The Adventures and Travails of Zynga v. Vostu, Part 2.5

Sometimes on the blog, we like to dig deeper into cases or issues that illustrate the legal principles important for doing business in Brazil. Think of it as a case study that helps us all understand a little better doing business in and with Brazil. This week, we return to the Zynga v. Vostu case, a copyright infringement litigation currently playing out in the courts of California and São Paulo. For a little background on the case, check out our first post when Zynga filed suit against Vostu in California.

In the initial article, we mentioned the prospect of Brazilian litigation and how it may be necessary to really get effective relief from Zynga’s position. We later mentioned the benefits of a parallel litigation approach, noting Zynga’s success in getting an injunction quickly in Brazil. As the case has continued in both courts, Vostu has now responded with a request in the California court to enjoin, or stop, Zynga from enforcing the Brazilian injunction. The court initially complied, directing Zynga to not enforce the injunction on a temporary basis. The California court further directed Zynga to “show cause,” or say why, the California court should not prohibit Zynga from continuing with its litigation in Brazil in all respects.

As one can imagine, this set off a flurry of motions and responses, and a week ago, the California court held a hearing to decide if it should require Zynga to stop any further litigation in Brazil. On August 26, the court issued a short order dissolving the temporary injunction and denying Vostu’s request for a permanent injunction. In other words, the California court has decided it will not prohibit Zynga from continuing its lawsuit in Brazil. So what is going on and what can this case show us?

• Wording is important. Looking at the decisions of the California court, it is exerting its power over Zynga because Zynga is located in California. The California court is not directing the Brazilian court to stop. The California court does not have this power, but it does have power over Zynga.
• Dual-track litigation is complex. There are numerous filings from both sides, and the parties have relied on Brazilian professors and attorneys to explain Brazilian law to the US court. This is common and necessary when dealing with a foreign legal issue, and it adds a layer of complexity to the case. Both parties have done a good job getting into the meaning of the Brazilian law and then explaining that to the judge, another potentially tricky issue.
• Corporate structure is key. One of the interesting things to note are the different names of the parties in the two litigations. For example, in the Brazilian lawsuit, Zynga targeted Google Brasil and Vostu Brasil, but in the US lawsuit, Zynga sued Vostu USA and Vostu LLC, both companies resident of the US. This distinction in the naming of parties may explain why Zynga is more willing to sue Google Brasil, even though Google is also an investor of Zynga in the US. Suing Google Brasil is one thing and quite often different than the US company.

Google, Yahoo, and Danos Morais

Brazilians are a tech-savvy society, and with the announcement that Brazil is now the fifth largest market for Facebook with over 25 million users, technology issues continue to bubble up in the courts. Google has recently made news with a judgment against it for failing to reveal the identity of three bloggers in the northern state of Ceará, and a number of Brazilian courts have wrestled with the rights of internet search engines and hosting companies with individuals’ rights to sue for defamation. So when it comes to issues like defamation and freedom of speech, what can tech companies expect when doing business with Brazil?

• Pro-active judiciary. Whether it is a fine for copyright infringement in Rio Grande do Sul, a judgment to pay damages for failure to remove copyright infringing materail in Minas Gerais, or fines for not removing defamatory material in Mato Grosso, courts have been quick to hit Google, Yahoo, and other internet companies with fines for not adequately policing the blogs and videos they host.
• Different damages. Brazilian law allows plaintiffs to seek “moral damages” (danos morais in Portuguese) for harm done to one’s reputation or mental suffering. Courts are more willing to assess this type of damages, including in commercial cases. While the numbers are not as large as U.S. punitive damages, they are more frequent.
• Stricter scrutiny. While some courts have chosen not to hold email providers responsible for damages arising from defamatory emails, the protection of companies hosting blogs is reduced. In a recent ruling, Brazil’s highest commercial court (the STJ) decided that Google is liable for damages from defamatory material posted on blogs and social networks from the moment the judiciary finds Google should remove the material. There is some safe harbor because the judge must first issue a ruling, but the courts are not agreeing that Google’s Terms of Service protect Google. Specifically, Google has argued that it should not be responsible for damages stemming from defamatory material posted on websites it hosts because users agree to not hold Google responsible. To this point, it appears the courts have turned a deaf ear to this argument.

What You Need to Know about Commercial Satellites in Latin America

The demand for digital televisions and cellular phones with 3G and 4G capabilities in Latin American is increasing rapidly. Meeting the demand requires the use of commercial satellites. With the help of China, many Latin American countries have answered the call by contracting for the construction of their very own commercial satellite. And while the purpose or the funding for these satellites is grabbing international attention, the issue hovering over Latin America is how to avoid a space jam.

First, a background on the past helps. Historically the cost to construct a satellite was astronomical and the ability to launch it was non-existent. In response, industry giants like Comsat and Intelsat were able to fill many orbital slots with their satellites. Countries without their own satellites bought or borrowed satellite capacity from these operators. Inevitably small companies and university research groups designed the technology to build smaller and cheaper satellites accessible to everyone for the right price. And with that came the boom in the private sector for satellite construction. Now Venezuela, Colombia, and Bolivia have started funding and constructing their own satellites.

Placing a satellite into orbit requires an orbital slot. The International Telecommunication Union (ITU) is an agency of the United Nations responsible for assigning orbital and electromagnetic positions (or slots) worldwide. When a satellite operator wants to develop a communications system, it reaches out to the ITU to request assignment of a certain frequency or geostationary orbital position. Requests are generally handled on a “first-come, first-served” basis. Presently, the orbital positions above Latin America are occupied. But the private commercial launch industry maintains there is ample capacity and space in the market to support existing satellites and projected demand

It appears Venezuela and Colombia have not secured orbital positions over their respective countries. Venezuela is borrowing Uruguay’s satellite position and Colombia is still negotiating its own space. Bolivia has been told by the ITU that the position it wants is overcrowded. But China (planning to launch 100 of its own satellites soon) and the private sector remain undeterred in their willingness to fund and build because even without assurance of an approved orbital position the demand is sky high.

If you are imagining rogue satellites colliding into each other in outer space, you are correct. The most common problem with satellites is launching them. According to the Space Liability Convention, when an object is launched from a country’s territory, that country is absolutely liable to pay “compensation for damage caused by its space object on the surface of the earth or to aircraft in flight,” where fault is established. Even if the launch is private, the government is held liable for damages caused by any launched object that collides into another or causes damage by way of disruption to other satellites. This might explain why governments elect to jockey for position rather than defy the norm by launching a satellite without the rights to the orbital position.

So what’s next for Latin American satellites? Demand is going to grow, more private companies will fight for space, and the potential for a vibrant sector is on the horizon.

Friday Follies

For this week’s edition of Friday Follies, we look at some other popular ideas about Brazil and offer some contrasting views, focusing on environmental laws, the recent struggles in global stock markets, and poker in Brazil.

When many people think of regulation in developing countries, the assumption can often be that it does not really exist. In fact, some companies choose the developing world because of the lack of environmental regulation. In recent years, we have noticed increasing regulation by the Brazilian authorities, and for the souther port of Paranagua, it resulted in a pretty big fine of millions of reais.

With stock markets around the world losing ground, Brazil’s market has also pulled back from recent highs. Some observers may assume this would reflect negatively on the Brazilian economy and spur serious concern in the Brazilian government. For the president of the national development bank, BNDES, there is no need to change current policy, and the drop in the stock market does not reflect the continued growth of the Brazilian economy.

Finally, many tourists have the image of Carnival in their heads and imagine some sort of Las Vegas on steroids. While Carnival is real, gambling is much more limited. For years, there has been no casino gambling in Brazil, and authorities typically give a pretty chilly reception to gaming in general, prohibiting advertisements for online poker company Full Tilt Poker.

Anything else this week?

Labor Laws and Multinationals…Three Problems and Three Solutions

One of the features of doing business in Brazil is adapting to a new set of laws. In Brazil, many things are similar, but there are a few sets of laws that stand out as quite different and surprising: consumer protection, tax, and labor. Today, we look briefly at labor law, describing some of the features of labor law and what to expect when doing business in Brazil.

In Brazil, labor law falls under a separate set of regulations, and many labor cases are resolved by specific, labor law tribunals. Many companies have a high number of labor law cases, and lots of law firms have labor law departments. So what can a multinational company expanding to Brazil expect?

• Lawsuits. Try as hard as one wants, labor lawsuits are a feature of business. Some companies react by keeping employees instead of firing them, and other companies try to rely on short-term employment contracts to avoid liability. But labor lawsuits are a fact of life.
• Interesting decisions. As a country with a civil law tradition, the concept of binding “precedent” does not exist in the same form as it does in common law country. The judge will decide each on its merits, and two cases with similar facts can render different results. There are also “moral damages” that compensate the employee for damage to reputation. For a glimpse of this, check out a recent opinion from a court in Goias (in the interior of the country) condemning a Siemens subsidiary to pay 4,000 reais in moral damages for revoking a promise to work. The court also found the defendant litigated in bad faith, adding to the award in favor of the employee.
• Potential trouble. According to leading news journal Exame, the owner of the brand Zara recently had to deal with a third-party manufacturer who was keeping immigrant employees in “slave-like” conditions. It appears the company is responding to the allegations and trying to keep greater control of its contractors, but this is an important issue to keep in mind from a legal and public relations perspective.

Criminal Law? Yep, It Still Applies

If one travels much in Brazil or Latin America, there is always a story of someone who was arrested by the police and then was able to win release with an offer of 20 or 30 dollars to the arresting officer. Normally, this story gets rolled into the “typical experiences” category and viewed as something necessary to get by. But just like we advise businesses to never consider a bribe, the same applies to individuals.

Late last week, the STJ (Superior Tribunal of Justice or court of last resort for all non-constitutional matters) confirmed the ruling of the appellate court for the State of Rio de Janeiro imprisoning a French national for attempting to bribe the police to get of jail. From the article, it appears the sentence was upheld even though the prosecution had not established the defendant was in police custody for a valid reason. The court found there was no concern, ruling that an attempt to bribe a public official is grounds for imprisonment, even if there are no grounds for the underlying offense.

So what is the lesson to be learned? Despite stories to the contrary, bribing a public official in Brazil still is not a good idea. Like an arrest in many other parts of the world, the best thing to do is still call your attorney.

Friday Follies

Continuing with our theme, this week we look at three other myths that sometimes float around and provide a counterpoint to consider.

• For years, the conventional wisdom was that most significant investment between Brazil and the US traveled a one-way road from the US to Brazil. Based on the activity of private equity funds in Brazil, this may not be the case. The Fogo de Chão chain of steakhouses is now 100% owned by Brazilians, and Fogo de Chão has 17 restaurants in the US compared to 6 in Brazil, even though it started in Brazil. In addition, Burger King is now owned by a Brazilian private equity firm.
• “When the US catches a cold, Brazil gets the flu.” Sound familiar? A potential response comes from a former president of the Brazilian Central Bank, who cited demand in China as the primary driver of Brazil’s ability to whether a crisis in the US. With massive Chinese investment in Brazil and big commodity sales from Brazil, the saying may no longer be true.
• Pedestrians don’t have the right of way. Okay, this might still feel true when visiting Brazil, but the law is in the pedestrian’s favor, and the police are promising to enforce it. Maybe it will soon be a legal and practical myth.

Reasons for Opening a Brazilian Subsidiary

One of the surprises for many US investors looking at Brazil is the relative difficulty of opening an entity. In the US, creating a corporation or a limited liability company has become so frequent and simple that many expect this same level of simplicity in other countries. In Brazil, opening a company is quite difficult and often puzzling. There are higher costs, more forms, and more time necessary. While some investors may feel repelled, there are many good reasons to slog through muck and open a Brazilian subsidiary. In our experience, here are a few:

• Access to capital. As noted in prior posts, access to loans in Brazil can be much more difficult than in the US. Interest rates are higher, and banks often require more pledged collateral. Even when a company is looking for a rather large loan with good credit, the terms from the lender can be much more unfavorable than expected in the US. A Brazilian subsidiary faces a different reality: BNDES. The BNDES is a state-owned bank in charge of providing financing for certain sectors to help spur the Brazilian economy. Interest rates are much more competitive, which lowers borrowing costs and increases margins, both good things for business profits.
• Access to people. Brazilian business culture still highly values pesonal relationships. Seeing your customers and business partners on a frequent basis can go a long ways towards building a successful future. With a Brazilian subsidiary, the commitment to local business culture will often increase as the foreign business has a visible presence.
• Access to markets. Certain sectors of the Brazilian economy are open only to Brazilian companies, and a Brazilian subidiary can open these doors. For example, the importation of equipment for lease normally needs to be done through a Brazilian company. When one considers the costs of shipping to Brazil, opening a Brazilian subsidiary and applying for the right permits can be a big advantage. There are other types of bids open only to Brazilian companies, and some sectors of the market, like airline ownership, require Brazilian participation. A Brazilian subsidiary can bridge these gaps.

Friday Follies

We’re going to try a new feature here on Fridays to give readers a little brevity and food for thought over the weekend. The series is called “Friday Follies,” and we’re going to use this space to challenge some of the commonly held notions about Brazil, especially it’s legal system. We welcome in the comments any further myths or misconceptions.

1. There’s no penalty for bad faith litigation in Brazil. I’ve heard this one before, and it’s normally used when bemoaning the judiciary and comparing it to the tools we have in US courts like Rule 11 sanctions and appellate sanctions for frivolous appeals. Of course, an award of 7.6 million against a plaintiff for bad faith litigation challenges this myth pretty forcefully.

2. Brazilian law firms need US or UK counsel to handle large deals. This myth usually follows the line of reasoning that Brazilian firms lack sophistication, adequate English speakers, and experience. The AmLaw Daily recently covered the purchase of Brazilian beverage maker Schincariol Group by Japanese brewer Kirin Holdings, a $2.6 billion deal handled by Brazilian firms Tozzini Freire and Mattos Filho, both Brazilian firms.

3. It’s always better to sue in the US than Brazil. This one is tricky because the Brazilian court system can take longer with less chance of punitive damages, but this statement often exists to the exclusion of all litigation in Brazil. For the purposes of getting a preliminary injunction, the Brazilian courts can be quite effective. We earlier covered the fight between Zynga and Vostu, and while the case drags on in the US, Zynga already got an injunction in Brazil ordering Vostu to take down all its games in Brazil–a big win for Zynga. It’s not as glamorous for the US media battle, but it’s definitely effective. So while suing only in Brazil could be tricky, a strategy of pursuing parallel litigation could be effective, and when seeking a preliminary injunction, Brazil may be the best place to start.

Anything else pop up this week?

The Patriot Act and Brazil, Surprised at the Connection?

According to a report in today’s Financial Times, European companies are increasingly shying away from US cloud service providers because of concerns over the reach of the Patriot Act. This interesting piece of news got me thinking about any connection to Brazil and cloud service providers in general. Would similar issues arise in relation to Brazil?

For those of you unfamiliar with some of the terms in the first paragraph, the “cloud” refers to the storage of electronic data on third-party servers. An easy example is an email account from Yahoo! or Gmail. The email does not actually reside in your computer but rather a server in another location; the user merely accesses it through the internet. Recently, this access has expanded and become cheaper, allowing companies to store massive amounts of electronic information on third-party servers. While this may cut costs, it has caused some to worry about the ability of governments to access this information, which leads us to the Patriot Act.

The Patriot Act was passed by the US Congress in response to the attacks on September 11. It gives broader surveillance powers to law enforcement agencies, and it removes prior barriers to forcing companies that hold electronic information from disclosing it. The reach of the Patriot Act is quite broad, and in the words of the managing director of Microsoft UK, neither Microsoft or any other company controlled by a US company can resist the US government’s request to hand over data, even if that data is collected and stored on a server in Europe.

So what does this mean for Brazil? The same statements by Microsoft UK would apply to Brazilian companies. Brazilians are heavy users of social networks like Facebook and Orkut (an earlier social network built by Google). Information obtained through both of these services would likely be available to the US government through Patriot Act. The same would be true for Microsoft, Dropbox, and other US companies.

Would there be potential for Brazilian companies to exploit this insecurity felt by local companies? Perhaps. From a business point of view, Brazil’s startup community is increasingly growing and becoming more sophisticated. Reports from Brazilian news magazines and journals show higher numbers of investors and entrepreneurs. These individuals could look to build or license a more private form of cloud storage.

On the legal side, investors and companies would have to consider a number of key elements:

• Control. One of the key ways to apply the Patriot Act is through the control exercised by a US company. Would foreign investment equal control and trigger Patriot Act surveillance? This would be important and depend on the investment.
• Local Law. Brazil has a number of data protection laws, some of which provide powerful remedies for consumers under the Consumer Protection Code. These would be important to consider for any Brazilian company or US investor.
• Local Law Enforcement. On the law enforcement front, it appears the Brazilian government has been very active. Another Financial Times article cited Brazil as the second-most active country requesting Google provide information on its users.