licenses from the Departments of State or Commerce or the Office of Foreign Assets Control. If your distributor or agent violates the export laws, the penalties can be as stiff for you as if you were violating the law yourself.
If your distributor is selling your civil use goods (controlled by the Export Administration Regulations), destination control statements (DCS) are required with all exports or re-exports regardless of whether a license is required. DCS require, at a minimum, the following language: “These commodities, technology or software were exported from the United States in accordance with the Export Administration Regulations. Diversion contrary to U.S. law is prohibited.” This obligation must be made clear to the distributor from the beginning. Moreover, your distribution agreement should include a provision both imposing the responsibility of including DCS with every export and providing for termination of the relationship if the requirement is not followed.
Foreign Corrupt Practices Act and Local Anti-Bribery Requirements Can Impose Strict Liability For Acts of Local Agents/Distributors
Under the Foreign Corrupt Practices Act (FCPA), you and/or your company can be held civilly and criminally responsible for corrupt acts agents commit on your behalf. For example, if you should have known that the commissions you were paying were likely to be used to bribe foreign government officials to generate sales of your products, you can be liable. Commitments from your agents, distributors, and franchisees to abide by the FCPA are an essential part of your compliance program. And remember, if the UK Bribery Act is implicated, strict liability applies.
Not only should your principal agreements contain FCPA clauses, you should provide third parties with information about your FCPA obligations. State that your FCPA obligations extend to the actions of third party vendors and insist they sign separate anti-corruption law compliance certifications. Such measures may act as a mitigating factor or provide some protection from liability in the case of rogue vendor action. This type of due diligence helps you determine if this foreign entity is one you really want to partner with in light of the local legal requirements discussed below.
Foreign Law Requirements Notwithstanding What Law Governs Your Agreement
Whatever law applies to your agreement, your conduct, as well as the conduct of your agents, distributors, and franchisees, may be governed by the public law of foreign jurisdictions. Sometimes a distribution or franchise arrangement will be governed by several countries’ regulatory schemes or even by supranational regulation, such as that of the European Union or multilateral treaties.
Foreign Competition Law May Affect Your Agreement
Competition or antitrust law is the 800-pound gorilla of legal compliance risks. Governments, almost everywhere, can and do regulate the very structure and function of your business and its relationships. While the U.S. and the European Union have by far the most developed and aggressively enforced schemes of applicable competition law, it is important to keep in mind that different countries have competition laws with different goals. Sales arrangements that comply with U.S. law do not necessarily comply with South African competition law. Even in Europe, retail price maintenance arrangements with distributors and restrictions on franchisees that are legal in the U.S. may be illegal in certain contexts. Be sure to have an antitrust lawyer with transnational deal experience look over your plans and decide whether a careful analysis by local counsel is necessary.
Getting Entangled in Foreign Domestic Law
Many countries, and some subnational jurisdictions, require that domestic law govern certain contractual relationships. The classic examples include labor contracts and contracts for the sale of real estate. Similarly, domestic franchise laws, as well as laws to protect dealers, distributors, and commercial agents, often apply to foreign parties’ relationships with domestic franchisees, dealers, etc., whether the foreign party realizes it or not. Consequently, the foreign party may find itself locked into a much different relationship with the domestic partner that it ever intended.
For example, many countries, no matter what your contract says, require you to pay significant compensation upon terminating a commercial agent or distributor. In fact, this termination payment requirement even applies in Puerto Rico. You must consider your exit strategy on the front end. These laws often also impact how long your contract term should be and whether you should have an indefinite term. In Russia, the entire franchise relationship is defined by statute, and Russian law can make the franchisor liable for the harm franchisees do to other parties. Every country is different. For this reason it is risky to enter into an agreement giving one party rights to all of Europe or the Middle East without considering the specific laws of each jurisdiction and how it will affect your business relationship.
Language, Currency and Tax Transfer Concerns for Your Agreement
In all international deals you must take cultural differences and English language skills into account. Ineffective communication and lack of information can lead to payment problems, misunderstandings regarding party obligations (consider the applicable INCOTERMS® for example), and general inefficiency. Specify which language version of your contract is controlling, in which language you will communicate over the course of your relationship and in which currency payments will be made. Determine if local law can pre-empt your contract language and control these issues. It is typical for national franchise laws to require that prospective franchisees be provided with copies of franchise agreements in the local language a certain number of days before executing the agreements. Also, some countries require approval from central banks for an agreement under which monies will be paid in foreign currency.
Finally, before agreeing to financial details, confirm whether your earnings in a foreign country will be subject to withholding tax and, if so, what the tax rate will be. A double taxation treaty between your home and the foreign country may apply. Without thorough research you could be in for a nasty shock when you learn that your country is subject to a punitive rate of withholding tax in the country where you are now doing business.
Intellectual Property Issues: Edit Your Agreement to Protect Your Rights in the Foreign Country
Intellectual property (IP) law is mostly national law. This means that just because you register your trademark in one country does not mean that it is protected elsewhere. Different entities can use and even register the same IP in different jurisdictions. Before you license your trademark to a commercial agent in country X, make sure you own the rights in that jurisdiction. Obtaining the rights often requires an affirmative act of registration. Even Starbucks faced a claim that a competitor, who had essentially expropriated its logo, had the right to use the trademark in China because Starbucks did not follow the registration procedures for several years after entering the Chinese market. Moreover, if your local agent registers your mark first in some jurisdictions, they own the rights, not you.
Every international business relationship has a unique set of issues that need to be addressed in a carefully customized agreement. The time that you invest on the front end will minimize risks and limit your liability in foreign jurisdictions. You know the saying,”you can pay me now or pay me later.” The risk in this case is that “later” can dramatically reduce your profit, limit your business growth, hurt your reputation and increase your headaches. However, once you really understand how to modify your agreements, you can confidently grow your business and limit those headaches!
Doreen M. Edelman is a shareholder at Baker, Donelson, Bearman, Caldwell & Berkowitz P.C. in Washington, D.C., where she helps clients create business solutions for international trade compliance. She has more than 20 years of experience developing compliance programs and counseling clients on export licensing, export controls, FCPA and Office of Foreign Assets Control (OFAC) sanction laws. Ms. Edelman also helps companies prepare global business plans and work through foreign government market regulations.