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International Business Law

Solution

International and Bi-lateral Treaties Impacting Medeco’s Decision

There are various treaties that took place between EU and USA that will impact the Medeco's decision making. Mentioned below are key decisions that should be considered (The European Union, 2009) by Medeco before entering the European market:
Information to Patients: The advertisements of Pharmaceuticals to the general public were opposed in EU's High-Level Pharmaceutical Forum.
Relative effectiveness: Any of the European Union members apply Health Technology Assessment before allowing any company to access their respective market. EUnetHTA has been established to look after the sustainable network for health technology assessment throughout Europe and focuses on the implementation of practical tools to provide relevant information member states.
Pricing and Reimbursement: European member states are pressing to push down the prices of new medicines and equipment to bring the cost incurred by customers at the affordable rates. This factor, if established, will bring more competition for Medeco in EU.
Parallel trading: This policy will drive the prices further, thus impacting the R&D of the company.
Competition in the off-patent sector: As Medeco, being the company from the US, relies on intellectual property protection to secure appropriate returns that it invests in R&D. When such protections expire, generally companies expect that generic competition will stimulate price reductions. But this is not the case in EU, as the compensatory mechanisms applied by EU members masks the competition and decreases the returns to innovation, which will be problematic for Medeco in the longer run.
As per agreement between China and US are concerned, they have focused on various measures (TCC Export, 2015) that will help Medeco to function properly in the Chinese market:
US and China agreed to adopt all necessary measures that are important for strengthening the trade relations between both the country. 
The contracts between firms will be fostered, and commercial transactions will be effected.
The host will support the entering companies in various areas such customs duties, rules formalities, regulations, administrative formalities, and others. This will help Medeco to conduct seamless business in China.
The companies will be given proper permission and facilitation according to the laws and the stationed representatives.
Contract and Financing Issues in Direct Sales Contract for Medeco

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Direct Sales in Germany:

There are three factors that should be taken into consideration while indulging into direct sales business in Germany (Foerster+Rutow, 2009):
Exporting into Germany: Medeco can directly export its products into the German market if it is not interested in any other forms of business.
Safety Laws and Standards: The product that Medeco will bring to Germany must comply with European and German product safety standards. Medeco has to provide sufficient information and warnings to the consumer regarding use of the products. Also, the name and address of Medeco must be there on the product’s packaging and underlies comprehensive reporting requirements in a manner similar to the US Consumer Product Safety Commission.
Electronic Commerce: As the Medeco is planning to bring in the electronic product (high tech blood testing device) into the market, therefore, the natural or legal persons offering information or communication services in Germany or to the German market are subject to the German Telemedia Law (Telemediengesetz, TMG). The TMG contains several regulations for information and communication services, such as information duties, definitions of provider responsibility, and data protection.

Direct Sales in China:

There are two regulations that guide the direct sales business in China, that are, Regulation on Direct Sales (Order of the State Council No. 444), and the Anti-chuanxiao (Pyramy Selling) Regulation (Order of the State Council No. 444), adopted in 2005 (Lehman, 2015). 
As per these regulations, the Medico has to obtain approval from the China government before engaging in any direct selling. Pyramid selling is prohibited in China under Anti-chuanxiao Regulation.
Medico has to obtain ‘Direct Sales License’ from the Ministry of Commerce. It’s license will be approved if it meets the following requirements:
Medeco must have sound business credit, and has no previous records of illegal operation during the past five years, and it has conducted direct sales in other countries for at least three years excluding its home country.
The paid-in-registered capital must not be less than RMB 80 million.
Under the Regulation of Direct Sales, Medeco has to deposit full amount in the designated bank.
Medeco has to set up a ‘Foreign Invested Enterprise' in China to get the approval of Ministry Bureau of Commerce.
All the necessary documents and certificates need to be submitted to get the approval within 100 working days. 
Credit certificates, samples of sales promotion, and any other requirements by the Bureau of Commerce has to fulfil before conducting the business.
Issues of Employing Local Sales Agents

Local Sales Agent in Germany:

Medeco has to ensure that whatever agreements it puts in place while selling the product should be in accordance with the European Union and Germany's national laws. Medeco's use of agents to perform the business calls for few directives by EU and Germany. Therefore, Council Directive 86/653/EEC has placed certain minimum standards of protection for self-employed commercial agents who sell or purchase goods on behalf of their principal - Medeco in this case (Export.gov, 2015). The directive has stated few of the guidelines in terms of rights and obligations of the principal and its agents along with the remuneration of the agents and the conclusion and termination of an agency contract. It also mentions the compensations that will be paid to the agents.
All the distribution agreements are subject to Article 81 (3) fo the Treaty Establishing the European Community. The benefit of Block Exemption Regulation (EC) No. 2790/1999 may not apply in cases of core restrictions such as the restriction fo a distributor’s ability to determine its sales price or certain territorial or other restrictions.
The licensing agreements are subject to Article 81 (3) of the Treaty Establishing the European Community. Licensing arrangements are containing provisions that contravene the rule of the ‘Block Exemption Regulation (EC) No. 772/2004', may be made void in whole, which could result in public fines.

Local Sales Agent in China:

Medeco can use local sales agent to import its product and distribute in the market. There are certain limitations on what a local commercial agent can do. A commercial agent can be a representative office of Medeco based in China or a domestic mainland Chinese entity with links to regional or multiregional distribution networks (McDermott Will & Emery, 2013). A commercial agent in China typically does not hold an import and export license and, therefore, pays a commission to such a license holder to facilitate the importation of foreign products.
The commercial agents cannot sign contracts and cannot legally bind the foreign supplier and normally indulges in promotion and distribution of the products. Also, they can’t be termed as distributors as they do not purchase the product and sell it.

Separate Agreements Issues

If Medeco engages in separate agreements with firms in Germany and France, granting each firm the exclusive right to market its product in their country then it has to consider following laws of each country as mentioned below:
French Law
According to the French law, two can organize into the following categories
A Simple Contractual Relationship
An Economic Interest Grouping
A Partnership Agreement; or
A Joint Corporation or Other Legal Vehicle.
These forms are contractual in nature, but each one is distinct from others, for example, the first one results in a common entity, the second form results in a quasi-common entity, and the third and fourth forms result in a common entity. The following factors must be taken into consideration while moving ahead:
Size and Complexity of the Proposed JV. Whether the common entity is justified, or it is a simple contractual joint venture to accomplish the goals of the deal.
Anticipated Length of the Contemplated joint venture: A contractual joint venture is often only a first step, which, if successful, will result in a common entity.
The relationship between the joint ventures: It is required to look into the anticipated problems concerning the management and control, compatibility of the parties' interests, relative size and commercial weight of the parties (LLP, 2015).
Use of Tax Benefits: The tax effects of the various forms vary. For example, if an immediate deduction of start-up expenses for the joint venture is a significant factor, the form of a partnership is likely to be the most appropriate structure
Cash flow: The requirements of cash flow will also affect the choice, for example, if income from the joint venture is to be accumulated and distribution of profits deferred, a common entity in the form is better.
German Law
There are various German Law that needs to be considered, particularly the tax laws. (The tax laws are different for German and France).
Corporate income tax: The deductibility of financing costs is restricted to prevent an excessive level of debt financing since interest expenditure is tax-deductible as a business expense.
Trade Tax: Medeco will be subject to German trade tax that accrues to the municipality in which the company has a permanent establishment. The calculation is subject to add-backs and reductions.
Issues in Licensing Intellectual Property Right
Germany
The patent law in Germany is governed by German Patent Act and the European Patent Convention. Medeco has to apply for a national approval in accordance with the PatG or a European Council, which can be valid in Germany. After the grant, Medeco can access the benefits it wants. The intellectual property rights must fulfill the pre-requisites of an invention under the PatG.
China
The use of intellectual property rights in China follows the below mentioned elements:
As China is a signatory to the international intellectual property agreements such as Paris Convention, Berne Convention, Madrid Protocol, and Patent Cooperation Treaty, it follows the global standards in intellectual property rights. Therefore, there are few major differences between China’s laws and those of other developed countries.
There is no requirement to register for special copyright in China because it is a signatory to the Berne Convention. The registration is made by the National Copyright Administration, the authority responsible for the administration and enforcement of copyright and related issues in China.
The China’s patent rights follow same as to that of UK, but it also covers utility models and designs. Invention patents give protection for a maximum of 20 years, utility models for ten, and each is subject to the payment of annual fees. The patent law of China operates under ‘first to file’.
The Chinese trade mark system operates in similar to the UK’s, giving protection for designs, symbols, colors or other devices used to identify a business’ products or services.
A trade mark owner may register their trade mark with Chinese Customs. This allows the local Customs offices to check and intercept infringing goods being imported or exported.
Other Business Structures and Ownership Agreements
There are various types of structures and ownership arrangements that are possible and most suitable for this kind of venture in Europe and China. We will take a look at both of them separately.
China
The following models of distribution in China can be adopted:
Importing: The import and export in China are regulated by China Customs and the People's Republic of China General Administration of Customs in China. Of the three levels of customs authorities in China, the GACC is at the top of the hierarchy. There are three steps that involve clearance of customs in China that are jointly performed by the provincial and local customs offices: documentation, inspection, and release of goods.
Trading Companies: The another method Medeco can take is the formation of an FIE with a business scope that encompasses trading. These FIEs can obtain trading rights to import and export goods, and can later even obtain a permit allowing them to engage in downstream distribution. Foreign controlled Chinese companies such as FIEs are registered and have RMB one million in paid up capital that can obtain an import and export trading license.
Wholesale distribution: There are many Chinese companies that act as distributors for foreign suppliers. Typically such distributors purchase and resell products to smaller Chinese distributors or retailers. For foreign undertakings, an increasingly common route to the Chinese market is to establish independent wholesale distribution in China.
Retail Distribution: Medeco can establish FICEs in the form of WFOEs and engage in retail distribution.
Europe
Below mentioned forms can be utilized by Medeco to operate in Europe:
Subsidiary: The subsidiary acts as a legally independent company. It trades under its own name and prepares its own balance sheet. The company can choose limited liability company, stock corporation, a partnership limited by shares. The German private limited liability company is the most widely used legal form for corporations. It combines high flexibility with relatively few obligations. Subsidiaries must be registered in the local Commercial Register and with the competent trade office. This must be in a legally certified form.
Autonomous Branch Office: It is an intermediate between forming an independent company and simply forming a division of a company. A branch office would typically, on the one hand, be dependent on the company, and on the other hand, have a certain degree of autonomy. There are three criteria for an autonomous branch office; they are dealings of a branch office, spatial independence of the branch office, and independence of the branch office regarding human resources. The name of the branch office can be the same as the main office (important in the case of Medeco). An appendix is required where a power of attorney pursuant to 50 clauses 3 of the German Commercial Code is to be restricted to the operations of a branch office with effect to third parties (HK, 2015).
Dependent Branch Office (permanent establishment): Permanent branches are additional branches of the enterprise as a whole. Few of the examples are manufacturing sites, with no sales; points of storage, receipt and shipping; mere points of brokerage; and sales points without their own purchasing. Dependent offices are not entered in the commercial register.
Representative: It is often associated with establishing branch offices.
Risks and Legal Issues Associated with Developed and Developing Country
The risks and legal issues associated with operating in a developed market are as follows:
The government of the developed country is stable, and there is no fear of continuously changing laws that might hamper the trade.
All the tax laws and policies are protected, and the companies can quickly enter into the market.
The intellectual property rights are secured by different treaties, and thus incumbent company does not have to bother about any stealing of such rights by any other parties.
There is well established a mechanism through which companies can solve any legal issues they face.
There are risks in business operations, as the developed market laws may not allow new companies to act function properly as it may stiffen the competition further that may affect other company's operating in the current market.
The risks and legal issues associated with operating in a developing market:
The governments in the emerging markets are not stable enough, and thus it leads to volatile policies and tax laws that hamper the day to day operation of the company.
There are project level risks such as contractual foundation benchmarks, technology, construction and operations benchmarks, competitive market risk benchmarks, counterparty, and financial (Standford, 2013).
Foreign currency rating, exchange controls, appropriation, the legal system, enforcement culture, transparency, civil disturbances, strikes, law change, political risk, poor sponsor support and monocline insurance wrappers are the factors that can create issues in developing markets for Medeco.

Currency issues in Europe and China

There are various currency issues related to operating in foreign markets like Europe and China. As Medeco will be involved in exporting its product from the US to Europe and China, below mentioned challenge can be considered which will be faced by this company.
Foreign currencies are sensitive to price fluctuations in the exchange rate. A price agreed with the a customer or supplier on one day could rise or fall if the exchange rate changes. If the current economic climate is considered where the currency is fluctuating daily, it will be difficult for Medeco to keep track of exchange rates.
However, there are steps that can be taken to protect Medeco against these currency fluctuations. As an exporting company, Medeco can decide whether it's best to price its goods or services in the local currency of the country with which it is trading. The decision will depend on the specific circumstances and on factors such as how it wants to present itself in that market and how its competitors are setting the price. On another hand, if Medeco indulges in trading with companies particularly in the European market, there are certain practices and standards that can help it a lot. For example, asking the bank to open a euro bank account for Medeco that will allow it to accept euro payments without having to convert into dollar every time. It can also use forward exchange rate by a specified date that can remove the uncertainty by tying Medeco in advance to an agreed exchange rate. Or it can use currency options. However, these agreements are expensive than forward exchange contracts but it can give Medeco more flexibility by giving it the option to buy or sell Euros at an agreed exchange rate.

The issues that may arise if Medeco invites officials from European companies or Chinese hospitals to the US for discussions are mentioned below:
Medeco has to ensure that there is the presence of lawyers from respective countries in case the discussions are being done on the ground that requires a better understanding of the respective laws.
There should be presence of an unbiased, honest and certified translator that can help in translation of any legal terms that are important for the understanding of each party present at the discussion.
The provision of entertainment is up to Medeco, and there is no legal binding for the same from any respective country law.
Medeco should ensure that the officials are allowed to conduct their discussions in the environment that are legally beneficial for all the parties. No parties can enforce other on the ground that discussion is being conducted on American soil, thus, provisions and law will be by US laws. The respective officials are free to put their points forward as per their own laws and regulations.

The issues that are to be considered by Medeco in expanding into the Latin American Market (PWC, 2013) are mentioned below:
The changing politics and weak economies of Latin America in recent years will pose a challenge for Medeco. The political situation in Latin America is unstable and there are various heavy regulations that can deter the decision making of Medeco.
Medeco has to regulate its business based on each countries' need in Latin America, as each country has its own laws and regulations.
However, the seven countries of Latin America is in the process of building together tariffs, tax laws, and tax rates and working to build a free trade agreement with the U.S. on a regional basis. This idea of Central American common market is supposed to benefit Medeco in coming days.
The complexity of tax laws and sudden changing environment will affect the way Medeco will conduct its business in Latin America. 
Even if the agents in Latin America asserts to Medeco that they have taken care of every laws and regulations, yet Medeco has to come on the ground and verify everything by itself.

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References

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  • FOERSTER+RUTOW,. Doing Business In Germany: A Guide For Foreign Investors. FOERSTER+RUTOW, 2007. Print.

  • HK,. "Expansion Possibilities For Foreign Companies In Germany - Handelskammer Hamburg". N.p., 2015. Web. 14 Dec. 2015.

  • Lehman, Lee - Xu. "Chinese Law | China: FAQ On Direct Sales In China".Lehman Law. N.p., 2015. Web. 14 Dec. 2015.

  • LLP, Pepper. "Legal Considerations For Foreign Companies Establishing Operations In ...". Pepper Hamilton LLP. N.p., 2015. Web. 14 Dec. 2015.

  • McDermott Will & Emery,. Distribution In China – Legal Issues. McDermott Will & Emery, 2013. Print.

  • NIbusiness,. "Foreign Currency Issues When Importing Or Exporting". N.p., 2015. Web. 14 Dec. 2015.

  • PWC,. Investing In Latin America: When, Where And How. PricewaterhouseCoopers, 2013. Print.

  • School, Stanford. "Law And Business In Emerging Markets | Stanford Law School". Stanford Law School. N.p., 2013. Web. 14 Dec. 2015.

  • TCC Export,. "TAC Program - Making Trade Agreements Work For You!". N.p., 2015. Web. 14 Dec. 2015.

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