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January 15, 2002, 9:00 AM ET, Alert No. 346.
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WTO Appellate Body Affirms FSC Decision
1/14. The Appellate Body of the World Trade Organization (WTO) issued its report [PDF] holding that the U.S. tax regime regarding extraterritorial income violates the WTO obligations of the U.S.
The Foreign Sales Corporation (FSC) tax regime, and its replacement legislation passed in late 2000, benefit U.S. companies, such as Microsoft, Cisco, and Motorola, that sell products abroad. The FSC tax scheme allowed a portion of a U.S. taxpaying firm's foreign source income to be exempt from U.S. income tax. The European Union (EU) filed a complaint about the FSC scheme with the WTO, alleging that it was a prohibited export subsidy. A WTO dispute settlement panel sided with the EU in 1999, and the WTO Appellate Body upheld its findings in early 2000. As a consequence, the Congress passed the Foreign Sales Corporation Repeal and Extraterritorial Income Exclusion Act of 2000, which preserved the benefits to U.S. exporters. The EU again filed a complaint. And again, a WTO panel sided with the EU. And now, that finding has been affirmed.
U.S. Trade Representative Robert Zoellick stated in a release that "We are disappointed with the outcome ... Given prior decisions, we knew this would be an uphill struggle, but we believed it was important to make our case for a level playing field on tax rules. The United States respects its WTO obligations, which serve America's interests, and we intend to continue to seek to cooperate with the EU in order to manage and resolve this dispute."
Zoellick added that "This is an especially sensitive dispute that, at its core, raises questions of a level playing field with regard to tax policy ... We will be consulting closely with Congress and affected U.S. interests regarding next steps."
Zoellick and U.S. exporters argue that there is an unlevel playing field because most nations have a territorial tax regime, under which they tax the income of corporations within their territory, while the U.S. has a global tax regime dating back to the 19th Century. American corporations are taxed by the United States government for their domestic and foreign income. That is, under the basic rules, if an American corporation sells its products in France, the U.S. taxes the income. However, if a French corporation sells its products in the U.S., France does not tax the income of the corporation operating in the U.S.
This puts U.S. corporations at a competitive disadvantage with respect to their foreign competitors when competing in a global economy. Hence, Congress has enacted various exceptions to the general rule, through such methods as the foreign tax credit, the Domestic International Sales Corporation (DISC), the Foreign Sales Corporation (FSC), and finally, the bill passed in 2000. U.S. exporters, and their supporters in Congress and the administration, argue that this is simply leveling the playing field between U.S. and European companies.
In contrast, the EU contends that by giving tax breaks to U.S. exporters, the U.S. is, in effect, subsidizing exports, in violation of its trade agreements.
EU Trade Commissioner Pascal Lamy stated in a release that "We now have a definitive legal ruling on the FSC case. Of course I'm pleased that the WTO has confirmed what we always believed. We have made a point of handling this dispute in a very reasonable manner. Now it is up to the US to comply with the WTO's findings and to settle this matter for once and for all. As to how, we look forward to rapid US proposals."
It is possible that Europe might now retaliate by imposing high tariffs on the products of U.S. companies. Neither Europe nor the U.S. seek a trade war, and the EU is likely pursuing the FSC issue to obtain a bargaining chip to use in other trade negotiations. However, if there were a trade war, Europe would likely target U.S. technology and aircraft companies.
5th Circuit Denies Rehearing in PSLRA Class Certification Case
1/14. The U.S. Court of Appeals (5thCir) issued its opinion in Berger v. Compaq denying Berger's petition for rehearing en banc. This is a case involving the heightened class certification requirements under the Private Securities Litigation Reform Act of 1995 (PSLRA). A three judge panel of the Court of Appeals issued its original opinion on July 25, 2001 reversing the District Court's class certification order. See, 257 F.3d 475.
District Court. Mark Berger and others filed a complaint in U.S. District Court (SDTex) against Compaq and some of its directors alleging violations of §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934 (15 U.S.C. §§ 78j(b) and 78t(a)), and Rule 10b-5 thereunder (17 C.F.R. § 240.10b-5). Berger and others sought class action status. The District Court certified a plaintiff class and appointed class representatives.
Appeals Court. Defendants sought interlocutory review of the certification order, on the grounds that it failed to meet requirements of the PSLRA. Congress passed the PSLRA in 1995 to insulate defendants from abusive suits, particularly technology related companies with volatile stock prices. The Appeals Court held that the District Court "improperly shifted the burden of proof to the defendants by adopting a presumption that the class representatives and their counsel are adequate in the absence of specific proof to the contrary. Second, it applied an impermissibly lax standard for adequacy that ignores the PSLRA's mandate that class representatives, and not lawyers, must direct and control the litigation."
Petition for Rehearing. On petition for rehearing the plaintiffs argued that the Court's original opinion created an additional, independent requirement for the adequacy standard for class certification under FRCP 23 by reading the provisions of the PSLRA into FRCP 23(a)(4). In denying rehearing, the Appeals Court wrote: "This we have not done, nor have we changed the law of this circuit regarding the standard for conducting a rule 23(a)(4) adequacy inquiry. Rather, we mean to emphasize that Congress enacted the "lead plaintiff" provisions of the PSLRA, 15 U.S.C. § 78u-4(a)(3)(B), to direct courts to appoint, as lead plaintiff, the most sophisticated investor available and willing so to serve in a putative securities class action."
BellSouth Chairman Wants Regulatory Relief
1/13. BellSouth Chairman & CEO Duane Ackerman gave a speech in Amelia Island, Florida, in which he advocated changes to the regulatory environment in which phone companies and other communications companies operate. He wants deregulation of DSL service. He also discussed a regulatory model in which competition would be facilities based, rather than based on the requirement that the incumbent phone companies, such as BellSouth, provide unbundled networks elements to competitors.
He stated that "I see four basic observations about the reigning regulatory model. By that I mean the model, applied to the wireline segment of the communications industry, a model that continues to constrain residential retail prices while creating a wholesale market of UNEs, UNE-p in particular, priced at TELRIC."
He elaborated: "First, the reigning model does not protect consumers. Second, it has distorted the investment of CLECs and ILECs -- to the detriment of consumers; its most visible and serious outcome being the glut of capital it enticed into high-speed, wireline facilities to serve businesses in metro areas. It discourages competitors from investing in their own facilities. Third, by distorting investment, it contributed heavily to the current capital scarcity in the industry; these capital woes turned out to be one of the substantive drivers of America's economic slowdown. Fourth, this regulatory model slows the delivery of advanced services to consumers, especially in under-served areas. The upshot of these four observations is plain: A new regulatory model is needed."
He stated that a new regulatory model is also warranted because technologies and markets have changed dramatically since passage of the Telecom Act of 1996. Wireless competes with wireline phone service. Data is a major portion of network traffic. Computers and the Internet are now a part of communications. Cable broadband competes with DSL.
People and Appointments
1/11. Mark Schneider rejoined the Washington DC office of the law firm of Sidley & Austin. Until January 11, he was Associate General Counsel for the Federal Communications Commission (FCC), focusing on spectrum issues. Before that, he was Senior Legal Advisor to former FCC Commissioner Susan Ness, focusing on wireless and international telecommunications issues. And before that, he was a partner at Sidley & Austin, where he focused on representing clients before the FCC. See, FCC release.
More News
1/14. President Bush gave a speech in Aurora, Missouri, in which he addressed economic issues. He stated that "the role of government is not to create wealth. The role of government is to create an environment in which people are willing to take risk, an environment in which people are willing to risk capital, an environment that heralds the entrepreneur and the small business person." He defended tax cuts and free trade.
1/14. The Federal Communications Commission (FCC) published a notice in the Federal Register of its final rule regarding spectrum aggregation limits for commercial mobile radio services (CMRS). The FCC eliminated the CMRS spectrum cap rule effective January 1, 2003; it also raised the cap to 55 MHz in all markets until the sunset date, and eliminated the cellular cross interest rule in Metropolitan Statistical Areas (MSAs), but retained the rule in Rural Service Areas (RSAs). The FCC first announced this action on November 8, 2001. See, November 8 release [PDF]. See also, Federal Register, January 14, 2002, Vol. 67, No. 9, at Pages 1626 - 1643.
1/14. The Securities and Exchange Commission (SEC) released an order in which it censured KPMG, for engaging in improper professional conduct because it purported to serve as an independent accounting firm for an audit client at the same time that it had made substantial financial investments in the client. The SEC found that KPMG violated the auditor independence rules by engaging in such conduct. KPMG consented to the SEC’s order without admitting or denying the SEC’s findings. See, SEC release.
1/14. The U.S. District Court (DDC) issued its opinion [PDF] in U.S ex rel. Fisher v. Network Software Associates, a case involving the six year statute of limitations of the False Claims Act.
1/14. The U.S. Court of Appeals (DCCir) heard oral argument in Sinclair Broadcast Group v. FCC, No. 01-1079.
1/14. The U.S. Court of Appeals (DCCir) heard oral argument in COMSAT Corp v. FCC, No. 00-1458.
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3rd Circuit Rules in Sherman § 2 Case
1/14. The U.S. Court of Appeals (3rdCir) issued its divided opinion in Lepage's v. 3M, an antitrust case involving transparent tape. The majority reversed a District Court order denying 3M judgment as a matter of law on a Sherman Act Section 2 claim. The dissenter wrote that the majority's opinion "would weaken § 2 of the Sherman Act to the point of impotence ... a consummation greatly to be desired by the behemoths of industry, such as Microsoft ..."
Background. LePage filed a complaint in U.S. District Court (EDPenn) against 3M alleging violation of antitrust law. It alleged, among other things, that 3M used its monopoly over its Scotch tape brand to gain a competitive advantage in the private label tape portion of the transparent tape market in the U.S. through the use of 3M's multi-tiered bundled rebate structure, which offered higher rebates when customers purchased products in a number of 3M's different product lines.
The jury returned a verdict in favor of 3M on unlawful agreements in restraint of trade and exclusive dealing, and against 3M on monopolization and attempted monopolization claims under Section 2 of the Sherman Act. 3M filed motions for judgment as a matter of law (JMOL) and for a new trial. The District Court granted 3M's motion for JMOL on the attempted maintenance of monopoly power claim, but denied 3M's motion JMOL in all other respects, and denied the motion for a new trial. The District Court entered a judgment for trebled damages of $68,486,679. The present appeal followed.
Appeals Court. The Appeals Court affirmed the order granting the motion for JMOL of law with respect to the attempted maintenance of monopoly claim, but reversed the order denying the motion for JMOL in all other respects. Hence, the case was remanded to the District Court with instructions to enter judgment in favor of 3M. Judge Morton Greenberg wrote the opinion of the Court, in which Judge Samuel Alito joined.
Dissent. Judge Dolores Sloviter wrote a long and stirring dissent. She wrote that "the majority applies reasoning that would weaken § 2 of the Sherman Act to the point of impotence. While that may be a consummation greatly to be desired by the behemoths of industry, such as Microsoft or 3M, it would be an incalculable loss to business generally and to the consumer. Section 2, the provision of the antitrust laws designed to curb the excesses of monopolists and near monopolists, is the equivalent in our economic sphere of the guarantees of free and unhampered elections in the political sphere. Just as democracy can thrive only in a free political system unhindered by outside forces, so also can market capitalism survive only if those with market power are kept in check."
Tuesday, Jan 15
8:30 AM - 5:00 PM. The North American Numbering Council (NANC) will meet. Location: FCC, 445 12th Street, SW, Room TW-C305 (Commission Meeting Room).
9:30 AM. The Communications for Coordinated Assistance and Response to Emergencies Alliance (Comcare) will hold a press conference to release a report titled "The E-Safety Program -- Making Americans Safer". For more information contact Alan Kitey at or 202 429-0574. See, Comcare release. Location: Zenger Room, National Press Club, 529 14th St. NW, 13th Floor.
1:30 PM. The U.S. International Telecommunication Advisory Committee (ITAC) will hold a meeting. See, notice in Federal Register, October 17, 2001, Vol. 66, No. 201, Page 52825. Location: State Department.
Wednesday, Jan 16
8:30 AM - 5:00 PM. The North American Numbering Council (NANC) may continue its meeting of January 15, if necessary. Location: FCC, 445 12th Street, SW, Room TW-C305 (Commission Meeting Room).
11:00 AM. The Cato Institute will host a panel discussion titled "Closing 'Windows' on Antitrust or Opening a New Era of Intervention? Competition Policy after the Microsoft Settlement". The participants will be Jeffrey Eisenach (Progress and Freedom Foundation), Robert Levy (Cato), Kenneth Starr (Kirkland & Ellis), Jonathan Zuck (Association for Competitive Technology), and James Miller (Citizens for a Sound Economy). A luncheon will follow. See, online registration page. Location: Cato Institute, 1000 Massachusetts Avenue, NW.
Thursday, Jan 17
9:30 AM. The Federal Communications Commission (FCC) will hold a meeting that will focus on a review of FCC policies and procedures by the Commissioners and senior agency officials. There will be three panel presentations. Panel One will include Chiefs of the Mass Media Bureau, Cable Service Bureau and Common Carrier Bureau. Panel Two will include the Chiefs of the Consumer Information Bureau and the Enforcement Bureau. Panel Three will include the Chiefs of the Office of Engineering and Technology, the International Bureau, and the Wireless Telecommunications Bureau. See, FCC release. Location: FCC, Commission Meeting Room (Room TW-C305), 445 12th Street, SW.
7:00 PM. Jim Dempsey (Deputy Director of the CDT) and David Cole (Georgetown law school) will discuss the newly revised and expanded edition of their book titled "Terrorism and the Constitution: Sacrificing Civil Liberties in the Name of National Security". See, Amazon listing. Location: Politics and Prose Bookstore, 5015 Connecticut Ave., NW. (This is at the corner of Connecticut and Nebraska. It is one mile north of the Van Ness Metro stop.)