Chinese Business Law: Who’s Pulling the Strings?

The Communist Party of the People’s Republic of China held its 19th Party Congress last week. The twice-a-decade party determines China’s political and economic development of at least the next five years, and is when the new leadership of the Communist Party is chosen. Chinese President Xi Jinping is expected to use this opportunity to further consolidate political power, and set forth his vision for the country’s future.

Under Xi, the trend of utilizing law to centralize authority and strengthen control has been accelerating, as evidenced by the recent codifying of informal restrictions, such as the anti-graft campaign. In an effort to embolden the campaign, Xi plans to invest legal authority in the nascent National Supervision Commission to crack down on corruption. It has been speculated that Wang Qishan, a current member of the Standing Committee of the Politburo and a.k.a. “China’s second most powerful man,” will head the organization.

Wang Qishan, the so-called anti-graft tsar, was recently accused by Chinese dissident Guo Wengui of corruption himself. Guo alleged that Wang has an illicit financial connection with the HNA Group, a multibillion-dollar Chinese conglomerate. Guo Wengui, a real estate billionaire turned exiled democratic-reform advocate has built quite an online following for himself in the last year utilizing social media to expose what he claims is his first-hand knowledge of the corruption of “Chinese kleptocrats.” Interestingly enough, Guo’s YouTube account was recently suspended for 90 days for alleged harassment. The identity of the person or organization who alleged harassment has not been released, although Guo believes that the Chinese government was behind the complaint.

The Communist Party’s growing influence on foreign companies has increased in recent years. The law in China requires foreign companies to set up Communist Party cells in their firms. According to Qi Yu, a deputy head of the Communist Party’s Organization Department, these party cells “help [foreign firms] to understand in a timely manner Chinese policies, to resolve salary disputes, and provide positive energy for the company’s development.” While Communist officials claim that foreign companies welcome the benefit of having a party cell within their organization, some foreign executives have privately expressed their concern about increasing political pressure from the Party to allow greater control over business and investment decisions.

Chinese Business Law Who’s Pulling the Strings (PDF)

The FTC Sends Student Debt Relief Scammers Their Regards

It was indeed an unlucky Friday the 13th for student debt relief scammers following an announcement of a task force by the Federal Trade Commission along with 12 state attorney generals. Cases have been filed against companies, such as Student Debt Doctor and American Student Loan Consolidators, under an operation named Game of Loans. The accused companies have been charged with misleading debtors about their fees and student-loan payments. Seven FTC actions are involved in the operation: five new cases, a single new judgment in favor of the FTC, and a preliminary injunction for a case filed this past year.

Over 42 million Americans have student loan debts with an outstanding balance of more than $1.4 trillion. After mortgages, student loans are the largest segment of U.S. debt. Student loan servicers assist student debtors with their payments, answer questions, and help them avoid defaulting on their loans. For this service, the federal government pays them millions of dollars.

The issue of fraud arises when these companies provide inconsistent or incomplete information, leaving student debtors vulnerable to scammers. It is estimated by the federal government that scammers have taken more than $95 million in illegal fees over the years. One example involved companies charging an upfront fee of several hundred to over a thousand dollars for merely mailing out paperwork that student debtors can obtain and do themselves for free. In another instance, a Florida-based company promised its student debtors loan forgiveness in five years or less. However, the company falsified the student debtor’s paperwork, such as income and employment status, in order to lower their monthly payments.

A precipitous rise in complaints by student debtors of fraud resulted from the federal government’s broadening of repayment options and debt forgiveness plans. To avoid being scammed, an advisory by the Department of Education stated that student debtors looking for debt consultation should avoid companies that charge fees upfront, ask for bank account information or access to their federal student aid PIN. A company having access to this PIN number would allow them to act on behalf of the student debtor.

In the wake of Operation Game of Loans, state officials ranging from Colorado, Texas, the District of Columbia, among many others, are working together to protect student debtors and educate the general population about how to spot these scams and if they are scammed, where to seek help. “Winter is coming for debt relief scams that prey on hardworking Americans struggling to pay back their student loans,” announced Maureen K. Ohlhausen, FTC Acting Chairman.

The FTC Sends Student Debt Relief Scammers Their Regards (PDF)

U.S. and European Tax Authorities Look at U.S. Corporate Profits Overseas

Republicans in Congress have released an outline of their plan to rewrite the tax code. A recent episode of NPR’s Planet Money explains that a centerpiece of the Republican plan is to drastically reduce corporate taxation, lowering the rate to twenty percent. Currently, the corporate tax rate in the U.S. is thirty-five percent, one of the highest in the world. But, there are various exceptions in the tax code that allow many Corporations to be taxed at about a little over twenty percent; a comparable rate to the rest of the world.

One of the most prominent exceptions allows companies to avoid taxation on profit earned outside of the U.S. so long as it remains outside of the U.S. Many U.S. companies take advantage of this through foreign subsidiaries that manage their international profits. In fact, seventy-three percent of Fortune 500 companies operate one or more subsidiaries in tax haven countries such as Luxembourg or the Cayman Islands, where corporate income tax rates are much lower. This amounts to trillions in U.S. corporations’ profits sitting untaxed overseas.

A recent case brought a glimmer of hope for those in Congress wanting to see money from overseas flow back into the U.S. economy. The IRS sued Amazon for roughly $1.5 billion, but ultimately, Amazon prevailed. In hopes of seeing money move to the U.S., President Trump called for tax reform including a one-time tax cut. Trump’s plan would slash the corporate tax rate to twenty percent and eliminate many existing exceptions. He believes that money saved could be used to hire more American workers. But, the President may face competition for subsidiaries’ money from where it is already piling up: Europe.

European countries themselves have been cracking down on this issue as well. This has resulted in a race to the bottom, with governments lowering taxes to try to lure corporations to their countries. Although European rulings may result in the U.S. missing out on huge sources of revenue, it could potentially aid the President’s efforts. The more difficult it becomes for companies to keep profits abroad, the more likely they may be to return that money to the U.S. Ultimately, Congress and the President’s ambitions have many challenges ahead of them. But, if their plan works, the U.S. may see trillions of dollars return to its shores.

U.S. and European Tax Authorities Look at U.S. Corporate Profits Overseas (PDF)

The Weinstein Company in Talks to Sell to Colony Capital

On Monday, October 16, The Weinstein Company (“Company”) announced that the studio has entered into an agreement with private equity firm Colony Capital. The struggling studio was left in a financial flux after multiple Hollywood actresses came forward with sexual harassment, sexual assault, and rape allegations against co-founder Harvey Weinstein. It was also revealed that Weinstein had reached at least eight settlements with women accusing him of sexual harassment and unwanted physical contact.

The Company has been struggling financially over the recent years due to the studio’s films’ poor performances at the box office. The New York based studio, known for Oscar winning films including The King’s Speech and The Artist, was founded by brothers Bob and Harvey Weinstein; the two brothers currently own 42% of the production company. Weinstein was fired by the board of the Company earlier in October due to the rising allegations of sexual misconduct.

In addition to the Company’s financial difficulties, internal investigations into Weinstein’s conduct may cost the studio between $20 and $40 million dollars. Additionally, the association with Weinstein is likely to hurt the studio’s upcoming slate of pictures. The Company has pushed back its Oscar hopeful, The Current War, from its original November 24, 2017 release date to later in 2018. Amazon Studios has also decided not to move forward with a David O. Russell television project that was to be a co-production with the Company.

Colony Capital was founded by Thomas J. Barrack Jr., a former business partner and close friend of President Trump. The private equity firm has experience with the movie business: in 2010, Colony Capital purchased Miramax, a production company that was also founded by the Weinstein brothers. Tarak Ben Ammar, a board member of the Company, said that Colony Capital had entered into an agreement with the studio to buy most of the Company’s television and movie properties. While the deal with Colony Capital will provide the Company a much-needed financial boost, many of the studio’s partners have cut ties amid the allegations against Weinstein. Goldman Sachs recently announced it is looking at options for its small stake in the production company.

The Weinstein Company in Talks to Sell to Colony Capital (PDF)

Recap: “From Big Law to Big Business”

On October 18, 2017, the Berkeley Center for Law, Business and the Economy (BCLBE) welcomed Aylin Oncel, a lawyer at Stripe, for a Q&A discussion about her career from a big law firm associate and a start-up entrepreneur to an in-house lawyer at a big company, and about the issues she thinks were important during her career.

Aylin received her J.D. from UC Berkeley School of Law in 2012. Passionate about global women’s issues, she once served on U.S. National Committee for UN Women. After graduation, she worked as a corporate attorney at Wilson Sonsini Goodrich & Rosati, specializing in mergers and acquisitions (M&A). She also co-founded a boutique wine gifting company in San Francisco named Vinkind. Now she is an in-house lawyer at Stripe, a US technology company that provides an online payment platform for private individuals and businesses.

“Don’t feel scared to do different things,” Aylin told us through her own experience. She realized that big law was not for her after two-years of M&A work and she wanted to make a change. Then she met her co-founder and decided to run a start-up. After experiencing all these different jobs, she found that an in-house position was the fit for her. Trying different things can help people figure out what they really want.

For her, Stripe is also a completely different world. She had no background in engineering before. “Just learn about a new industry,” she said. However, previous work experience did help in her career like negotiation skills gained through daily interaction with lawyers and clients.

Aylin told us several considerations that are important for a start-up. First, you need money that is a revenue source, like savings or a family sponsorship. Second, you have to choose a partner wisely. For example, personality match and skills are key points to take into consideration. Third, be nice and people will appreciate that. Last but not least, get some basic knowledge such as learning the framework of businesses.

When asked about how she feels working in-house, Aylin said it was an amazing work. People on the team are really smart, efficient and energetic and they respect your time. Everyone is nice and it is a great experience.

Recap From Big Law to Big Business (PDF)

The U.S. Supreme Court to Decide Whether the Data Stored Abroad is Beyond Reach

Following the fight between technology companies and justice departments, the U.S. Supreme Court decided to hear the case United States v. Microsoft. A warrant was issued in 2013 by a federal magistrate judge under a 1968 federal law—the Stored Communications Act, forcing Microsoft to hand over a customer’s email stored overseas for a criminal investigation. In 2016, a three-judge panel of the Second Circuit Court ruled that the 1986 law did not apply to data outside U.S. Later, the full Second Circuit Court reheard the case but the court deadlocked.

Though the mutual legal assistance treaties enable governments to collect evidence for criminal cases through the cooperation of local justice departments, the process is deemed by some judge as “slow and laborious.”

In the “big data” industry, the collection and control of data are critical. The digital information stored in other countries is governed by the local laws and the technology companies have to obey both U.S. laws and foreign laws. It may create a dilemma if the two sources of law differentiate. Some foreign governments are especially worried about their customers’ data stored by American companies being provided to U.S. governments for other uses and some services by U.S. technology companies are even banned in certain country for not obeying local policies.

The U.S. giant technology companies have achieved great successes almost all over the world. But the increasing distrust of information security may hurt their ability to compete in leading cloud computing, especially after the Snowden’s revelations. The fear of a back door spying program has led to reconsideration by some foreign customers of their relationship with U.S. online service providers. In answering these challenges, some companies purposely build data centers overseas to avoid being suspected of leaking information to U.S. government authorities. But whether this can be an effective way to reassure their customers will depend on the decision to be made by the Supreme Court Justices.

The U.S. Supreme Court to Decide Whether the Data Stored Abroad is Beyond Reach (PDF)

Boeing & Bombardier: Dispute up in the Air

Earlier this month, the U.S. Department of Commerce issued a 300% tariff on Bombardier’s C-Series aircraft imports to the United States. The Department initially imposed a 220% tariff in countervailing duties and subsequently announced an additional 80% in anti-dumping duties.

The present dispute began in April when U.S. aircraft manufacturer, Boeing, filed a petition against Bombardier with the Department of Commerce and the U.S. International Trade Commission (USITC). Boeing argued that Canadian plane manufacturer, Bombardier, had sold 75 C-Series jets to Delta Air Lines at unfairly low prices and alleged that Canadian state subsidies had created an unfair competitive advantage. Specifically, Boeing claimed that Bombardier offered the new jets for less than $20 million apiece when the jets cost more than $33 million each to produce. The Department of Commerce and USITC are set to make their final rulings in December and February respectively.

Bombardier explained that they did not unfairly underprice their aircrafts. Instead, they merely sold the C-Series aircrafts at launch pricing, as Boeing and most other industry actors normally would do when marketing new planes. Furthermore, Bombardier has argued that U.S. authorities are acting absurdly because there is no comparable American-produced aircraft that would be in competition with the C-Series. The petition instead is perceived as a tactical move by Boeing to limit competitors from the American aircraft market in general.

This perception is compounded by the fact that Boeing brought the case in front of U.S. agencies rather than a multilateral forum such as the World Trade Organization (WTO), which has ruled on the illegality and permissibility of subsidies in both the U.S. and European aerospace industries in the past. For example, the WTO ruled in 2016 against the European aircraft manufacturer, Airbus, for the illegal subsidies it received to build the Airbus A350. Similarly, the WTO ruled that Boeing received wrongful subsidies for the 777X jetliner, but the decision was overturned earlier this year.

The Boeing-Bombardier dispute has attracted the attention of stakeholders on both sides of the Atlantic because of its potential to affect aircraft manufacturing jobs not only in Canada, but also in the U.K., which is home to a major Bombardier manufacturing facility. As a result, both governments have pressured Boeing to retract its petition.

In a surprising turn of events, Airbus, has agreed this week to take a 50.01% stake in Bombardier’s C-Series program. As part of the agreement, Airbus will establish an assembly line for the C-Series at its facilities in Alabama. The arrangement is aimed to present the C-Series jet as domestically produced to sidestep the 300% tariff, though a former USITC commissioner has commented that the deal may be coming too late to affect the decision to impose anti-dumping or countervailing duties against the Bombardier jets. Thus, despite the excitement surrounding the Airbus-Bombardier partnership, the outcome of Boeing’s trade case remains up in the air.

Boeing & Bombardier Dispute up in the Air (PDF)

Supreme Court Seeks Solicitor General’s Views on Apple v. Pepper Petition

The Supreme Court has asked the U.S. Solicitor General Noel Francisco to file a brief expressing the federal government’s views on Apple’s petition for review of Apple v. Pepper. This is good news for the electronics giant as the Court is traditionally more likely to grant certiorari after calling for the Solicitor General’s opinion.

In 2011 a group of consumers, seeking class action status, filed a lawsuit alleging that Apple monopolizes the market for iPhone apps in order to charge excessive commissions (currently at 30%). In January, the Ninth Circuit ruled that the consumers were allowed to pursue these allegations, in direct contrast with a long-held Supreme Court doctrine established in Illinois Brick Co. v Illinois.

If the Supreme Court upholds the Ninth’s Circuit decision it would leave Apple liable to lawsuits from developers and consumers alike. The Court’s decision in Illinois Brick attempted to avoid this very floodgate problem by holding that only direct purchasers of a good or service may file a private lawsuit under the Sherman Act. Non-direct purchasers do not have standing in antitrust disputes even if they demonstrate that they suffered economic harm from anti-competitive conduct.

The Ninth Circuit’s decision not only exposes Apple to claims from many parties but creates confusion on how to enforce the Court’s decision in Illinois Brick. In 1998 the Eighth Circuit used Illinois Brick to find that consumers couldn’t go after electronic distributors with monopolization accusations. The Washington Legal Foundation has filed an amicus brief supporting Apple’s petition for certiorari, asking the Court to create uniformity on this antitrust question.

Apple’s defense relies on a claim that consumers are not direct purchasers from the App Store and therefore do not qualify to bring a suit under the Sherman Act. The app developers pay commission to Apple and set the price for their app’s sale. Apple claims to facilitate the sale of the product while retaining no ownership of the app. The Ninth Circuit disregarded this argument, holding that Apple acts as a distributor and not as a mere collector of payments that ultimately end up in the developer’s pockets.

While seeking the views of the federal government might indicate the Court’s interest in reviewing Apple’s petition, it marks a departure from the Court’s reluctance in hearing antitrust cases in recent history. This is a doubly interesting decision on the Court’s part as the Court typically calls on the Solicitor General only when questions of review implicate significant federal interests.  Here, the Court’s decision to review Apple’s petition ultimately has no effect on the government’s ability to enforce the Sherman Act.

Supreme Court Seeks Solicitor General’s Views on Apple v. Pepper Petition (PDF)

Kona Brewing Company the Latest Brewery Sued for False-Labeling

Kona Brewing Company, owned by the Craft Brew Alliance, is the latest brewery to find out just how much consumers value where their beer is brewed. In a class action lawsuit filed against Craft Brew Alliance, plaintiffs allege they were deceived by Kona’s Hawaiian-themed brand. The brewery’s motto on its website is “Liquid Aloha – Hawaii,” beers it markets include the “Lemongrass Luau” and “Wailua Wheat,” and its cans feature volcanos, surfers, and other symbols consumers associate with Hawaii.

While Kona does have a brewery in Hawaii, the beer sold in the continental United States is brewed in Oregon, Washington, New Hampshire and Tennessee. Kona argues that its marketing strategy is “puffery” and would not confuse the average consumer. The plaintiffs contend they paid a premium to drink beer they thought was brewed in Hawaii.

The U.S. District Court for the Northern District of California denied Craft Brew Alliance’s motion to dismiss. This court, known for being plaintiff-friendly in class action litigation, has earned a reputation as the nation’s “food court.” Approximately 20% of the country’s food-related class action litigation takes place in the Northern District of California.

Litigation over the last few years has generally been favorable to beer drinkers. In 2015, a court ruled in favor of beer drinkers who thought Kirin Ichiban brewed its beer in Japan. Soon after, Beck’s reached a settlement with consumers who thought their German-style beer was actually brewed in Germany. However, in 2016, a court held that it was unreasonable for consumers to assume that Red Stripe beer was brewed in Jamaica. Beer drinkers who thought Coors brewed its beer in the Rocky Mountains have yet to have their case resolved.

Those who support the class action lawsuit against Kona are interested to see whether courts start to place an emphasis on the craft of beer. Wine law ensures consumers know exactly where wine is made, and where ingredients used to make that wine are from. Surely, craft beer advocates would prefer similar laws in order to give the industry more credibility.

However, critics are quick to point out that the plaintiffs only seek damages, and do not have the standing to seek an injunction. Hence, it is unlikely beer law will derive any benefit from the lawsuit. These same critics believe the lawsuit is meritless and poses an unnecessary financial burden to a small brewery like Kona.

Kona Brewing Company the Latest Brewery Sued for False-Labeling (PDF)