Legal Strategies Pursued by Multinational Companies - Essay Example

Legal Strategies Perused by Multinational Companies Legal Strategies Perused by Multinational Companies Affiliation Legal strategy plays a key role for multinational companies (MNC) in business decision and operation process. According to Constance Bagley, managers of MNC should know how business risk can be minimized by understanding the law and thereby creating value to the business. The purpose of this research is to analyze the complexity involved in MNCs business in the areas that have legal implications like insider trading laws , intellectual property issues pertaining to launch of a new product , hiring and dismissing employees , an age discrimination case and company policies on staff welfare like childcare leave. Introduction Legal strategy plays a key role for multinational companies (MNC) in business decision and operation process. According to Constance Bagley, managers of MNC should know how business risk can be minimized by understanding the law and thereby creating value to the business. For a company that carryon business in an international level has to observe legal obligation of the host country in which it is doing business. As such, managers of MNC are to analyze and to perform on legal advice tendered by company’s legal counsel and company’s legal counsel has to acquaint the business concerns witnessed in a global business atmosphere by MNC’s business managers. Thus, business management and legal strategy are interlinked for a company that operates in many countries. Under globalization, managers working in MNCs are frequently confronted with a mixture of host –country law and parent country laws that influence and affect business operations in other countries. For instance, Title VII of the Civil Rights Act of 1964 was empowered with extraterritorial effects in 1991 and it is estimated that 1991 amendment would adversely affect about 2100 U.S companies which runs more than 21,000 overseas units in 121 countries. Intricacy increases when U.S law is applied in German civil system or in the civil law of other countries that adhere a Scandinavian or a French replica. The purpose of this research is to analyze the complexity involved in MNCs business in the areas that have legal implications like insider trading laws , intellectual property issues pertaining to launch of a new product , hiring and dismissing employees , an age discrimination case and company policies on staff welfare like childcare leave. Analysis For a multinational company, procedures for dismissing employees are different according to location of its business. If business parent or subsidiary is located in U.S.A, employees can be terminated at-will rule as no reasons or compensation is to be given to the discharged employees. In U.S, majority of the nonunionized employees can be terminated at-will. A business manager should be aware that the majority countries do not follow U.S style of employment at-will style. For example, in Germany, dismissal of employees is a complex process. Under German law, dismissal of employees is made difficult by (1) statutory period of notice (2) dismissal criteria (3) Works Council has to be consulted. Under German law, notice of termination differs with the employee’s service and if an employee has an experience of twenty years, a minimum notice period of seven month has to be given. For instance, if an employee of a U.S parent company transferred to its German subsidiary and if he was retired at the age of sixty-five, the affected employee may file a suit in U.S. that he was compelled to retire because of his age which is in violation of the Age Discrimination in Employment Act (ADEA). Even if the German subsidiary or affiliate had observed the provisions of ADEA and did not compel its U.S employee to leave at sixty-five, the company would be infringing the German law which requires that employees should retire at sixty-five. Further, U.S citizen transferred to a Germany subsidiary may ask for twelve weeks of unpaid childcare leave under the Family and Medial Leave Act and U.S laws forbids sex-based bias in benefits. Under German law, there is no maternity childcare leave for men. Thus, for managers working in MNCs have to develop additional layers of legal, cultural and ethical complexity. According to an article in Wall Street journal, American companies like AT&T Corp and Colgate –Palmolive Co now understand that firing employee’s at-will in Germany or in India or in other host countries will be a complicated and expensive decision and U.S companies operating in these countries are upset by host country’ employee termination rules. For establishing minimum standards for cross-border companies, European Council issued a directive as early as in 1994 for the formation of European works councils and this directive would be affecting about 250 U.S multinational companies. For instance, Bristol – Meyers Squibb Co was threatened by more than 1,000 German pharmacies if it carries on its plan of laying off about 500 employees. A multinational company should engage in organizing its business affairs and its business transactions by maximizing its tax savings and to indulge in judicial tax planning. Multinational business has selected opportunities to minimize their tax rate by moving profits from higher-taxed jurisdictions to lower-taxed regions mainly to minimize their foreign tax rate. As a legal strategy of minimizing their tax-rate, multinational companies transfer the intellectual property to their holding company formed in an offshore which is located in a tax-efficient jurisdiction. Both very giant to very small companies are perusing this strategy for many years and there is no legal contravention is involved in this process. Thus, a multinational company can devise a legal strategy by transferring economic rights on their existing patents and the revenue stream connected with the intangible property like trade-mark, secret-process to an offshore jurisdiction where tax rate is lower in terms. Further, research and development or intangibles which are in the developing process can be organized in a foreign jurisdiction where tax rates are lower. U.S companies with original ownership of the intangibles may transfer their intangibles or patents to offshore subsidiaries through cost-sharing agreements. This legal strategy will help the U.S companies to retain the use of patents or intangible at the same time by transferring the right to exploit the intangible to an offshore subsidiary outside the U.S. The U.S Company’s subsidiary in tax heaven can license the IP to its foreign subsidiary in barter for an arms-length royalty. Certain countries allow special tax rates to foreign companies if they satisfy with their business plan. For instance, in Switzerland, the effective tax rate is 30 percent and it is being reduced to 4 to 8 percent in case of eligible multinational companies willing to operate its subsidiaries from Swiss. Another tax strategy is to take advantage of provisions of with-holding tax through organizing the subsidiary in tax heaven with constructive tax treaties. It is wise to devise foreign subsidiary at Switzerland or at Ireland as these countries having low tax rates and a burly tax treaty net work. Ariad is the licensee to a patent owned by MIT. This U.S patent relates to a key cell signaling pathway, whereas the granted claims in various countries are limited in nature. Ariad is of the opinion that it considered all drugs that act through their pathway as violating on its patent rights. Ariad initiated suits against various companies including Eli Lilly for patent infringement on the above ground. Ariad was succeeded initially in getting a court ruling in its favor. Later, USPTO rejected its claims and now the critics are of the opinion that Ariad may not succeed in its legal actions and the originally issued patent right might be withdrawn. Ariad case offers in insight into how a patented biological pathway can limit a company’s liberty to operate on the patented drug that acts as a biological pathway which is claimed by another company as its patent. Patent granted can be challenged on a national basis using the legal system of the host country concerned. Managers of the MNCs should take into cognizance all these factors to design their legal strategy to pursue their business objectives. When different companies raise overlapping claims on a patent, it will end up in interference proceedings or seeking court’s directive to resolve the issue. In the case of Genentech and Celltech, both the companies claimed certain techniques of antibody production. As both the companies granted patents which expired in 2006, this had resulted in an intricate series of litigations which was initially solved. However, these companies made an agreement to seek renewal of both patents. Genentech obtained a new patent which is having a life up to 2018. Later, legal action by third parties made this patent being revoked due to double patenting. Hence, MNC managers should take necessary legal strategies to safeguard their patent rights. World’s best selling drugs are Lipitor and Advair with reported annual sales revenue of $ 6 and 13 billion respectively. Generic companies tried to challenge the award of patents to the above drugs and defending companies have to spend a large sum on litigation process to defend their valuable products from infringers. Pfizer is the licensee of ‘Liptor’ and the original owner was Warner –Lambert. Since patent for drug calcium atorvastatin is expiring in December 2010, Warner-Lambert got an extension of the same. Ranbaxy challenged the validity of these patents which made the US Court of Appeals in declaring the grant of later patent as invalid. This would make easy for generic manufacturers to enter into the US market. It has been estimated that Pfizer would loose about $ 25 billion in revenues during the period 2007 to 2010. The legal procedures perused in many countries are of not much help in trying to establish patent infringement. Another disadvantage is that high costs of litigation process are also acts as a deterrent to initiate legal proceedings against infringers. It is essential to have a proper legal risk strategy for multinational companies to optimize their commercial return and to retain their market exclusivity. Eli Lilly failed to protect its product Prozac as its chosen patent strategy has failed. Eli Lily case is the clear demonstration of how income from a blockbuster drug can dwindle. In the case of Losec and AstraZeneca, they are successful in keeping their blockbuster income in tact in the long run by devising an effective mixture of scientific, commercial and intellectual property methods. Major international drug companies like Sanoti –Avantis’s Plavix are engaged patent safeguarding strategies to retain their market exclusivity and risks that these companies are willing to take in trying to damage generic companies’ growth. For MNCs which operates in different countries should take steps to protect its intellectual property by making confidentiality agreements, non-solicitation agreements and non-compete agreements with key employees, business associates and distributors to protect its intellectual properties like patent, trade secrets, trademarks etc. An effective tax planning will be having a properly structured income that will offer the MNCs with an accrual of lower –taxed disposal income in low taxed region that can be employed to finance future operations and expansion. A legal advisor is under moral obligation to suggest ways and means to minimize the effective tax rates of a MNC so that MNC can increase the volume of their profitability. (Andreoli, 2006). A successful business manager employed in MNCs must able to (1) be familiar with legal issues that are entrenched in business decision (2) to make business decisions in an atmosphere of legal uncertainty (2) to communicate with the lawyers and make legal decisions Employees and business associates should be cautioned about the criminal penalties available both U.S laws and host countries laws for infringing trade mark or for stealing trade designs or formulas. For instance, an action was brought against one Lopez who left General Motors (GM) and joined Volkswagen in Germany. Lopez was charged for stealing trade secret documents from GM and passed it on to Volkswagen. GM was paid $100 million by Volkswagen and it agreed to buy GM spare parts worth of $ 1 billion over a seven year period through a settlement Further, Lopez was indicted by both German and U.S authorities. Due to Lopez episode, U.S Congress enacted a law thereby making stealing of trade secrets as a federal offense after Lopez case. At the time of introduction of details of new patented products , an MNC should inform its employees and affiliates all over the world that they should not engage in insider trading anticipating a spurt in company’s stock price after the introduction of new patented product. It should be remembered even a marginal profit through insider trading can blemish careers since insider trading is punishable offense not only in U.S but also in the host countries. Conclusion For MNC that operate in different countries will always pose legal complexity and uncertainty and the managers should be well trained to deal with the safeguarding of company’s intellectual property , hiring and dismissing employees and insider trading issues in the host country legal environment. Further, managers of MNC also face myriad legal issues like product liability, workmen compensation and sexual harassment. A successful business manager employed in MNCs must able to (1) be familiar with legal issues that are entrenched in business decision (2) to make business decisions in an atmosphere of legal uncertainty (2) to communicate with the lawyers and make legal decisions. It is to be observed that many of the legal issues or dilemmas faced by the MNCs managers in the global environment have no direct answers. Hence, attorneys should ensure that they clearly understand the complex atmosphere of international business and to script legal analyses that facilitate managers to arrive at business decisions that is best for their companies and investors. References Andreoli, Brian (2006) foreign tax strategies can be boon to multinationals: opportunities abound for multinational ---- Financial Executive. Bennett, J. (2002). 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