Comparative Legal Process and Economic Impact on International Business for Technology Companies


Moscow - KremlinThe Internet and other new technologies have had considerable success expanding internationally but not without its perils. Once that service or product has foreign customers, it falls under the jurisdictional laws of the citizenry of those customers. Unfortunately, U.S. companies hire chief legal counsels who might have impressive U.S. credentials for the investors and Wall Street, but might have little or no international experience.

I recall advising a NASDAQ traded company whose chief legal counsel had substantial S.E.C. practice from a major New York law firm, with top 10 law school credentials. Yet, several years into his tenure, the software company began a strong initiative, clearly indicated in its 10K, to expand and sell its products internationally. The chief legal officer bolstered his legal staff with lawyers reflecting his credentials. One labor lawyer handled all international labor disputes – but had no passport. Another lawyer, with little or no language skills, had to restructure the scores of subsidiaries with stronger head office approval yardsticks through corporate minutes and the like.

The lack of international experience and background had a severe impact on the bottom line.  Had the international corporate development had been handled properly beforehand, the legal fees paid to foreign counsel would not have mushroomed unnecessarily. The labor lawyer had to coordinate the international appellate cases from wrongfully discharged employees and managers. Why? The U.S. by default can fire any employee, hired without a contract (commonly known as “at will”), with or without cause. The U.S. attorney handling all international labor matters never bothered to visit foreign judicial forums or explore the local legal procedures and process for each subsidiary. Not one of the subsidiaries had an employee manual reflecting the local laws and drafted in the local language. The appellate process, expensive in its own right, would not only be fruitless but also expensive, as appellate attorneys cost more per hour than standard trial attorneys. More capital had been exhausted through a legal process that could have been avoided by proper legal management of international subsidiaries and operations.

American legal process is substantially different from other countries, with the exception of the United Kingdom and former member countries of the British Empire. There little less than 200 countries in the World (close to 192). That would mean that if you were to eliminate U.S./U.K. based jurisprudence, you have 188 countries with their own legal systems that will behave dramatically different.

Recently, Google is encountering the so called “international legal hump” problem with its privacy rules – effective in the U.S. but not so in Europe. (http://europeanlawblog.eu/?p=1651&utm_source=rss&utm_medium=rss&utm_campaign=walking-the-data-protection-tightrope-the-google-privacy-policy-investigations) Now, whether the legal matters deal with privacy or antitrust, U.S. companies with enough legal capital can develop its legal strategies to surmount the controversies with its vast, financial resources. I recall asking a partner from a major firm representing IBM during an antitrust proceedings whether he was concerned about the proceedings, and he answered no, because IBM can hire a lot more lawyers than the Department of Justice. That kind of strategy might not be so effective internationally.

Regulatory chiefs in Europe tend to rule independently and always politically in favor of the European State. For example, in the U.S. wireless carriers use different wireless protocols to discourage its customers to migrate to a competitor. In Europe, the E.U. regulator mandated that the wireless carriers only adopt one protocol so that each customer can travel throughout the European Union without being charged for roaming charges and not requiring different hardware. Even today, U.S. carriers still provide different wireless protocols for the customers, having an additional incremental cost to U.S. customers over European ones.

Even the nature of antirust differs in Europe from the U.S. U.S. regulators look for the impact on a consumer while the European regulator judges whether the business process is, de facto, considered antitrust. Recently, Microsoft is going through a similar investigation for its operating system because, by default, it offers only Internet Explorer, and no other web portals. In other words, what is O.K. in the U.S. is not so OK in Europe. http://www.nytimes.com/2013/03/07/technology/eu-fines-microsoft-over-browser.html?pagewanted=all
Even Apple is facing problems where the legal infrastructure tends to be dramatically different from the U.S. — China. http://www.nytimes.com/2013/04/02/technology/apples-chief-tim-cook-apologizes-to-china-over-warranty-policy.html. In other words, Apple’s management on customer care passes the muster of the U.S. Federal Trade Commission. Great. Unfortunately, someone forgot to tell the CLO that China does not abide by what is allowed by the U.S FTC rules and regulations. Given that the China’s market numbers 1.3 billion, it would behoove Apple to make sure that it follows that country’s rules and regulations.

Sometimes even hiring foreign counsel does not help. What is needed is someone familiar with both the foreign and U.S. laws just to consider the local strategies for holding unto a foreign operation. For example, in telecommunications, a U.S. carrier might be selling services in another country. One such carrier had been selling international services within that country; after several years, the telecom rules and regulations had changed. The problem originated when the foreign carrier had to privatize and now it had to show financial results every quarter. One way was to eliminate the competition – in this case, have the local regulator create new rules for the incumbent U.S. carrier. Now, like every Central American country, its population can only support very few international carriers – maybe 2 at the most. That also meant, I commented jokingly with an element of truth, that if anyone hired a local law firm to represent the foreign carrier, that law firm risked losing its only telecommunications lines. I recommended someone like myself to handle the legal matter. Instead, the U.S. carrier hired foreign counsel with the dire result that it lost millions of dollars of business. And that was predictable in my opinion. The local political nature and economic reality would force the foreign counsel to be less than enthusiastic in its representation. The carrier lost not only the legal case and legal fees associated from the hiring the local counsel. Don’t assume what works in the U.S. might work in some other country.

From my personal legal experience, I always practice due diligence in knowing the local rules and regulations for each country where the multinational company does business. I disavow applying the American-Anglo jurisprudence system to one that is codified, such as the Napoleonic code. Since legal systems are derived from the local culture, it pays to visit the local country, study the legal procedures, regulations, to make sure that I have clear understanding how local businesses operate.

I also prioritize my efforts by placing those countries where the company has the most financial or strategic exposure on the top of the list. It doesn’t make sense to manage all 192 countries, but I look at regions where similar legal infrastructures are similar – European Union or Caribbean and Latin America (CALA) – or largely populated countries, India and China. Those regions will have similar legal infrastructure or considerable market power. This strategy helps me reduce legal costs and accelerates my process to create a legal infrastructure to protect the company’s financial interests.

Most importantly, I prefer to work with a legal and accounting teams that can communicate the comparative differences between the U.S. and the foreign jurisdiction. Unfortunately, the CLO normally heading a legal department may not have the right experience to handle these international matters. Such mistakes can cost a company millions of dollars in penalties, a la Microsoft, or the opportunity to market in that country.

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About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP, jrzarco2001@yahoo.com, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy. http://www.docstoc.com/video/89135472/make-your-business-an-international-presence; http://www.youtube.com/watch?v=fx5gijf3yoc For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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