The Big Move

By: Alex Furman, Gayle Strong, Robert Stang and Richard Petkun Issue: Global Trade Section: Jewel Of Collaboration

Highlights and Current Developments for Businesses Considering International Expansion

The Big Move Expanding internationally can be a huge benefit for a company whose business has traditionally been entirely domestic. An expanding business can seek new markets, labor sources, raw materials and efficiencies. Additional trade partners and channels are available internationally, and expansion can generally offer a business greater flexibility. However, businesses that are expanding internationally also face greater challenges and a host of new legal considerations when entering the international sphere. Keeping updated on these considerations is a challenge for any international business.

There are at least three major areas where a business will face increased legal pressures in its international business: tax, trade regulation, and intellectual property.

While one article cannot apprise a business of every consideration or solve all of the issues for expanding internationally, this article provides a taste of the important areas to consider. For example, a business must deal with trade regulations for importation and will interact with U.S. Customs and Border Protection (CBP), the governmental agency that enforces those regulations on its own behalf and on behalf of other government agencies. Related agencies such as the International Trade Commission may also become involved, especially for any enforcement of intellectual property rights. Each of these areas of concern, and compliance with the respective agencies’ regulatory requirements require careful consideration by a business expanding internationally. The rest of the article provides a primer for some of those considerations.

Patent Yoga: The Flexible and Changing Strengths of U.S. Patent Protection to Protect a Global Competitive Edge.

For many years now, due in large part to the volume of business conducted using electronic means, intellectual property is an important aspect of most successful domestic and international businesses. Intellectual property can be effectively designed to protect every aspect of a business’s unique or valuable concepts: a flagship product, a business plan, a secret recipe, or a marketing campaign. Patents can cover a product itself, how it is made or used, or even how a service is performed. Other types of common intellectual property are trademarks, which protect the brand associated with the product or service, and can protect in some instances packaging or product shape, and copyrights, which provide protection for the creative and expressive elements of products or services, including marketing materials, ad copy, or how a website is displayed.

As a background, an important aspect of all intellectual property rights including patent rights is that they are rights to exclude. Intellectual property rights are the right to exclude others from copying, mimicking, or creating “knock-offs” and they almost never include the right for a business to actually make a certain product or sell a certain service under a certain brand. Intellectual property rights may be enforced when they are infringed, meaning that a company may be stopped from copying a product or using a brand name when that product or brand name is protected by intellectual property rights.

U.S. intellectual property rights can be enforced in the U.S. through preventing infringing actions, such as making or selling “knock-off” products, imitating brands or styles, or copying names of services and any of these infringements may also be stopped at the U.S. border. Enforcement inside the U.S. is often accomplished through federal lawsuits at U.S. District Courts, and through Federal Trade Commission actions to stop products at the U.S. border when they are imported. Each of these actions affect infringement inside the U.S. and each action can certainly send ripple effects upstream for an infringing company that is manufacturing abroad. For example, a Crocs subsidiary, Jibbitz, recently won a $56 million judgment against a Chinese manufacturer that was imitating the Jibbitz-branded shoe charms that contained copyrighted elements like famous characters. These types of enforcements can routinely send would-be competitors running and warn others to steer clear.

Intellectual property protection in the U.S. and abroad is important for a business with international plans, and the limits of protection provided by only U.S. intellectual property rights should be understood by any business with intellectual property that is expanding internationally. Intellectual property in the U.S. is generally limited to protecting trade within the U.S. and trade that crosses U.S. borders. However, there are exceptions to these rules that businesses must consider, whether the businesses have rights they want to enforce, or they may have rights enforced against them. These exceptions can be particularly significant to businesses expanding internationally or facing international competition. For businesses with international expansion opportunities or competitive pressures, these exceptions and the enforcement of U.S. intellectual property can be critical either to operating successfully or to stopping a competitor’s infringement. Patents provide some of the best examples where U.S. intellectual property can extend its reach beyond U.S. borders. Indeed, some recent notable patent infringement battles have centered around the territorial limits of patent protection.

Businesses with significant international trade such as Microsoft, AT&T, and Research In Motion (RIM), the maker of the ubiquitous Blackberry® smartphones and devices, have heavily litigated the issue of whether U.S. patent rights can be enforced abroad. The underlying law that they have litigated comes from a relatively smaller case that made it to the U.S. Supreme Court based on the alleged infringement of shrimp processing equipment that was made and shipped out of the U.S. in parts for assembly by international customers. The basic rule coming from that case was that companies could not perform an “end run” around U.S. patents by shipping unassembled portions of a protected product for assembly overseas. The subsequent litigations determined whether several specific situations fit the rule. First of all, shipping software and hardware separately to be installed later was found to infringe. By contrast, making copies of software abroad and then installing the software to create a patented combination was not found to infringe. Finally, shipping a product into the U.S. while the patented service was performed later internationally was found not to infringe.

Through all of these findings, a significant question has been touched upon but has remained an open question: can the extension of patent rights outside of U.S. borders be used to protect patented methods or services outside the U.S.? In March 2009, the reigning U.S. court for patents, the Federal Circuit, has agreed to look at the issue and decide whether a company performing parts of a patented method or service in the U.S. while performing other parts of the method or service in another country can infringe a U.S. patent.

Trademark Land Grab: Strict Territorial Limits on Trademark Rights Require Coordinated International Registration Efforts.

Unlike U.S. patent rights that may have some international enforcement, a U.S. trademark registration does not provide for international trademark protection, although the same protections at the U.S. border are still available. For trademarks, international registrations are required in countries where protection is desired. If seeking trademark protection in multiple countries seems daunting, there are two primary international trademark conventions that permit a U.S. trademark owner to seek and obtain multi-country protection through a consolidated trademark application filing: the Community Trade Mark (CTM) and the Madrid Protocol. The CTM convention provides for registration of marks in the European Union. The CTM fees have recently been significantly reduced 40%, which makes the CTM an attractive alternative for obtaining foreign trademark rights. The Madrid Protocol is an international treaty that allows a trademark owner to seek registration in any of the almost 50 member countries by filing a single application, called an “international application,” through the U.S. Trademark Office and based on a U.S. trademark application or registration.

Regulations Obstacle Course: The Multi-Faceted Trade Regulations Governing Imported Products.

For companies expanding internationally, particularly for those involved in importing goods or international manufacturing, there are numerous issues that arise from trade regulations.

Compliance with trade regulations can be complicated and costly, but the alternatives are certainly worse. Fines, Customs delays and redelivery notices can strangle international business that does not pay attention to these Agency regulations and requirements. However, companies successfully importing products into the United States must be aware of their responsibility to follow all rules and regulations enforced by CBP.

No matter how difficult or costly the task of complying with trade regulations may be for a business, there may also be cost saving opportunities to minimize duties and fees owed on imported products. These compliance and cost saving opportunities are often specific to the products being imported, but there are three issues to be considered by all importers of products into the U.S.:

Proper tariff classification of the goods under the U.S. Harmonized Tariff Schedule. Proper valuation of the imported products. Declaring the correct country of origin for the products.

Although these issues sound simple, in reality they can be complex determinations. Tariff classification, for example, can require choosing among multiple line items in the tariff with similar descriptions of the products. Each tariff classification might correspond to a different rate of duty, and misclassification of products (even inadvertently) opens the door to penalties.

Customs Building (XL)Valuation relates to the value of the products that is declared to U.S. Customs. The methodologies for appraisement can differ significantly depending on whether the products were imported pursuant to a sale, related party issues, identification of the actual buyer and seller, the existence of royalties or licensing fees, and whether the seller received anything free of charge or at reduced value in order to manufacture the products. Obviously, there are numerous variations in how contracts and production processes are structured and each variation raises its own special needs.

Determining the country of origin seems straightforward, but in fact may also be a complex determination, especially for products manufactured in one country with components or materials from a different country. The rules of origin can also change depending on the country of manufacture. For example, products manufactured in China follow one rule, products manufactured in Mexico or Canada (NAFTA countries) may follow a different rule, and goods manufactured in Israel are subject to a third rule of origin.

In addition to the above issues, all importers must be aware of recordkeeping responsibilities and the possibility of their goods being subject to more selective trade enforcement actions (for example, the imposition of antidumping duties or countervailing duties).

In the event of a question as to any of the above issues, companies often seek guidance from an outside expert (customs broker, customs attorney, etc.). They may also have the opportunity to request a binding ruling from CBP to clarify any outstanding issues. Changing the Rules of Tax: The Current Shifting Landscape of International Business Tax.

Changing tax rules affect all businesses and international expansion adds another layer of complexity to the tax position of any business.

With the recent emphasis on tax system reform by the Obama administration, the tax positions of businesses will again change, particularly in terms of international taxation.

The Obama administration has recently increased the tax burden on companies that shift jobs internationally. The revenue-increasing measures proposed are targeted mainly at (1) the deferral of U.S. tax on foreign-source income, and (2) certain provisions allowing U.S. businesses, in the Treasury’s view, “to artificially inflate or accelerate” their use of U.S. tax credits for taxes paid to foreign countries. The administration’s plan would earmark a large portion of the expected revenue gain from these measures to extend the existing tax credit for certain “research and experimentation” expenditures.

While only the broad outlines of these proposals were announced in early May, revenue-raising provisions would include the following:

A new statutory mechanism would be enacted to limit the benefit of most deductions associated with overseas income. The announcement declares an intention to prevent U.S. taxpayers from obtaining any U.S. tax benefit by deducting expenses “supporting their offshore investments until they pay taxes on their offshore profits.” Additional restrictions on a U.S. taxpayer’s use of double tax relief (“foreign tax credits”) would be enacted. The use of “disregarded entity” elections under the existing check-the-box rules would be restricted or prohibited in situations where disregarded entity treatment has facilitated deferral of U.S. tax on overseas earnings. Since this provision would take effect in 2011, taxpayers would be given some time to restructure their operations.

International trade regulations are complicated, but an awareness of and conformance with the regulations may provide an opportunity to save substantial costs and to avoid expensive delays by planning a clear route through complex international trade classifications. An additional proposal included in the announcement may increase audit resources and add to the procedural tools available to the IRS to identify and deal with undisclosed offshore bank accounts held by individual taxpayers.

Successful international expansion requires preparation. Specifically, it requires attention to various considerations in the areas of intellectual property, trade regulation and tax. While domestic issues in these areas may be commonly understood, expanding internationally raises new concerns that must be considered to ensure a successful expansion. Intellectual property rights and protection should be analyzed and may need to be retooled for the foreign marketplace. In some cases, current U.S. or other national intellectual property rights may be ineffectual in supporting international expansion, requiring development of new strategies.

The international tax landscape is changing and promises to continue to change with a political focus on the economy. However, even in spite of these new issues, a business can, through careful planning, minimize the potential risks of international expansion while taking full advantage of its benefits, from new markets to greater flexibility and a realization of lower costs of doing business.

Alex Furman and Gayle Strong (Intellectual Property), Robert Stang (Global Trade and Regulatory Matters), and Richard Petkun (Tax) are attorneys with the law firm of Greenberg Traurig, LLP. Greenberg Traurig is an international, full-service law firm with more than 1,800 attorneys and governmental affairs professionals in the U.S., Europe and Asia. Contact Greenberg Traurig at