Non-Establishment Forms of International Business Flashcards
What is the progression of involvement in international business characterized by?
A series of steps including agency arrangements, distributorships, contract manufacturing, joint ventures, and foreign direct investment
This progression allows companies to gradually increase their commitment to foreign markets.
What is foreign direct investment (FDI)?
Establishment abroad by forming a joint venture, foreign subsidiary, or acquiring a foreign company
FDI offers the greatest control in the foreign market but also involves the greatest risk.
What are two principal forms of non-establishment presence in foreign markets?
- Engaging a sales representative in the foreign market
- Contract manufacturing with a foreign entity
These forms allow companies to enter foreign markets without fully establishing a business.
What is contract manufacturing?
A form of licensing where a seller authorizes a third party to use its intellectual property to manufacture products
This can lead to efficiency gains and cost savings in foreign markets.
What is franchising?
A form of licensing allowing a third party to use intellectual property to provide services or a combination of services and products
Franchising is particularly relevant in the trade of services.
What is a key issue in contract manufacturing and franchising?
The transfer of technology (intellectual property) and access to proprietary technology
Tension often exists between the licensor and licensee regarding access.
What can a seller do to establish a distribution network in a foreign market?
Engage a local party to sell its products, such as a foreign agent or distributor
This helps sellers who lack local market knowledge.
What is the role of an independent foreign agent?
Solicits orders for goods but does not take title to the goods
The risk of non-payment remains with the seller.
What distinguishes an independent foreign distributor from an agent?
A distributor buys goods from the seller for resale and takes title to them
This means the distributor assumes the risk of resale.
What financial commitment is typically greater, an agent or a distributor?
Distributor
Distributors are usually larger companies with more resources.
True or False: A foreign agent can bind the seller in all cases.
False
Whether an agent can bind the seller depends on the law of the foreign jurisdiction.
Fill in the blank: The first step in developing a distribution network in a foreign market is to engage a _______.
[local party or representative]
What is the primary role of an agent in a sales relationship?
To find a buyer and not to set the terms of the sale.
What control does the seller-principal maintain in an agency relationship?
Control over the price of the goods and the parties to whom the products are sold.
How does an independent distributor differ from an agent?
An independent distributor takes title to the goods for resale, losing control over the sales price and customers.
What may restrict a seller’s ability to limit a distributor’s powers?
Local laws may restrict the ability of the seller to limit the freedom of the distributor.
Can an agent appoint subagents or sub-distributors without the seller’s consent?
No, an agent normally does not have this power.
What is a key downside of greater control over agents or distributors?
The seller may become subject to liability under the laws of the foreign nation.
What legal implications arise if the agent is an employee of the seller?
The seller may be subject to labor and tax laws of the foreign nation.
What might local labor laws require from a seller-employer when terminating an employee?
Strict requirements such as review by a labor bureau.
How can the sale of products by a local employee affect taxation?
It might subject the seller to income tax laws of the foreign nation.
What is a potential liability issue for the seller regarding the actions of the sales representative?
The actions of the employee may be imputed to the seller for tort or contract liability.
What is a significant concern regarding illegal activities of foreign agents and distributors?
The seller may be implicated in illegal acts such as bribery or tax evasion.
What law exposes sellers to liability for making improper payments to foreign officials?
The Foreign Corrupt Practices Act of 1977.
What might an agent/distributor seek regarding territorial rights?
Exclusive rights for a particular territory.
What competition law issue can arise from exclusive agreements with distributors?
It may create antitrust or competition law issues.
How does the EU’s approach to competition law differ from that of the United States?
The EU considers all member nations’ territories as a single territory for competition purposes.
What could a prohibition against selling outside of an EU country violate?
EU competition law, as it restricts competition within all EU territories.
What issue may arise if a distributor is prohibited from selling competing products?
It may create issues under both U.S. antitrust law and local competition laws.
What is a critical consideration for sellers regarding agency or distributorship termination?
Sellers must be familiar with the laws governing termination in the host nation.
Why are some nations concerned about foreign sellers terminating agency relationships?
They fear exploitation of local agents/distributors by foreign sellers.
What can a seller do after establishing contacts with customers through an agent/distributor?
The seller can terminate the agency/distributorship relationship and sell directly to the customers.
What are the potential consequences of terminating an agency relationship?
It often signals a permanent end to the business relationship and may lead to disappointment.
What rights might an agent/distributor seek if they feel termination was unfair?
They may seek to vindicate their rights under local law.
What distinction do national laws usually draw regarding termination?
Between termination with cause and termination without cause.
What are the penalties for sellers typically associated with termination without cause?
They are usually more onerous.
What should be included in the agreement regarding termination for cause?
Reasons that justify termination for cause and opportunities for the agent/distributor to cure defects.
What contingencies may automatically terminate the agency agreement?
Insolvency of the agent/distributor, nationalization of property, or force majeure events.
True or False: Failure to reach sales quotas generally constitutes just cause for termination in all countries.
False.
In the event of termination without cause, what compensation might the agent/distributor be entitled to?
Monetary settlement based on a percentage of gross sales or a multiple of earnings.
What may the seller need to compensate the agent/distributor for upon termination?
Goods in possession, goodwill created, and advertising expenses.
What may a local court do if there is a dispute over termination rights?
Enjoin the seller from terminating the agreement and prevent them from engaging another representative.
What must the seller do to protect intellectual property rights before entering an agency agreement?
Comply with local laws to obtain protection for trademarks, patents, and copyrights.
What is essential for the seller regarding intellectual property ownership in the agency agreement?
The seller must be established as the sole and exclusive owner of the intellectual property rights.
What obligations should the agent/distributor agree to concerning intellectual property?
Not to make claims to intellectual property and to notify the seller of any violations.
What type of information may be protected only by contract and not by intellectual property law?
Confidential business information.
What types of confidential information should be protected in the agreement?
- Corporate structure
- Financial information
- Marketing plans
- Customer lists
- Personnel information
In many cases, how do foreign nations treat the terms ‘agent’ and ‘distributor’?
They often use these terms interchangeably or without precision.
What is advisable for sellers regarding foreign laws on agency and distributorship?
Have local counsel examine foreign laws closely.
What must parties do before entering into a business relationship?
Reduce their agreement to writing.
What types of laws must parties understand when drafting an agency or distribution agreement?
- U.S. law
- Law of the distributor or agent’s country
- Applicable international law
What are the primary sources of EU competition law?
Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU).
The TFEU was established by the Treaty of Lisbon, effective December 1, 2009.
What does TFEU Article 101 prohibit?
Agreements, decisions by associations, and concerted practices that prevent, restrict, or distort competition affecting trade between member states.
This is analogous to § 1 of the U.S. Sherman Act.
What does TFEU Article 102 address?
Monopolization and abuse of a dominant position.
This is similar to § 2 of the U.S. Sherman Act.
What are the three elements of collusive conduct under Article 101(1)?
- Collusive conduct
- May affect trade between member states
- May prevent, restrict, or distort competition within the common market
What types of agreements fall under Article 101?
Both vertical and horizontal agreements.
Vertical agreements occur between different levels of trade, while horizontal agreements occur at the same level.
What is the purpose of Article 101(3)?
To provide exemptions for agreements that contribute to production improvement or consumer benefits while not restricting competition unnecessarily.
What are the two positive reasons for exemption under Article 101(3)?
- Contributes to the improvement of production or distribution
- Allows consumers to receive a fair share of the resulting benefit
What are the two negative conditions for exemption under Article 101(3)?
- No unnecessary restrictions on competition
- Does not eliminate competition for a substantial part of the products
How does EU competition law differ from U.S. antitrust law?
EU law has a specific exemption mechanism under Article 101(3), while U.S. law uses a ‘rule of reason’ approach without such a mechanism.
What significant change occurred in 2004 regarding the application of Article 101(3)?
The application became decentralized, allowing private companies to determine exemptions without prior notification to the European Commission.
What powers were devolved to national competition authorities under Regulation 1/2003?
Enforcement powers related to Article 101(3) and the ability to assess agreements affecting trade between member states.
What role do national courts play in EU competition law?
They have exclusive competence to handle lawsuits involving private damage actions for infringements of Articles 101 and 102.
What is the significance of private damage actions in EU competition law?
They aid public enforcement and ensure the effectiveness of the EU competition law scheme.
What guidance is available for firms regarding Article 101(3) after 2004?
Firms must rely on jurisprudence and block exemption regulations for guidance.
The Commission used to issue what types of official determinations before 2004?
Negative clearances and comfort letters.
True or False: Article 101(2) states that any agreement breaching Article 101(1) is automatically void.
True
What is the primary regulation governing vertical restraints in the EU?
Regulation 330/2010
Accompanied by Guidelines on Vertical Restraints issued on May 19, 2010.
What types of agreements does Regulation 330/2010 primarily apply to?
- Agency agreements
- Distributorship agreements
- Franchise agreements
What does the concept of vertical agreements include?
- Purchase of intermediate goods
- Finished goods
What is the first step in examining a vertical agreement under EU law?
Determine if the agreement is caught by any provisions of Article 101(1)
What is the second step in the examination process of a vertical agreement?
Check if the agreement qualifies for the ‘safe harbor’ under Regulation 330/2010
What is the third step if the agreement does not qualify for the ‘safe harbor’?
Can the agreement be justified under Article 101(3)?
What are the four conditions of Article 101(3) that parties must satisfy?
The answer is not provided in the text.
What factors are necessary to determine market share according to the Vertical Guidelines?
- Relevant product market
- Relevant geographic market
How should market shares be calculated?
Based on market sales value data in the preceding calendar year
What happens if the market share exceeds 30 percent but does not exceed 35 percent?
The ‘safe harbor’ may continue to apply for two consecutive calendar years.
What are hardcore price-fixing restrictions in vertical agreements?
- Fixing distribution margin
- Conditional rebates or reimbursement
- Price monitoring measures
- Prohibiting commission sharing in agency agreements
Can manufacturers restrict resale of contract goods to a particular territory in the EU?
Yes, but restrictions on passive sales are hardcore restraints.
What may be agreed between a supplier and distributor regarding active sales?
Restrictions on active sales may be agreed as long as the 30 percent market share threshold is met.
What are selective distribution provisions?
Restrictions whereby the product may only be sold to customers selected based on certain criteria.
What type of selective distribution criteria may be permitted?
Purely qualitative selective distribution criteria justified by the nature of the product.
In the case of Pierre Fabre Dermo-Cosmetique SAS v. President de L’Autorite, what restriction was ruled as caught by Article 101(1)?
Restriction of distribution to physical spaces with a qualified pharmacist present.
What did the CJEU rule in the case of Coty Germany GmbH v. Parfumerie Akzente GmbH?
The selective distribution scheme was upheld as justified by the nature of the products.
What constitutes a hardcore restraint regarding Internet sales?
An outright prohibition to sell or advertise a product over the Internet.
List some Internet sales restrictions considered hardcore competition restrictions.
- Requiring higher prices for online buyers
- Limiting Internet sales to a stated proportion
- Restricting website access based on customer residence
What may justify restrictions on Internet sales in exceptional circumstances?
Reasons of safety or health.
What is problematic about non-compete obligations in vertical agreements?
Any obligation extending beyond a maximum period of five years.
What is a limitation of the agency/distributorship form for Worthington?
The agent/distributor may be engaged in other businesses, affecting priority for the principal’s products
The agent/distributor may sell competing products, impacting focus on the principal’s offerings.
What is one challenge faced by Worthington when selling products in Germany?
The need to manufacture products in the U.S. and ship them to Germany, incurring costs and time delays
This includes customs duties and storage costs that may lead to competitive pressures.
What is a potential disadvantage for Worthington when competing with a German competitor?
The German competitor may not face the same costs associated with shipping and manufacturing
This can create a competitive disadvantage for Worthington in the German market.
What is one potential strategy for Worthington to address market challenges?
Establishing a manufacturing subsidiary in Germany or licensing a local company to produce products
Licensing is a form of technology transfer that can mitigate investment risks.
Define technology transfer.
The process by which an owner of technology provides access to its technology to another party
Access can be through complete ownership transfer or licensing agreements.
What are the two forms of international technology transfer?
- Vertical licensing for quick market entry with no investment
- Horizontal licensing for cross-licensing between firms with complementary technology
Vertical licensing is often used by smaller firms, while horizontal licensing can involve competitors.
Why is technology transfer important in modern international business?
Knowledge and information have become crucial for international commerce, with intellectual property being among the most valuable assets
Companies like Worthington Superabrasives rely on their technological advantages to compete.
What are examples of valuable intellectual property?
- Patents
- Trademarks
- Copyrights
- Trade secrets
Companies like Pfizer, Apple, and Coca-Cola own significant IP assets.
True or False: The theft of intellectual property has become a minor issue for IP owners.
False
Copyright piracy and trademark counterfeiting are major problems, reflecting the value of IP.
What challenges do licensors face when entering licensing agreements?
Risks of improper use of IP, competition from the licensee, and potential piracy
Licensors often restrict access to core technology, licensing only nonessential technology.
Fill in the blank: Technology transfer can involve the transfer of complete ownership through a sale or assignment of the _______.
[technology]
What is the significance of MNEs in the context of intellectual property?
MNEs own the bulk of the world’s most valuable IP and invest significant resources in R&D and marketing
They spend millions on developing and promoting their IP assets.
What role does intellectual property play in international economic development?
It plays a central role in modernization, industrialization, and improving living standards in developing countries.
What is a critical tool for the modernization and industrialization of developing countries?
Advanced technology.
Which country is the leading nation in the creation and export of advanced technology and intellectual property?
The United States.
What is a significant concern for developed nations regarding technology?
The pressure to share advanced technology with developing nations.
What two categories can the international IP legal system be divided into?
- Individual national legal systems
- International treaties
What are the two main purposes of international treaties in the context of intellectual property?
- Establish legal standards for domestic legislation
- Provide principles for the treatment of foreign intellectual property rights
True or False: International treaties directly create intellectual property rights.
False.
What does the principle of territoriality mean in intellectual property law?
IP rights are independent and created by the domestic law of each nation.
What are the two most important treaties for harmonization of intellectual property law before the establishment of the WTO?
- Paris Convention for the Protection of Industrial Property
- Berne Convention for the Protection of Literary and Artistic Works
What is the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)?
An essential treaty that sets minimum standards for IP rights for WTO members.
What significant change did the America Invents Act bring to U.S. patent law?
Adoption of the ‘first inventor to file’ system.
What are the three requirements for patent eligibility under U.S. law?
- Novelty
- Usefulness
- Non-obviousness
Fill in the blank: A patent issued by the U.S. Patent and Trademark Office gives the patent owner a _______.
monopoly for 20 years.
What are the two basic systems for granting patents worldwide?
- Examination system
- Registration system
In the examination system, what does the patent-granting authority do before granting a patent?
Determines the validity of the patent based on prior art and statutory criteria.
What is a major criticism of the U.S. Patent and Trademark Office?
Many U.S. patents are held to be invalid despite being granted.
What is a key advantage of the registration system for patents?
Low costs and speed of issuance.
What are the major international treaties governing patents?
The Paris Convention and the Patent Cooperation Treaty (PCT)
The Paris Convention was established to protect industrial property, while the PCT facilitates international patent filings.
How many countries are members of the Paris Convention?
179 countries
This includes the United States.
What are the two most important rights created by the Paris Convention?
- Right of national treatment
- Right of priority
What does the right of national treatment entail?
A nation cannot discriminate against foreigners regarding patents or trademarks
Foreign applicants must receive treatment equal to that of domestic owners.
What is the significance of the right of priority under the Paris Convention?
It allows an applicant to file additional patent applications in other Paris countries within 12 months and retain the priority date of the first application.
What does the Patent Cooperation Treaty (PCT) allow applicants to do?
File a single international application that acts as a national application in designated PCT member countries.
How long is the additional period granted by the PCT for filing national patent applications?
Eighteen months, in addition to the 12-month period under the Paris Convention.
Does the PCT create an international patent system?
No, the final decision on patent grants is made by each national patent office.
What does the European Patent Convention (EPC) provide?
A single application process for obtaining a patent valid in multiple European countries.
What is the term duration for a European patent under the EPC?
Twenty years from the date of filing.
What is the purpose of the Unitary Patent System authorized by the European Patent Convention?
To allow applicants to acquire a unitary patent valid in multiple European states.
What are the two regulations that instituted the Unitary Patent System?
- EU Regulation No. 1257/2012
- Council Regulation (EU) No. 1260/2012
How many European states participate in the Unitary Patent System?
26 European states
All EU states except Spain and Croatia.
What role do trademarks play under U.S. trademark law?
To distinguish goods from those of another and serve as an indicator of origin and quality.
What is the hallmark of a trademark?
Distinctiveness.
What is the difference between ‘first to use’ and ‘first to file’ systems?
‘First to use’ is followed in the U.S., while many other countries use ‘first to file.’
What functions do trademarks traditionally serve?
- Indicating source of origin
- Guaranteeing quality
What must trademarks be used in connection with?
Some commercial activity.
How are trademarks protected under U.S. law?
Through both state and federal law.
What was the purpose of the Lanham Act?
To provide a framework for enforcing common law trademark rights at the federal level.
What does the U.S. Patent and Trademark Office do?
Keeps a register of trademarks.
What can federal courts do for registered trademarks?
Issue injunctions or award monetary relief.
What does § 526 of the Tariff Act of 1930 allow?
The U.S. Customs Service to seize counterfeit goods entering the U.S.
What does Article 2 of TRIPs incorporate?
All of the major substantive provisions of the Paris Convention concerning trademarks
The Paris Convention also applies to patents.
What is the right of priority for trademarks under the Paris Convention?
Six months
This principle is also applicable to patents.
What does the 1957 Nice Agreement provide?
A single classification system for the registration of trademarks
This agreement helps unify trademark classification across countries.
What must an applicant identify when registering a trademark?
The class of goods to which the trademark applies
Examples include clothing, eyeglasses, handbags.
What could happen if a registered trademark is used with a different class of goods in some countries?
It may be illegal and can lead to cancellation of the mark.
What is the Madrid Agreement?
A system for the international registration of trademarks established in 1891
The Madrid Protocol, adopted in 1989, has greater participation.
How many countries are members of the Madrid Protocol as of this writing?
104 countries
What is the term of an international registration under the Madrid Protocol?
Ten years
The registration can be renewed indefinitely for additional 10-year periods.
What does the Council Regulation No. 40/94 establish?
A unitary European Community trademark valid in the entire European Union
This trademark is independent of existing national laws.
What are the categories of copyrightable material recognized under U.S. law?
- Literary works
- Musical works
- Dramatic works
- Pantomimes and choreographic works
- Pictorial, graphic, and sculptural works
- Motion pictures and other audiovisual works
- Sound recordings
- Architectural works
What is the basic right of copyright ownership?
The right to prevent unauthorized copying without permission.
What does the fair use doctrine allow?
Limited copying for educational and archival purposes
This is a common law doctrine now codified in the Copyright Act.
What is required to obtain a U.S. copyright?
No formal procedures are necessary; it must be original and fixed in a tangible medium of expression.
What is the minimum term of protection under the Berne Convention?
Life of the author plus fifty years.
What principle does the Berne Convention’s National Treatment provision establish?
A work receiving copyright protection in one signatory country is entitled to the same protection in all other signatory countries.
What are moral rights in copyright?
Rights personal to the author, including the right to be known as the author and to prevent derogatory use of the work.
What does Article 10 of TRIPs state about computer programs?
Computer programs shall be protected by copyright.
What is know-how?
Knowledge that has commercial value.
What protects know-how primarily where it does not qualify as intellectual property?
Contract and tort.
What is the definition of a trade secret under the Uniform Trade Secrets Act?
Information that derives independent economic value from not being generally known and is subject to reasonable efforts to maintain its secrecy.
What does the Economic Espionage Act of 1996 create?
Federal criminal penalties for the misappropriation of trade secrets.
What does Article 39 of TRIPs provide regarding undisclosed information?
Procedures to protect it from acquisition by others contrary to honest commercial practices.
What type of agreement is being discussed in the context of Worthington and Berens?
Patent License Agreement
Who is permitted to manufacture the products under the agreement?
Berens
In which country will Berens manufacture the products?
Germany
What percentage of the relevant market do Worthington and Berens each hold?
25 percent
What type of patent does Worthington have for its products?
U.S. patent
How do consumers perceive the Worthington Superabrasive compared to ordinary industrial abrasives?
Technologically superior and worthy of a price premium
Fill in the blank: Worthington has a _______ patent for its products.
U.S.
True or False: Berens will manufacture products for the U.S. market.
False
What is the purpose of the contract manufacturing agreement between Worthington and Berens?
To permit Berens to manufacture products in Germany
What are the two methods for U.S. companies to penetrate foreign markets without establishing a business entity overseas?
Selling overseas through an agent/distributor or by contract manufacturing.
What is a limitation of using agents or distributors for U.S. companies in foreign markets?
It limits the ability to establish the identity and business reputation of the U.S. company overseas.
In a distribution agreement, what is the role of the distributor?
An independent contractor required to avoid creating confusion about ownership or authority.
What is one intended purpose of creating a separation between the distributor and the U.S. company?
To prevent consumer confusion regarding ownership and authority.
What is the next step for a U.S. company wanting to achieve international recognition for its trademarks?
Investing capital and establishing a business entity overseas, such as a wholly- or partially-owned foreign subsidiary.
What is the business format franchise?
A non-establishment form of doing business that helps penetrate foreign markets without capital investment.
In a business format franchise, under whose trade name does the franchisee operate?
The franchisor’s trade name.
What are some requirements for a franchisee in a business format franchise?
Assume a standard appearance and follow standardized methods of operation.
What advantage does franchising provide to a franchisor?
Achieves international trademark and trade name recognition without capital outlay.
What does the franchisor provide to the franchisee?
Valuable trademarks, trade names, business methods, and knowledge.
According to the U.S. Department of Commerce, what is key to a successful franchise operation?
A strong system.
What are the primary concerns of a franchise agreement compared to a patent licensing agreement?
Licensing of trademarks and trade names.
What governs the franchise relationship in the United States?
Both federal and state laws.
What federal agency has established disclosure requirements for franchising?
The Federal Trade Commission (FTC).
Fill in the blank: The FTC’s disclosure requirements are found in _______.
16 C.F.R. pt. 436 (2019).
What act governs misrepresentation in the franchise prospectus in Canada?
Arthur Wishart Act (Franchise Disclosure).
True or False: Some nations have specific laws governing franchise agreements.
False; some apply general principles of contract law.
What may also apply to franchise agreements in the European Union?
EU competition laws.
