The Battle for Brazil’s Stomach, and How this Explains A Lot about Brazil

Recently, the Brazilian business community has been following the potential merger of Pão de Açucar and Carrefour Brasil, two of the largest food retailers in Brazil. The contemplated transaction has many of the elements that make Brazilian business fascinating and challenging, including political machinations, regulatory concerns, and the internationalization of Brazilian business. What does this transaction show us? Business in Brazil is nothing if not interesting.

One of the more interesting aspects of the Brazilian business community is the role and influence of state-owned development banks. The largest and best known development bank is the Banco Nacional de Desenvolvimento Econômico e Social (National Economic and Social Development Bank), also known as BNDES. This bank is the second largest development bank in the world, and it invests in a variety of projects to promote social goals, like education, healthcare, and public services. In the proposed merger of Pão de Açucar and Carrefour Brasil, BNDES would contribute 1.7 billion euros to an investment fund known as Gama 2 SPE. The investment fund would acquire capital from other private sources and purchase Pão de Açucar, creating an entity called Novo Pão de Açucar (NPA). At this point, both NPA would infuse 1.5 billion euros into Pão de Açucar (check out Veja’s excellent graphic for a visual explanation).

At this point, most readers should take notice of some pretty interesting facts. First, this is a very large transaction, and it represents the massive growth of the Brazilian economy. Second, BNDES is taking a pretty large stake in the merger of two food retailers. This has set off a bit of a political debate. President Rousseff’s Chief of Staff, Gleisi Hoffman, directly addressed the issue at one of her recent press conferences, defending BNDES’s role. Other political commentators have chimed in, criticizing BNDES for participating in the ownership of a company that does not have the same public goals, like financing exports or building infrastructure. The third interesting characteristic of the transaction comes after understanding it a little more fully.

When NPA contributes 1.5 billion euros in capital into Pão de Açucar, Carrefour France (the parent company) must also direct 500 million euros into Carrefour Brasil, bringing the two merging entities onto an equal capital structure. NPA then acquires 69% of Carrefour Brasil, leaving 31% in the hands of Carrefour France. To finalize the transaction, NPA exchanges 19% of the shares of Carrefour Brasil for 11.7% of the shares in Carrefour France. NPA has the right to buy an additional 6% of the shares of Carrefour France, and it can appoint two directors of Carrefour France. In sum, BNDES and a group of Brazilian investors acquires indirect control over the large multinational Carrefour France. For a country recently known as “third world,” this represents an important role in the global economy.

The final interesting aspect of this transaction is the role of CADE, the Conselho Administrativo de Defesa Econômica or equivalent of the U.S. FTC. Due to the increasing amount of large transactions, CADE is playing a bigger role in Brazilian business. CADE has the obligation to protect consumers and competition, and it can place conditions on the Pão de Açucar/Carrefour transaction. In a sign of the growing strength of Brazilian regulators, CADE can require the new entity to sell off stores or make other concessions to gain approval.

While the Pão de Açucar/Carrefour merger is not final, watching the transaction unfold in the news media is an excellent way to learn more about some of the features of Brazilian business. As the Brazilian economy grows, expect to see more of these large, sophisticated transactions include significant international impacts.

Domain Name Expansion: A Personalized Site for Your Trademark and Your Business

On May 6, SILC brought you news on domain name dispute resolution with a focus on protecting your trademark-based domain name from cybersquatters and imposters. Until recently it has been a race to register the domain name first or file an action after for the rights to the domain name. Since there can only be one user per domain name, in 2010, the Internet Corporation for Assigned Names and Numbers (ICANN) saw an unprecedented number of arbitrations filed in cases involving cybersquatting — unauthorized use of trademarks in Internet domain-name registrations. On June 20, the Board of Directors of ICANN approved a plan to expand the present 22 generic top-level domain names.  The most common top-level domains are .com, .org and .edu, and now Internet address names will be able to end with almost any word in any language. ICANN says the plan is to offer organizations around the world the opportunity to market their brand, products, community or cause in new and innovative ways.

The expansion allows organizations to secure a legitimate and personalized site for their trademark-based domain. The organization can register its trademark name as the domain name or its dot-com name. For example, Canon, Inc. can be .canon and Allstate Insurance Company can be .allstate and so on. This can now be accomplished by registering the brand as a top-level domain. The idea is to reduce cybersquatting as well distinguish a bonafide business from counterfeiters.

An organization has to file an application with ICANN to obtain a personalized domain name.  Then, ICANN will review the application and perform a conflicts check with all other domain names worldwide. Should a domain name already exist or if two or more companies compete for the same domain name, there will be an opposition process. Once awarded a top-level domain name, it will be up to the organization to make sure its consumers will be able to easily and readily access its site.

Applications for top-level domain names will be accepted by ICANN beginning January 12, 2012 to April 12, 2012. ICANN announced that applications for each new generic top-level domain will cost USD$185,000, plus annual fees of USD$25,000. Each application is several hundred pages long. Depending on the size or scope of an organization, each applicant needs to determine whether they want to participate and file one or more applications. The thought process behind such an expensive and cumbersome application process is to deter cybersquatters and counterfeiters from rushing to take the domain name before the bonafide user can register.

What should your organization do? If you are a small business or even a large organization, you should consider registering your trademark first. If you have not already registered a trademark-based domain name, check to see if the name is still available under the 22 general top-level domain names. Remember, while .com might be taken, .net might still be available and accessible under trademark infringement laws. If your organization is interested in applying for a personalized top-level domain name, consider using legal counsel to discuss your options, guide you through the application process and assist you in working with ICANN to obtain the site.  

New Rules Approaching for Public Bids

As mentioned earlier in the week, there are a few delays with some of the pending infrastructure projects in Brazil for the World Cup and Olympics. In response, the Brazilian National Congress is debating changes to the law regulating public bids. We’ve been following the discussions and asked Cesar Pereira, a partner in the the law firm of Justen, Pereira, Oliveira & Talamini, to comment on the current state of affairs. Cesar has specialized in administrative law, which in Brazil refers to the law of government contracts. His firm has an excellent reputation in the field, and he has graciously allowed us to post his comments.

The Brazilian House of Representatives made this week the final vote to pass a bill creating a special regulation for the government procurement of goods, services and works needed for the 2014 FIFA World Cup, the 2016 Olympics and related events. To become law, the bill will now be subject to an urgent vote at the Senate. This is expected to take place within the next two weeks. According to current political comments, this bill should be enacted with no additional changes towards the end of July.

The so-called Differential Public Procurement Regime (RDC, in Portuguese) is a series of profound changes in the Brazilian government purchases regulation. It aims at expediting bidding procedures and allowing for more comprehensive, turn-key contracts. For the time being, the new rules are applicable only to a limited range of contracts. However, most specialists believe that these changes will soon be extended to public procurement in general.

The RDC is laid out in 47 sections, and many provisions will still be subject to further regulation by executive orders. The new legislation ranges from the basic principles ruling the bidding procedures to the specificity of administrative sanctions applicable to fraudulent behavior. Some of the changes seem adequate for the purpose of expediting the procedures. There are three key modifications to speed up the process.

First, article 13 provides that all bids will preferably be electronic (online). Although Brazil is currently very familiar with online procurement auctions for ordinary goods and services, construction works and complex contracts are still physically tendered. The new law will lift any restriction on online tendering.

Second, according to article 15, the minimum time for advertisement of the invitations for bids, will be greatly reduced. Complementing this procedural change, article 12 provides that the general rule will now be the post-qualification of bidders. Under current legislation, in most procurement methods the bidders must be shortlisted in a pre-qualification phase.

Last, article 27 provides that only one administrative appeal will be admitted, after the post-qualification of the bidders. These procedural changes, combined with the use of online methods, are likely to significantly shorten bidding procedures.

Another important change in comparison with current practice is the provision of article 6. The budget for the government purchase will no longer be disclosed in the invitation for bids. This aims at causing greater competition between the bidders. Under the current regulation, most procuring agencies will disclose the budget as a reference price. A novelty of the bill is the creation of a judgment criterion based on the “highest discount” offered by the bidder on the procuring agency’s budget for the purchase – article 6(1). This method (“reference price”) existed in Brazil until 1993 and was greatly criticized. Under a different format, it is back in the Brazilian procurement regulation.

Article 8(V) and article 9 intend to advance contracts under turn-key arrangements, in which all steps including basic design are comprised in the scope of the contract. Although turn-key contracts have been always widely used for government works in Brazil, the new regulation tries to remove any obstacle to the adoption of full turn-key arrangements, in which the author of the basic design could also be the contractor responsible for the works – article 9(1)(2).

Article 47 creates new administrative penalties for defective performance and wrongful practices, including fraudulent behavior of the bidders and contractors. These are harsher than those under current legislation. However, article 47(2) ensures that the essential current due process rules will remain applicable.

These are just examples of a variety of rules included in the bill and aimed at making public procurement procedures faster and more cost-effective. Some of the changes have been tried before in more limited areas, such as the purchase of ordinary goods and services. Others are being brought back into Brazilian legislation. Some are truly new and their effect will need to be verified in practice. They are an attempt to expedite purchases that may already be overdue.

Personal Jurisdiction? Not Anymore (Technical Post with a Bonus Brazil Mention)

As the summer heats up, it’s time for Supreme Court opinions, which have been coming out fast and furious. While the majority of the opinions have little effect on international disputes and investment, the Court’s decision in J. McIntyre Ltd. v. Nicastro could bring some significant changes for those engaged in international commerce.

Personal jurisdiction has long been a fairly confusing area for courts, practitioners, and scholars. There are two types of personal jurisdiction–general and specific–and a number of other cases that speak generally about the concepts and principles underlying the types of personal jurisdiction. The legal community had grown to accept the notion that general jurisdiction required continuous and systematic contacts with the forum state (or the state where the case is pending). Where a court had general jurisdiction over a defendant, the plaintiff could bring almost any suit, regardless of the connections between the lawsuit and the contacts with the forum state. Specific jurisdiction analyzed the contacts between a particular incident and the defendant’s contacts with the state. As such, in some cases, a court could have specific jurisdiction and not general jurisdiction, depending on the facts of the case.

To determine specific jurisdiction courts often turned to the concept of placing products in the “stream of commerce.” This phrase originated from a series of Supreme Court opinions where the Court looked at the defendant’s choice to place a product into commerce. If the defendant purposefully placed the product into commerce, then the Court then applied concepts of fairness and foreseeability to determine if the local court should have jurisdiction wherever the stream of commerce took the product.

This doctrine has consistently troubled foreign manufacturers because of the potential for liability in a number of far-flung states. For example, if a Brazilian manufacturer sold to a distributor in Texas, it potentially faced liability anywhere in the United States. Courts could look at the decision to sell to the distributor in Texas as a purposeful choice to place the product in the stream of commerce. If the Brazilian manufacturer knew the Texas distributor had national reach, then it would be foreseeable for the sale of the product to create personal jurisdiction wherever the consumer ultimately purchased it. After the decision in Nicastro, this scenario changed.

Looking at the opinion, the plurality focused on the “stream of commerce” and pushed it aside in favor of focusing on the defendant’s choice to purposefully avail itself of the forum state. When the Court looked at the facts, it found a manufacturer from the United Kingdom who had intended to sell to the US but without targetting the forum state, in this case New Jersey. The manufacturersold its product to a US distributor located in Ohio with nationwide reach, but the Court found no other purposeful intent to direct the product at New Jersey. Without any further contacts directed at New Jersey, the Court found the New Jersey court did not have personal jurisdiction, despite placing the product in the stream of commerce. A brief statement at the beginning of the opinion summarizes the Court’s decision:

“As a general rule, the exercise of judicial power is not lawful unless the defendant ‘purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.’ Hanson v. Denckla, 357 U. S. 235, 253 (1958). There may be exceptions, say, for instance, in cases involving an intentional tort. But the general rule is applicable in this products-liability case, and  the so-called  ’stream-of-commerce’ doctrine cannot displace it.”

In other words, because the UK manufacturer did not purposefully direct its activities at New Jersey, the New Jersey courts did not have jurisdiction.

The Nicastro decision holds some pitfalls for the casual reader and merits close attention. Only four justices joined in the opinion of Justice Kennedy, which sought to create a stronger test for personal jurisdiction by eliminating the need to consider foreseeability and fairness and focus only on the submission of the defendant to the applicable sovereign, either the United States or the forum state. In the US legal community, we call this a plurality, and the reasoning is not binding, only persuasive, in future cases with similar facts. Two justices wrote a concurrence, backing away from the plurality’s reasoning and wanting to retain notions of fairness and foreseeability to judge the defendant’s contacts with the forum state. The concurrence even cited the hypothetical example of a small Brazilian manufacturing cooperative and the unfair result of making it responsible for lawsuits all over the United States. When combining the plurality with the concurrence, the Court took a strong stand limiting personal jurisdiction over foreign manufacturers and requiring the plaintiff show purposeful contacts with the forum state. Unfortunately, there is no controlling reasoning as to why the Court required the plaintiff make this showing.

Three justices wrote in dissent, arguing the other six justices interpreted the law too narrowly. In the dissent’s view, foreign manufacturers could easily avoid the consequences of injury caused by their products, barring only exceptional circumstances where the manufacturer sold sizeable quantities to a state or otherwise directed its activities at that state. Quoting from a law review article, the dissent chose particularly vivid imagery:

“Inconceivable as it may have seemed yesterday, the splintered majority today ‘turn[s] the clock back to the days before modern long-arm statutes when a manufacturer, to avoid being haled into court where a user is injured, need only Pilate-like wash its hands of a product by having independent distributors market it.’” Weintraub, A Map Out of the Personal Jurisdiction Labyrinth, 28 U. C. Davis L. Rev. 531, 555 (1995).

The dissent’s principle concern is the ability of a foreign manufacturer to escape liability in many state courts by selling to a US distributor, and from my point of view, this is a valid concern. For example, if a foreign manufacturer sells to a distributor in Florida, it is unlikely any state courts besides those in Florida have jurisdiction over the manufacturer, barring some sort of targeted marketing campaign at a different state. While the decision benefits foreign manufacturers, it also shifts greater responsibility to US distributors. The US distributor can no longer look to the foreign manufacturer for help in defending a claim brought in US courts. If the foreign manufacturer can excuse itself from the litigation, the US distributor faces a bigger potential share of the liability, especially where liability is joint and several.

Creative lawyers will likely find other application of the Nicastro decision, using it in negotiations with involving foreign manufacturers or litigation strategy with a US plaintiff. Regardless, Nicastro can be an important tool in international dispute resolution and cases brought in the US.

Airports, Airports, Airports

In the early days after Brazil won the right to host the 2014 World Cup, Ricardo Teixeira, the President of the Brazilian Football Confederation and the 2014 World Cup Organizing Committee, famously said Brazil needed “airports, airports, airports.” So what is the current status of airport construction, and is there room for private investors looking to capitalize on the shortage of infrastructure?

Unlike the United States where private airports are common, in Brazil there are only two private airports in the country, both belonging to the company Usiminas, the large Brazilian steel producer. Any other private airports require government authorization, which has led to a brewing battle between the supporters of building a wholly private airport in São Paulo and public-private airport through government concession in Campinas, Guarulhos, and Brasilia. Brazil is trying to ramp up its airport construction, but it appears the process is moving slowly and drawing criticism from FIFA and soccer hero Romario, who has declared only divine intervention will ensure all infrastructure projects are ready.

So where do private investors fit in? It seems like there is still lots of opportunity. A recent report by the popular magazine Veja notes other private infrastructure projects have gained a large market share, like ports that now handle almost 60% of exports leaving the country. And even when comparing the fight over the kind of aiport to be constructed, private companies are on both sides of the issue. In fact, the President of Brazil, Dilma Rouseff, recently announced the airports in Campinas, Guarulhos, and Brasilia will all be majority owned by private companies. The question is not whether private investors will be involved but how, and hopefully the result will be a number of new airports in the future.

Some Features of Brazilian Litigation

On a rather frequent basis, we get to explain the different elements of Brazilian and U.S. litigation, and both sides are normally quite surprised at the other country’s response. Here’s a quick primer on some of the major differences:

• The opening salvo. In the U.S., plaintiffs can file their complaint without any supporting documents, relying on the presumption that well-plead statements in the complaint are deemed true. Not so in Brazil. Typically, the plaintiff files a lengthy complaint with a host of supporting documentation. The Brazilian judge has an investigatory function, and it helps to get the court pointed in the right direction.
• Questions for the court. Like many countries with a civil law tradition, lawyers for one of the parties can meet with the judge on an ex parte basis, either dropping by the court or scheduling an appointment. This concept shocks 99% of U.S. litigators.
• Gathering evidence. U.S. litigators are used to large amounts of document discovery and depositions allowing a party to find out the facts of its case. This is not quite the norm in Brazil. Documents can be obtained, but typically only through a court order. It is not uncommon for this court order to come after lots of fighting.
• The final hearing. In addition to the lack of a jury (except in some criminal cases), Brazilian trials are fairly short affairs consisting of little testimony and many of the questions posed by the lawyers and interpreted by the judge before being asked of the witness. The “art of cross-examination” has a completely different meaning.
• Then the appeals. Brazilian civil procedure has many more appeals, including many by right. The appellate judges have thousands of cases and conduct their deliberations in public, often without any oral argument from the attorneys (and very rarely any interaction between counsel and the bench).

Angel Investing in Brazil, A Possibility?

When doing business in Brazil, one of th greatest challenges is access to capital and lines of credit within the country. With high interest rates and stringent lending guidelines, it’s common for U.S. investors to be a bit surprised when seeking funding from traditional lending sources. This would seem to create a large market for more non-traditional forms of fundings, like private equity, venture capital, and angel investing. Exame is one of the leading business magazines in Brazil, and it recently looked into the world of angel investing, where startup companies pitch ideas to individuals or groups of investors looking to participate in growing businesses.

Some of the things listed in the article may be surprising to U.S. readers:

• Angel investors in Brazil are still nervous about publicity. According to the article, many of the cultural barriers are dropping, but there are a number of angel investors afraid to admit to the occupation.
• The angel investing community is growing. While the charts in this article show the relative size, it appears angel investing is becoming more accepted.

Fighting in the Online Gaming Space

What happens when a Brazilian company launches a set of video games in Brazil with strong similarities to games in the United States made by a U.S. company? You get a surprisingly complex litigation. Yesterday, online game company Zynga filed suit against alleged copycat company Vostu, headquartered in Brazil with offices in Buenos Aires and New York. The complaint focuses on the similarities between the competitors’ games and alleges only one cause of action–copyright infringement. The news articles covering Zynga’s complaint show a series of screenshots, and when combined with the relative brevity of the complaint, it appears to be a fairly straightforward case. But as many people involved in international commerce will tell you, looks can be deceiving.

For starters, Zynga sued a Brazilian company for copyright infringement but only alleged copyright protection in the U.S. How does this affect Vostu’s activities in Brazil? Zynga clearly targeted Vostu’s U.S. connections, describing its U.S.-based servers, location of its offices and marketing activities, and the travel habits of one of its founders, but much of Vostu’s business activities are directed at Brazilian consumers. Zynga’s screenshots further reveal this by comparing views of the Vostu’s games with images of Portuguese words where Zynga uses English. Zynga may have a more difficult time really attacking Vostu’s core business in Brazil through U.S. litigation, especially because U.S. judgments are typically unenforceable in Brazil.

Zynga faces other problems to make a strong move against Vostu in Brazil. Many U.S. courts have held Brazilian defendants can only be made to appear in U.S. court through a lengthy process called letters rogatory. This means the U.S. plaintiff has to send a copy of the complaint and summons (or demand to appear in court) through a diplomatic process than can take months, if not years. Without service through letters rogatory, none of Vostu’s Brazilian companies can be made to appear in court in California, further weakening any judgment by the California court. This same process also applies for getting documents and testimony from the Brazilian companies, although courts seek to streamline the process.

Zynga is a sophisticated company, and it is highly unlikely it hired unqualified attorneys or did not take these preliminary issues into consideration. But it will be noteworthy to watch how Zynga pursues this action. Right now, it does not look like Zynga is going to sue Vostu in other countries, like Brazil, but such action may be necessary for Zynga to really strike at the heart of Vostu’s operations. With the impressive list of funders backing Vostu, it’s likely Vostu already had this in mind.