Old Continent, New Deal
The European Union Is Developing a Body of Law That Will Have a Major Impact on U.S. Businesses
Posted Sep 12, 2004 10:45 AM CST
By Martha Neil
The evolution of the European Union is changing the political and economic landscape of the continent. Indeed, the creation and growth of the EU may be the most profound development in Europe’s history that wasn’t accompanied by conquest and war. And the legal repercussions of what’s happening in Europe are being felt in the United States.
A unified Europe has long been the dream of both dictators and idealists, but it took the trauma of World War II to trigger serious efforts to bring some unity to the disparate national political structures, monetary systems and cultures on the continent. Those efforts were bolstered by the growth of democratic governments in Western Europe following the war, and later by the collapse of the Soviet bloc in the east.
Now the European Union spans the continent and boasts one of the world’s most powerful economies. In May, 10 nations, most of them formerly in the Soviet bloc, officially joined the EU, bringing its membership to 25 nations with a total population of nearly 500 million people—200-plus million more than the population of the United States.
The EU’s unofficial boundaries reach from the Republic of Ireland and the United Kingdom in the west, to Poland and the Baltic States in the east, to Greece and across the Mediterranean Sea to Italy, Spain and Portugal. Bulgaria, Romania and perhaps Turkey are expected to join within the next few years.
And by its own account, the European Union is unique. It is not designed to replace Europe’s existing nations. Rather, its members have adopted a form of “integration” under which they delegate some of their sovereignty to common institutions, including a parliament, courts and financial agencies, that decide political and economic matters of joint interest.
Some of those concessions of sovereignty have been significant. On Jan. 1, 2002, a dozen EU nations, including France and Germany, replaced their own currencies with the euro. (The United Kingdom is the most notable holdout.) And a convention is writing a constitution for the EU that will address issues concerning individual rights as well as government structure and economic cooperation.
A burgeoning behemoth like the European Union is bound to make waves, and they’re washing up on U.S. shores with increasing frequency and impact. After all, Europe is still the major trading partner for U.S. businesses. Moreover, the EU is quickly developing a body of law that is having a significant impact on American companies doing business in Europe, even as it diverges in some key ways from U.S. law.
In an increasingly global legal environment, U.S. lawyers will have no choice but to take notice when uniform laws and standard legal practices are established for such a large number of countries, say experts in the field. That creates opportunities, as well as obstacles, for U.S. lawyers representing clients who do business in Europe.
“All these great issues!” exclaims Lawrence M. Gill of Chicago. The current climate “is of great benefit, I think, to savvy lawyers who can look a little bit into the future and prepare their clients for these significant changes,” says Gill, a member of the council of the ABA Section of International Law and Practice.
“Any time you have a change that impacts as many states as there are now in the EU,” says Gill, “it’s going to have an impact on the United States.”
Citing just one example, Gill says an EU mandate that all its member states start using international financial reporting standards as of Jan. 1 will create a tremendous amount of potential work for U.S. lawyers.
The new financial reporting standards will become the EU’s version of the Generally Accepted Accounting Principles that are routinely used by U.S. companies for annual reports, audits and other financial documents.
At first glance, it might seem that adopting the international standards would be of interest primarily to accountants, but Gill says different auditing standards can lead to huge variances in a company’s reportable income and amount of debt. If so, a wide range of transactions, from mergers and acquisitions to existing loan agreements, may have to be reconsidered by U.S. companies or their subsidiaries doing business with European counterparts. U.S. lawyers also will have to monitor the possible merger of the two sets of standards, he says.
The sudden shift to international standards throughout the European Union on Jan. 1 “will have a significant impact on the documents, and transactional and contractual relationships that U.S. companies enter into,” says Gill, even in some cases for companies that don’t do much business overseas.
At least in the view of many lawyers on this side of the pond, one of the more dubious achievements of the European Union has been to bring administrative law to new levels of complexity.
Perhaps that shouldn’t be surprising in light of what the EU is trying to accomplish by synchronizing the economic regulatory structures of 25 separate member states to encourage freer trade among EU members and a more united approach to dealing with outside markets.
But in practice, the European Union is building a layer of oversight that in some cases defers to the national laws of its member states and in some cases trumps them, and often requires member states to find ways to implement EU laws and regulations.
For the uninitiated, things are made even more difficult by the web of regulatory agencies based in various EU locales and the proliferation of arcane terminology—dubbed “Eurojargon”—in which those agencies immerse their pronouncements. Even the EU itself acknowledges the problem by including an extensive glossary on its Web site, www.europa.eu.int.
“My own personal judgment is that it has added a significant layer of complexity,” says Stanley J. Marcuss, a Washington, D.C., lawyer, of the EU’s regulatory structure.
“Many of the national laws in Europe have remained on the books” at the same time that a new regulatory layer has been imposed by the EU, says Marcuss. “In any significant way, I don’t think it has smoothed the way to removing regulatory and trade barriers.”
Erika Christian Collins, an employment lawyer in New York City, reaches a similar conclusion.
“In the EU, the directives come down and then the member states have to promulgate regulations,” says Collins, a vice chair of the International Employment Law Committee in the international law section. “I think data privacy is a perfect example of this, because the member state regulations are all very different in terms of getting down to the letter of the law and complying. It’s a big challenge for U.S. companies, because a lot of U.S. companies are in sev- eral or even all the [EU] member countries, and they’ve got to do something a little bit different in each member state.”
There have, certainly, been a number of instances in which the EU’s regulatory structure has had a streamlining effect, say American experts. One example is the “community trademark,” which offers one-stop shopping to protect a mark throughout the EU, says Madison, Wis., attorney Gina G. Carter. “Most people who want to do business in Europe are not just targeting one country,” she notes. “So the community trademark is very useful.”
But another international law expert cautions American practitioners to be prepared for more changes in the EU’s legal and regulatory structure. That structure “is not complete,” says George A. Bermann, a law professor at Columbia University in New York City. “There are directives and things being added all the time.”
Bermann is director of a project initiated by the ABA Section of Administrative Law and Regulatory Practice earlier this year to help U.S. lawyers navigate the unfamiliar and shifting waters of EU law and regulation.
The primary goal of the project is to produce a statement that sets forth the general principles and practices that govern the EU’s administrative law, according to a project outline that Bermann submitted in February to the administrative law section’s council. Background reports will provide more detailed discussion of various aspects of EU administrative law.
The areas covered by the statement and background reports will include adjudication, rule-making, judicial review, transparency (access to information on the rule-mak- ing process), data protection and oversight of the administrative process.
The project is slated for completion in 2006. The final product should be broadly similar to a statement of federal administrative law in the United States, according to Bermann’s report. That statement was produced in 2002, and one of the background reports has been published while work continues on the others.
The need for an effort like that being initiated by the administrative law section helps to illustrate a continuing reality for American lawyers representing clients on matters in Europe or anywhere else beyond U.S. borders: Other legal systems are likely to handle things differently, and American lawyers operating on foreign turf are going to have to adjust to those different approaches.
For instance, the administrative process being developed by the European Union still reflects a general approach common to its member states but dissimilar to the U.S. system. The EU’s administrative law system is not governed by statutes that can be referred to for explanations of the regulatory scheme, says William F. Funk, the outgoing chair of the administrative law section.
And the notice-and-comment rule-making so integral to U.S. administrative law has no significant role in the EU administrative process, says Funk, a law professor at Lewis & Clark College in Portland, Ore. Instead, the EU bases the transparency of its processes for developing administrative rules on making documents public.
In addition, Funk and other experts say the administrative process in Europe is not as formalized as the U.S. system, which means that more is accomplished through personal dealings with officers of administrative agencies.
As a result, Funk says, U.S. lawyers who don’t have a lot of on-the-ground presence in Brussels, where most EU government agencies are headquartered, may be working at something of a disadvantage.
“For most American law firms and most American businesses that don’t on a daily basis have dealing with the EU, it’s pretty much a black box,” says Funk. “It’s not like it’s secret. It’s just that you’re not part of the process.”
TALK TO THOSE IN THE KNOW
Contrary to U.S. practice, transactional matters of any complexity in the EU tend to be handled in informal negotiations, says T. Andrew Ragusin, who worked in Brussels for a U.S. law firm and now serves as European counsel to a number of American companies.
“I think that going in cold is a big mistake,” says Ragusin. “I think you need to talk to people who have a lot of experience, who know the players, and who can direct you to the right individual or individuals.”
The assistance of experienced counsel is crucial, says Ragusin. “If you have any questions at all,” he says, “the smart money is on liaising with commission officials,” and resolving the issues collaboratively.
His reference is to the European Commission, the EU’s primary administrative agency with rule-making authority. It was the commission, for instance, that ruled against Microsoft in March in a claim that the software giant had violated European competition laws.
The commission fined Microsoft a record $497 million euros (roughly $613 million) on grounds that the Redmond, Wash.-based company sells its software in Europe in a way that violates the EU’s competition rules. The commission maintained that the changes it ordered Microsoft to make will improve competition in the software field on a global basis.
In June, the EU agreed to lift the order until the European Court of Justice, the EU’s highest judicial body, considers an appeal by Microsoft.
Meanwhile, the U.S. Circuit Court of Appeals for the District of Columbia in June approved a settlement between Microsoft and the Justice Department in a similar antitrust suit. The settlement includes provisions that will allow consumers to more easily use software from companies competing with Microsoft on computers that use Microsoft’s Windows program.
Antitrust is an area that highlights the different regulatory styles of the United States and the European Union. It also illustrates their varying approaches to managing the competitive instincts of companies, as well as how the laws of each reach into other jurisdictions.
Even when a merger involves only U.S. companies, EU antitrust law can be implicated if the companies have significant connections to Europe, says Ragusin. And whenever that is the case, he adds, it’s important to begin informal negotiations with EU officials early in the process to address antitrust issues.
This is a common approach in Europe, he says, but U.S. lawyers accustomed to resolving antitrust issues in a more formal setting often fail to recognize it. And that could cause a merger sanctioned by U.S. authorities to fail due to lack of approval from counterparts in the EU.
Moreover, Ragusin says, a “philosophical gulf” exists between American and European Union antitrust regulators. The U.S. Department of Justice and the Federal Trade Commission routinely focus on potential harm to consumers in evaluating a prospective merger. EU regulators, on the other hand, are concerned primarily about adverse effects the merger will have on competitors.
Those different approaches have come close to scuttling mergers of U.S. corporations on recent occasions, notes Ragusin.
In 2000, for instance, a merger of General Electric (an airplane engine manufacturer) and Honeywell (which makes avionics and aircraft components) was vetoed by EU regulators after the U.S. Justice Department approved it. Justice accepted the companies’ argument that the combination would result in a more efficient operation leading to lower prices for consumers. The EU, however, saw a potential for unfair competition.
Another example involves two U.S. companies that had no assets or subsidiaries in Europe. But the EU had jurisdiction over the attempted merger of McDonnell-Douglas and Boeing (both manufacturers of commercial airplanes and components) because of their sales to European airlines.
The FTC approved the merger on grounds that it would not substantially reduce competition due to Boeing’s pre-existing market dominance. The EU, however, decided that the merger would significantly enhance Boeing’s market lead. It took years after the companies began trying to merge in 1997 to gain the EU’s approval, Ragusin recounts.
Several treaties have encouraged cooperation between EU and American antitrust regulators, with some success, but more efforts are needed to integrate the two systems, says Ragusin.
“While these agreements have been successful at the enforcement level, they have failed to foster a cooperative climate in the clearance of transactions such as the GE/Honeywell and the Boeing/McDonnell-Douglas mergers,” he says. Thus, “Renewed calls for a more collaborative effort between the two sets of regulators were made this spring, given the serious economic and financial repercussions of the philosophical divide.”
In another area, Wisconsin lawyer Carter says the EU follows a stricter approach to intellectual property rules than U.S. law does. For instance, relatively stringent European restrictions on data collection intended to preserve consumers’ privacy apply both to Internet sellers and onsite European retail operations, notes Carter.
These tougher rules can benefit some companies, adds Carter. The EU, for example, offers database protection for significant and unique compilations, while the U.S. does not currently consider databases copyrightable.
LEARN AS YOU GO
Even for experienced business lawyers in the United States, coming to terms with developing law and regulation coming out of the EU can seem daunting.
“It’s like a law school exam,” says Collins of the international law section. “I often feel like the greatest value I add is not my detailed knowledge of the laws in other countries. It’s issue-spotting.”
When taking on a new client with European ties, competition concerns are “at the top of my list,” says Carter, who represents manufacturers and retailers, as well as IP-related businesses.
In general, “You have to look carefully at what is not going to be permissible under the competition policy in the EU,” says Carter. “For example, if you have a manufacturing client that wants to distribute its product in Europe, and it’s a product that needs sales and service support, you will need a distributor on the ground. And the EU competition policy does limit restricting the territory. There are restrictions on having distribution agreements be exclusive.”
One issue that U.S. practitioners may fail to spot is the potential for legal problems in far-flung locations, says Washington, D.C., attorney Marcuss.
If a client is selling components to a manufacturer in another country, the attorneys involved obviously should review applicable laws of the countries in which both the client and manufacturer are located. But it is also important to consider whether other countries’ laws may apply if the completed product is shipped elsewhere, Marcuss says.
Depending on the nature of the product being manufactured, there may be restrictions on its import, or it could even be illegal in other countries, Marcuss notes. Examples of products that are likely to cause regulators particular concern include food, pharmaceuticals, anything that could pose a biohazard, and products that could be considered—or could be used to create—weapons for military or terrorist use.
U.S. lawyers representing companies doing business in Europe also must keep in mind that national laws as well EU regulations may still apply to a variety of business conduct, say experienced practitioners.
In the area of labor and employment, for instance, European law generally does not follow the employment-at-will rule that applies widely in the United States, says Collins.
In Europe, she notes, employment law is a matter of public policy, and laws and collective agreements generally set strict standards on matters such as wages, benefits, termination and severance pay that are commonly negotiated on an individual basis in the United States. Even termination for cause may not be easy to accomplish in European states because of statutory protections for workers, she says. Consequently, standard provisions in U.S. employment contracts aren’t likely to succeed where European workers are concerned.
Similarly, Ragusin says, a common mistake made by U.S. lawyers is using form documents based on American law and assuming those principles can be applied elsewhere because choice of law and choice of forum are located in this country.
“There has to be tremendous caution in understanding that the enforcement likely will have to take place overseas,” Ragusin says. “And purely U.S.-styled agreements are not going to be enforceable or fully enforceable.”
Ragusin also advises, “Spend a lot of time in crafting a document that’s enforceable in multiple jurisdictions, but certainly enforceable against your counterpart in Europe.” And if “their documents do not do the trick, then you have to spend months or years trying to pull them out of that sinkhole. So money spent up front is money wisely spent.”
And finally, say Ragusin and other experienced practitioners, it’s important to maintain perspective in handling a matter that involves foreign law and foreign parties. While the American lawyer likely will play a stronger directional role based on a closer understanding of his or her own client and the client’s overall goals, local counsel from another country is likely to have superior knowledge about how things are done there.
As a result, says Ragusin, “That directional role needs to be tempered with humility.”
Martha Neil, a lawyer, is a legal affairs writer for the ABA Journal.