journal - University of Maryland School of Law

MARYLAND JOURNAL OF
INTERNATIONAL LAW AND TRADE
VOLUME 14
1990

MARYLAND JOURNAL OF INTERNATIONAL LAW AND TRADE
VOLUME 14 SPRING 1990 NUMBER 1
ARTICLES
CONTENTS
PROTECTING THE GLOBAL ATMOSPHERE:
BEYOND THE MONTREAL PROTOCAL
K Mart v. Cartier: THE SUPREME
COURT DECIDES THE GRAY MARKET
PROBLEM
NOTES AND COMMENTS
TAKING THAT FIRST STEP: THE
SECURITIES AND EXCHANGE COMMISSION'S
PROPOSED MULTI JURISDICTIONAL
DISCLOSURE SYSTEM
Gregorian v. Izvestia: AN
ANALYSIS OF THE ELUSIVE
SOVIET DEFENDANT
THE ROLE OF INTERNATIONAL LAW
IN DOMESTIC COURTS: WILL THE
LEGAL PROCRASTINATION END?
BOOK ESSAY
OF MORALITY, POLITICS AND
THE LEGAL ORDER
BOOKS RECIEVED
Pamela Wexler 1
R. Richard Hopp 21
Alan Goggins 43
Jennifer C. Lasko 75
Margaret Hartka 99
Katherine L. Vaughns 127

MARYLAND JOURNAL OF INTERNATIONAL LAW AND TRADE
VOLUME 14 FALL 1990 NUMBER 2
ARTICLES
CONTENTS
FOREIGN CORRUPT PRACTICES ACT: AMENDMENTS
OF 1988
United States v. Verdugo-Urquidez, THE FOURTH
AMENDMENT HAS LIMITED APPLICABILITY TO ALIENS
ABROAD
NOTES AND COMMENTS
Bill Shaw 161
Michele Levy Cohen 175
THE UNITED STATES' 1986 EMERGENCY ECONOMIC SANCTIONS
AGAINST LIBYA - HAVE THEY WORKED?
John F. Cooke 195
REEVALUATING THE "CORPORATE VEIL" METAPHOR IN THE
CONTEXT OF INTERNATIONAL TRADE: A CRITICAL ANALYSIS OF
Hester International Corporation v. Federal Republic of
Nigeria
Brooke A. Beyer, Jr. 233
MARYLAND COUNTERS APARTHEID: Board of Trustees v. City of
Baltimore
Cynthia L. Golomb 251
BOOKS RECEIVED

PROTECTING THE GLOBAL ATMOSPHERE:
BEYOND THE MONTREAL PROTOCOL
Pamela Wexler*
I. INTRODUCTION ..... .................................. 1
II. THE OZONE DEPLETION PROBLEM ................... 2
III. THE ROAD TO M ONTREAL .......................... 5
A. Early International Environmental Precedents .... 5
B. Previous Environmental Negotiations ............ 6
C. The M ontreal Protocol ........................ 7
1. Substantive Lim its ....................... 8
2. Impetus for Widespread Participation ....... 8
IV. THE PROMISE OF THE PROTOCOL: SURMOUNTING OBSTA-
CLES TO PREVENTATIVE REGULATION ................ 10
A. Scientific Uncertainty .......................... 10
B. Differential Economic Impacts .................. 12
V. BEYOND THE MONTREAL PROTOCOL .................... 14
A. The Call for More Stringent Controls ........... 15
B. Building on the Protocol ....................... 16
C. Unilateral Moves by the United States ........... 17
V I. C ONCLUSION ..................................... 18
I. INTRODUCTION
On January 1, 1989, the Montreal Protocol on Substances that
Deplete the Ozone Layer' entered into force, binding forty-six signatory
nations to limits on the production and consumption of chemicals
believed to be destroying the protective layer of ozone that encircles the
earth. Negotiated in rapid response to mounting evidence of potentially
irreversible damage to the global environment, the treaty is a milestone
in the history of international cooperation. It marks the first effort of
the international community to avert an environmental crisis, instead of
waiting for the crisis to occur before acting.
Unfortunately, the treaty does not end the production or use of
chemicals suspected of destroying ozone. Further, the Protocol cannot
* Research Associate and Legal Counselor, Center for Global Change, University
of Maryland; J.D., 1989, University of Maryland School of Law.
1. Montreal Protocol on Substances that Deplete the Ozone, Final Act, September
16, 1987, reprinted in 26 I.L.M. 1541 (1987) [hereinafter The Protocol]. As of this
writing, the Protocol has yet to receive an official United Nations citation.

2 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
prevent already released chemicals from harming the earth's atmosphere.
2 The accord, therefore, cannot be viewed as a definitive solution
to the problem of ozone depletion. It does, however, represent an important
first step toward successfully attacking the significant political,
economic and scientific barriers that have doomed previous environmental
agreements and may even point the way to a new era of international
cooperation in protecting the global environment from other
potential catastrophes.
After a brief discussion of the nature of the ozone problem, this
comment will review the advances in international environmental law
that culminated in the Montreal Protocol. It will then focus on the
treaty's methods for overcoming many of the difficulties that have
plagued previous environmental agreements. Finally, this comment will
review the accord's limitations and suggest ways to use it as a basis for
the development of new mechanisms to protect the global environment.
II. THE OZONE DEPLETION PROBLEM
High above the earth's surface, an invisible layer of ozone serves
as a shield, absorbing the sun's ultraviolet rays and preventing them
from ever reaching the planet. The formation of ozone atoms is a relatively
simple process; it requires only the interaction of ordinary oxygen
and ultraviolet radiation from the sun. Through natural chemical reactions
dependent upon variations in sun strength and the amount of oxygen
in the atmosphere, stratospheric ozone is continually produced and
destroyed.
Scientists formerly presumed that there was a constant level of
ozone in the upper levels of the atmosphere, where oxygen is abundant.
But, as early as 1974, speculation occurred that the "ozone layer," a
relatively thin layer of gas in the stratosphere, was subject to depletion.
3 Only eleven years later, researchers reported a hole in the ozone
2. Current ozone measurements reflect only gases released in the 1970s and earlier;
gases now in the lower atmosphere (ground level to about five miles from the
earth's surface) will take seven to ten years to reach the stratosphere (which stretches
from the lower atmosphere to approximately thirty miles above the earth's surface). As
the chemicals in refrigerators and insulating foams continue to break down over the
next decade, even more gases will gradually be released. Government scientists estimate
that the levels of these gases will not stop rising until they reach six to eight parts
per billion, more than double their present levels. Gleick, Treaty Powerless to Stem a
Growing Loss of Ozone, N.Y. Times, March 20, 1988, at 1, col.2.
3. Molina and Rowland, Stratospheric Sink for Chlorofloromethanes: Chlorine
Atom Catalyzed Destruction of Ozone, 249 NATURE 810 (1974). (Two years after
Molina and Rowland's article appeared, the National Academy of Science ("NAS")

1990] MONTREAL PROTOCOL
layer over Antarctica. A natural filter, ozone screens out much of the
dangerous solar radiation thought to be responsible for increased incidence
of skin cancer, crop reductions and even harm to the body's immune
system. Although the size of the hole in the ozone layer varies
seasonally and with weather patterns, recently released data has
sparked fears of wider depletion than originally postulated.' Researchers
just back from the Arctic report surprisingly high levels of the
chemicals thought to precede ozone destruction.'
The prime suspect in the ozone layer's destruction appears to be
chlorine.' High levels of chlorine are in turn thought to be the byproducts
of chlorofluorocarbons ("CFCs"), industrially produced synthetic
compounds of varying types and numerous applications. Commercial
issued a study supporting the team's theory. One month later, the United States Environmental
Protection Agency ("EPA") announced a ban on aerosol propellant uses of
CFCs effective in 1978).
4. Fifteen years ago, scientists assumed ozone depleted only at the Poles and at a
rate of about one percent annually. But a new government panel sponsored by NASA
estimates a 1.7 percent loss in the latitudes from Florida to Pennsylvania and three
percent from Pennsylvania north to mid-Canada. These discoveries are alarming and,
as indicated by Senator Max Baucus in an address to the Senate, "[an ozone hole over
the darkened ice-sheet of Antarctica when the Sun is low presents a much different
threat than unrestrained ultraviolet radiation pounding on the surface of the ocean
when the Sun is high in the sky." 134 CONG. REC. S2110 (daily ed. March 14, 1988).
According to EPA estimates, the increased ultraviolet light from only one percent depletion
will result in a three to six percent increase in the rate of most skin cancers.
Gleick, supra note 2, at 30.
5. According to Adrian Tuck of the National Oceanic and Atmospheric Administration,
the level of lethal chemicals was 50 times higher than normal and comparable
to that found in the Antarctic where dramatic ozone depletion occurs each spring. Arctic
Data Raises Fear of Wider Ozone Depletion, Boston Globe, February 18, 1989, at
1, col.l. Scientists are also alarmed by new evidence that the chemistry causing ozone
depletion can take place at higher temperatures than those found in the Arctic circles.
Id.
6. Chlorine destroys stratospheric ozone (03) by "stealing" ozone's third oxygen
atom. The result is a free oxygen atom and a highly reactive radical, chlorine monoxide,
a compound just as destructive as the chlorine element itself. Comment, The Montreal
Protocol: Confronting the Threat to the Earth's Ozone Layer, 63 WASH. L. REV.
997, 1000, n.21 (1988).
Warnings regarding the extraordinarily destructive power of CFCs should be
heeded. It has been postulated that one molecule of chlorine can destroy as many as
100,000 molecules of ozone. If this estimate is accurate, the ultimate effect of an annual
release of approximately one million tons of CFCs would be grave. Ozone Layer
Depletion: Hearings Before the Subcomm. on Health and the Environment of the
House Committee on Energy and Commerce, 100th Cong., 1st Sess. 15-16 (1987)
(statement of Professor F. Sherwood Rowland, Department of Chemistry, University of
California at Irvine) [hereinafter Hearings].

4 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
production of CFCs as refrigerants began in 1931 and, by the end of
World War II, scientists had discovered CFCs' remarkable propellant
properties as well. 7 Currently, CFCs are also used as blowing agents,
producing approximately three billion pounds of plastic raw materials. 8
Both non-toxic and non-flammable, CFCs have proven ideal for industrial
uses because they are chemically inert. In other words, they are
immune to decomposition or oxidation in the atmosphere. It is this ability
of CFCs to withstand quick destruction that makes them so environmentally
damaging. Instead of being destroyed in the lower atmosphere,
these chemicals rise to the stratosphere where they slowly
decompose in the sunlight, giving off deadly chlorine atoms.
In addition to their ozone depleting capabilities, CFCs also contribute
to global warming by absorbing energy that is normally emitted
back into the stratosphere. Accumulated in the atmosphere, these gases
create a virtual blanket around the earth's surface, resulting in an atmospheric
temperature rise known as the "greenhouse effect." 9 Carbon
dioxide is by far the most prevalent of these "greenhouse gases." Of the
trace gases which account for approximately one-sixth of the entire gas
total, however, CFCs account for approximately one-third." Notably,
too, CFCs are increasing more rapidly than any other type."
Because of their two-fold capability for assaulting the earth's atmosphere,
CFCs clearly pose a threat to the global environment. Frustrating
a solution to this threat is the virtual impossibility of pinpointing
and controlling all of the sources of these chemicals: CFCs are
produced and used all over the world, yet the damage is occurring
where we can be almost certain that no CFCs are being produced - in
Antarctica. Even if it were possible to somehow trace all of the sources
of these hazardous chemicals, prior international accords offer little
7. These two uses alone probably account for the dramatic changes in American
lifestyles that ushered in the post-war period. For instance, CFCs as coolants made
large air-conditioned areas such as shopping malls, high-rises and indoor stadiums a
reality. Air conditioning is arguably the factor most responsible for the development of
the Sun Belt. The chemical's importance to the U.S. is also demonstrated by the 100
million auto air conditioners currently in use. Weisskopf, CFCs: Rise and Fall of a
Chemical Miracle, Wash. Post, April 10, 1988, at Al, col. 1.
8. Id.
9. Comment, Thinning Air, Better Beware: Chlorofluorocarbons and the Ozone
Layer, 6 DiCK. J. INT'L L. 87, 92 (1987). Current measurements estimate the annual
rise in global temperatures due to increased atmospheric concentrations of gases to be
0.5 degree centigrade. See Comment, supra note 6, at 1000, n.24.
10. Hearings, supra note 6, at 253. (statement of David A. Wirth, Senior Project
Attorney, Natural Resources Defense Counsel).
11. Id.

1990]
MONTREAL PROTOCOL
guidance for solving environmental problems where responsibility cannot
be apportioned. A solution to the problem of ozone depletion thus
depends on unprecedented international cooperation.
III. THE ROAD To MONTREAL
The dramatic development of environmental law that occurred in
the 1970s and 1980s was largely a response to local and national pollution
problems in developed countries. Despite this heightened environmental
conscience in some countries, the international community was
ill prepared to address the possibility of a global catastrophe produced
by destruction of the earth's ozone layer. The threat of ozone depletion
barged onto the international agenda before a legal or institutional
framework had been constructed to address such a threat. The Montreal
Protocol is therefore exceptional as the global community's quick
response to this challenge, especially when viewed in contrast to the
international agreements that predated it.
A. Early International Environmental Precedents
One of the earliest cases recognizing problems with the international
transport of pollutants, the 1941 Trail Smelter Case, 2 provided
the first recognition of a state's responsibility for pollutants it could not
contain within its boundaries. Still, the case sparked no international
dialogue on the matter. In oft-cited language, the international tribunal
that heard the case noted only that "no State has the right to use or
permit the use of its territory in such a manner as to cause injury by
fumes in or to the territory of another or the property or the persons
therein . . ."I3
The Corfu Channel Case eight years later was no more enlightening.
" ' 4 The court there recognized only ". . .every State's obligation not
to allow knowingly its territory to be used contrary to the rights of
other states."' 1 While these two cases provided a starting point, the
decisions were simply too narrow to deal adequately with the problems
caused by pollution from greatly expanded worldwide economic activity.
As the decades following World War II brought increased levels of
industrial development all around the world, international environmental
standards noticeably lagged.
12. Trail Smelter Case (U.S. v. Can.), 3 R. Int'l Arb. Awards 1905 (1941).
13. Id. at 1965.
14. Corfu Channel Case (U.K. v. Alb.), 1949 I.C.J. 4.
15. Id. at 22.

6 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
B. Previous Environmental Negotiations
Seemingly overnight, an international agenda on the problems of
pollutants came sharply into focus in the early 1970s. The most likely
forum for addressing these problems, the United Nations ("UN"), responded
by sponsoring the United Nations Conference on the Human
Environment in Stockholm in June of 1972. While the Stockholm Conference
failed to resolve the difficulties associated with unprecedented
levels of transnational pollution, the Conference did result in two significant
accomplishments. First, it produced a twenty-six principle Declaration,
which, while according countries the right to exploit their own
resources, explicitly acknowledged that every nation has a responsibility
to ensure that such exploitation does not damage the environment
beyond its boundaries. 16 The Conference also led to the 1973 establishment
of the United Nations Environmental Programme ("UNEP"),
designed specifically to stimulate environmental awareness.
Although the UN has made other sporadic attempts to deal with
transnational pollution, 7 it is essentially UNEP which has forged an
international consensus on the ozone depletion issue. 8 After a successful
decade of sponsoring projects and cooperative ventures, UNEP organized
the Conference of Plenipotentiaries on the Protection of the
Ozone Layer in Vienna in 1985.1 9 This Conference, though it did not
achieve its original goal of a draft protocol, 20 was in itself a striking
16. Declaration of the United Nations Conference on the Human Environment,
Report f the United Nations Conference on the Human Environment, at 3, U.N. Doc.
A. CONF. 48/14/Rev. 1, U.N. Sales No. E.73.II. A.14. (1972). The Declaration however,
included no substantive provisions, and thus, was of limited assistance to drafters
of a treaty intended to impose specific limits on ozone depleting chemicals.
17. Seven years later after the Stockholm Conference, the U.N. sponsored the
Geneva Convention on Long-Range Transboundary Air Pollution. Convention on Long-
Range Transboundary Air Pollution, Geneva, Nov. 13, 1979, U.N. Doc. ECE/HLM.1
R.1 (1979), reprinted in 18 I.L.M. 1442. That meeting, too, while successful at developing
a process for the exchange of information on air pollutants, produced no substantive
guidelines on reductions. The agreement's only substantive provision, article 2, contains
a vague command that the participants "gradually reduce and prevent air
pollution, including long-range transboundary air pollution." 18 I.L.M. at 1443.
18. Only four years after its inception, the Programme identified ozone depletion
as one of five areas deserving of priority treatment. See generally Smith, The United
Nations and the Environment: Sometimes a Great Notion?, 19 TEX. INT'L L. J. 335,
338 (1984).
19. Proceedings of the Governing Council at its Thirteenth Session, United Nations
Environment Programme, 47 Doc. UNEP/GC.13/16 (1985) [hereinafter Vienna
Conference].
20. One point of contention preventing the establishment of the protocol was the
discrepancy between the U.S. proposal for a total international aerosol ban and the

1990]
MONTREAL PROTOCOL
accomplishment. It produced a treaty, the Vienna Convention for the
Protection of the Ozone Layer, 21 and, more importantly, it marked the
first time in history that the international community adopted anticipatory
safeguards to an environmental threat.
While the Convention adopted in Vienna contained no substantive
provisions, it was combined with the resolutions from the Conference to
create a framework for the Montreal Protocol. For instance, the Convention
included a resolution to convene a series of international workshops
on "both short and long term strategies to control equitably
global production, emissions and uses of CFCs, taking into account the
particular situation of developing countries as well as updated scientific
and economic research." 22 Participants also authorized UNEP to "convene
a Diplomatic Conference, if possible in 1987, for the purpose of
adopting such a protocol." 23 The Convention also imposed obligations
on signatories to exchange research, cooperate in the formulation of
standards, and adopt domestic legal or administrative measures to protect
human health and the environment from ozone-depleting chemicals.
24 These extensive provisions, while only a first step, provided the
baseline for future negotiations. Given the lack of any effective environmental
law precedents, the Convention must be praised for achieving a
new level of cooperation. More importantly, the drafters who met in
Montreal came equipped with knowledge of the Convention's deficiencies.
Thus, once the groundwork was laid in Vienna, the participant
nations were qualified to conclude an accord that would address the
most obvious limitations in previous international negotiations - an
absence of both substantive controls and incentives that encouraged full
participation by the global community.
C. The Montreal Protocol
As signatories to the Vienna Convention suspected, deep cuts in
global consumption and production of CFCs were required to change
current ozone depletion rates. Accordingly, the Protocol contains rigor-
EEC recommendation for only a thirty percent reduction in aerosol use, bolstered by
limits on future CFC production capacity.
21. Vienna Convention for the Protection of the Ozone Layer, March 22, 1985,
reprinted in 26 I.L.M. 1516 (1987) [hereinafter Vienna Convention]. (The Vienna
Conference refers to the 1985 meeting; the Convention to the resultant treaty.)
22. Id. at 1523.
23. Id.
24. Id. at 1529-1530. Article 2 of the Convention also includes a dispute resolution
provision, but there is no express obligation for signatories to arbitrate before litigating
claims in the International Court of Justice.

8 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
ous limitations on production, consumption and trade of chemicals associated
with the main sources of ozone depletion. The Protocol also
takes an innovative approach to the issue of enforcement, adding incentives
for countries to join the agreement.
1. Substantive Limits
The Protocol divides the eight chemicals it regulates into two
groups, each having different schedules for reduction. Group I, consisting
of five fully halogenated CFCs, is scheduled for a freeze at 1986
use levels to take effect January 1, 1989.25 A thirty-percent reduction
over the next three-year period will then be followed by an additional
twenty-percent cut by January 1, 1999.26 The treaty also freezes use at
1986 levels for a second group of three halons, 27 but these limits do not
begin until January of 1991.
2. Impetus for Widespread Participation
To encourage global compliance, the Protocol bans signatories
from importing CFCs or products containing them from any country
not yet a party to the agreement. 2 8 Exports from signatories to nonsignatories
are to be banned unless they are determined to be in compliance
with the reduction measures outlined in the Protocol. 2 9 The accord
also prohibits signatories from reaching agreements with non-signatories
which would provide the latter with financial assistance to
produce controlled substances.
25. The Protocol, supra note 1. The agreement gives participating countries six
months to effect the reductions, thus, the freeze will actually begin in approximately
July of 1989.
26. Id. Combined, these limits set a 1999 deadline for a fifty percent reduction in
total CFC production, but do not guarantee reductions for any one chemical. Each
chemical within a group is assigned an "ozone depletion weight", a measure of its
relative potential ability to destroy ozone molecules, and production of either CFCs or
halons, while limited to the 1986 totals, can be comprised of any combination of chemicals
within the group.
27. Id. Halons, most commonly found in fire extinguishants, are chemicals having
properties similar to CFCs. They are regulated separately under the agreement because
they are currently produced in far smaller quantities and less is known about worldwide
production and use of them. They are however, believed to be substantially more
potent at destroying the ozone layer than CFCs.
28. 26 I.L.M. at 1554-1555.
29. Id. The Protocol suggests signatories are to refrain from exporting to nonsignatories
any technology for producing or utilizing the controlled substances and are
to avoid any new subsidies or aid for exports of controlled products or substances to
non-signatories. Id.

1990]
MONTREAL PROTOCOL
The Protocol also calls for multilateral and bilateral cooperation,
specifically cooperation through international organizations on research,
exchange of information, and development of public awareness.
The accord establishes requirements for data reporting, calling for
UNEP to convene a meeting of government experts to recommend to
the parties measures for coordinating data on production, imports and
exports. Emphasizing technology, the Protocol calls for reductions in
emissions of controlled substances as well as the development of alternative
chemicals and chemical products. Expanded technical assistance
is also urged, particularly in helping the developing nations to comply
3 0
and make the transition to new chemicals and technologies.
Clearly, an enormous degree of cooperation was necessary to effect
these extensive provisions. But many participants have acknowledged
that agreement would never have occurred absent solid leadership from
the United States, a major producer of CFCs. As early as 1978, the
United States played a leadership role regarding CFC controls by enacting
a near-complete domestic ban on aerosol use. Beginning in the
fall of 1986 and extending through the spring of 1987, the U.S. took
the lead, sponsoring a series of diplomatic initiatives and bilateral scientific
and policy missions. The strong influence of the United States is
also evident in the structure and concept of the final treaty - which is
almost identical to the one the United States began advocating in early
1986. According to Richard Benedick, the principal U.S. negotiator for
the Montreal treaty, absent the leadership of the American govern-
ment, the negotiations may have lacked the "reasoned debate" that
46 9931
"emphasize[d] science as a neutral basis for discussion ... .
Input from the American private sector and Congress also assured
the treaty's success. United States-based environmental groups, making
fastidious use of the international media, helped inform the policy makers
and people of other nations of the dangers of ozone layer depletion.
The U.S. Congress also gave an all-important urgency to the treaty
negotiations by serving notice to the international community that if an
acceptable agreement was not reached, the U.S. was prepared to legislate
unilaterally with trade restrictions against countries not accepting
responsibility for CFCs.
30. 26 I.L.M. 1557. Some of the most successful international agreements have
stressed diversity among contributors, including such varied groups as government officials,
public interest groups and legal scholars. See Robinson and Waxmonsky, The
U.S.-U.S.S.R. Agreement to Protect the Environment: 15 Years of Cooperation, 18
ENVTL L. 403, 407 (1988).
31. 19 Env't Rep. (BNA) No.8, at 274 (June 24, 1988).

10 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
IV. THE PROMISE OF THE PROTOCOL:
SURMOUNTING OBSTACLES To PREVENTIATIVE REGULATION
Collectively, both the limits and the sanctions found in the treaty
effect an unusual approach to an international environmental problem.
But these features alone cannot explain the surprising success of the
negotiations. The mechanisms employed in the Protocol must also be
appreciated as the international community's first attempt to surmount
two of the most difficult barriers to effective environmental regulation
- scientific uncertainty and economic impact.
A. Scientific Uncertainty
David Doniger of the NRDC probably summed up the difficulty
with environmental regulation best when he noted the "high burden of
proof' that is needed to "convict a chemical." 32 General indifference to
early warnings has been a consistent problem for environmental regulators,
and the experience with CFCs has been no different. 33 Doniger
suggests that had the world properly dealt with early warnings and
phased out CFCs in the early 1970s, we would not now be facing detectable
depletion.' But the usual slowness to action has been even
more striking with regard to ozone because of the huge gaps in scientific
knowledge. 35 Even environmentally responsible governments and
industries have been hesitant to act until the harmful impacts of certain
chemicals have become clearly manifest. Yet clear evidence of
harm often does not occur until long after chemicals are released. 36
Atmospheric science, the discipline responsible for discovering the
ozone problem, is still relatively young and untested. Thus, the normal
32. Weisskopf, supra note 7.
33. Action on the early scientific findings stalled when Ronald Reagan took office
- a 1979 EPA recommendation for a freeze on U.S. production went unheeded and
DuPont halted its 15-year search for CFC substitutes - but interest reappeared in
1985 when researchers reported a hole in the ozone layer over Antarctica. Based on
these recent findings, Dupont has reversed its original position and on March 24, 1988,
announced its intention to halt production of CFCs altogether. DuPont Will Stop Making
Ozone Killers, L. A. Times, March 25, 1988, at 1, col.3.
34. Id.
35. In fact, there still is no scientific consensus on the current damage to the
ozone layer. Gleick, supra note 2. As summed up in a statement of Irving Mintzer,
head of the Climate Program of the World Resources Institute, "we're asking people to
reduce the risk of an invisible, odorless, colorless gas because we perceive that there
will be a risk of destruction to an invisible shield, allowing penetration of invisible
rays." Id.
36. See supra note 2.

1990]
MONTREAL PROTOCOL
difficulty preventative regulation has with scientific uncertainty is exacerbated
when confronting ozone depletion. Even the most dire of predictions
from computer models did not prepare scientists for the discovery
of a hole in the ozone layer.
The effort to make such models more accurate has been hampered
by the inability or failure to collect complete and consistent data." Satellite
information on ozone was not recorded prior to the last decade, a
factor which has frustrated attempts to develop a reliable sense of
ozone's long-term behavior. Inadequate data is not the only distraction
for those addressing ozone depletion, however. There is still debate in
the scientific community as to the severity of the ozone problem. Some
scientists question the entire hypothesis on which ozone depletion theories
rest, postulating instead that the interaction of chlorine and ozone
is closely tied to the 11-year cycle of solar radiation and that the next
few years are likely to bring a renewal of ozone as solar activity
peaks.
3 8
Uncertainty as to the relative effectiveness of various control strategies
also remains a significant problem. Accordingly, there has been a
substantial proclivity, particularly on the part of industry, to resist regulation
until the research picture is complete. Even when DuPont announced
its intention to halt CFC production, 39 it did not support unilateral
U.S. moves and refused to submit a schedule for its phaseout.
Advocating "extreme caution," the company's Freon Product Division
Environmental Manager, Dr. Joseph Steed, warned that from DuPont's
standpoint, eliminating the potential risk of depletion by taking an "unknown
or potentially greater risk . . . using replacement products that
have not been proven safe . . . is not acceptable. 40 The environmental
community on the other hand, discounts the potential threats from alternatives
as "minimal when compared with the threat of underestimating
the problem and failing to impose adequate [and timely]
controls.""'
Remarkably, the Montreal negotiations did not succumb to such
37. In fact, U.S. negotiator Benedick doubts that even the scientific knowledge of
five years ago would have been an inadequate foundation for the treaty. Stanfield,
Global Guardian, National Journal, Dec. 12, 1987.
38. See Gleick, supra note 2.
39. See supra note 33.
40. Steed, Global Cooperation, Note Unilateral Action, 5 ENVTL. F. 15, 19 (July/
August 1988). The auto industry also supports the treaty but opposes any unilateral
U.S. action. 18 Env't Rep. (BNA) No. 5, at 479 (May 29, 1987).
41. Shimberg, A Sound Framework, A Flawed Regulation, 5 ENVTL F. 15,19
(July/August 1988).

12 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
excuses for inaction. Instead, the treaty stands on a solid scientific
foundation, relying on the most modern scientific techniques available,
including complex computer modeling, satellite measurements and advanced
atmospheric chemical theories. Rather than adopt an all too
typical "wait and see" attitude, the drafters created a structure for implementing
future controls if the scientific evidence indicates they are
required. One article for instance, calls for parties to regularly assess
new information and to meet periodically to adjust control measures. 42
Thus, the treaty not only manages current knowledge, but also demonstrates
remarkable foresight and flexibility."
B. Differential Economic Impacts
Perhaps the most difficult obstacle facing international environmental
regulators is the uneven distribution of costs and benefits involved
in imposing international controls. While all nations are certain
to be affected by the depletion of the ozone layer, not all nations will be
affected to the same degree. Considering that the annual world market
for CFCs now approaches $2.2 billion, controls are likely to inflict disproportionate
economic impacts upon countries heavily dependent upon
CFC use or production. To overcome this problem, some of the most
important provisions of the Protocol are intended to minimize the adverse
economic effects on signatory countries. Prior international efforts
were often hampered by the inability of drafters to recognize and make
concessions for these differences. Like the acid rain deliberations between
the U.S. and Canada, international agreements have failed
largely because different players often have conflicting concerns. Thus,
the agreement in Montreal is most unique for its accommodation of
various parties' special economic circumstances.
For instance, at one point during the negotiations, progress stalled
42. 26 I.L.M. 1556. The first of these meetings was held in March of this year in
Great Britain. In April, Finland will host the first of the regular review meetings specified
by the treaty.
43. As noted by then EPA Administrator Lee Thomas and head of the U.S. Delegation
to Montreal, the agreement "keeps the door open for further action if it becomes
necessary." 18 Env't Rep. (BNA) No. 21, at ?1347 (Sept. 18, 1987). But even before
the final ratification of the treaty, its flexibility was evident. A mere four months after
the accord was signed, thirteen chemical companies from seven nations met and agreed
to accelerate toxicity testing on CFC alternative compounds. These representatives also
agreed to a tentative schedule for additional testing and plans for the publication of
interim results. 18 Env't Rep. No. 41, at 2122 (Feb. 5, 1988). And by December of
1988, several non-governmental organizations, numerous countries, and UNEP itself
was calling for a stepped up reassessment of the limits due to mounting scientific evidence.
Id.

1990]
MONTREAL PROTOCOL
when the Soviet Union voiced fears over what the strict controls would
do to its rather inflexible economy. Threatening to refrain from signing
the accord, the Soviets requested special permission to utilize the production
of CFC plants already under construction. To assure an orderly
phaseout, an express clause was inserted which extended the U.S.S.R.
permission to complete CFC production provided for in its most recent
five-year plan. Article 2(6) allows the Soviets to add the output of the
new plants to the 1986 base figures, for a maximum annual CFC consumption
of 0.5 kilograms per Soviet citizen.
Final agreement on the treaty was also threatened by the European
Economic Community's ("EEC") last-minute demand that it be
treated as a single entity. Non-aligned participants opposed the demand,
primarily because a question remained as to whether the treaty
would be enforceable without ratification by all twelve individual member
countries of the Community." As now written, the compromise
provides for the treatment of the EEC as a single entity, but only after
all the member nations have individually ratified the treaty. Thus, the
agreement permits the apportionment of production and consumption
of the controlled chemicals among the Community's member nations,
provided every member nation signs the treaty and the Community
taken as a whole meets the general requirements of Article 2.'
The most significant response to differential economic impacts involves
the exceptions granted to "developing countries." 4 Participant
developing countries now using modest amounts of the chemicals have
been allowed to increase consumption for ten years before being required
to abide by the restrictions of the accord. Increases in developing
countries' consumption will, however, be limited to a maximum of
0.3 kilograms per capita per year. 47 To allow for export to these quali-
44. The United States also voiced opposition to common treatment, specifically
expressing fear that the new approach would set a dangerous precedent for future international
negotiations. Complete abandonment of the treaty was averted only through
frantic negotiations moderated by UNEP executive Mostafa Tolba and Ambassador
Winifred Lang, head of the Austrian delegation and chairman of the conference to
negotiate the Protocol. See 18 Env't Rep. (BNA) No. 21, at 1347 (Sept. 18, 1987).
45. See 26 I.L.M. 1552. As of March of 1989, all 12 members of the EEC had
signed the treaty.
46. Although Article 5 of the treaty classifies all signatories as either developed or
developing, a definition of the term "developing" is conspicuously absent from the accord.
Unfortunately, history suggests that as additional countries come under the
agreement, the omission will inevitably become the topic of future debate. See 26
I.L.M. 1555.
47. These countries currently have an average consumption of 0.2 kilogram per
capita per year. See 18 Env't Rep. (BNA) No. 21, at 1347 (Sept. 18, 1987).

14 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
fying developing countries, producing participants will accordingly be
allowed to increase production by ten to fifteen percent.
This pragmatic attitude towards the needs of developing countries
was critical to universal acceptance of the accord. At the time of the
1972 Stockholm Conference, Third World nations regarded environmental
protection as a luxury of the rich, a ploy by the industrialized
nations to keep developing countries poor. But the attitude of these nations
is changing, due in large part to the shrewd paternalism of the
U.S. Rather than imposing its point of view upon countries with needs
divergent from its own, the U.S. is slowly convincing developing countries
that economic development can and must be achieved without destruction
of natural resource bases. By pointing to its own grave mistakes
and by adopting stringent domestic measures, the U.S. has
strengthened and extended its commitment to reducing CFC use. Fortunately,
there is some evidence that this new approach is working: As
of March of 1989, forty-four nations representing ninety-two percent of
the world's CFC production capacity had either signed or expressed
their intention to sign the Montreal Protocol. 48
V. BEYOND THE MONTREAL PROTOCOL
Although'the Protocol represents an impressive first step, concern
that it did not go far enough became evident almost immediately after
its signing. For instance, the Protocol does not address any chlorine
compounds other than five fully halogenated CFCs and three halons,
even though there is mounting evidence that there are more environmentally
damaging substances in use. Also, the signatories soon realized
that the provision which permits developing nations to increase use
of CFCs over the next decade could result in as much as a fifty percent
rise in worldwide consumption." 9 Thus, by the time the Protocol was
ratified by the United States Senate, even its sponsors were doubting
the effectiveness of the adopted controls. 5 "
The true test of the treaty will be whether it can provide a suitable
foundation for strengthening controls on current producers and extending
those controls to all potential producers. These criteria must be
48. Moritz, Third World and Ozone Blackmail, Christian Science Monitor,
March 23, 1989, at 18.
49. See also infra note 50.
50. Senator Claiborne Pell (D-R.I.) warned that the Protocol's reduction schedule
was "neither sufficiently rapid nor sufficiently large in magnitude," while Senator John
Chafee (R-R.I.) forthrightly stated that the version of the treaty signed in Montreal
was too weak, especially in light of developing scientific findings. Wright, States News
Service, March 14, 1988.

19901
MONTREAL PROTOCOL
fulfilled in light of accumulating scientific evidence suggesting that the
problem of ozone depletion is worse that originally suspected.
A. The Call for More Stringent Controls
Surprisingly, it has been the European Community, and not the
United States, that has stepped up the fight against ozone destruction
following the signing of the Protocol. In early March of 1989, the
twelve member nations of the European Community met in Brussels
and agreed to an immediate eighty-five percent reduction with total
elimination by the year 2000. Just days after the Brussels meeting, a
conference sponsored by British Prime Minister Margaret Thatcher
gathered representatives of 123 nations in London to discuss, among
other things, extending the accelerated phaseout schedules to all of the
treaty's signatories. 1 While this goal was not achieved in London, the
EEC, the United States and Canada did vow to go beyond the Protocol's
requirements and completely phaseout CFC use by the turn of the
century .52
The push for accelerated timetables however, has not met with
universal acceptance. Third World countries, embarking upon economic
developments that will necessarily involve large-scale dependence
on industries that use CFCs, are simply not willing to forego
growth they view as crucial. 5 3 According to the developing nations, it is
the industrialized world, grown rich while creating the environmental
crisis, that is most responsible for the current damage and capable of
bearing the burdens associated with CFC elimination. 4 There is also
some suspicion on the part of developing nations that the call for steep,
immediate cuts by the West is an attempt to prevent poorer nations
51. Participants at the London meeting included China, India and the Soviet
Union, countries constituting the most vocal and influential opponents of accelerated
phaseout schedules. The EC's action apparently jolted the U.S. into action. Just days
after the unscheduled Brussels conference, William K. Reilly, President Bush's new
EPA Administrator, called for the United States to match the European plan to speed
up the timetables for phaseout.
52. President Bush, however, made it clear that the U.S. phaseout was conditioned
on the development of adequate substitutes. Lemonick, First Aid for the Ozone
Layer: The Movement to Ban CFC's is Starting to Roll, TIME, March 13, 1989, at 50.
53. China for instance, has recently completed 12 CFC production plants. The
need for the capacity is unquestionable. Although the country has a population of 1.1
billion, fewer than 1 in 10 families have a refrigerator. Stammer, Saving the Earth:
Who Sacrifices?, L. A. Times, March 13, 1989, at 1, col.6.
54. Stevens, Ecological Threats, Rich-Poor Tensions, N. Y. Times, March 26,
1989.

16 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
from becoming principal players in the global economy." Lastly, Soviet
and Chinese officials have balked at the idea of accelerating the
phaseout schedules without more scientific evidence.
Because the revisions suggested in London supplant the very provisions
that gained the treaty widespread acceptance from Third World
nations, it will be a considerable challenge to get these nations to adopt
the changes. The thought, favored by certain politicians and governments,
that a period of dirty growth is unavoidable during large scale
industrialization, must not be permitted to seduce regulators into sacrificing
the health of people, if not the future of the planet. Switching to
CFC substitutes is not expected to be cheap or easy. It is estimated
that worldwide restructuring of equipment to handle CFC alternatives
will cost $6 billion over the next decade. 56 According to Archie Dunham,
a vice president at DuPont - the largest producer of CFCs -
this figure pales in comparison to the cost of industry gearing up to
make products such as refrigerators, air conditioners, and cleaning
equipment that can operate with the new chemicals. 5 1 But the current
hesitation on the part of Third World countries to agree to any controls,
even the lax ones contained in the Montreal Protocol, unless they
are given certain economic assurances from the West must be addressed.
If populous Third World countries like China and India do not
stop CFC production, the steps taken by the West, no matter how drastic,
will be futile.
B. Building on the Protocol
In the face of the Third World's general reluctance to join the
Protocol, it is imperative that industrialized nations take concrete steps
to accelerate global participation. Developing countries must be extended
trade, credit and/or direct financial assistance as incentives to
join in the Protocol. Most importantly, Third World nations must be
given assistance in developing and financing CFC-free industrialization.
5 8 Another idea suggested in London by India and China calls for
55. Suspicions regarding motives have often been a point of contention in international
negotiations. Similar charges were levied in the late 1960s against the United
States and the Soviet Union for their attempts to curb the proliferation of nuclear
weapons. And the Brazilian government has resisted much of the environmentalism
directed towards its rainforest, claiming that it is merely a plot to keep the country
poor. Giaimo, Deforestation in Brazil: Domestic Political Imperative - Global Ecological
Disaster, 18 ENVTL. L. 537, 554-555 (1988).
56. Stammer, supra note 53.
57. Id.
58. China and India for instance, made it clear at the London Conference that

1990]
MONTREAL PROTOCOL
the creation of an international fund financed by developed nations to
help developing nations switch to safer chemicals.
Some of the more innovative programs utilized in other areas of
environmental law need to be expanded and adapted for use in the fight
against ozone depletion. For instance, debt swaps, used most successfully
to prevent deforestation in South America, could be implemented
to compensate Third World countries for agreeing to halt CFC
proliferation. Principal and interest payments owed to international
lending organizations could be reduced by developed countries in return
for the forbearance of CFC use and production. Such guarantees could
be required in the future when new loans are made because international
aid agencies such as the World Bank are now much more comfortable
with conditioning loans on the recipient country's adoption of
environmentally sound policies.5 9
Another promising option is one adopted just recently at a United
Nations conference focusing on international shipments of hazardous
waste. When delegates from developing countries balked, a clause was
inserted into a draft treaty which expressly recognized the wealthier
countries' responsibility for bearing a larger portion of the burdens of
control. 60
C. Unilateral Moves by the United States
The United States must, as it has before, take the lead in the fight
against CFC use and production. Primary attention must be focused on
the search for CFC alternatives; our own phaseout and future Third
World development cannot be achieved without success in this area.
Since the technologies to recover and recycle CFCs are available or
discoverable, the government must develop appropriate policies to encourage
research and implementation of these technologies, including
economic incentives for stepped-up research projects. The United
States must also make a full scale effort to educate and persuade its
citizens to prevent CFC releases. The first step in this effort could be
the offering of cash incentives to businesses and consumers for the return
of discarded air conditioners and refrigerators.
The United States government must also be willing to make unpopular
political moves when necessary. Senator Chafee, for instance,
has introduced a bill that would quickly phase out CFCs domestically
they will not accept any provisions that deduct the added costs of CFC substitutes from
their foreign development assistance. See Stevens, supra note 54.
59. Id.
60. Id.

18 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
and eventually ban imports that are products of or contain CFCs, unless
the country of origin has a similar phaseout program. Though this
may not be economically advantageous to the U.S., it would be an effective
weapon against potentially powerful Third World objections, especially
if all developed countries were to adopt similar domestic measures.
The United States should also consider using its trade leverage to
effect an immediate worldwide ban on aerosol sprays. 1
The government must also be willing to explore other alternatives
if projected reductions in CFC use fail to materialize as rapidly as expected.
A proper starting point would be the promulgation of new regulations
to prohibit the use of CFCs in cleansing agents by the nation's
armed services. Finally, if alternatives are not developed quickly
enough by industry, the government must be willing to establish a tax
on ozone depleting chemicals. The EPA must also forge ahead with its
proposal to impose a regulatory fee on CFC producers in order to remove
any windfall profits generated from future supply restrictions. 62
VI. CONCLUSION
The difficulties of achieving international consensus on effective
regulations to protect the global atmosphere are enormous. They are
dwarfed, however, by the potentially catastrophic consequences of failing
to reach such consensus. The Montreal Protocol represents a momentous
advance in international environmental cooperation, but it will
not by itself solve the ozone depletion problem. The Protocol's controls
must be strengthened, and the economic concerns of developing countries
must be addressed to achieve a more rapid phaseout of CFCs. It is
simply unfair to expect nations which consume a disproportionately
small share of the world's resources to bear most of the burden for a
crisis created largely by the developed world.
The limited success achieved by the Montreal Protocol to date has
raised the possibility of conquering ozone destruction. Now it has become
necessary for the global community to recast the treaty in a form
that will be fully effective. The ramifications of such an amended
treaty's success will be significant beyond the problem of ozone depletion.
For if the global community is able to overcome this one problem,
61. Despite a near total ban by the United States, many countries have not followed
suit and are still using CFCs as propellants for aerosols.
62. See S3 Fed. Reg. 30604 (1988) (to be codified at 40 C.F.R. pt. 82) (proposed
Aug. 12, 1988), for a more detailed explanation of the EPA's attempt to deal with
unintended economic consequences of regulations adopted to implement the Montreal
Protocol domestically.

1990] MONTREAL PROTOCOL 19
it will improve its chances of coping successfully with future environmental
crises that are expected to be even more politically and economically
challenging.

K MART V. CARTIER: THE SUPREME COURT DECIDES THE
GRAY MARKET PROBLEM
R. RICHARD HoPP*
I.
In 1921 the Second Circuit Court of Appeals decided Bourjois &
Co. v. Katzel.' In that case the plaintiff purchased the exclusive right
to sell the face powder "Java" in the United States from the French
manufacturer of the powder. The defendant, an owner of a small drug
store, imported the genuine face powder from the French company and
began to sell it in competition with the plaintiff. The plaintiff argued
that the defendant was infringing on his United States registered trademark.
Properly grounded in the trademark theory of the time, the Second
Circuit denied protection to the plaintiff, holding:
Trade-marks . . . are intended to show without any time limit the
origin of the goods they mark, so that the owner and the public
may be protected against the sale of one man's goods as the goods
of another man. If the goods sold are the genuine goods covered by
the trade-mark, the rights of the owner of the trade-mark are not
infringed. 2
Rejecting the circuit court's theory that the trademark "Java" indicated
only that the face powder came from the French company, the
Supreme Court reversed.' The Court held that the mark not only indicated
the source of the face powder as French, but that "[it is the
trade mark of the plaintiff only in the United States and indicates in
* Law Clerk to the Honorable Joseph C. Howard, United States District Court for
the District of Maryland; B.A. 1986, University of Washington; J.D. 1989, University
of Maryland School of Law.
1. 275 F. 539 (2nd Cir. 1921).
2. Id. at 543 (emphasis added). This decision is based on the "source theory" of
trademarks which regards the purpose of trademarks solely to protect the consumer
from counterfeits. In Apollinaris Co. v. Scherer, 27 Fed. 18, 20 (1886), the court held:
There is no exclusive right to a name or symbol or emblematic device except to
denote the authenticity of the article with which it has become identified by association.
The name has no office except to vouch for the genuineness of the thing
which it distinguishes from all counterfeits; and until it is sought to be used as a
false token to denote that the product or commodity to which it is applied is the
product or commodity which it properly authenticates, the law of trade-mark cannot
be invoked.
3. Bourjois & Co. v. Katzel, 260 U.S. 689 (1923).
(21)

22 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
law, and, it is found, by public understanding, that the goods come
from the plaintiff although not made by it." ' 4 In addition, the Court
considered a trademark's purpose as more than denoting source, but
also as a valuable asset of the plaintiff's business. 5 Trademark rights
are "a delicate matter that may be of great value but that [are] easily.
. . destroyed, and therefore should be protected with corresponding
care." ' The value of a trademark was identified by the Supreme Court
as the good will of plaintiff's business as well as the "reputation he
stakes upon the character of the goods." '
Not only the Supreme Court, but also Congress, recognized the
inequities involved in denying Bourjois & Co. protection for the rights
it purchased from the French manufacturer. Following the Court's decision
in Katzel, Congress enacted § 526 of the Tariff Act of 1922,
later reenacted as § 526(a) of the Tariff Act of 1930.8 This statute
prohibits the importation into the United States of any merchandise:
[1] of foreign manufacture ... [2] bearing a trademark owned by a
citizen of, or by a corporation or association created or organized
within ... the United States, [3] and registered in the Patent and
Trademark Office by a person domiciled in the United States ...
[4] unless written consent of the owner of such trademark is produced
at the time of making entry. 9
Thus, a business finding itself in the position of Bourjois & Co. is
now, at least ostensibly, afforded protection not only by the Supreme
Court's decision in Katzel, but also by federal statute.
The Customs Service regulations implementing § 526, however,
have not extended this protection to all situations. Specifically, there is
no § 526 bar to the importation of articles when:
(1) Both the foreign and the U.S. trademark or trade name are
owned by the same person or business entity;
(2) The foreign and domestic trademark or trade name owners are
parent and subsidiary companies or are otherwise subject to com-
4. Id. at 692.
5. Id.
6. Id.
7. Id.
8. Codified as 19 U.S.C. § 1526 (1982). This statute was characterized as a
"hastily drafted provision" and "introduced as a 'midnight amendmen[t]' on the floor
of the Senate." K Mart Corp. V. Cartier, 486 U.S. 281, 303 (1988).
9. 19 U.S.C. § 1526

1990]
K MART v. CARTIER
mon ownership or control; 1 " [or]
(3) The articles of foreign manufacture bear a recorded trademark
or trade name applied under a-uthorization of the U.S. owner .... 1
It is these three exceptions to the protection of § 526 that were
challenged in K Mart Corp. v. Cartier Inc., 2 with the Supreme Court
upholding exceptions (1) and (2) (the "common control" exception) as
permissible regulatory interpretations of § 526, but striking down exception
(3) (the "authorized use" exception)." 3
II.
An association of United States trademark holders, the Coalition
to Preserve the Integrity of American Trademarks,"' brought suit seeking
a mandatory order directing the Customs Service, contrary to its
regulations interpreting § 526, to exclude all gray market goods from
entry into the United States. 5 The district court judge upheld the regulations."
6 Holding that the "pivotal question" is whether the construction
of § 526 by the Customs Service is "sufficiently reasonable" to be
accepted by the reviewing court,' 7 the court found reasonableness based
upon:
[T]he legislative history, judicial decisions, legislative acquiescence,
and the long-standing consistent policy of the Customs Service. The
regulations clearly implement the limited purpose for which Section
526 was enacted and are consistent with and effectuate the intent
of Congress to permit entry of trademarked goods not involving the
10. 19 C.F.R. 133.2(d) (1987) provides definitions for this subsection. " 'Common
ownership' means individual or aggregate ownership of more than 50 percent of the
business entity, and ... '[clommon control' means effective control in policy and operations
and is not necessarily synonymous with common ownership."
11. 19 C.F.R. 133.21(c)(1)-(3) (1987).
12. K Mart, 486 U.S. 281 (1988).
13. Id. at 287.
14. Members of this association are manufacturers or distributors of products
such as fragrances and cosmetics, watches, tires, fine crystal, cameras, photographic
equipment, binoculars and electronic goods. Coalition to Preserve the Integrity of
American Trademarks v. United States, 598 F.Supp 844, 846 (D.C. 1984).
15. Id. The Supreme Court defined gray market goods as "a foreign-manufactured
good, bearing a valid United States trademark, that is imported without the consent
of the U.S. trademark holder." K Mart Corp. v. Cartier, 486 U.S. at 285.
16. Coalition to Preserve, 598 F.Supp at 852.
17. Id. at 851.

24 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
Katzel situation.' 8
The court of appeals reversed, holding that the district court "misapprehended
the doctrine of deference to an agency interpretation of its
governing statute,"' 9 and that the Customs Service regulations "cannot
be squared with Section 526 and are thus invalid." 20 The court of appeals
based its opinion on the Supreme Court's decision in Katzel,
which emphasized that trademark law is intended not only to guard
against public deception, but also to protect property rights."
Noting this decision, the court of appeals held that Congress "similarly
rejected without qualification the legal theory underlying the
Second Circuit's opinion in Katzel - the view that a trademark genuine
in a foreign country is necessarily genuine here as well - and enshrined
the alternative 'territoriality' approach into law." 22 The Customs Service
regulations, therefore, conflicted with Congress' intent to reject the
Second Circuit's legal theory of trademark protection, and the court
struck down the regulations. 23
Furthermore, the court held that even if § 526 were ambiguous,
the Customs Service's interpretation did not display the consistency
requisite for judicial acceptance. 24 The regulations were not adopted
contemporaneously with the statute, were supported only by "poorly
articulated and vacillating reasoning," and were inconsistent.
The Supreme Court affirmed the court of appeals in part and reversed
in part. 26 One majority concluded that exceptions (1) and (2)
18. Id. at 852.
19. Coalition to Preserve the Integrity of American Trademarks v. United States,
790 F.2d 903, 908 (D.C. Cir. 1986).
20. Id. at 907.
21. Id. at 909-10.
22. Id. at 910. (emphasis added).
23. Id. at 905. The court continued that if "the intent of Congress is clear, that is
the end of the matter .... ." Id. at 908 (quoting Chevron U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 843 (1984)).
24. Id. at 916.
25. Id. at 916-17.
26. K Mart Corp. v. Cartier, 486 U.S. 281 (1988). This decision on the merits
followed a decision announced in March of 1988 which decided the question of jurisdiction
only. K-Mart Corp. v. Cartier, 485 U.S. 176 (1988). In that decision the majority
held that the district court had jurisdiction under both the federal question provision,
28 U.S.C. § 1331 and the statute permitting jurisdiction over acts of Congress
relating to trademarks, 28 U.S.C. § 1338(a). The minority was of the opinion that
jurisdiction belonged exclusively to the Court of International Trade for suits over embargoes
and other restrictions on the importation of merchandise pursuant to 28 U.S.C.
§ 1581(i)(3). The merits were not considered in the March decision, most likely, in
2 5

19901
K MART v. CARTIER
created by the Customs Service could stand as a permissible construction
of Congress' intent when enacting § 526,27 while a second majority
concluded that exception (3) could not be permitted to stand. 28
Justice Kennedy began the Court's opinion with an explanation of
the typical situations in which gray markets are formed. First, there is
the situation presented in Katzel involving an American company
which purchases from an unaffiliated foreign company the exclusive
right to use the foreign company's trademark and sell its trademarked
good in the United States (case 1).19 If the foreign company or a third
party begins to sell the trademarked good in competition with the
holder of the American sales rights, a gray market is formed.
The second situation involves an American company which registers
a trademark in the United States for goods that are manufactured
by a related company in a foreign country (case 2).30 This situation
may involve a foreign manufacturer creating a United States subsidiary
which subsequently registers the trademark in order to control
United States distribution (case 2a). 31 Two other possible variations are
created when an American company creates a manufacturing subsidiary
in another country (case 2b), or its own unincorporated but affiliated
manufacturing division in a foreign nation (case 2c). 32
Finally, a third situation which creates a gray market occurs when
the owner of an American trademark authorizes a foreign manufacturer
to use its trademark (case 3).33 The foreign manufacturer is independent
of the American company and often the authorization contains
a condition that the manufacturer may not import the product into the
United States. The agreement, however, does not stop third parties
from purchasing the product from the foreign manufacturer and subsequently
importing it into the United States.
In order to determine whether the Customs Service regulations
order to allow Justice Kennedy the opportunity to break a four to four deadlock created
by the vacancy on the Court. In fact, the Court's opinion on the merits consists of two
majority opinions written by Justice Kennedy with the concurring opinions of the
others. See infra notes 27-28 and 125-27 and accompanying text.
27. K Mart, 486 U.S. at 284. The majority included Justice Kennedy, with Justices
White, Brennan, Marshall and Stevens concurring.
28. Id. This majority consisted of Justice Kennedy, with Justices Scalia, Blackmun,
O'Connor and Chief Justice Rehnquist
concurring.
29. Id. at 286.
30. Id.
31. id.
32. Id. at 286-287.
33. Id.

26 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
were valid, the Court held that the "reviewing court must first determine
if [the Customs Service] regulation is consistent with the language
of the statute. ' 34 "If the statute is silent or ambiguous with respect
to the specific issue addressed by the regulation, the question
becomes whether the agency regulation is a permissible construction of
the statute." 3 5
A.
The Court held that § 526 was ambiguous when applied to the
three variations of case 2. An ambiguity is created in case 2a because
the language "bearing a trademark owned by a citizen of, or by a corporation
or association created or organized within . . .the United
States . . . " does not make it clear which company owns the United
States trademark. On one hand it could be argued that the foreign parent,
which owns the American subsidiary also owns the trademark, in
which case the protections provided in § 526 do not apply. On the other
hand it could be argued that it is the American company which owns
the trademark regardless of who owns the American company, and
therefore the protections of § 526 should apply. 36
The Court found a second ambiguity in the phrase "merchandise
of foreign manufacture. '37 When applied to the situations involved in
cases 2b and 2c, it is possible to interpret "merchandise of foreign manufacture"
to mean "goods manufactured in a foreign country" '38 in
which case protection would be granted. But the phrase can also be
read to mean "goods manufactured by a foreign company" 3 9 in which
case § 526 would apply only if the foreign subsidiary or unincorporated
division were considered to be foreign, even though actually owned by
an American company.
The Customs Service regulations contained in subsections (1) and
(2) resolve these ambiguities by removing the protection of § 526
whenever the companies involved are under common control. Thus, a
foreign parent in case 2a is considered to own the trademark and is not
permitted to prohibit the entry of the genuine product. In cases 2b and
2c similar products manufactured by companies abroad are not consid-
34. Id. at 291.
35. Id. (citing Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837, 843 (1984)).
36. Id. at 292.
37. Id. Only Justice White joined in this particular portion of the opinion.
38. Id.
39. Id.

1990]
K MART v. CARTIER
ered to be foreign due to the affiliation or actual ownership involved by
an American parent.
Justice Brennan, joined by Justices Marshall and Stevens, concurred
that § 526 was not intended to extend to subsidiaries of foreign
parents, emphasizing the circumstances surrounding the enactment of
the statute. "The most blatant hint that Congress did not intend to
extend § 526's protection to affiliates of foreign manufactures (case 2)
is the provision's protectionist, almost jingoistic flavor. Its structure bespeaks
an intent, characteristic of the times, to protect only domestic
interests." ' A foreign manufacturer cannot invoke § 526 for protection
unless it first registers the trademark with the Patent and Trademark
Office. 4 ' But even that is not enough to gain the benefit of § 526 because
the trademark must be owned by a citizen or corporation of the
United States. 42
The barriers that Congress erected seem calculated to serve no
purpose other than to reserve exclusively to domestic, not foreign, interests
the extraordinary protection that § 526 provides. But they are
fragile barriers indeed if a foreign manufacturer might bypass them by
the simple device of incorporating a shell domestic subsidiary and
transferring to it a single asset - the U.S. trademark. 3
Because a reading conferring § 526's protection to a shell subsidiary
would make most of the limiting language "pointless," 44 Brennan
agreed with Justice Kennedy that the Customs Service regulations reasonably
avoid this anomaly. 5 In addition, the concurring Justices held
that it is the parent corporation and "not the subsidiary whose every
decision it controls [that] better fits the bill as the true owner of any
property that the subsidiary nominally possesses." '48
Brennan also concurred in his opinion that § 526 is ambiguous
with regard to the requirement that merchandise be "of foreign manufacture."
47 This requirement is vague because the phrase could be interpreted
to mean either "'merchandise manufactured in a foreign
country' or 'merchandise manufactured by a foreigner.' Under the former
definition, the merchandise manufactured abroad [by a domestic
firm's subsidiary] would fall into § 526's ban. Under the later defini-
40. Id. at 297.
41. 19 U.S.C. § 1526 (1982).
42. Id.
43. K Mart, 486 U.S. at 298.
44. Id.
45. Id.
46. Id. at 299.
47. Id.

28 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
tion, however, the coverage is not clear." 4 Since the intent of Congress
was not to extend protection to foreign affiliates, the Customs Service
regulation reasonably resolves the ambiguity. 9
In his dissent, Justice Scalia, joined by Chief Justice Rehnquist
and Justices Blackmun and O'Connor, characterized the majority's
reading of the phrase "of foreign manufacture" as "queer" and "not
merely unusual but inconceivable . . . ."I Scalia explained his dissatisfaction
with the majority's holding:
The statute excludes only merchandise "of foreign manufacture,"
which the majority says might mean "manufactured by a foreigner"
rather that "manufactured in a foreign country." I think
not. Words, like syllables acquire meaning not in isolation but
within their context. While looking up the separate word "foreign"
in a dictionary might produce the reading the majority suggests,
that approach would also interpret the phrase "I have a foreign
object in my eye" as referring, perhaps, to something from Italy.
The phrase "of foreign manufacture" is a common usage, well understood
to mean "manufactured abroad."'"
Thus, the dissent argued that § 526 is clear and unambiguous with
its language "of foreign manufacture" and the Customs Service regulations
may not be used to alter the intent of Congress. 2
Justice Kennedy, writing for a second majority consisting of Chief
Justice Rehnquist and Justices White, Blackmun, O'Connor and
Scalia, also held that the authorized use exception contained in subsection
(c)(3) of the Customs Service regulation did not resolve any similar
ambiguity. 53 In the case of an unaffiliated company which authorizes
the use of its trademark, § 526 clearly allows protection of the
trademark from gray market imports. Therefore the regulation operates
contrary to the Congressional intent of § 526 and must fall. According
to the Court, "[u]nder no reasonable construction of the statutory
language can goods made in a foreign country by an independent
foreign manufacturer be removed from the purview of the statute." '54 In
48. Id.
49. Id. at 300.
50. Id. at 319.
51. Id.
52. See, Board of Governors, FRS, v. Dimension Financial Corp., 474 U.S. 361,
368 (1986).
53. K Mart, 486 U.S. at 293.
54. Id. at 294.

1990]
K MART v. CARTIER
his concurrence, Brennan agreed with this result because in case 3 the
United States trademark holder "is unambiguously 'owned by' a U.S.
firm, and registered by a firm 'domiciled in the United States,' and the
goods sought to be imported are 'of foreign manufacture.'-55
B.
Even before the Court delivered its opinion on the merits, Justice
Scalia had identified the importance of the gray market issue. In the
decision of the jurisdictional issue," 6 Justice Scalia characterized the
gray market situation as one "which may have immediate and substantial
effects on the national economy . . . ."' Indeed, in contrasting the
jurisdictional question with the question raised on the merits, Justice
Scalia noted that the "gray-market question is of greater economic
importance." 58
The opinions on the merits also reflected the other Justices' recognition
that the issue presented to them was one of importance for business,
economics and international trade. Justice Kennedy began the
Court's opinion by describing the reality of how gray markets fit into
international commerce. 59 The other justices either referred to the
"multi-billion dollar industry [which] has emerged around [gray market
merchandise], ' 1 0 or expressed concern for how the decision in this
case would be received by trade partners abroad." 1
With these very practical economic considerations in mind, the
Court proceeded to resolve the questions presented based on the ambiguities
of § 526 and the reasonableness of the Customs Service regulations.
62 Emphasis on the plain meaning of the statute and deference to
an agency's interpretation are the established means of resolving questions
of statutory interpretation. 63 This method seems particularly unsatisfactory
in a case such as K Mart, however, when the ultimate decision
has such a large impact on business and trade.
Instead of confining itself to a narrow reading of the statutory construction
rules, it would have been more appropriate for the Court in
55. Id. at 323.
56. K Mart Corporation v. Cartier, Inc., 486 U.S. 176 (1988).
57. Id. at 191 (Scalia, J., dissenting).
58. Id.
59. K Mart, 486 U.S. 281, 286-87 (1988).
60. Id. at 295.
61. Id. at 322.
62. Id. at 292.
63. See, e.g., Chevron U.S.A., Inc., v. Natuaral Resources Defense Council, Inc.,
467 U.S. 837, 842-43 (1984).

30 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
this case to have considered an analysis of how businessmen involved in
the gray market would be affected. The Court could have fairly included
economic considerations by broadly construing recent statutory
construction precedent. For example, in Bethesda Hospital Ass'n v.
Bowen," ' the Court held that in "ascertaining the plain meaning of the
statute, the Court must look to the particular statutory language at
issue, as well as the language and design of the statute as a whole."
Building on this language, the Court might have considered that the
design of § 526 was to create certain protections and build trade barriers.
66 Because the purpose of the statute was to protect certain businesses,
the Court could have appropriately based its opinion, at least in
part, on those business practices.
This approach would arguably place the Supreme Court in the
role of legislator. The Court is empowered, however, only to interpret
what Congress has written, not write the law itself. If Congress, in its
farther-reaching power, does not like the practical result of a court's
interpretation, it can overrule it by making the language of a statute
clearer. Indeed, Congress took this step after the Second Circuit's decision
in Bourjois & Co. v. Katzel. 67 A forceful argument for placing
Congress in this superior position vis-a-vis the courts is that only Congress,
and not judges, have the experience and resources necessary to
write the law.
Yet, when an issue of such practical and immediate importance is
decided, as in K Mart, it would seem impossible for the Supreme Court
to reach a decision without considering more than the ambiguity of a
statute and legislative history. Instead of parsing statutory language,
the Court, in this case, should have reviewed the alternatives to § 526
in the common law as well as extrinsic considerations for businessmen
in the gray market such as antitrust and contract law. Reference to
such considerations could have lead the Court to a more effective resolution
of the problem presented.
III.
The result of the Court's holding in K Mart denies the owners of
American trademarks who are affiliated with a foreign manufacturer
the protection of § 526. Although these commonly controlled entities
64. 485 U.S. 399 (1988)(quoted by the Court in K-Mart, 486 U.S. at 291).
65. 485 U.S. at 403-405 (emphasis added).
66. One concurring opinion, in fact, did consider this at length. See K Mart, 486
U.S. at 295-96 (Brennan, J., concurring in part and dissenting in part).
67. See supra notes 8 and 9 and accompanying text.
' 65

1990]
K MART v. CARTIER
may not use the legislation to bar importation, they are not without
protection from gray market competition. 68 In addition, the apparent
windfall given to companies which have authorized the use of their
marks can be abused: The prohibition on importation created by § 526
may lead to a successful challenge based on contract principles or antitrust
laws.
A.
Alternatives available to the commonly controlled companies for
protection from gray market competition fall into two broad areas.
First, there are tort remedies such as unfair competition and intentional
interference with contractual relations; second, there are state and federal
laws which may provide relief.
The tort of unfair competition in its narrowest sense prohibits the
"palming off [of] one's goods as those of a rival trader." 9 This concept,
combined with the Supreme Court's notion in Katzel that the American
seller adds something to an imported good," 0 could permit an
American company to argue that gray market imports are being
palmed off as the product of another American company usually associated
with the domestic sale of the imported item. Furthermore, unfair
competition has been based on acts "which lie outside the ordinary
course of business and are tainted by fraud, or coercion, or conduct
otherwise prohibited by law." 7 It is relatively easy to characterize one
who imports goods on the gray market as engaging in conduct tainted
68. To support its decision to deny the protection of § 526 to affiliated companies,
the Court suggested that the holder of a United States trademark could protect itself
from gray market competition in one of three ways:
They could, for example, jointly decide in their mutual best interests that the manufacturer
(1) should not import directly to any domestic purchaser other than its
affiliate; (2) should, if legal, impose a restriction against resale (or against resale
in the United States) as a condition on its sales abroad to potential parallel importers;
or (3) should curtail sales abroad entirely.
K Mart, 486 U.S. at 302. The first solution suggested will hardly be effective, as the
dissent pointed out, because "the bulk of the gray market is attributable to third parties
that are unaffiliated with either the manufacturer or the trademark holder." Id. at
328. The third solution to curtail sales abroad entirely is not really a solution to the
problem of gray market goods, because it simply avoids the creation of a gray market.
The second suggestion, as well, may not be viable. Even the Court as it made this
suggestion was careful to qualify itself with the crucial phrase "if legal." See infra
notes 115-24 and text accompanying.
69. Schechter Corp. v. United States, 295 U.S. 495, 531 (1935).
70. See supra notes 3-7 and text as well as infra notes 80-88 and text.
71. Schechter Corp. v. United States, 295 U.S. 495, 532 (1935).

32 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
by fraud, especially when the consumers are intentionally left ignorant
of the true source and circumstances of the importation.
In the case of William R. Warner & Co. v. Eli Lilly & Co., 2 the
Supreme Court found unfair competition in a set of facts very likely to
occur in the gray market context. The plaintiff was a manufacturer of
a liquid preparation of quinine which was mixed with chocolate in order
to create a distinctive color and flavor." An affiliate of the defendant
began manufacturing a similar product 4 and Lilly not only sold it
at a lower price but "induc[ed] the purchasing druggist in his own interest
to substitute, as well as he could, the [cheaper imitation] for the
[more expensive original]. In other words, [the defendant] sought to
avail itself of the favorable repute which had been established for [the
plaintiff's] preparation in order to sell its own." 75
The Court held that there was no deception, and therefore no unfair
competition with regard to the sales to the druggists because the
sales involved clearly distinguishing labels . 7 The sales to the actual
consumers, however, usually did involve fraud, and the Court held the
defendant liable for the palming off, even though it only sold directly to
the druggists. 7 7 "That no deception was practiced [by defendant] on
the retail dealers, and that they knew exactly what they were getting is
of no consequence. The wrong was in designedly enabling the dealers to
' '7
palm off the preparation as that of the [plaintiff]. " This theory of
liability may be of use against an importer of gray goods who sells to a
retailer, with the retailer subsequently palming off the goods as originally
coming from the United States trademark owner. 9
72. 265 U.S. 526 (1924).
73. Id. at 527-529.
74. The actual manufacturer was the Pfeiffer Chemical Company and the Searle
& Hereth Company, both of which were commonly controlled with the defendant Eli
Lilly & Company which actually sold the product. Id. at 527.
75. Id. at 529-30.
76. Id.
77. Id.
78. Id. "One who induces another to commit a fraud and furnished the means of
consummating it is equally guilty and liable for the injury." Id.
79. Another case that may prove to be a useful analogy to the gray market goods
situation is Hanover Milling Co. v. Metcalf, 240 U.S. 403 (1916). The Supreme
Court's analysis may prove significant because Hanover Milling Co. involved a party
who misled consumers with similar packaging to an existing trademark, even though
the party engaging in the deception was using the trademark lawfully. Id. at 424. The
Court found unfair competition, notwithstanding the lack of infringing use, based on
the defendant's purpose of taking advantage of the plaintiff's advertising and reputation.
Id. at 423. A less obvious use of the Hanover Milling Co. case may be made by
the gray market importer. Hanover Milling Co. established that common law trade-

1990]
K MART v. CARTIER
Finally, there is an old Eighth Circuit case which found unfair
competition in a case directly on point: Perry v. American Hecolite
Denture Corp. 80 Plaintiff, the American Hecolite Denture Corporation,
received by assignment all United States rights to sell denture blanks
manufactured by the German Hecolite company. Defendant purchased
denture blanks manufactured by German Hecolite, as did the plaintiff,
from retailers in Germany and imported them into the United States.
When defendant sold the blanks, he represented only that they were
the original denture blanks manufactured by German Hecolite. 8 '
Analyzing these facts, the court held that "it was incumbent on
plaintiff to show that [defendant] had 'palmed off his blanks as those of
the plaintiff'; that he was guilty of 'passing off' as it is called in the
English law books." 82 The court found that plaintiff became associated
with the name Hecolite in the United States because he sold the denture'blanks
"in [a] distinctive little green box, [and] vouched for and
replaced [the product] whenever complained against . . .. , Americans
had come to expect the plaintiff's product when Hecolite was offered.
Despite the fact the products were identical, the court held that
the defendant was attempting to sell on the plaintiff's reputation and
standing.84
Relying on the Supreme Court decision in Katzel, as well as English
cases "in accord with our own decisions," 85 the court considered it
settled that "an exclusive sales agent of foreign made trade-marked
goods may so carry on his business of selling the goods in the country
of import as to there create public understanding that the goods have
come from him, though not made by him." 86 Because a domestic retailer
can become known as the source for a foreign manufactured
item, the court found an appropriate test for unfair competition to be:
[W]hat, if anything, [is there] to identify the [U.S.] agent with the
mark rights may not create a monopoly in markets or regions to which the mark's
trade has never reached. Id. at 419. Due to the legitimacy of both marks involved in
Hanover Milling Co., and the legitimacy, or at least genuiness, of a gray market trademark,
an importer might successfully argue that as long as the United States trademark
owner is not selling or advertising in a particular region, the gray market importer
is permitted to do so.
80. 78 F.2d 556 (8th Cir. 1935).
81. Id. at 561.
82. Id. at 559 (citing Schechter, Warner and Hanover Milling Co.).
83. Id.
84. Id.
85. Id. at 560.
86. Id.

34 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
articles dealt in by him which was used to induce the purchaser to
buy them; "what, if any, peculiar feature whether in get-up or
shape or whatever it may be." Was there anything about the goods
which by way of get-up says to the purchaser: "This is a thing for
which (the [U.S.] sales agents) are responsible, not necessarily as
makers, but as persons who have dealt in it and who guarantee its
quality to you. "87
If there is such a peculiar feature to a good, then an importer has
no "right to sell in such a way or under such circumstances as to induce
belief or trade upon the understanding that the [goods come]
from the [U.S. agent] or they are identical to those sold by the [U.S.
agent] .88 In the gray market goods context, therefore, a feature peculiar
only to the United States trademark and creating public understanding
that the goods come from the American trader, would warrant
protection.
A second common law cause of action, in addition to unfair competition,
is intentional interference with contractual relations. This tort
is only loosely, and often mistakenly used by the courts, but it is a
viable cause of action. 8 9 In addition to the courts which have made
actual use of it, the Restatement (Second) Torts has adopted this tort
and stated its elements clearly:
One who intentionally and improperly interferes with the performance
of contract ... between another and a third person by inducing
or otherwise causing the third person not to perform the contract,
is subject to liability to the other for the pecuniary loss
resulting to the other from the failure of the third person to perform
the contract. 90
A domestic parent may take advantage of this tort by having its
foreign affiliate enter into a contract providing that the affiliate will not
sell the trademarked goods in the United States, as well as not sell the
goods to a third party who intends to import the goods into the United
States. If a third party should purchase the product from the foreign
company and subsequently attempt to sell it in the United States, no
87. Id. at 560-61.
88. Id. at 561.
89. See e.g., DEP Corp. v. Interstate Cigar Co., 622 F.2d. 621 (2nd Cir. 1980).
90. 90. RESTATEMENT (SECOND) TORTS § 766 (1977). Compare with RESTATE-
MENT (SECOND) TORTS § 766C providing that there is no liability for the negligent
interference with contractual relations.

1990]
K MART v. CARTIER
protection is available from § 526 due to the Customs Service's common
control exception, but the Restatement alternative offers a cause
of action for relief. 91 The American trademark owner would argue that
the gray market importer caused the foreign affiliate to breach its contract
regarding resale, and therefore the importer is subject to liability
"for the pecuniary loss resulting to the [American company] from the
failure of the [foreign firm] to perform the contract." '92 This argument
has found some support in the courts. 93
In DEP Corp. v. Interstate Cigar Co., 94 the plaintiff had been appointed
the exclusive United States dealer of soap manufactured under
the trademark "Pears." 95 Defendant purchased the soap from a European
middleman and sold it in the United States at a lower price than
the plaintiff. 6 Relying on the Restatement (Second) Torts and New
York state common law, the Second Circuit suggested the plaintiff had
a cause of action based upon a theory of intentional interference with
contract relations. 97 The suit's basis would have been the defendant's
interference with plaintiff's enjoyment of his exclusive distribution
contract. 98
Commonly controlled companies may also be able to protect themselves
from gray market competition through various state and federal
statutes. For example, the Unfair Import Practices Chapter of the
Trade Act of 19749 declares unlawful:
Unfair methods of competition and unfair acts in the importation
of articles in the United States, or in their sale by the owner, importer,
consignee, or agent of either, the effect or tendency of which
is to destroy or substantially injure an industry, efficiently and economically
operated, in the United States, or to prevent the establishment
of such an industry, or to restrain or monopolize trade and
91. With regard to the knowledge requirement, the RESTATEMENT (SECOND)
TORTS § 766 comment i (1977) provides that "to be subject to liability under the rule
stated in this Section, the actor must have knowledge of the contract with which he is
interfering and of the fact that he is interfering with the performance of the contract
(emphasis added).
92. RESTATEMENT (SECOND) TORTS § 766 (1977).
93. See infra notes 95-99 and accompanying text.
94. 622 F.2d 621 (2nd Cir. 1980).
95. Id. at 621.
96. Id.
97. Id. at 624.
98. Id.
99. 19 U.S.C. § 1337 (1982).

36 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
commerce in the United States .... '00
If a violation is found, the Federal Trade Commission is authorized to
exclude the articles from entry into the United States."'
There are also two common state laws that could be invoked to
provide protection from gray market competition: anti-dilution and unfair
competition statutes. A typical anti-dilution statute provides:
Likelihood of injury to business reputation or of dilution of the distinctive
quality of a mark or trade name shall be a ground for injunctive
relief in cases of infringement of a mark registered or not
registered or in cases of unfair competition, notwithstanding the absence
of competition between the parties or the absence of confusion
as to the source of goods or services.' 02
This statute would allow an American company harmed by gray
market goods to argue that the distinctive quality of its mark, perhaps
as the only American distributor of a foreign item, has been lost due to
the gray market imports. Therefore, an injunction prohibiting the gray
goods would be appropriate. Furthermore, if the gray goods are in some
way inferior, the domestic trademark owner could argue that an injunction
is an appropriate remedy due to the tarnished association consumers
have developed due to the deception caused by the gray goods.
Even a blurring of the domestic trademark owner's identity as the "official"
domestic source of the foreign import would be enough for a
cause of action pursuant to most anti-dilution statutes." °3
State unfair trade practice legislation generally codifies and repeats
most of the common law protections mentioned above. For exam-
100. Id. § 1337(a).
101. Id. § 1337(d), (e) and (f). Similar relief may be granted as well by the Federal
Trade Commission pursuant to its power granted by 15 U.S.C. § 45 to prohibit
unfair methods of competition and unfair or deceptive acts. 15 U.S.C. § 45 (a)(1)
(1988).
Another applicable federal statute is the Lanham Act, 15 U.S.C. § 1051 (1988),
which prohibits the use in commerce of any "reproduction, counterfeit, copy, or colorable
imitation of a registered mark." 15 U.S.C. § 1114(1) (1988). Due to differences in
warranty provisions and servicing arrangements, in addition to the theory announced
by the Supreme Court in Katzel, this may prove to be a convincing argument. See
supra notes 3-7 and 80-88 as well as accompanying text.
102. N.Y. General Business Law § 368-d (McKinney 1984).
103. An anti-dilution statute, even if available, will not be easy to use. Courts are
unfriendly to these statutes and will only enforce them to a limited extent when the
mark is distinctive. See, e.g., J. GILSON, TRADEMARK PROTECTION AND PRACTICE §
5.05[91 (1988).

19901
K MART v. CARTIER
pie, Maryland's unfair or deceptive trade practices statute prohibits,
among other activities, "[flalse, falsely disparaging, or misleading oral
or written statements, visual description, or other representation of any
kind which has the capacity, tendency, or effect of deceiving or mis-
"1104
leading consumers ....
B.
If a company wishing to avoid the uncertainties of alternative remedies
decides not to affiliate itself too closely with a company abroad
and avail itself of the protection of § 526 for authorized use such as in
case 3, there still may be legal barriers to surmount. Agreements authorizing
a foreign manufacturer to use a trademark will usually contain
a provision limiting the sale of the manufactured item to foreign
countries and prohibiting its sale in the United States. Such contracts
may also limit third parties to whom the authorized manufacturer may
sell the goods; namely not to anyone for the purpose of subsequent importation
into the United States. These restrictive agreements are an
obvious target for a suit alleging antitrust violations." 5 Antitrust violations
notwithstanding, however, it is questionable whether courts will
uphold contracts containing these types of restrictions.
Timken Roller Bearing Co. v. United States 0 6 involved an action
charging antitrust violations against an American company which allegedly
combined with its related companies in France and Britain.
These three companies signed agreements which provided for, among
other things, the allocation of world-wide trade territories among the
companies," 7 cooperation to protect each other's markets and eliminate
outside competition, 108 and participation in cartels to restrict imports
to, and exports from, the United States. 10 9 Arguing on appeal that the
district court erred in its determination that the Sherman Act antitrust
laws were violated, Timken contended that the restraints on trade relied
on by the lower court were reasonable, and therefore not in viola-
104. MD. COM. LAW CODE ANN. § 13-301(1) (1983).
105. A company wishing to authorize the use of its trademark abroad may, of
course, simply not include any restrictions on resale at all. When a gray market import
reaches United States Customs, § 526 will deny entry. Relying on the Customs Service
and waiting for the infringing goods to enter the country may not, however, provide
much peace of mind for the businessman making a substantial investment, and the
contract provisions are an obvious place to make certain of protection.
106. 341 U.S. 593 (1951).
107. Id. at 596.
108. Id.
109. Id.

38 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
tion of the antitrust laws, because they were "an exercise of Timken's
right to license the trademark 'Timken.' "110
The Supreme Court was not persuaded by this argument. The
Court first indicated that the American Timken company was possibly
precluded from making this argument because it might not be the
owner of the trademark for the British and French corporations."' Assuming
American Timken was the owner, however, the Court held that
a "trademark cannot be legally used as device for Sherman Act violation."'
2 The Court found that the agreements "went far beyond pro-
tection of the mark 'Timken' and provided for control of the manufacture
and sale of [the goods] whether carrying the mark or not." ' 3
Timken therefore provides an indication that agreements authorizing
the use of a mark in certain geographical areas only, in order to allocate
trade territories, will not be favored by the courts and may violate
the Sherman Act." 4
If antitrust law does not create a barrier to these agreements, they
may be held invalid as a matter of contract law." 5 The owner of a
trademarked good probably would want to restrict the manufacturer's
sale of a good in one of two ways. The most comprehensive method
would be a complete ban on the manufacturer from selling to a third
party when the third party is a potential gray market importer. A second
method would require that the subsequent sale of the good must be
at a certain minimum price." 6 In this way the trademark holder could
110. Id. at 597.
111. Id. at 599.
112. Id. at 599. The Court supported this proposition by noting that the Trademark
Act itself penalizes the use of a mark "to violate the antitrust laws of the United
States." Id. (citing 60 Stat. 427, 439, § 33(b)(7), 15 U.S.C. §§ 1051, 1115(b)(7)
(1988)). ("The reason for the penalty provision was that 'trade-marks have been misused
. . . [and] have been used in connection with cartel agreements.' 92 Cong. Rec.
7872." Timken, 341 U.S. at 599 n.8).
113. Id. at 598-99.
114. See Timken at 598. ("[Timken's] premise that the trade restraints are only
incidental to the trademark contracts is refuted by the District Court's finding that the
'trade mark provisions [in the agreements] were subsidiary and secondary to the central
purpose of allocating trade territories.' " (brackets in original)).
115. The grounds a court would use to strike down such a contract would be
broad public policy considerations based on illegal bargaining, judicial hostility to monopolies
and analogies to the antitrust laws. As such, the analysis of contract law is
related to the antitrust problem above.
116. This involves the sale of an article where the sale contains an agreement
fixing the resale price. A trademark owner wishing to limit gray market competition
might require the resale price to be the same or a certain percentage higher than the
price of the authorized article.

1990]
K MART v. CARTIER
require that the gray market imports be sold at a price high enough to
prevent competition with the authorized goods.
The comprehensive ban on all resale to potential gray market importers
would not be enforced by the courts. "Under ordinary circumstances,
the 'owner' of an article has a complete 'monopoly' in its use
and enjoyment." 11 The owner has absolute discretion to sell or refuse
to sell to a potential gray market importer. But, once the owner has
made a sale, his exclusive rights are gone, including his power to refuse
to sell to a gray market importer."' Neither will a notice attached to
the article stating that the article may not be imported into the United
States be an effective remedy. "If the seller firmly fastens to the article
a notice that there shall be no resale . . . for other than a specified use,
the notice is wholly inoperative as a control over subsequent owners."11"9
The second method of using a resale price maintenance agreement
20 may be a viable alternative. Fair trade laws, enacted in some
form by almost every state, and contained in some federal legislation,
make these agreements enforceable.' 2 ' The underlying theory of these
statutes is that they are only used by producers of an article that is
uniform and can be identified by a trademark. 22 "Its use in no way
suppresses the competition of other similar articles with the identified
articles, either by other producers [or retailers]. An unreasonable high
price will cause consumers to buy competing articles instead and thus
decrease the seller's total profits." 12 3 A producer may use these resale
agreements to restrain competition because he is only limiting the competition
of a good in which he already has exclusive ownership.
The use of uniformity and identification as the key to permitting
this type of monopoly suggests that they may not be appropriate in the
gray market context. The fact that the gray market exists indicates
that there is indeed actual competition between retailers of an identifiable
good. A resale price agreement may not be permitted in this context
because it would create a monopoly which otherwise would not
exist. This is consistent with Corbin's conclusion that these statutes "do
not protect persons who use resale price maintenance agreements for
the purpose or the effect of obtaining a monopoly that will eliminate
117. A. CORBIN, 6A CORBIN ON CONTRACTS § 1408, at 227 (1962).
118. Id.
119. Id. at 228.
120. See supra note 116.
121. CORBIN at 234.
122. Id. at 228.
123. Id.

40 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
competition with their products."' 24
IV.
By allowing the exception for commonly controlled or owned companies
to stand, one majority of the Supreme Court encourages international
competition and free trade across borders. Without the protection
of § 526, some companies will not receive a monopoly in the sale of
trademarked goods in the United States which could be used to fix
higher prices for American consumers. Whatever harm the United
States owners of trademarks may claim due to the Court's holding can
be mitigated by alternatives to § 526 such as various statutes and tort
theories.
The second majority in K Mart struck down the authorized use
exception to § 526. The effect of this holding is to protect American
businessmen from competition in the American companies' own trademarked
goods. The same activity of a gray market importer, if done by
a domestic firm authorized to use a trademark for manufacturing,
would constitute a trademark infringement. The Supreme Court has
simply provided analogous protection in the case of a foreign manufacturer
authorized to use the trademark. Additionally, this majority prevents
a gray market importer from being unjustly enriched by the
American trademark holder's advertising expenses, good will, and entrepreneurial
skill. Protecting the exclusive rights of an owner of a
United States trademark also benefits American consumers by giving
them the assurance that the trademarked goods they purchase have a
consistent source and quality. This protection, however, if abused, is
limited by antitrust and contract law.
The approaches of the two majorities, in terms of trade policy and
the effect on international commerce, are inconsistent. The Court's
overall holding, however, is consistent with modern statutory construction
jurisprudence. 125 Perhaps the actual disagreement between the two
majorities goes not to ambiguities and statutory construction so much
as to where the line should be drawn between international free trade
on one side, and protection of American business investments on the
other. 126 If this is true, the Court's compromise, even though difficult to
124. Id. at 235.
125. See K Mart Corp. v. Cartier, 486 U.S. 281, 284 (1988) (Part II A of Justice
Kennedy's majority opinion discusses the standard of review for agency regulations and
supra notes 62-63 and text).
126. This conclusion is supported by the fact that Justice Kennedy's terse opinion
for the majorities, focusing only on the language and intent of the statute and regula-

19901
K MART v. CARTIER
reconcile with regard to trade policy, at least does not create an undue
burden on international businessmen.
tions was joined only by Justice White, and then only for one section. Id. The other
justices and the Chief Justice all wrote or joined concurring opinions indicating that
their interest was in much more than simple statutory construction.

COMMENT
TAKING THAT FIRST STEP: THE SECURITIES AND
EXCHANGE COMMISSION'S
PROPOSED MULTIJURISDICTIONAL DISCLOSURE SYSTEM
I. INTRODUCTION ....................................... 44
II. O V ERVIEW ....................................... 44
A. International Developments ..................... 45
1. Effect of European Community Actions ..... 47
2. Basle Agreement ......................... 48
3. International Organization of Securities Commissions
Efforts .......................... 48
B. United States - Canadian Developments: The Free
Trade Agreem ent ............................. 49
III. THE SEC's REQUEST FOR COMMENTS IN 1985 ......... 49
IV. GOALS OF SECURITIES REGULATION ..................... 51
V. WHY CANADA ? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 52
A. The Registration Process ...................... 53
B. Periodic Reporting Requirements ............... 54
C. Auditing and Accounting ...................... 55
D. Other Similarities and Differences ............... 58
VI. PROBLEMS IN ANY MULTI JURISDICTIONAL DISCLOSURE
S Y ST EM ... ... .. .. . . .. ..... . . .. .. . ... . . .. . .. . .. . .. 59
VII. THE PROPOSED SYSTEM ............................ 59
A. Registration of Offerings ....................... 60
1. Investment Grade Debt and Preferred Stock . 60
2. Other Offerings .......................... 61
B. Periodic Reporting ............................ 61
C. Tender Offers ............................... 62
D. Proxy Solicitation and Rights Offerings .......... 63
VIII. RESPONSES TO THE RELEASE, ANALYSIS AND RECOMMEN-
D A TIO N S ......................................... 64
A . Civil Liability ................................ 64
B. Securities Offerings and Periodic Reporting ...... 65
1. Eligibility Requirements .................. 65
2. Accounting Reconciliations ................ 67
C. Tender Off ers ................................ 71
D. Shelf Registration ........................... 72
E. Expected Cost Savings ........................ 72

44 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
IX . C ONCLUSION ..................................... 73
I. INTRODUCTION
This Comment presents a review of the developments leading up to
the joint decision by the United States Securities and Exchange Commission
(the "SEC"), the Ontario Securities Commission (the "OSC")
and the Commission des valeurs mobilieres du Quebec (the "CVMQ")
on July 26, 1989 to propose in a recent release 1 a multijurisdictional
disclosure system to regulate the disclosure requirements of qualifying
United States and Canadian securities issuers. The new proposed multijurisdictional
system is, in the words of the SEC, "a hybrid between
the reciprocal approach and the common prospectus approach" 2 to facilitating
simultaneous multijurisdictional offerings of securities, periodic
disclosure and other reporting currently required.
This comment will also discuss certain major aspects of the proposed
system. Additionally, after a review of some of the comment letters
the SEC has received, the proposed system will then be analyzed to
determine whether the proposed system adequately meets the goals of
securities regulation in the areas reviewed.
II. OVERVIEW
In recent years the SEC has noted the trend towards the globalization
of international securities markets. 3 Since the adoption of Form
20-F in 19791, the SEC has continued to respond to this trend. 5 With
1. Multijurisdictional Disclosure, Securities Act Release No. 6841, Exchange Act
Release No. 27055, Trust Indenture Act Release No. 2217, [1989 Transfer Binder]
Fed. Sec. L. Rep. (CCH) 84,432 at 80,281 (July 24, 1989) [hereinafter "The Release"].
A short explanation about the three commissions involved is perhaps warranted.
The SEC is the primary regulatory body in the United States for the securities
industry and regulates on a federal level. Each state exercises concurrent jurisdiction
with the SEC but state securities statutes (collectively known as "Blue Sky" laws)
provide only secondary regulation. In Canada the opposite is true. The primary regulatory
bodies are the provincial securities commissions with only some secondary regulation
occurring at the federal level. However, over 92% of the value of securities traded
in Canada are subject to the jurisdiction of either the OSC or the CVMQ due to the
location of the Toronto and Montreal stock exchanges within their jurisdictions. I will
refer to the provincial securities regulations of the OSC and CVMQ as Canadian Securities
regulation. For a more detailed explanation, see id. at 80,289-290.
2. Id. at 80,282.
3. Facilitation of Multinational Securities Offerings, Securities Act Release No.
6568, [1984-1985 Transfer Binder] Fed. Sec. L. Rep. (CCH) 83,743 at 87,318 (Feb.
28, 1985), [hereinafter "The 1985 Release"].
4. Rules, Registration and Annual Report Form for Foreign Private Issuers, Ex-

1990] PROPOSED DISCLOSURE SYSTEM
the new multijurisdictional disclosure system proposed, the SEC has
indicated it intends to take its first step toward integrated regulation of
the United States - Canadian securities market, with possible expansion
in the future to additional jurisdictions.'
A. International Developments
There has been a tremendous growth in recent times of both the
size and number of new foreign issues of securities in the United States
and in the number" and volume 8 of foreign securities traded in the
United States as the financial markets have become increasingly integrated
across national borders. 9 The single largest source of such investment
activity in the United States is Canada. 10
The above-mentioned integration has not been a one way street.
Foreign investors have had an even greater proclivity toward investing
in the securities of United States corporations." Again, the single larg-
change Act Release No. 16371 [1979-1980 Transfer Binder] Fed. Sec. L. Rep. (CCH)
T 82,363 at 82,547 (November 29, 1979) and Form 20-F, 17 C.F.R. § 240.220f (1979)
were adopted as an integrated registration statement and annual reporting form for use
by foreign private issuers.
5. The 1985 Release, supra note 3, at 87,318.
6. The Release, supra note 1, at 80,281.
7. There are 150 foreign securities traded on U.S. stock exchanges and 291 are
quoted on NASDAQ. Including all the foreign securities traded over-the-counter, there
are over 2,000 foreign issues traded in the United States. The Release, supra note 1, at
80,284.
8. . Gross transactions by United States investors in foreign corporate stocks exceeded
$151 billion in 1988, an almost 900% increase since 1980. Gross transactions
by United States investors in foreign debt securities exceeded $445 billion in 1988, a
1200% increase since 1980. The Release, supra note 1, at 80,284.
9. See SIMONDS, MULTINATIONAL CORPORATIONS LAW: BIBLIOGRAPHY OF MUL-
TINATIONAL CORPORATIONS AND FOREIGN INVESTMENT, (1989); WORLD ECONOMIC
AND FINANCIAL SURVEYS, INTERNATIONAL CAPITAL MARKETS: DEVELOPMENTS AND
PROSPECTS, (International Monetary Fund, Washington, D.C., April 1989) [hereinafter
"International Monetary Fund"].
10. Canadian issuers accounted for 124 public offerings in 1987 and 1988 aggregating
$10 billion, of which over $8 billion consisted of equity or convertible debt.
Additionally, over $1.7 billion in Canadian debt has been registered in the last three
years, pursuant to the SEC's shelf registration process under Rule 415. See 17 C.F.R.
§ 330.415 (1983). More than half of the 516 foreign issuers that file periodic reports
with the SEC are Canadian. As of June 30, 1989, there were 21 Canadian issuers
listed on the New York Stock Exchange, 38 on the American Stock Exchange and 146
quoted on NASDAQ. See The Release, supra note 1, at 80,285. Compare with the
figures in note 7, supra.
11. See, Gira, Toward a Global Capital Market:the Emergence of Simultaneous
Multinational Securities Offerings, I I MD. J. INT'L L. & TRADE 157, 163 (1987).

46 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
est source of such investment in the securities of United States corporations
by the investors of a foreign country has been from Canada. 2 The
United States and Canada are the world's largest bilateral trading
partners 3 and, next to the European Community, represent the most
significant geographic integration of financial services markets. 4
Simultaneous multinational issues of securities, one of the trends
that the SEC, OSC and CVMQ hope to address in the proposed regulations
5 present, perhaps, the most clear evidence that globalization is
real. In 1983, Alcan Aluminum and Bell Canada, both Canadian companies,
each simultaneously offered equity issues in the United States,
Canada and Japan.' 6 In 1984, British Telecommunications offered 2.5
billion shares of common stock in a privatization simultaneously in the
United Kingdom, Japan, Canada, and the United States. 17 In 1986,
British Gas PLC conducted a similar offering of 4 billion shares while
in 1987, British Airways PLC offered 720 million shares simultaneously
in those four countries and Switzerland. 8 In 1988, the British
Steel PLC privatization offered 2 billion shares simultaneously in the
United States, Canada, Japan and throughout western Europe and
Hong Kong Telecommunications Limited offered 877 million shares simultaneously
in the United States, Hong Kong and elsewhere.' 9 This is
just the beginning, however, and simultaneous multinational issues
should be even more popular in the future. 2 "
This globalization of the world's securities markets has not occurred
without good reason. Exchange rate fluctuations, high interest
rates, technological progress in the securities markets and deregulation
have all contributed toward the globalization trend. 2 ' This trend has
produced substantial benefits for securities issuers, borrowers, savers,
investors and bankers 22 , and it is unlikely that this trend will reverse. 2 "
12. See, International Monetary Fund, supra note 9, at 51. At the end of 1987,
there were 50 U.S. security dealers registered with the OSC. Additionally, there is a
large volume of offshore activity. Id.
13. Id. at 50.
14. Id.
15. The Release, supra note 1, at 80,282.
16. The 1985 Release, supra note 3, at 87,320.
17. Id.
18. The Release, supra note 1, at 80,284 n.16.
19. Id.
20. Debs, The Development of International Equity Markets, 4 B.U. INT'L L. J.
5, 9 (1986) [hereinafter "Debs, Development"].
21. Id.
22. Debs, Globalization of Financial Markets: What is Happening and Why?, 15
INT'L Bus. LAW 198, 201 (1987) [hereinafter "Debs, Globalization"].

1990]
PROPOSED DISCLOSURE SYSTEM
There is, however, a downside. With increased international linkage
comes increased risk due to the greater consequences of a single
failure. 24
The constraints on further globalization have been summarized by
Richard Debs 2 5:
The constraints on further globalization will not be market constraints.
They are not questions of supply and demand for the services.
The demand is there and the financial institutions are eager
to meet the demand. The constraints on further globalization relate
to infrastructure. The financial infrastructure of the global financial
system is based on domestic systems - domestic systems of law, of
regulation and supervision, of accounting rules, of clearing and settlement,
of stock exchanges, etc. Most of these systems, which together
constitute the basic institutional framework of the global
markets, are still predominantly based on national market practices,
and are as yet not adequately geared to the global
markets. 26
Properly handling those constraints will not be easy because there is no
worldwide regulatory authority and any efforts to harmonize regulation
will require political and economic compromise.1 7
1. Effect of European Community Actions
Efforts parallel to the United States - Canadian multijurisdictional
disclosure system are already underway to integrate securities regulation
in the European Community. 28 The European Community efforts
can be traced back to the Treaty of Rome 2 . By 1992, mutual recognition
of prospectuses meeting minimum common requirements is ex-
23. Debs, Development, supra note 20, at 9.
24. Debs, Globalization, supra note 22, at 201.
25. In 1986, Richard Debs served as the President of Morgan Stanley International,
the Chairman of the Subcommittee on International Economic Development of
the United States Chamber of Commerce, and was a member of many other committees
and councils concerned with international economics. Debs, Development, supra
note 20, at 5.
26. Id. at 201.
27. Karmel, Can Regulators of International Capital Markets Strike a Balance
Between Competing Interests?, 4 B.U. INT'L L. J. 105, 106 (1986).
28. See International Monetary Fund, supra note 9, at 52-55.
29. 2 ALAN CAMPBELL, COMMON MARKET LAW, 2-4 (1969) (Annotated Treaty
of Rome, arts. 1 to 3).

48 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
pected throughout the European Community." 0 The inclusion of only
Canada in the current negotiations thus gives the SEC the advantage
of a "wait and see" position with respect to the events occurring in the
European Community. 3 '
2. The Basle Agreement
In July, 1988 the "Group of Ten" 32 finally agreed upon a plan,
entitled the Basle Agreement, to harmonize regulations in the banking
industry.1 3 This gradual integration of the banking industry has encouraged
multilateral efforts to coordinate regulatory policies in other
areas, including securities regulation 4 which has lagged considerably
behind banking regulation." 6
3. International Organization of Securities Commissions Efforts
The October 1987 stock market crash spurred on new efforts by
the International Organization of Securities Commissions to coordinate
the regulation of the securities markets. 3 6 This organization has realized
that striking the right balance between regulatory objectives - fostering
competition and protecting investors" - becomes an increasingly
complex task as the international linkages deepen. 38
The result of this organization's efforts have been attempts to establish
more effective policy coordination. 9 Securities regulators have
realized, however, that the efficient and safe operation of the national
and international securities markets can no longer be assured without
30. International Monetary Fund, supra note 9, at 54.
31. See supra note 6 and accompanying text.
32. The "Group of Ten", oddly enough, contains twelve members: Belgium, Canada,
France, the Federal Republic of Germany, Italy, Japan, Luxembourg, the Netherlands,
Sweden, Switzerland, the United Kingdom and the United States. International
Monetary Fund, supra note 9 at 55 n.25.
33. Committee on Banking Regulation and Supervisory Practices, International
Convergence of Capital Standards (July, 1988).
34. International Monetary Fund, supra note 9 at 58.
35. Id. at 60.
36. Id. at 15, 73.
37. Id. at 7.
38. International Monetary Fund, supra note 9, at 15.
39. See, e.g., Committee on Financial Markets, Minimum Disclosure Rules Applicable
to All Publically Offered Securities, Paris (1976). According to SEC Chairman
David Ruder, 1OSCO has also been preparing a report on international securities
offerings that could guide further multijurisdictional disclosure efforts. Ruder Says Unreleased
IOSCO Report Could Be Blueprint for Global Offerings, Sec. Reg. & L. Rep.
1438 (BNA Sept. 22, 1989).

1990]
PROPOSED DISCLOSURE SYSTEM
more effective and comprehensive policy coordination amongst the
nations. 40
B. United States - Canadian Efforts: The Free Trade Agreement
While efforts have been underway in the European Community,
serious efforts between the SEC, OSC and CVMQ have been underway
since 1985 when the SEC released a request for comments entitled
"Facilitation of Multinational Securities Offerings".' Then, in 1987,
The Canada - United States Free Trade Agreement 42 provided additional
incentive to coordinate and harmonize United States and Canadian
securities regulation as it heightened awareness of the differences
in Canadian and United States securities regulation. 43
The FTA also removed barriers to trade in the financial services
and lifted many restraints on United States and Canadian financial institutions.""
Thus, the FTA is a response to and is expected to help
continue the trend towards increased cross-border financial services
4 5
activity.
III. THE SEC's REQUEST FOR COMMENTS IN 1985
Against this background of activity, the SEC initially researched
the possibility of a multijurisdictional disclosure system when the SEC
published a request for comments on February 28, 1985.46 The system
then proposed would have included the United States, Canada and the
40. International Monetary Fund, supra note 9, at 59.
41. The 1985 Release, supra note 3, at 87,318. See infra notes 46-48 and accompanying
text.
42. Free Trade Agreement, Jan. 2, 1988, United States - Canada, 27 I.L.M. 293
(1988) (hereinafter the "FTA"].
43. International Monetary Fund, supra note 9, at 52.
44. Id. at 8. See generally, GOLD AND LEYTON-BROWN, TRADE-OFFS ON FREE
TRADE, 321-45 (1988).
45. International Monetary Fund, supra note 9, at 51.
46. See The 1985 Release, supra note 3. For an in-depth analysis of the 1985
Release and the responses the SEC received see Gira, supra note 11, 171-76; Cox,
Internationalization of the Capital Markets: The Experience of the Securities and
Exchange Commission, 11 MD. J. INT'L L. & TRADE 201, 204-207 (1987); Note, SEC
Proposals to Facilitate Multinational Securities Offerings: Disclosure Requirements
in the United States and the United Kingdom, 19 N.Y.U. J. INT'L L. & POLICY 457
(1987)[hereinafter "Note"]; Spencer, Jr., The Reaction of the Securities and Exchange
Commission to the Internationalization of the Securities Markets: Three Concept
Releases, 4 B.U. INT'L L. J. 111 (1986); Lorenz, EEC Law and Other Problems
in Applying the SEC Proposal on Multinational Offerings to the U.K., 21 INT'L LAW
795 (1987).

50 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
United Kingdom and would facilitate simultaneous multinational securities
offerings under either a reciprocal approach or a common prospectus
approach. 47
The common prospectus approach would necessitate all three
countries agreeing on the disclosure standards for an offering document
that would be acceptable to all three jurisdictions. 48 The advantages of
such an approach are that it would harmonize disclosure requirements,
provide greater comparability of financial information from issuers
from different countries and would expedite the development of a uniform
international database suitable for use by the secondary markets.
49 Unfortunately, the disadvantage of the common prospectus approach
is its impracticability. 5 "
Under a reciprocal approach, however, each country would accept
the prospectuses of issuers from the other countries as long as minimum
standards were met. 51 Thus, only the home country would review
the prospectus. 52 The advantages of the reciprocal approach are its ease
of implementation and the time and expense it would save issuers. 5 "
The disadvantages to the reciprocal approach are that it eliminates incentives
to harmonize disclosure standards, compromises the comparability
of financial information and does not expedite the creation of a
suitable database for the secondary market. 54
The responses to the SEC's 1985 Release were overwhelmingly in
favor of the reciprocal approach because of its practicality, but several
commentators suggested modification of the reciprocal approach. 55
While many commentators realized the inclusion of the United Kingdom
in a multijurisdictional disclosure system creates additional obstacles
to clear, 56 very few commentators suggested scraping the whole
idea. 57 Commentators from jurisdictions not included welcomed the
47. The 1985 Release, supra note 3, at 87,318.
48. Id. at 87,322.
49. Id. at 87,323.
50. Id.
51. Id. at 87,322.
52. Id.
53. Id. at 87,323.
54. Id.
55. Gira, supra note 11, at 174-76.
56. See infra notes 69 - 71 and accompanying text.
57. Gira, supra note 11, at 175. Of all of the law review articles I have come
across, only one comment suggested scrapping the whole idea. See Note, supra note 46.
However, the primary reason given was that the author thought the differences between
disclosure standards in the United States and the United Kingdom were too
great.

1990]
PROPOSED DISCLOSURE SYSTEM
SEC's reciprocal approach and remarked that they would like to see
such efforts extended to their countries. 8
After reviewing the responses received, the SEC began discussions
with the OSC and the CVMQ. 5 9 These discussions resulted in a 1988
Memorandum of Understanding between the three commissions which
is the foundation for the currently proposed multijurisdictional disclosure
system. 6 0
IV. GOALS OF SECURITIES REGULATION
Any multijurisdictional disclosure system must adequately meet
the divergent goals of securities regulation. The SEC's two primary securities
regulation goals are to foster competition and to protect United
States investors. 61 The fostering competition goal seeks to minimize restraints
and entry barriers to foreign issuers by removing unnecessary
impediments to transnational capital formation without unduly disadvantaging
United States issuers. 62
The investor protection goal seeks to ensure that United States investors
have sufficient disclosure of comparable, consistent, reliable and
relevant financial information to make an informed investment decision.
6 " The SEC hopes that the proposed multijurisdictional disclosure
system can meet these two goals.
State Blue Sky laws also attempt to protect investors within their
states. As of 1985, 34 states had "fair, just and equitable" statutes
which regulate the offer and sale of securities based on the merit of the
investment and the quality of the issuer whereas the remaining 16
states have "full disclosure" statutes which, like the SEC's regulations,
allow any securities to be offered as long as adequate disclosure is
made. 64 These Blue Sky laws will not be changed by the proposed multijurisdictional
disclosure system. 65
58. Gira, supra note 11, at 175.
59. The Release, supra note 1, at 80,282.
60. Id.
61. Id.
62. Id.
63. Id.
64. The 1985 Release, supra note 3, at 87,323 n.26.
65. Any further explanation of state Blue Sky laws is beyond the scope of this
comment. For an analysis of the efficacy of state Blue Sky laws and merit regulation in
an international securities market see Note, State Securities Regulation: Merit Review
of Foreign Equity Offerings, 25 VA. J. INT'L L. 939 (1985). Some Blue Sky regulators
such as the North American Securities Administrators Association and the Idaho Finance
Department, however, have already endorsed the SEC's proposed multijurisdictional
disclosure standards. State Developments: Regulatory Briefs, Sec. Reg. & L.

52 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
Canadian regulatory goals are remarkably similar to those found
in the United States. Canada has also sought to protect investors
through the mechanism of full and fair disclosure of financial information
to investors so that investors may make an informed investment
decision while at the same time maintaining fairness and equality. 6
Thus, both the United States and Canada have historically relied on a
refined and well developed system of disclosure as the principal protection
for investors. 67
V. WHY CANADA?
Canada is a logical first step for the SEC to take. Not only are
Canadian securities regulations comparable in many ways to those of
the SEC, Canada is also the largest source of foreign securities in the
United States.68
Many of the obstacles that would have to be overcome with a system
including the United Kingdom do not present a problem with a
system limited to the United States and Canada. The methods of offering,
underwriting, registering and marketing securities in the United
Kingdom differ substantially from those in the United States and Canada.
69 Also, disclosure, accounting and auditing standards vary considerably
more between the United Kingdom and the United States than
they do between Canada and the United States. 70 Finally, a recent
English court decision could potentially hamper SEC insider trading
7 1
investigations.
Rep. 21 (BNA Jan. 5, 1990).
66. The Release, supra note 1, at 80,282; 80,289.
67. Id. at 80,282.
68. See supra notes 10-16 and accompanying text.
69. The 1985 Release, supra note 3, at 87,321. In the United Kingdom, a definitive
prospectus which cannot be subsequently amended is filed generally two weeks
before the price setting date. Only after the price setting date or "impact date" can
prospectuses be circulated and offers solicited. By contrast, in the United States and
Canada, preliminary prospectuses, which are subject to subsequent amendment, can be
circulated before the effective date during the waiting period to solicit offers. Id.
70. For a detailed analysis of the differences between the United Kingdom and the
United States, see Gira, supra note 11 at 164-170; Note, supra note 46; Lorenz, supra
note 46.
71. In re an Inquiry Under the Company Securities (Insider Dealing) Act 1985,
slip. op. (Ch. Mar. 31, 1987). [hereinafter the "Warner decision"]. In the Warner
decision, an English court ruled that journalists may withhold their sources of information
predicting the results of government reviews of takeover bids from government
inspectors. The Warner decision may thus hamper SEC requests for information under
the Memorandum of Understanding on Exchange of Information Between the SEC,

1990]
PROPOSED DISCLOSURE SYSTEM
One commentator from the United Kingdom strongly supported
the SEC's efforts and stated that it understood why Canada was chosen
as the first logical partner but also expressed its hope that the United
Kingdom will be chosen as the next participant at the earliest possible
opportunity. 7 " Another commentator hoped to see the system extended
to Europe and Japan. 73 For now, however, the proposed system is limited
to the United States and Canada.
A. The Registration Process
Both Canada and the United States have a waiting period after
the filing of a prospectus and before the effective date during which the
disclosure documents are reviewed by the regulatory authorities."'
While the SEC focuses exclusively on the adequacy of disclosure, the
OSC and CVMQ also evaluate the merit of the offering. 7 " Thus, the
OSC and CVMQ individually perform a review process comparable to
the combined review process undertaken by the SEC and some of the
state Blue Sky commissioners.
During the waiting period in Canada, as in the United States, securities
may be offered, but not sold, while only limited types of information
may be disseminated to generate interest in the prospective offering.
76 Canadian underwriting and marketing practices are also
similar to those employed in the United States. 7
Prospectuses in Canada and the United States have many similar
common required elements. Some of the major items requiring a
description and discussion in both countries are the issuer's capital
structure, property and business, development of business, acquisitions
CFTC, and the United Kingdom Department of Trade and Industry in Matters Relating
to Securities and Futures [1986-1987 Transfer Binder] Fed. Sec. C. Rep. (CCH) $
84,027, at 88,244 (Sept. 23, 1986). For a more detailed analysis of the Warner decision,
see Note, The British-U.S. Memorandum of Understanding of 1986: Implications
After Warner, 11 FORDHAM INT'L L. J. 110 (1987).
72. Letter from Barclays Bank PLC to Jonathan G. Katz, Secretary of the SEC
(September 26, 1989) [hereinafter the "Barclays Letter"]. The hopes of Barclays Bank
PLC will likely be realized. The United Kingdom has already been identified by Sara
Hanks, former Chief of the SEC's Office of International Finance, as the next candidate.
Hanks Cites SEC's "Practical Stance" on International Securities Issues, Sec.
Reg. & L. Rep. 103 (BNA Jan. 19, 1990).
73. Letter from Sullivan and Cromwell to Jonathan G. Katz, Secretary of the
SEC at 3 (October 31, 1989) (hereinafter th'e "Sullivan Letter"1.
74. The Release, supra note 1, at 80,290-291.
75. Id. at 80,291.
76. Id. at 80,291 n.67.
77. Id. at 80,292.

54 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
and operating results, officer and director compensation, officer and director
indebtedness to the issuer, and interests in material transactions.
78 Also required in both countries is a description and discussion
of the securities offered, use of the proceeds, underwriter's obligations,
plan of distribution, distribution spread, and material risks and risk
factors. 79 Finally, prospectuses in both countries require audited financial
statements for the past five years, an auditor's report, and various
resolutions or certifications by the officers and directors of the issuer
approving the prospectus. 8
The OSC and CVMQ have both adopted the use of a short form
prospectus in their Prompt Offering Qualification system. 81 Like the
SEC's Forms S-3 and F-3, this short form prospectus also contains virtually
all of the information contained in a long form prospectus by
incorporating by reference other documents filed with the regulatory
body. 82
Like the SEC's Rule 41583 shelf registration process, the CVMQ
also has a shelf registration process available. 8 Both shelf registration
processes are designed to allow the frequent issuer of securities easier
and quicker access to the market over a maximum one year period of
distribution. 5 The OSC has not yet, however, adopted a shelf registration
process.
B. Periodic Reporting Requirements
As in the United States, once a company registers securities in
Canada, it becomes subject to periodic reporting requirements. 8 " These
78. Id. at 80,291.
79. Id. at 80,291-292.
80. Id. at 80,292. For a more detailed analysis of the comparability of United
States and Canadian prospectus requirements, see generally Connelly, Multinational
Securities Offerings: A Canadian Perspective, 50 LAW & CONTEMP. PROBS. 251, 258
(1987).
81. The Release, supra note 1, at 80,292.
82. Id. Form S-3, 17 C.F.R. 239.13 (1987) and Form F-3, 17 C.F.R. 239.33
(1987) are abbreviated registration forms for certain qualifying domestic (S-3) and
foreign (F-3) issuers for certain transactions.
83. 17 C.F.R. § 230.415 (1983).
84. The Release, supra note 1, at 80,293.
85. Id.
86. Id. at 80,293. The Securities and Exchange Act of 1933, 15 U.S.C.A. §§ 77a
(1933), 77b - c (1987), 77d (1980), 77e (1954), 77f (1987), 77g (1933), 77h (1940),
77i (1987), 77j (1954), 77k (1934), 771 (1954), 77m (1934), 77n (1933), 77o (1934),
7 7 p (1933), 77q (1954), 77r (1933), 77s - t (1987), 77u (1933), 77v (1987), 77w
(1933), 77x (1975), 77y - aa (1933) governs the registration process in the United

19901 PROPOSED DISCLOSURE SYSTEM
periodic reporting requirements are also similar. Like United States reporting
companies, Canadian reporting companies must file audited annual
financial statements, 8 " unaudited quarterly financial statements, 88
and reports of any material changes in the company. Additionally,
Canadian reporting companies are subject to proxy regulation as are
United States reporting companies. 9 0
C. Auditing and Accounting
Although auditing standards in Canada differ in some aspects
from those in the United States, generally accepted practice in Canada
routinely encompasses all significant auditing procedures required in
the United States. 91 The Canadian Institute of Chartered Accountants
("CICA") periodically reviews new auditing standards adopted by its
United States counterpart, the American Institute of Certified Public
Accountants ("AICPA"). 92
AICPA standards require the inclusion of an explanatory paragraph
in an auditor's report if there are substantial doubts about the
entity's continued existence as a going concern 9 " or if other material
uncertainties exist. 9 ' Canadian standards prohibit such a paragraph if
States. All companies that register securities for sale in the United States pursuant to
this act automatically become reporting companies for purposes of the Securities and
Exchange Act of 1934, 15 U.S.C.A. §§ 77b - c (1987), 77d (1980), 77e (1954), 77j
(1954), 77k (1934), 77m (1934), 77o (1934), 77s (1987), 78a - c (1988), 78d - d2
(1987), 78e (1934), 78f (1987), 78g (1984), 78h (1989), 78i (1982), 78j (1934), 78k
(1984), 78k-1 - 1 (1987), 78m (1988), 78n (1985), 78o (1987), 78o-3 (1986), 7 8 p
(1964), 78q - q-i (1987), 78r (1936), 78s (1975), 78t - t-1 (1987), 78u - u-I (1988),
78v (1934), 78w (1987), 78x (1975), 78y (1986), 78z (1935), 78aa - bb (1987), 78cc
(1938), 78dd (1934), 78dd-1 - dd-2 (1988), 78ee (1975), 78ff (1988), 78gg - hh
(1934), which regulates periodic reporting requirements.
87. The Release, supra note 1, at 80,293. Annual reports including audited financial
statements are required by reporting companies in the United States by either
Form 10-k, 17 C.F.R. § 249.310 (1989) or Form 20-F, 17 C.F.R. § 249.220f (1989).
88. The Release, supra note 1, at 80,293. Unaudited quarterly financial statements
are required on Form 10-Q, 17 C.F.R. § 249.308a (1989) for United States
reporting companies.
89. The Release, supra note 1, at 80,293. Material changes in the business, operations
or capital of the issuer are required to be reported on Form 8-K, 17 C.F.R. §
249.308 (1977) for United States reporting companies.
90. The Release, supra note 1, at 80,293.
91. Id. at 80,293-294.
92. Id. at 80,294.
93. See AICPA Statement of Auditing Standards [hereinafter "SAS"] No. 59.
94. The Release, supra note 1, at 80,294.

56 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
there is adequate disclosure in a note to the financial statements. 95 But
is this really a difference? In substance it is not. Under either standard
the same result is achieved: the doubts or uncertainties are disclosed to
the readers of the financial statements.
This difference in form, however, may also be soon ameliorated.
The CICA has recently published guidelines encouraging Canadian auditors
to add comments for United States readers that explain the variation
in reporting standards and cross-reference to the adequate disclosure
whenever the auditor's report is included in a document to be filed
with the SEC. 96 The proposed multijurisdictional system would require
such explanation. 97
Thus, significant differences between Canadian and United States
auditing standards do not exist. Under either set of standards, investors
are given sufficient disclosure to make informed investment decisions.
There are differences between the ethical and independence standards
promulgated by the CICA and the AICPA, 98 but these differences generally
have no effect on an audit performed in a competent, professional
manner.
United States generally accepted accounting principles ("GAAP")
are similar in many respects to Canadian GAAP, but there are some
differences. 99 Canadian GAAP require the purchase method of accounting'
for most business combinations that would be accounted for
by the pooling-of-interests method under United States GAAP.
United States GAAP require the expending of certain development
costs' 012 that may be capitalized under Canadian GAAP. 10 3 United
95. Id.
96. Id.
97. Id.
98. Id.
99. Id.
100. See CICA Handbook § 1580. The purchase method of accounting for business
combinations is used in both the United States and in Canada. Under this method,
the acquired assets are revaluated to their fair market value in the acquiror's financial
statements. Any excess of purchase price over the fair market value of the net assets
acquired is generally attributed to goodwill, a long term asset.
101. AICPA Statement of Financial Accounting Standards [hereinafter "SFAS"]
No. 16. Under the pooling-of-interests method of accounting for business combinations,
the acquired assets are included in the financial statements of the acquiror at the values
previously stated in the acquired company's financial statements. Thus, under this
method, there is no revaluation of assets to fair market value and no recognition of
goodwill.
102. SFAS No. 2.
103. CICA Handbook § 3450. The capitalized development costs would then be
expended generally over their expected useful life within certain maximum lifespans
0 1

1990]
PROPOSED DISCLOSURE SYSTEM
States GAAP require current recognition of foreign currency gains and
losses10 4 10 5
in some cases where Canadian GAAP allow deferral.
There are differences in pension accounting measurement methods'
01 and, under United States GAAP but not Canadian GAAP, an
expense must be recognized in certain situations under an employee
stock compensation plan when the stock options are granted. 07 Canadian
GAAP follow the income statement approach to accounting for
income taxes. 10 8 United States GAAP previously followed the income
statement approach but recently switched to the balance sheet
approach." 9
Canadian GAAP do not consider the effect of common stock
equivalents on earnings per share," 0 whereas United States GAAP require
reporting earnings per share both on a primary basis (the same as
Canadian GAAP - without the effect of common stock equivalents) and
on a fully diluted basis (with the effect of dilutive common stock
equivalents)."' Also affecting earnings per share information, United
States GAAP define extraordinary items more restrictively."' Canadian
GAAP do not require the consolidation of nonhomogeneous subsidiaries,"'
whereas United States GAAP do." 4
Finally, differences may be significant in certain heavily regulated
industries, such as insurance or banking." 6 In these types of industries,
through the process of amortization.
104. SFAS No. 52.
105. CICA Handbook § 1650.
106. Compare CICA Handbook § 3460 with SFAS No. 87.
107. Accounting Principles Board Opinion [hereinafter "APB"] No. 25.
108. CICA Handbook §§ 3470 to 3471.
109. SFAS No. 96, which superceded APB No. 11. Deferred taxes arise from
timing differences between the recognition of income for tax purposes and the recognition
of income for financial statement purposes. Typically, one of the largest timing
differences giving rise to deferred taxes results from the allowed use of accelerated
depreciation for tax purposes while straight line depreciation is used for financial statement
purposes. Such a timing difference can be significant in a capital intensive industry.
The balance sheet approach (currently in vogue in the United States) accounts for
deferred taxes using currently existing tax rates, regardless of when the timing difference
originated. The income statement approach (previously in vogue in the United
States and currently followed in Canada) accounts for deferred taxes using the tax
rates that existed when the timing difference originated.
110. CICA Handbook § 3500.
111. APB No. 15.
112. Compare CICA Handbook § 3480 with APB No. 30.
113. CICA Handbook § 1600.
114. SFAS No. 94.
115. The Release, supra note 1, at 80,294.

58 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
specialized accounting practices may have developed. 116
D. Other Similarities and Differences
Canada's federal and provincial takeover laws impose on incumbent
management and third-party bidders detailed disclosure requirements
that closely resemble those required by the Williams Act 1 7 under
schedule 14D-1,118 the United States federal takeover law. Also, the
substantive protections of Canadian law are similar to the Williams
Act. Both provide for acceptance of tendered shares on a pro rata basis
1 9 and minimum time periods that the tender 2 °
offer must be open.
Also, generally all holders of the same class of security must be offered
the same consideration. 21
There are some differences between Canadian takeover law and its
United States counterpart, however. Under Canadian law, when a variation
in the terms of the tender offer increases the value of the consideration
offered, all shareholders must receive such increase. 2 2 A final
difference between Canadian and United States takeover law is that
the Williams Act prohibits the purchase by the bidder of the target
shares by any means other than the tender offer while the tender offer
is open, whereas Canadian law allows a bidder to purchase up to 5
percent of the target shares by other means while the tender offer is
open. 123
116. Id.
117. 15 U.S.C.A. §§ 781(i) (1987), 78m(d) - (e) (1988), 78n(d) -(f) (1985).
118. The Release, supra note 1, at 80,295 and 17 C.F.R. § 240.14d-100 (1986).
Various states have case law and statutes governing takeovers. They govern anything
from the required duties of care of incumbent officers and directors to addressing the
extent to which the successful acquiror can sell off the acquired assets. Such state laws
are beyond the scope of this comment.
119. Compare Canadian Business Corporations Act [hereinafter "CBCA"] §
196(1)(c), Ontario Securities Act [hereinafter "OSC"] § 94(7), and Quebec Securities
Act [hereinafter "QSC"] with the Securities and Exchange Act, 15 U.S.C.A. §
78n(d)(6) (1985).
120. Compare CBCA § 197(b), OSA §§ 94(2), 97(5), and QSA §§ 147.3, 147.8
(21 calendar-day minimum offering period) with Rule 14e-l(a), 17 C.F.R. § 240.14el(a)
(1986)(20 business-day minimum offering period).
121. Compare CBCA § 197(d), OSA § 96 and QSA §§ 145 to 146 with Rule
14d-10(a)(2), 17 C.F.R. § 240.14d-10(a)(2) (1986) and 13e-4(f)(8)(ii), 17 C.F.R. §
240.13e-4(f)(8)(ii) (1986).
122. The Release, supra note 1, at 80,296 n.133.
123. See Letter from Cohen Swados Wright Hanifin Bradford & Brett to
Jonathan G. Katz, Secretary of the SEC at 2 (October 25, 1989) [hereinafter the
"Cohen Letter"]. See also Letter from the American Bar Association to Jonathan G.
Katz, Secretary of the SEC at 6 (November 10, 1989) [hereinafter the "ABA Let-

19901
PROPOSED DISCLOSURE SYSTEM
VI. PROBLEMS IN ANY MULTI JURISDICTIONAL DISCLOSURE SYSTEM
Any multijurisdictional disclosure system must not only adequately
meet each jurisdiction's securities regulation goals, as previously
discussed, but should also harmonize disclosure standards as
much as possible while still reducing the costs inherent in complying
with multijurisdictional disclosure standards. 124 A minimum of harmonization
of disclosure standards is necessary to provide potential investors
in each jurisdiction with the minimum of information they need to
make an informed investment decision by ensuring sufficient comparability
of information when making an investment choice between a
home country investment and a foreign investment."
On the other hand, for a multijurisdictional system to have any
value, it must reduce the costs inherent in complying with differing but
often duplicative disclosure requirements. The latter is accomplished
through a mutual recognition approach. 12
Finally, member countries must effectively enforce their securities
laws throughout the multiple jurisdictions when applicable. 2 ' Such effective
enforcement requires comprehensive cooperation and enforcement
assistance among the regulatory bodies. 12 Memoranda of Understanding
are already in place between OSC, CVMQ and the SEC. 129
VII. THE PROPOSED SYSTEM
The proposed system would permit certain Canadian issuers to
register securities and meet periodic disclosure requirements in the
United States using Canadian disclosure documents. 30 The system
would also allow certain Canadian tender offers to be made in compliance
with Canadian tender offer regulation.'
As proposed, the system would allow Canadian issuers subject to
United States proxy regulation to use Canadian documents for certain
proxy solicitations" 3 2 and certain rights and exchange offers. 133 Finally,
ter"]; Sullivan Letter, supra note 73, at 24.
124. The Release, supra note 1, at 80,288.
125. Id.
126. Id. at 80,288-289.
127. Id. at 80,289.
128. Id.
129. Id. at 80,289; n.54.
130. Id. at 80,281.
131. Id.
132. Id.
133. Id. at 80,297.
l 5

60 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
Canadian companies subject to the insider reporting requirements of
Section 16 of the Securities Exchange Act 34 could fulfill these requirements
using Canadian forms." 5 Comparable reciprocal treatment
would be given to United States issuers in Canada.' 36
Canadian issuers generally must have at least a three year reporting
history with either the OSC or CVMQ and meet minimum market
value and public float tests to participate. 3 7 The public float and market
value tests may be varied depending on the type of security issued.
13 8 All Canadian issuers would still be subject to United States
civil liability and anti-fraud provisions. 3 9 Finally, all Canadian prospectuses
filed with the SEC would have a wraparound form giving the
name and address of the company's resident agent in the United States
and containing appropriate warnings. 10
A. Registration of Offerings
The system would distinguish between offerings of investment
grade debt or preferred stock and other offerings. The distinction has
been made because much less disclosure is required for an investor to
make an informed investment decision about the former as opposed to
the latter type of investment.""
1. Investment Grade Debt and Preferred Stock
Debt and preferred stock offerings that are non-convertible for at
least one year would be considered investment grade if the securities
had a rating signifying such by at least one of the nationally recognized
statistical securities rating services in the United States." 2 Proposed
134. 15 U.S.C.A. § 78p (1964).
135. The Release, supra note 1, at 80,281.
136. Id.
137. Id. at 80,298.
138. Id. at 80,303.
139. Id. at 80,301 n.155. See also the Securities and Exchange Act, 15 U.S.C.A.
§§ 77k (1934); 771 (1954); 77o (1934) and the Security and Exchange Act, 15
U.S.C.A. §§ 78o (1987); 78r (1936); 78t (1987) and the Securities and Exchange Act,
17 C.F.R. §§ 240.10b-5 (1987); .13e-4 (1986); .14e-3 (1980).
140. Id. at 80,301. Such warnings would include that the investment may have
tax consequences in Canada, that investors may have to pursue remedies for securities
law violations against persons and assets located in Canada and that the financial statements
are prepared in accordance with Canadian GAAP. Id.
141. Id. at 80,318.
142. Id. at 80,303 n.172. At present, Moody's and Standard and Poor's are the
only rating services that meet the definition of nationally recognized rating service. See

19901 PROPOSED DISCLOSURE SYSTEM
Form F-9 would rely entirely on Canadian disclosure for such offerings
and Canadian companies that had at least (CN) $180 million market
value for their common stock and at least (CN) $75 million public float
would be eligible to use Form F-9.1 43 No reconciliation of the financial
statements to United States GAAP would be required when using
Form F-9.""
2. Other Offerings
All other security offerings could be made under proposed Form
F-10 for eligible Canadian issuers.'" Form F-10 would require the
wraparound to include a reconciliation of the financial statements to
United States GAAP as specified by Item 18 of Commission Form 20-
F. " ' 4 Canadian banks and bank holding companies would also have to
include supplemental industry specific information required by Item
III.(C), "Risk Elements" and Item IV., "Summary of Loss Experience"
of Industry Guide 3 under the Securities Act. 14 7 Eligible Canadian
issuers must have common stock with a market value of at least
(CN) $360 million and public float of at least (CN) $75 million.' 48
B. Periodic Reporting
Issuers that either registered securities under Form F-9" 9 or are
eligible to use that for15 could fulfill their periodic disclosure require-
Letter from Dominion Bond Rating Service Limited to Jonathan G. Katz, Secretary of
the SEC, at 1 (October 18, 1989) [hereinafter "DBRS Letter"].
143. The Release, supra note 1, at 80,303. "Public float" is defined as the monetary
value of all outstanding equity securities owned by non-affiliates. Id. at 80,303
n.173.
144. Id. at 80,298.
145. Id. at 80,303. Included in this category would be debt or preferred stock that
is convertible within one year and common stock.
146. Id. at 80,303. Item 18 of Form 20-F, 17 C.F.R. § 249.220f (1989) requires
full disclosure of all of the information required by regulation S-X and United States
GAAP. See The Release, supra note 1, at 80,303.
147. Id. at 80,304.
148. Id. at 80,303.
149. Under 15 U.S.C.A. § 78o(d) (1987) and Regulation 15D 17 C.F.R. §§
240.15d-1 (1982), .15d-2 (1971), .15d-3 (1983), .15d-5 (1983), .15d-6 (1984), .15d-10
(1989), .15d-ll (1985), .15d-13 (1989), .15d-16 (1985), .15d-17 (1971), and .15d-21
(1962) all issuers who register with the SEC become subject to periodic reporting requirements
thereafter.
150. Canadian issuers could be subject to United States periodic reporting disclosure
requirements if they had previously made offerings in the United States of the
securities covered by proposed Form F-9; or if such a security is listed on a national

62 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
ments by filing their Canadian periodic reporting disclosure documents
with the SEC under proposed Form 40-F. 151 As with the original registration
on Form F-9, no reconciliation to United States GAAP would
be required.
1 52
Issuers that either registered securities under Form F-10 or are
eligible to use that form 1 53 could also fulfill their periodic reporting requirements
by filing their Canadian periodic disclosure documents with
the SEC under Form 40-F. 5 Such issuers, however, would be required
to include the reconciliation indicated under Item 17 of Form 20-F. 55
C. Tender Offers
Under the system proposed, tender offer filings related to offers for
a class of shares of a Canadian issuer could proceed in the United
States under Canadian law if less than 20 percent of the shares were
held of record by United States residents, the tender offer was extended
to all United States shareholders and the transaction is not subject to
an exemption from substantive Canadian takeover law.'56 Compliance
with Canadian law under the circumstances outlined would suffice for
compliance with the Williams Act, 57 the federal United States tender
offer law.158 State takeover laws' 5 9 , however, would not be affected by
the proposed system and, as such, would still have to be complied
with.
1 0
Canadian tender offer disclosure documents would be filed under
proposed Form F-8, along with a wraparound including additional SEC
securities exchange in the United States (see 15 U.S.C.A. § 781(b) (1987)); or if such
a security is held of record by more than 500 shareholders, more than 300 of which are
United State residents and certain asset tests are met (see 15 U.S.C.A. § 781(g)
(1987), as supplemented by Rules 12g-1 and 12g3-2(b), 17 C.F.R. §§ 240.12g-1
(1986) and .12g3-2(b) (1984)).
151. The Release, supra note 1, at 80,309.
152. Id.
153. See supra notes 145 to 148 and accompanying text.
154. The Release, supra note 1, at 80,309.
155. Id. Item 17 of Form 20-F, 17 C.F.R. § 249.220f (1989) requires reconciliation
of only the measurement items which are the income statement and the balance
sheet. See The Release, supra note 1, at 80,303 n.177.
156. Id. at 80,305.
157. See supra note 117.
158. The Release, supra note 1, at 80,305.
159. See supra note 118.
160. The Release, supra note 1, at 80,305 n.193. Where state takeover law prohibited
extending the offer to shareholders residing in that state, the offeror could exclude
such shareholders from the offer. Id.

1990]
PROPOSED DISCLOSURE SYSTEM
mandated disclosure and informational legends. 161 Bidders making all
cash tender offers would not have to meet market value and float eligibility
requirements. Those making exchange offers1 " 2 would have to
meet such eligibility tests. 6 '
Finally, the proposed system would offer no relief from the reporting
obligations imposed by Schedule 13D. 6 1 This occurs whenever any
Canadian entity acquires more than five percent of the target com-
16 5
pany's equity securities within a specified period of time.
D. Proxy Solicitation and Rights Offerings
Under the proposed system, Canadian companies soliciting proxies
from United States shareholders need only provide the proxy material
required under Canadian law if the only matters being voted on at the
annual meeting are routine matters such as the election of directors or
ratification of accountants.'" If, however, the matters to be voted on
include nonroutine matters or are such that preliminary proxy materials
would be required under United States proxy rules, then such proxies
of United States shareholders must be solicited in accordance with
United States proxy rules.' 67 Canadian issuers that comply with Canadian
shareholder proposal laws will be deemed to have complied with
United States shareholder proposal rules 68 under Rule 14a-8.' 69
Similar to the tender offer rules proposed, certain rights offerings
could be made pursuant to Canadian law under cover of Form F-7.11 0
No market value or float tests would apply but eligible issuers would be
required to have had the class of securities to which the rights pertain
listed on either the Toronto or Montreal Exchange for the previous 36
months.' 7 '
161. Id. at 80,306.
162. An exchange tender offer is one that offers either all securities or a mixture
of securities and cash for shares of the target company.
163. The Release, supra note 1, at 80,306.
164. 17 C.F.R. § 240.13d-101 (1982).
165. The Release, supra note 1, at 80,306.
166. Id. at 80,308.
167. Id.
168. Id.
169. 17 C.F.R. § 240.14a-8 (1987).
170. The Release, supra note 1, at 80,304.
171. Id.

64 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
VIII. RESPONSES TO THE RELEASE, ANALYSIS AND
RECOMMENDATIONS
Responses to the Release were overwhelmingly in favor of the
SEC's initiative. Only one response reviewed was entirely opposed to
the whole idea. 1 7 2 Another unique response favored the proposed system
but recommended full Item 18 reconciliation to United States
GAAP in all financial statement filings. 173 The rest of the responses
generally either gave opinions on specific questions opened for commentary
by the SEC or suggested some refinements to the proposed system.
A. Civil Liability
Several commentators suggested that SEC rules should be
amended to specifically provide Canadian issuers who otherwise fully
comply with the multijurisdictional disclosure requirements a safe harbor
from civil liability. 7' Such a safe harbor appears to be a vital
prerequisite.
The proposed system would allow certain Canadian issuers to use
Canadian disclosure documents to meet SEC filing requirements. 75
Such filings using Canadian documents would not violate United States
disclosure law. Absent a safe harbor, however, an anti-fraud action
could still be brought alleging that the documents are misleading because
information which normally appears in a United States disclosure
document, but not in a Canadian document, has been omitted. 17 1
1 77
This would completely defeat the purpose of the proposed system.
172. Letter from Financial Analysts Federation to Jonathan G. Katz, Secretary of
the SEC (November 6, 1989). This two page letter stated that Canadian issuers should
be subject to full United States requirements, regardless of the type of securities offered
or the nature of the investors. Anything less would be a "significant disservice to
U.S. investors". Id. at 2.
173. Letter from Ernst & Young to Jonathan G. Katz, Secretary of the SEC, at 1
(November 28, 1989) [hereinafter the "Ernst Letter"].
174. Letter from the Toronto Stock Exchange to Jonathan G. Katz, Secretary of
the SEC, at 6 (October 31, 1989) [hereinafter the "Toronto Letter"]; Letter from the
New York Bar Association to Jonathan G. Katz, Secretary of the SEC, at 6 (November
29, 1989) [hereinafter the "NY Bar Letter"]; Letter from Northern Telecom Limited
to Jonathan G. Katz, Secretary of the SEC, at 2 (October 30, 1989) [hereinafter
the "NT Letter"]; Letter from Osher, Hoskins & Harcourt to Jonathan G. Katz, Secretary
of the SEC, at 3 (November 13, 1989) [hereinafter the "Osher Letter"]; Letter
from Inco Limited to Jonathan G. Katz, Secretary of the SEC, at 4 (October 31, 1989)
[hereinafter the "Inco Letter"]; Sullivan Letter, supra note 73, at 5.
175. See supra note 130 and accompanying text.
176. The Release, supra note 1, at 80,301 n.155.
177. Sullivan Letter, supra note 73, at 5; Inco Letter, supra note 174, at 4.

1990]
PROPOSED DISCLOSURE SYSTEM
Thus, my first recommendation is the creation of such a safe harbor.
B. Securities Offerings and Periodic Reporting
Distinguishing non-convertible investment grade debt and preferred
stock from other securities seems appropriate.' 78 The price of
such securities is almost entirely due to the relationship between the
yield and the risk that the issuer will default. The price of other securities
typically is determined by many additional factors.
Most commentators thought that the same or less stringent eligibility
requirements and reconciliations used for offerings should also be
used for periodic reporting.' 79 As a conservative first step and for the
sake of simplicity, the same standards should apply. If this proposed
system functions smoothly, the eligibility and reconciliation requirements
for periodic reporting companies can be further relaxed at a
later date.
1. Eligibility Requirements
Two commentators suggested that the eligibility requirement of investment
grade as rated by a nationally recognized statistical rating
service be expanded to include not just Canadian issuers so rated by
the United States rating services of Moody's or Standard and Poor's,
but also Canadian issues so rated by comparable Canadian rating services.
180 Such a suggestion appears appropriate. Moody's and Standard
and Poor's only rate 32 Canadian issuers that are investment grade
whereas Dominion Bond Rating Service Limited alone rates an additional
85 Canadian issuers that are investment grade but not rated by
the United States rating services. 18 My second recommendation appears
obvious. The definition of nationally recognized rating service
should be expanded to include comparable Canadian rating services.
Five commentators mentioned the non-convertible for one year eligibility
requirement for investment grade debt and preferred stock.
Two commentators stated that the one year non-convertible definition
was appropriate and this period need not be extended.' 8 ' One commen-
178. Only the Ernst Letter, supra note 173, at 2, stated that such a distinction is
inappropriate.
179. Sullivan Letter, supra note 73, at 30 (less stringent standards for periodic
reporting); ABA Letter, supra note 123, at 7 (the same standards for continuous reporting
purposes).
180. Sullivan Letter, supra note 73, at 11; DBRS Letter, supra note 142, at 1.
181. DBRS Letter, supra note 142, at 1.
182. ABA Letter, supra note 123, at 2; Letter from Bow Valley Industries Ltd. to

66 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
tator suggested that such a period of non-convertibility should be extended
to at least two years. 183 Another commentator saw no reason for
treating securities that are convertible after one year as non-convertible
because the commentator has seen very few issues of securities that
become convertible after a specified period of time. 1 "
The last commentator on the non-convertible criteria raised an interesting
point. While the investment grade debt or preferred stock is
non-convertible, perhaps there are sufficient differences between these
types of securities and other securities to merit different disclosure requirements.
185 The differences, however, disappear as the date for po-
tential conversion, nears.
18 6
Imposing the additional disclosure requirements of Form F-10 issuers
on Form F-9 issuers when the date the securities becomes convertible
is sufficiently close so that the convertibility feature has a significant
enough impact on the price of the securities would be an ideal
solution. This solution would respond to the growing similarities in the
information needs of these investors as the convertibility date approached.
Implementing such a solution, however, would be too unduly
complicated and unwarranted given the small volume of issues of secur-
1 87
ities that become convertible after a specified time.
Until such issues become more common, I do not recommend adjusting
the proposed system to make special accommodations for such
issues. Rather, only investment grade debt and preferred stock that is
never convertible should be eligible for Form F-9. This approach is
much simpler to implement while it still meets investors' information
needs should these needs change over the life of the securities as the
convertibility feature of the securities changes. Also, this approach
eliminates the need to determine how significant an effect the conversion
feature has on the price of the securities. Finally, this approach, if
it errs, does so on the conservative side.
Two commentators felt the market value and public float eligibility
criteria for investment grade debt and preferred stock issuers should
be supplemented with alternative criteria because such tests do not ade-
Jonathan G. Katz, Secretary of the SEC, at 2 (October 30, 1989) [hereinafter the
"Bow Letter"].
183. Letter from the Financial Executives Institute to Jonathan G. Katz, Secretary
of the SEC, at Attachment page 1 (November 20, 1989) [hereinafter "FEI
Letter"].
184. Sullivan Letter, supra note 73, at 10-11.
185. See supra notes 141-148 and accompanying text.
186. Ernst Letter, supra note 173, at 4.
187. See supra note 184 and accompanying text.

1990]
PROPOSED DISCLOSURE SYSTEM
quately reflect the market following of a captive finance subsidiary."' 8
Such issuers would not meet the eligibility criteria even though they
may fit the definition of substantial issuers' 89 that the system was
designed for. I also feel that the criteria defining substantial issuers
should include some additional alternative criteria.
One commentator suggested scraping the market value test and
retaining only the public float eligibility criteria. 190 Another commentator
suggested scraping both the market value and public float tests and
replacing them with a trading volume test.' 9 ' While I do not recommend
scraping either test initially, I do recommend creating some trading
volume test as an alternative criteria for eligibility.
2. Accounting Reconciliations
Whether a reconciliation to United States GAAP should be required
in the wraparound and, if so, whether such reconciliation should
be in conformity with Item 17 (requiring reconciliation of only the
measurement items 92 ) or Item 18 (requiring full reconciliation to
United States GAAP and all disclosure required by regulation S-X 93 )
of Form 20-F were the two areas most often addressed by the commentators.
Only one commentator thought full Item 18 reconciliation
should be required in all circumstances.' 94
Most commentators, however, felt that no reconciliation was necessary
for Form F-9 issuers of investment grade debt or preferred stock
and that only Item 17 reconciliation was necessary for Form F-10 issuers
of other securities. 95 Some commentators went further to state that
188. Letter from General Motors Acceptance Corporation to Jonathan G. Katz,
Secretary of the SEC, at 2 (October 26, 1989) [hereinafter the "GMAC Letter"]; NY
Bar Letter, supra note 174, at 2.
189. "Substantial issuers" are defined as those issuers that have a large enough
market following so that the prices of such securities reflect all available public information.
The Release, supra note 1, at 80,282. A more precise definition of substantial
issuers is those issuers whose size is large enough that the market cperates efficiently
for them. NY Bar Letter, supra note 174, at 2.
190. ABA Letter, supra note 123, at 2-3. As previously discussed, the market
value and public float eligibility criteria apply to both offerings of non-convertible investment
grade debt or preferred stock and other offerings.
191. Sullivan Letter, supra note 73, at 10.
192. See supra note 155 and accompanying text.
193. See supra note 146 and accompanying text.
194. Ernst Letter, supra note 173, at 2-4.
195. FEI Letter, supra note 183, at 1-2; ABA Letter, supra note 123, at 3;
GMAC Letter, supra note 188, at 2; Cohen Letter, supra note 123, at 3; Letter from
NOVA Limited to Jonathan G. Katz, Secretary of the SEC, at 6 (October 30, 1989)

68 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
such Item 17 reconciliation for Form F-10 issuers should not be
mandatory but should only be necessary when there are material differences
between United States GAAP and Canadian GAAP. 96 Still
other commentators thought there should be no reconciliation in any
circumstances. 97
Just how significant are the differences between Canadian GAAP
and United States GAAP? The difference between the purchase
method and pooling-of-interests method of accounting for business
combinations only arises in the context of certain types of business
combinations. 98 This difference arises because the former method requires
a revaluation of the net assets acquired while the latter does
not. 199 This difference, however, only creates a significant difference in
long term assets.
Every dollar of current assets and current liabilities represents either
an actual dollar of cash or cash equivalents or a claim to receive or
pay a dollar in the near future. Since the fair market value of a dollar
is generally a dollar, regardless of whether that dollar is received now
or in the near future, current assets and current liabilities are generally
stated at values that very closely approximate fair market value. Thus,
using one or the other business combination accounting method has virtually
no effect on current assets or current liabilities.
The differences in pension accounting"' and income tax accounting
20 1 have their primary effect on the footnotes of the financial statements
and on long term liabilities or long term assets. However, the
footnotes generally explain how the pension account numbers and the
income tax account numbers were derived.
As far as comparability of financial statements is concerned, since
Canadian GAAP requires a method of accounting for income taxes
that was previously required in the United States, Canadian GAAP
financial statements are just as comparable to current United States
[hereinafter the "NOVA Letter"]; NY Bar Letter, supra note 174, at 7.
196. Inco Letter, supra note 174, at 5; Sullivan Letter, supra note 73, at 3; NT
Letter, supra note 174, at 2.
197. Osher Letter, supra note 174, at 2 (however, Item 17 of Form 20-F, 17
C.F.R. § 249.220f (1989) suffices if some reconciliation required); Letter from Norcen
Energy Resources Limited to Jonathan G. Katz, Secretary of the SEC, at 1-2 (November
3, 1989) [hereinafter the "Norcen Letter"]; Letter from Placer Dome, Inc. to
Jonathan G. Katz, Secretary of the SEC, at 1 (October 27, 1989) [hereinafter the "PD
Letter"]; Bow Letter, supra note 182, at 2.
198. See supra notes 100-101 and accompanying text.
199. Id.
200. See supra note 106 and accompanying text.
201. See supra notes 108-109 and accompanying text.

19901
PROPOSED DISCLOSURE SYSTEM
GAAP financial statements as United States GAAP financial statements
from several years ago are. Pension accounting in the United
States seems to change every couple of years. Thus, pension accounting
is inherently inconsistent and attempting to obtain comparability is a
meaningless waste.
The differences in reporting earnings per share data 2 ' and extraordinary
items 20 3 can produce significant differences in the amount
of information available to investors in equity securities. Earnings per
share data are a primary and frequently relied upon means for investors
to make quick evaluations of equity investments. As such, this information
is very valuable to an investor.
The rest of the general differences in the GAAP of the United
States and Canada are either fairly insignificant or are merely a question
of timing differences which are also fairly insignificant when financial
statements are evaluated over an extended period of time. No prudent
investor makes an investment decision based on financial
statements covering only one year. Indeed, both Canadian disclosure
regulations and United States disclosure regulations require financial
statements for period of time that is generally long enough so that timing
differences are fairly insignificant.
The primary factors necessary to decide whether or not to invest in
an investment grade debt or preferred stock issue are the yield and the
risk. The yield on such securities is determined by only two factors and
is the quotient of the fixed return divided by the price. Both of these
factors are readily determinable without any reconciliation.
The risk represents the possibility that the issuer cannot pay interest
or preferred dividend payments on a regular basis. A strong working
capital position 20 4 and strong cash flows indicate low risk. Since
working capital is generally unaffected by the differences in GAAP, a
reconciliation would not provide any useful information on working
capital. Also, none of the differences have any direct effect on cash
flow. 105 Finally, the investment grade rating is an alternative evaluation
202. See supra note I10-111 and accompanying text.
203. See supra note 112 and accompanying text.
204. Working capital equals current assets less current liabilities.
205. However, there may be some indirect effects due to the timing of when taxable
income is recognized. For example, assuming an item where income tax laws followed
GAAP, if U.S. GAAP required expending the item immediately while Canadian
GAAP required capitalization and amortization of the item, U.S. GAAP would produce
lower current taxable income and lower current income taxes. Hence, current
cash flow would be greater under U.S. GAAP. However, this advantage is short lived
because taxable income and income taxes would be lower in future years under Canadian
GAAP and, hence, future cash flow would be greater under Canadian GAAP.

70 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
of the risk involved. Thus, reconciliation of financial statements for
Form F-9 issuers of investment grade debt or preferred stock is not
justified and should not be required.
Other types of investments are evaluated based on many additional
factors. Comparability of earnings per share data certainly provides
valuable information to the common stock investor or to other
Form F-10 issuance investors. An Item 17 reconciliation, however, is
sufficient to provide such comparable earnings per share data and much
additional comparable information.
Item 18 reconciliation, while it does provide even more information,
does not seem necessary. Requiring Item 18 reconciliation would
defeat the purpose of the multijurisdictional system because such reconciliation
would not significantly simplify multijurisdictional disclosure
over present methods. 2°8 Also, just because there are some differences
between Canadian GAAP and US GAAP, it does not follow that
disclosure documents prepared in accordance with Canadian standards
cannot meet the SEC's sufficient disclosure goal.
The SEC does not require disclosure of everything. Only disclosure
of material matters is required. The SEC has defined "material" as
describing those matters to which there is a substantial likelihood that
a reasonable investor would attach importance in determining whether
to purchase the security registered. 2 " 7 Thus, disclosure documents prepared
according to Canadian standards, although differing from those
prepared according to US standards, can still meet the SEC's disclosure
goal as long as the material matters are disclosed. Since Canadian
securities regulation has a similar disclosure goal 208 , the material matters
are disclosed in documents prepared in accordance with Canadian
standards.
One commentator even remarked that no one other than the SEC
has ever expressed any interest in its reconciliation disclosure. 20 9 Just
because investors do not question such reconciliations, however, it does
not follow that such reconciliations do not provide helpful information
with which a reasonable investor is substantially likely to form the basis
for an informed investment decision. Thus, Item 17, but not Item
18, reconciliation should be required for Form F-10 issuers.
Again, when the risk is evaluated over multiple years, these differences become
insignificant.
206. Cohen Letter, supra note 123, at 3.
207. Rule 405, 17 C.F.R. § 230.405 (1985).
208. See supra notes 65-66 and accompanying text.
209. PD Letter, supra note 197, at 1.

1990]
PROPOSED DISCLOSURE SYSTEM
C. Tender Offers
One commentator noted that the implementation of the proposed
multijurisdictional system does not eliminate the need to continue attempts
to harmonize the standards in both countries. 21 0 This is especially
true in the area of tender offers. 21' The real problem occurs when
two bidders vying for the same target have their bids governed by different
sets of regulations." 2
Two commentators noted how this could occur. 21 '3 An initial Canadian
bidder could commence a tender offer for a target company that
had less than 20 percent of its shares held of record by United States
shareholders. 21 ' The initial bidder thus could make its bid pursuant to
Canadian tender offer law and still be in compliance with the Williams
Act. 215 By the time a rival United States bidder commenced a competing
tender offer, a sufficient number of shareholders could have sold
their shares to one of the large United States arbitrageurs, so that
United States shareholders would then represent over 20 percent of the
shareholders. 26 The second bidder would thus have to comply with the
Williams Act. 21 7
This would create a bifurcated bidding process. 218 The first bidder,
pursuant to Canadian law, could purchase an additional five percent of
the shares of the target company while the tender offers were still
open. 219 However, the second bidder, pursuant to United States law,
would be precluded from doing the same. 220
Such an anomaly must be addressed by the proposed system.
Somehow, the competing bidder should be subject to the same rules as
the initial bidder. 22' Perhaps this could be accomplished by determining
the percentage of United States shareholders (and thus the applicable
set of rules) for the second bidder retroactively to the date the ini-
210. Letter from the American Stock Exchange to Jonathan G. Katz, Secretary
of the SEC, at 7 (November 20, 1989).
211. Cohen Letter, supra note 123, at 2; Toronto Letter, supra note 174, at 4.
212. Toronto Letter, supra note 174, at 4.
213. Sullivan Letter, supra note 73, at 23-24; ABA Letter, supra note 123, at 6.
214. ABA Letter, supra note 123, at 6.
215. See supra notes 156-158 and accompanying text.
216. ABA Letter, supra note 123, at 6.
217. See supra note 156 and accompanying text.
218. Sullivan Letter, supra note 73, at 24.
219. See supra note 123 and accompanying text.
220. Id.
221. ABA Letter, supra note 123, at 6.

72 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
tial bidder commenced its bid. 2
Only one commentator disagreed with the 20 percent threshold 2
for tender offers, stating that the threshold should be 49 percent. 22 The
other commentators mentioning this threshold thought 20 percent was
appropriate. 2 5 I agree with the latter group. Acquisition of 20 percent
of the stock of the target company is the minimum threshold necessary
to constitute a tender offer under Canadian law. 228
D. Shelf Registration
Currently, shelf registration is possible under SEC Rule 415227
and under rules promulgated by the CVMQ in Quebec. 2 8 However,
the OSC has no similar process in Ontario. This could result in very
few offerings of shelf registration eligible securities in Ontario, a disadvantage
to Ontario investors and Ontario issuers. The adoption by the
OSC of a similar shelf registration process would eliminate this disadvantage,
and is recommended. 29
E. Expected Cost Savings
Over the years, Canadian issuers have been deterred from issuing
securities in the United States because of the perceived excessive cost
and practical difficulty in complying with United States disclosure and
reporting requirements. 2 3 0 The proposed multijurisdictional system
should help remove the unnecessary impediments to such issuers.
Two commentators expected to realize cost savings due to the reduced
compliance burden on the periodic reporting. 2 32 Another commentator
expected to save substantial legal and printing costs. 2 33 Finally, one
commentator expected to save up to two-thirds of its rights offerings
expenses incurred, exclusive of underwriting fees, because 15 to 20 per-
222. Sullivan Letter, supra note 73, at 25.
223. See supra note 156 and accompanying text.
224. ABA Letter, supra note 123, at 5.
225. Sullivan Letter, supra note 73, at 22; PD Letter, supra note 197, at 2.
226. Sullivan Letter, supra note 73, at 22.
227. 17 C.F.R. § 230.415 (1983).
228. See supra notes 83-85 and accompanying text.
229. NT Letter, supra note 174, at 3; Osher Letter, supra note 174, at 7.
230. Sullivan Letter, supra note 73, at 2.
231. Letter from Shearson Lehman Hutton to Jonathan G. Katz, Secretary of the
SEC, at 1 (October 24, 1989).
232. Inco Letter, supra note 174, at 2; NT Letter, supra note 174, at 6.
233. Norcen Letter, supra note 197, at 3.
2 31

1990]
PROPOSED DISCLOSURE SYSTEM
cent of its shareholders are United States residents. 23 '
IX. CONCLUSION
The globalization of the world's capital markets is no longer a prediction
about the future, it is today's reality. The SEC, OSC and
CVMQ must respond to this. The Release is a major step in the right
direction. This comment has analyzed some of the major aspects of the
proposed multijurisdictional system and has pointed out some of the
system's shortcomings. These shortcomings can be overcome, however.
Through further cooperative efforts by the SEC, 3 ' OSC, CVMQ and
other regulatory bodies, the obstacles standing in the way of an effective
multijurisdictional disclosure system can be removed and the goals
of security regulation can be met.
Alan Goggins
234. NOVA Letter, supra note 195, at 8-9.
235. The SEC is setting up an International Affairs Office to improve cooperative
efforts with securities regulators abroad. Cooperative agreements have recently been
reached with France and the Netherlands to improve information flow and curb insider
trading and other market abuses. USA Today, Dec. 19, 1989 at 1, col. 1.

NOTE
GREGORIAN v. IZVESTIA: AN ANALYSIS OF THE
ELUSIVE SOVIET DEFENDANT
In Gregorian v. Izvestia 1 , the United States Court of Appeals for
the Ninth Circuit affirmed a district court ruling which set aside a default
judgement for libel against the Soviet newspaper Izvestia 2 and
reversed the district court's decision allowing a default judgment to
stand for breach of contract against Soviet trading organizations 3 . The
court found that under the Foreign Sovereignty Immunity Act"
("FSIA"), the court did not have jurisdiction over Izvestia and the libel
claim 5 . The court vacated the default judgement on the breach of
contract claim' under Rule 60(b)(6) which allows a court to vacate a
judgment for "any other reason justifying relief . . . ."' This left Gregorian,
a California businessman, with no recourse for his injuries.
This note examines the role FSIA played in isolating the Soviet
Union from liability for its actions. Although FSIA carves out specific
cases where foreign entities are not granted immunity 8 , the wording of
1. 871 F.2d 1515 (9th Cir. 1989).
2. Id. at 1522.
3. Id.
4. Foreign Sovereign Immunities Act of 1976, Act of October 21, 1976, Pub. L.
No. 94-583, 90 Stat. 2891 (codified at 28 U.S.C. 1330; 1332(a)(2)-1332(a)(4);
1391(F); 1441(D); 1602-1611 (1976).
5. Gregorian, 871 F.2d at 1521-1522.
6. Id. at 1522.
7. Fed. R. Civ. P. 60(b):
On motion and upon such terms as are just, the court may relieve a party or his
legal representative from a final judgment, order, or proceeding for the following
reasons: (1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered
evidence which by due diligence could not have been discovered in time to
move for a new trial under Rule 59(b); (3) fraud (whether heretofore denominated
intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party;
(4) the judgment is void; (5) the judgment has been satisfied, released, or discharged,
or a prior judgment upon which it is based had been reversed or otherwise
vacated, or it is no longer equitable that the judgment should have prospective
application; or (6) any other reason justifying relief from operation of the
judgment.
8. See infra notes 86-91 and accompanying text for exceptions to sovereign
immunity.
(75)

76 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
FSIA leaves room for judicial interpretation.' The Gregorian court followed
established case law and legislative interpretation in reaching its
decision. 10 This note suggests that other interpretations are possible
which afford some protection for the unsuspecting businessman dealing
with the Soviets.
With Mikhail Gorbachev's recent push for perestroika"l and glasnost",
more Americans will have business contacts with the Soviets
and expose themselves to possible liabilities incurred in theses transactions.
If courts continue to follow the Ninth Circuit's reasoning, American
businessmen who deal with the Soviets will have no recourse for
commercial wrongdoing by the Soviets.
I. THE CASE
A. Facts
In 1970, Raphael Gregorian, an American of Russian decent'", and
his company, California International Trade Corporation ("CIT"), began
exporting medical and laboratory equipment to the Soviet Union, 1
acting as a broker or sales representative.' 5 In 1982, the Soviet Ministry
of Foreign Trade awarded the status of "accreditation" to CIT.' 6
This honor allowed CIT to have an office in Moscow and was evidence
9. In the Legislative History of FSIA, the committee noted that "[tihe courts
would have a great deal of latitude in determining what is a 'commercial activity.' "
H.R. REP. No. 1487, 94th Cong., 2d Sess. 1, 16, reprinted in 1975 U.S. CODE CONG.
& ADMIN. NEWS 6604, 6615 [hereinafter House Report]. See infra notes 107-127 and
accompanying text for judicial interpretations of "direct effect" and "commercial
activities."
10. See infra notes 52-76 for a discussion of the court's analysis.
11. Perestroika refers to Gorbachev's proposed "restructuring" of the Soviet
Union. Gorbachev described perestroika as "a policy of accelerating the country's social
and economic progress and renewing all spheres of life." M. GORBACHEV, PER-
ESTROIKA NEW THINKING FOR OUR COUNTRY AND THE WORLD, II (1987).
12. Glasnost (publicity) refers to Gorbachev's recent push for openness in the Soviet
Union.
13. Gregorian was born in Volgograd (formerly Stalingrad) and spoke fluent Russian.
Hyatt, The CEO Who Came in from the Cold, INC. Jan., 1986 at 87. [hereinafter
Hyatt].
14. Gregorian, 871 F.2d at 1517.
15. Gregorian v. Izvestia, 658 F. Supp. 1224 (C.D. Cal. 1987).
16. Gregorian, 871 F.2d at 1517. As of 1982, CIT was the smallest company accredited
to operate in the Soviet Union. About 25 companies were accredited, including
IBM and E.I. Du Pont de Nemours and Co. "The Soviets usually required minimum
sales of $40 million to qualify for accreditation, but they waived the rule because of
[CIT's] high-quality equipment." Hyatt, supra note 13, at 90.

1990]
GREGORIAN v. IZVESTIA
of the Soviets' high regard for Mr. Gregorian.1 7
From 1982-1984, there were several billing disputes between Mr.
Gregorian and the Soviets involving three sets of equipment.' Mr.
Gregorian claimed that he shipped the equipment to the Soviet Union
pursuant to an oral contract with various customers, the Ministry of
Foreign Trade, the Union of the Soviet Socialist Republics and V/O
Medexport and V/O Licensintorg (Soviet foreign trade organizations);
and that the Soviets installed the equipment in their hospitals.'" Mr.
Gregorian also claimed that the Soviets have not paid for any of the
equipment shipped after 1982.20 The Soviets denied any contractual
relationship."
On November 10, 1984 the Ministry of Foreign Trade revoked
Mr. Gregorian's accreditation. 2 On November 18, 1984, the Soviets
published an article in Izvestia, a Soviet newspaper, entitled "Duplicitous
Negotiator: A Story About a U.S. Firm and an Abuse of Trust." 23
In the article, the Soviets accused Mr. Gregorian of bribery, smuggling
and unethical business practices as well as accusing Mr. Gregorian of
espionage. 24
B. Lower Courts
After unsuccessful attempts to resolve the disputes with the Soviets,
5 Mr. Gregorian filed suit in United States District Court for the
Central District of California on January 1, 1985 alleging libel, breach
of contract and civil conspiracy. He named Izvestia, the USSR, V/O
Licensintorg, V/O Medexport, and the USSR Ministry of Foreign
Trade as defendants. 6 Mr. Gregorian charged that the Soviets revoked
his accreditation and published the libelous article in Izvestia to avoid
17. id.
18. Id.
19. Id.
20. Id.
21. Gregorian, 871 F.2d at 1517.
22. Id. Gregorian received a telex from the Protocol Administration of the Soviet
Ministry of Foreign Trade stating that "the Ministry of Foreign Trade has decided to
discontinue the activities of the firm's representatives in the Soviet." Gregorian had 90
days to leave the Soviet Union. Hyatt, supra note 13, at 90.
23. Gregorian, at 1517.
24. Id.
25. Gregorian, 658 F.Supp. at 1226. After receiving the telex, Gregorian went to
Switzerland and offered to meet with the Russians. Gregorian's lawyer went to Moscow
to try to reinstate Gregorian's accreditation but was unsuccessful. See Hyatt, supra
note 13, at 90, 92.
26. Gregorian, 658 F. Supp. at 1226-1227.

78 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
paying for the medical equipment which CIT shipped to the Soviet
Union. 7
The United States State Department served process on the Soviet
defendants pursuant to 28 U.S.C §1608(a). 28 On May 31, 1985, the
United States Embassy in Moscow sent copies of the complaint and
summons to the Soviet defendants. 9 The State Department also enclosed
a note advising the defendants of FSIA and that the defendants
were to respond within sixty days or risk default under United States
law. 3 0 Under the direction of the Soviet government, the defendants
rejected service and returned the documents, claiming that in accordance
with the "principle of sovereign equality of state, . . . the Soviet
state and its organs enjoys immunity from the jurisdiction of foreign
3 1
courts."
On July 31, 1985, the district court entered default judgments for
four of the contract claims and the libel claim, awarding damages on
the contract claims in the amount of $163,165.17 and on the libel
claim in the amount of $250,000.00.32
On October 14, 1986, a U.S. Magistrate issued an order giving
Mr. Gregorian the right to attach and execute against property in the
United State owned by the Soviet defendants. 3 Mr. Gregorian seized a
Cyrillic typewriter from a U.S. correspondent for Izvestia. 4 On November
20, 1986, the Magistrate issued a second order allowing them
to execute against funds held under the Bank of Foreign Trade for V/
0 Medexport. 36 On November 21, 1986, counsel for V/O Medexport
and V/O Licensintorg made an appearance. 6 The U.S. Marshal then
executed a writ on two bank accounts of the Bank of Foreign Trade at
BankAmerica International in New York City. 37 Bank of America
withdrew funds to satisfy the judgment and notified Moscow that their
accounts had been attached. 38 V/O Medexport and V/0 Licensintorg
filed motions to dismiss the case, vacate the judgment and stay the exe-
27. Id. at 1227.
28. Id.
29. id.
30. Id.
31. Gregorian, 658 F. Supp. at 1226-1227, quoting Embassy of the U.S.A. at
Moscow, Note No. 925, May 31, 1985.
32. Gregorian, 658 F. Supp. at 1227.
33. Id.
34. Id.
35. Id.
36. Id.
37. Gregorian, 658 F. Supp. at 1227.
38. Id.

19901
GREGORIAN v. IZVESTIA
cution. 39 On December 4, 1986, the court issued an order to stay the
execution of judgement and froze the funds in the BankAmerica." °
After the appearance of the Soviet defendants, negotiations took
place between the Soviets and the State Department, who encouraged
the Soviets to appear." 1 The United States, as an amicus curiae, agreed
with the Soviets' motion to set aside the default judgment to consider
the Soviets' defenses.' 2
In April 1987, the district court granted the Soviet's motion to set
aside the libel claim, holding that the claims against the Soviet newspaper
lacked subject matter jurisdiction under FSIA.' 3
The court denied defendant's (V/O Medexport's) 60(b)(4) motion
to set aside the default judgment for the breach of contract claims,
however, holding that the court had personal and subject matter jurisdiction
under FSIA." The court found subject matter jurisdiction for
the plaintiff's contract claim under the "direct effect" clause of FSIA
which finds jurisdiction over the foreign defendant when there is a commercial
act outside the United States which has a direct effect inside
the United States.' 5 The court applied due process standards to FSIA
in deciding the personal jurisdiction issue. 46 The district court found
that the Soviet trading organizations were not separate juridical entities
from the USSR.' 7 This would enable the plaintiffs to use contacts
between the USSR and the United States as a whole as a way to gain
personal jurisdiction over the trade organizations.' 8
Finally, the district court found that the court could not vacate the
judgment under Rule 60(b)(6) because the Soviets had been culpable
in failing to respond to the original action.'" Rule 60(b)(6) allows a
court to vacate a judgement "for any other reason justifying relief.
. .. ,,50 Both sides appealed the district court's decision." 1
39. Id.
40. Id.
41. Gregorian, 871 F.2d at 1518.
42. Id.
43. Gregorian, 871 F.2d at 1520.
44. Gregorian, 658 F. Supp. at 1234-1236.
45. Id. at 1236.
46. Id. at 1234-1236.
47. Id. at 1236.
48. Id.
49. Gregorian, 658 F. Supp. at 1237-1239.
50. Fed. R. Civ. P. 60(b)(6).
51. Gregorian, 871 F.2d at 1516.

80 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
1. Libel Claim
C. Court of Appeals
The court of appeals affirmed the district court's ruling to set aside
the default judgment and dismiss the libel claim for lack of subject
matter jurisdiction. 52 First, the court found that the district court correctly
granted Mr. Gregorian's request for a rule 54(b) 53 certification
which allowed Mr. Gregorian to immediately appeal the dismissal of
their libel claim." Rule 54(b) allows a court to enter a final judgment
on one or more claims when "there is no reason for delay and upon an
express direction for the entry of judgment." 55 In accessing the correctness
of a 54(b) ruling, the court of appeals took into account other
claims which may present similar issues that need to be reviewed as a
single claim 5 " and considered the trial court's assessment of the "equities"
involved, such as prejudice and delay. 57 The court of appeals
should then only overturn its decision if the court's decision was clearly
unreasonable. 5 8 The court of appeals found that the district court did
not abuse its discretion in finding that the unadjudicated claims of
emotional distress and civil conspiracy were distinct and separate from
52. Id. at 1522.
53. Fed. R. Civ. P. 54(b) states:
When more than one claim for relief is present in an action .. .the court may
direct the entry of a final judgment as to one or more but fewer than all the
claims .... only upon an express determination that there is no just reason for
delay and upon an express direction for entry of judgment. In the absence of such
determination and direction, any other order or form of decision, however designated,
which adjudicates fewer than all the claims . . . shall not terminate the
action as to any of the claims . . .and the order or other form of decision is not
subject to revisions at any time before the entry of judgment adjudicating all the
claims . ..
54. Gregorian, 871 F.2d at 1518.
55. Fed. R. Civ. P. 54(b).
56. Gregorian, 871 F.2d at 1518-1520. In Curtiss-Wright Corp. v. General Electric
Company, 446 U.S. 1 (1980), the Supreme Court stated the standard that a court
must apply when considering Rule 54(b) motions:
The court of appeals must . . .scrutinize the district court's evaluation of such
factors as the interrelationship of the claims so as to prevent piecemeal appeals in
cases which should be reviewed only as single units. But once such judicial concerns
have been met, the discretionary judgment of the district court should be
given substantial deference . . . . The reviewing court should disturb the trial
court's assessment of the equities only if it can say that the judge's conclusions
were clearly unreasonable.
Curtiss- Wright Corp., 446 U.S. at 10.
57. Gregorian, 871 F.2d at 1519-1520.
58. Curtiss-Wright Corp., 446 U.S. at 10.

1990]
GREGORIAN v. IZVESTIA
the libel claim." Thus, the libel claim was properly before the court of
appeals. 60
The court of appeals found that under FSIA, the court did not
have subject matter jurisdiction for the libel claim. 6 " The court rejected
Mr. Gregorian's assertion that the "commercial activity" exception to
sovereign immunity applied to the libel claim. 2 The plaintiff claimed
that the purpose of the libel was commercial; the Soviets were using
the libel to avoid commercial obligations. 6 " The court of appeals looked
to the nature of the Izvestia article and found that it was governmental.
4 The court relied on the fact that the newspaper was a government
organ which expressed the official opinions of the Soviet Union. 65 Thus,
the court of appeals found that the district court correctly dismissed
the libel claim for lack of subject matter jurisdiction. 66
2. Breach of Contract Claim
The court of appeals found that the district court erroneously denied
the defendant's 60(b)(6) motion to vacate the default judgment. 67
59. Gregorian, 871 F.2d at 1520.
60. Id.
61. Id. at 1522.
62. Id. at 1521. The commercial activities exception to sovereign immunity is
codified at 28 U.S.C. 1605(a):
(a) A foreign state shall not be immune from the jurisdiction of courts of the
United States or of the States in any case -
(2) in which the action is based upon a commercial activity carried on in the
United States by the foreign state; or upon an act performed in the United States
in connection with a commercial activity of the foreign state elsewhere; or upon an
act outside the territory of the United States in connection with a commercial
activity of the foreign state elsewhere and that act causes a direct effect in the
United States ...
28 U.S.C. 1605(a) (1982).
63. Gregorian, 871 F.2d at 1521.
64. Id. FSIA defines commercial activities as:
• . . either a regular course or commercial conduct or a particular commercial
transaction or act. The commercial character of an activity shall be determined by
reference to the nature of the course of conduct or particular transaction of act,
rather than by reference to its purpose.
28 U.S.C. 1603(c) (1982).
65. Gregorian, 871 F.2d at 1521. The court in Yessenin-Volpin v. Novosti Press
Agency, 443 F.Supp. 849 (S.D.N.Y. 1978) addressed the question of libel against Soviet
publications. The court characterized Izvestia as an "'organ of the Soviets of
Working People's Deputies' published by 'The Presidium of the Supreme Soviet of the
U.S.S.R.'" Yessenin-Volpin, 443 F. Supp. at 856.
66. Gregorian, 871 F.2d at 1522.
67. Id.

82 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
The court of appeals vacated the judgment and remanded the case to a
lower court for proceedings to decide whether there was subject matter
and personal jurisdiction over the breach of contract claim. 68 The court
went on to provide ample guidance for interpreting a 60(b)(6) request
and applying FSIA to the breach of contracts claim. 6 "
a. Rule 60(b)(6) Motion
The court of appeals examined policy considerations involved in
granting a 60(b)(6) 70 motion and found that the district court had
abused its discretion by denying the motion." The appellate court also
found that the defendants' failure to comply with United States law
(FSIA) did not constitute culpable behavior. 2 The court held that a
foreign sovereign defendant's reasonable belief that it is immune from
a suit under FSIA is not culpable conduct that would prevent a
60(b)(6) motion to set a aside a default judgment. 7 1
b. Rule 60(b)(4) Motion
The district court denied the defendants' Rule 60(b)(4) motion to
vacate a default judgment for the breach of contract claim, claiming
that FSIA provided subject matter and personal jurisdiction over the
defendants. 7 4 Since the court of appeals reversed the 60(b)(6) motion,
it did not have to rule on the 60(b)(4) motion. 7 5 The court did recognize
that on remand, the lower court may be faced with the issues of
personal and subject matter jurisdiction under FSIA and set forth
guidelines to help the lower court. 76
68. Id.
69. Id. at 1526-1530.
70. Id. at 1523-1526. The court looked at several policy consideration. Rule 60(b)
is remedial and must be applied liberally. Meadows v. Dominican Republic, 817 F.2d
517, 521 (9th Cir. 1987). Default judgments are disfavored; cases should be decided on
their merits if possible. Pena v. Seguros La Comercial, S.A., 770 F.2d 811, 814 (9th
Cir. 1985). The court should consider whether the defendant seeks timely relief from a
judgment and whether the defendant had a meritorious defense. Meadows, 817 F.2d at
521. The court should also take into account whether the plaintiff would be prejudiced
if the judgment were set aside and if the defendant's actions were culpable. Id. See
infra notes 103-106 and accompanying text for discussion of Rule 60(b)(6).
71. Gregorian, 871 F.2d at 1526.
72. Id. at 1523-1526. See infra notes 152-157 and accompanying text for a discussion
of culpable conduct.
73. Id. at 1525.
74. Gregorian, 658 F. Supp. at 1234.
75. Gregorian, 871 F.2d at 1526.
76. Id. at 1526-1530. See also supra notes 67-75 and accompanying text for the

1990]
GREGORIAN v. IZVESTIA
II. STATUTES
A. FSIA and Sovereign Immunity
Under the sovereign immunity doctrine, a foreign state may be
immune from the jurisdiction of another state's court. The United
States Supreme Court first recognized the doctrine of sovereign immunity
in The Schooner Exchange v. M'Faddon.7 In The Schooner Exchange,
the court granted immunity to a foreign state which had not
consented implicitly or explicitly to the suit. 78 Gradually, the judicial
system began to rely on the State Department for guidance in granting
immunity to foreign states.
In 1952, the State Department adopted a restrictive theory of sovereign
immunity. 80 Under the restrictive theory, sovereign immunity is
only available to a foreign state if the case is based on the state's public
acts (jure imperii). 8 1 If commercial activity (jure gestionis) is the basis
of the suit, the foreign state cannot be granted immunity. This framework
posed problems in that it required a political body, the State Department,
to apply legal standards though it was not equipped to hear
witnesses, take evidence or have appellate review. 83
The Foreign Sovereign Immunity Act was adopted in 1976, codifying
the restrictive theory of sovereign immunity. 84 FSIA was enacted
in response to the increasing number of Americans who were coming
into contact with foreign states. " FSIA ensures that United States
citizens have access to the United States judicial system to bring a
claim against a foreign defendant.
court's analysis of FSIA as it applies to the breach of contract claim.
77. 11 U.S. (7 Cranch) 116 (1982).
78. Id.
79. House Report, supra note 9, at 8, reprinted in 1976 U.S. CODE CONG. &
ADMIN. NEWS at 6606. The practice of relying on the State Department for the determination
of sovereign immunity can be found in Ex Parte Peru, 318 U.S. 578 (1943)
and in Mexico v. Hoffman, 324 U.S. 30 (1945).
80. Letter from Jack B. Tate, Acting Legal Advisor to the Secretary of State, to
Phillip B. Perlman, Acting Attorney General of the United States (May 19, 1952),
reprinted in 26 Sep't St. Bull. 984 (1952) [hereinafter Tate Letter]. See House Report,
supra note 9, reprinted in 1976 U.S. CODE CONG. & ADMIN. NEWS at 6607.
81. House Report, supra note 9, at 7, reprinted in 1976 U.S. CODE CONG. &
ADMIN. NEWS at 6605.
82. Id.
83. Id. at 6608.
84. Id. at 6605. Foreign courts also apply the restrictive theory against the United
States in suits against the United States. Id.
85. Id.

84 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
The Foreign Sovereign Immunity Act provides a foreign state with
immunity from jurisdiction in United States courts unless the cause of
actions falls into one of the exceptions enumerated in FSIA. First, a
foreign state cannot raise sovereign immunity if it has explicitly or implicitly
waived its immunity. 8 6 The second major exception to immunity
is for commercial activities and is contained in three clauses. 87 A foreign
state is not immune from jurisdiction in U.S. courts if the cause of
action is based on commercial activity performed within the United
States or if the action is based on an act performed in the United
States connected to the foreign state's commercial activity outside the
United States. 88 Also, a foreign state does not receive immunity if the
cause of action is based on a commercial act occurring outside the
United States but having a direct effect in the United States. 89 Noncommercial
exceptions to FSIA also include cause of actions involving
personal injury or death and damage to or loss of property occurring in
the United States caused by the tortious conduct or omission of a foreign
state or its employee acting within scope of his official employment.
90 Finally, foreign states are granted immunity for claims "arising
out of malicious prosecution, abuse of process, libel, slander, misrepresentation,
deceit, or interference with contract rights." 91
FSIA offered little guidance in determining commercial activity,
giving the courts "a great deal of latitude" in determining commercial
activity. 92 Commercial activity is defined in paragraph (c) of section
1603 as including a broad range of activities from "a regular course of
commercial conduct" to "a particular commercial aggression or act." 93
To determine if an activity is commercial, the court looks at the nature
of the activity to see if it is governmental or public, which would pre-
9 4
clude jurisdiction.
86. 28 U.S.C. 1605(a)(1) (1982).
87. 28 U.S.C. 1605(a)(2) (1982).
88. Id.
89. Id.
90. 28 U.S.C. 1605(a)(5) (1982).
91. 28 U.S.C. 1605(a)(5)(B) (1982).
92. House Report, supra note 9, at 16, reprinted in 1976 U.S. CODE CONG. &
ADMIN. NEWS at 6615.
93. See supra note 64. Commercial activities include "the carrying on of a commercial
enterprise such as a mining extraction company, an airline or a state trading
corporation," as well as "a single contract... House Report, supra note 9, reprinted
in 1976 U.S. CODE CONG. & ADMIN. NEWS at 6614-6615.
94. Id. at 6615. See also Artz, The Noncorporate Plaintiff: Hostages to the Gordian
Knot of the Foreign Sovereign Immunity Act of 1976, 54 CIN. L. REV. 907
(1986) for a discussion of commercial activity as it relates to corporate and non-corpo-

1990]
GREGORIAN v. IZVESTIA
Section 1330(b) 95 provides for personal jurisdiction over a foreign
defendant when the court has the power to hear the claim under section
1330(a), i.e. there is subject matter jurisdiction over the claim
under FSIA. 9 6 Service must be made pursuant to section 1608 of
FSIA. Also, minimum contacts between the foreign state and the
United States are required, as well as adequate notice. 7
FSIA was enacted to ensure that the court would decide the question
of sovereign immunity free from the constraints of foreign policy. 8
The passage of FSIA removed the determination of immunity from the
executive branch and gave it to the judicial branch, thus ensuring that
immunity considerations would be based on legal grounds, not on foreign
policy considerations. 9 Further, other countries followed the practice
of having the courts be responsible for all foreign sovereignty decisions.'
0 FSIA also gave the courts a way to obtain in personam
jurisdiction over foreign defendants' 01 and a way to afford relief to a
plaintiff who has a judgment against a foreign defendant. 10 2
B. 60(b)(6)
Federal Rule of Civil Procedure 60(b) allows a court to set aside a
judgment in certain situations. Rule 60(b)(6) enables a court to vacate
a judgment "for any reason justifying relief . . ."'I' This clause addresses
situations not specifically covered in the first five clauses 0 4 , and
does not address a substantive standard of review.' 05 In granting a Rule
60(b) motion, courts have broad discretionary powers which have been
defined by later case law.' 06
rate plaintiffs.
95. 28 U.S.C. 1330(b) (1982). This section provides a federal long arm provision
over foreign states.
96. House Report, supra note 9, at 13, reprinted in 1976 U.S. CODE CONG. &
ADMIN. NEWS at 6612.
97. Id.
98. House Report, supra note 9, at 7, reprinted in 1976 U.S. CODE CONG. &
ADMIN. NEws at 6612.
99. Id.
100. Id.
101. See 28 U.S.C. 1330(b) (1982).
102. House Report, supra note 9, at 7, reprinted in 1976 U.S. CODE CONG. &
ADMIN. NEWS at 6612.
103. See supra note 7.
104. Id.
105. Id.
106. See supra note 70.

86 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
III. CASE LAW
A. FSIA and Commercial Activities
Although FSIA codified earlier law regarding sovereign immunity,
a large body of case law has developed to interpret the more general
phrases of the statute, resulting in differing interpretations. The phrase
"commercial activities" has been interpreted by the courts to mean, as
indicated in the legislative history, the nature of the act." 0 7
In Yessenin-Volpin v. Novosti Press Agencys 08 the plaintiff
brought an action for libel against Tass (Telegraph Agency of the
USSR) 0 9 , Novosti Press Agency, "an information agency of Soviet
public organizations," ' 10 and The Daily World, a newspaper published
by the Communist Party of the United States. The court held that
TASS and Novosti were entitled to sovereign immunity as both organizations
did not engage in commercial activity."' The court rejected
plaintiff's argument that even though libel is specifically mentioned as
not conferring jurisdiction under section 1605(a)(5)(B), the court could
still find jurisdiction under the commercial activities exceptions found
in section 1605(a)(2).1 2 Specifically, the court found that the publications
in question were publications of the USSR itself which represented
"official commentary of the Soviet government," and were not
made "in connection with a contract or other arrangement with a nongovernmental
agency, which activity would be found commercial under
most circumstances."
' 13
The third clause of section 1605(a)(2) grants subject matter jurisdiction
over claims that are based on acts connected with the commercial
activity of a foreign state that occur outside 'the United States but
have a direct effect in the United States. 1 4 The third clause is the subject
of litigation and commentary to determine the meaning of "direct
effect in the United States."' 1 In Zendan v. Kingdom of Saudi Ara-
107. See supra note 94.
108. 443 F. Supp. 849 (1978).
109. Id. at 852.
110. Id. The articles were published in Sowjetunion Heute, Krasnaya Zvezda
(Red Star), Izvestia and Sovetskaya Rossiya (Soviet Russia). Id. at 856.
111. Yessenin-Uolpin, 443 F.Supp. at 856.
112. Id. at 8855-856.
113. Id. at 856.
114. See supra notes 87-94 and accompanying text for a discussion of the commercial
activities exception to FSIA.
115. See Note, Effects Jurisdiction under the Foreign Sovereign Immunities Act
and the Due Process Clause, 55 N.Y.U. L. REV. 474 (1980); Note, Direct Effect Jurisdiction
under the Foreign Sovereign Immunities Act of 1976, 13 N.Y.U. J. INT'L L.

1990]
GREGORIAN v. IZVESTIA
bia, the court held that a direct effect must be "substantial and foreseeable."
11 In Zendan, the court found that something legally significant
must occur in the in United States to achieve a direct effect such as a
bank refusing to pay on a letter of credit, transferring money, or incurring
a debt." 7 According to the court's reasoning in Zendan, however,
a financial loss incurred by the plaintiff in the United States is not
enough to constitute a direct effect.' s
The court in Texas Trading v. Federal Republic of Nigeria addressed
the issue of direct effects in the United States in relation to
corporate plaintiffs. 19 Texas Trading involved breach of contract actions
against Nigeria and its bank by American businesses. 120 The
court pointed out that a corporation is intangible and can only suffer
financial loss. 2 ' Thus, the court found the test to apply direct effect
standard to corporate plaintiffs was whether the corporation had suffered
direct financial loss.' In Texas Trading, a direct effect in the
United States occurred when the defendants breached contracts which
provided that money owed to the plaintiffs would be collected in the
United States.' 23
The court in Meadows v. Dominican Republic, a case involving a
breach of contract claim, found subject matter jurisdiction under
FSIA. 124 The court determined that there were direct effects on the
plaintiff in the United States. 2 5 The defendant, the Dominican Republic
and one of its executive agencies, failed to pay the plaintiff, an
American businessman, his commission for obtaining a loan for the
plaintiff.' 28 The Dominican Republic's contract with the plaintiffs to
pay their commission in the United States constituted a direct effect in
the United States. 127
& POL. 571 (1981).
116. 849 F.2d 1511, 1514 (D.C. Cir. 1988).
117. Id. at 1515.
118. Id.
119. 647 F.2d 300 (2nd Cir. 1981).
120. Id. at 302.
121. Id. at 312. The court commented that "Unlike a natural person, a corporate
entity is intangible; it cannot be burned or crushed. It can only suffer financial loss."
Id.
122. Texas Trading, 647 F.2d at 312.
123. Id.
124. 817 F.2d 517, 523 (9th Cir. 1987).
125. Id.
126. Id.
127. Id.

88 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
B. Personal Jurisdiction and FSIA
Once subject matter jurisdiction has been established under FSIA,
the court must determine if asserting personal jurisdiction over the foreign
defendants meets due process requirements. Courts have applied
due process standards to establish personal jurisdiction under FSIA. 2 8
The court must first determine if the defendant has "certain minimum
contacts" with the forum state so that "maintenance of the suit does
not offend traditional notions of fair play and substantial justice." 12 9
The court also looks to whether the foreign state has purposefully
availed itself to the privilege of doing business in the United States
Texas Trading considered the problem of personal jurisdiction and
FSIA.' 3 ' The court used the entire United States for establishing minimum
contacts, not just the forum state, 32 and noted that section 1608
provides for world wide service of process. 3 The court applied the policy
justifications found in Hanson v. Deckla T , concluding that if a
foreign sovereign invokes the "benefits and protections of (American)
law," then the foreign defendant would expect to be brought into an
American court.' 35 Texas Trading also stressed the forum state's interest
in providing redress for its citizens against foreign defendants which
FSIA provides. 136
C. Culpable Conduct Under 60(b)(6)
Rule 60(b)(6) provides that the court may vacate a judgment "for
any other reason justifying relief . ..,37 Rule 60(b)(6) offers no substantive
guidance which has lead to much case law surrounding the
128. See House Report, supra note 9, at 13, reprinted in 1976 U.S. CODE CONG.
& ADMIN. NEWS at 6612. According to the House Report, there must be minimum
contacts between the forum state and the United States and adequate notice before
personal jurisdiction can exist.
129. International Shoe Co. v. State of Washington, 66 S. Ct. 154, 158 (1945),
quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940).
130. Hanson v. Denckla, 357 U.S. 235,253 (1958).
131. Texas Trading, 647 F.2d at 313-315. Meadows also considered the question
of personal jurisdiction, relying on Texas Trading's analysis. Meadows, 817 F.2d at
523.
132. Texas Trading, 647 F.2d at 314.
133. 28 U.S.C. 1608 (1982).
134. See supra note 130 and accompanying text.
135. Texas Trading, 647 F.2d at 314, quoting Hanson, 357 U.S. at 253.
136. Texas Trading, at 315. See also McGee v. International Life Insurance Co.,
355 U.S. 220, 231 (1957), where the Supreme Court noted that "[tihe forum has a
"manifest interest in providing effective means of redress for its residents..
137. See supra note 7.
3 0

1990]
GREGORIAN v. IZVESTIA
rule. Courts have limited the broad discretionary power of the courts to
several policy considerations. First, rule 60(b)(6) is remedial in nature
and must be applied liberally. 13 8 Second, default judgments are disfavored
and should be decided on their merits whenever possible. 139 The
court should also take into account whether the defendant has a meritorious
defense ° , i.e. if the facts the defend alleges were true, he
would prevail.'" Also, the defendant must ask for relief in a timely
manner. 42 The court may consider whether granting a Rule 60(b)(6)
motion will prejudice the plaintiff 43 and whether the defendant's culpable
behavior lead to the default. 144 Thus, the court can deny a Rule
60(b)(6) motion if the plaintiff would be prejudiced by the court setting
aside the judgement, if the defendant has no meritorious defense
or if the defendant's culpable conduct caused the default.1 43
The court in Jackson v. People's Republic of China maintained
that Rule 60(b)(6) offered relief that was "an extraordinary remedy,
which may be invoked only upon a showing of exceptional circumstances."'
48 In Jackson, a class action was filed against the People's
Republic of China ("PRC") for payment of bearer bonds in default,
which had been issued by the Imperial Chinese Government in 1911 .14
The appellate court upheld the district court's decision to grant the
PRC's motion to set aside the default judgment under 60(b)(6) when
the defendant claimed absolute immunity. 48 The court also held that
extraordinary circumstances existed in the present case which justified
granting the defendant's 60(b)(6) motion to dismiss.' 49 The court relied
on the fact that the default judgment against the PRC was "a significant
issue in bilateral United States/China relations."' 150 The court also
found that the defendants had a meritorious defense: the PRC was unfamiliar
with United States judicial practice and the PRC believed that
international law did not require them to appear.'
138. Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984).
139. Id.
140. Id.
141. Gregorian, 658 F. Supp. at 1237.
142. Gregorian, 871 F.2d at 1523.
143. Falk, 739 F.2d at 463.
144. Id.
145. Gregorian, 871 F.2d at 1523.
146. 794 F.2d 1490, 1494 (11th Cir. 1988).
147. Id. at 1491-1492.
148. Id. at 1494.
149. Id. at 1495.
150. Id.
151. Jackson, 794 F.2d at 1496.

90 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
In Pena, the Ninth Circuit defined culpable conduct as whether
the defendant had actual or constructive notice of the filing of the action
and failed to respond. 15 Meadows followed the rules set forth in
Pena.' 53 In Meadows, the plaintiff sent the defendants a copy of the
complaint by mail but received no receipt. 16 4 The plaintiff also sent a
letter to the Department of State, requesting them to serve process on
the defendants and the defendants still failed to respond.' 55 In Pena,
the court also found culpable conduct. 15 1 In Pena, the defendant failed
to keep a correct address on file with the state insurance department
which resulted in the notice of action being sent to the wrong
address.1 57
IV. ANALYSIS
The Gregorian court, ruling in favor of the Soviet defendant, left
the American businessman no remedy for the wrongs caused by the
Soviet government and its agencies.' 58 By finding no subject matter jurisdiction
over the libel claim, the court precluded Mr. Gregorian from
recovering for the injuries caused by the Izvestia article. The court set
aside the default judgment on the breach of contract claim, remanding
the case to the lower court for further proceedings.'" Although the
appellate court followed prior case law in its rulings, the court managed
to leave Mr. Gregorian, an American citizen, without a remedy
for the extensive damage caused by the Soviets. On remand, the lower
court could find the contract claim within one of the enumerated exceptions
to sovereign immunity in FSIA, giving the court jurisdiction over
the claim. 160
A. Libel Claim
The court found that the libel claim fell outside the commercial
activity exception of FSIA, leaving Mr. Gregorian with no redress for
152. Pena V. Seguros La Comercial, S.A. 770 F.2d 811, 815 (9th Cir. 1985).
153. Meadows, 817 F.2d at 521.
154. Id. at 520.
155. Id.
156. Pena, 770 F.2d at 815.
157. Id.
158. See supra notes 52-72 and accompanying text for the court's treatment of
the issues involved.
159. See supra note 68.
160. See supra notes 86-91 and accompanying text for exceptions to sovereign
immunity embodied in FSIA.

1990]
GREGORIAN v. IZVESTIA
the financial loss caused by Izvestia's false accusations. 161 Mr. Gregorian
argued that jurisdiction was proper under all three clauses of the
commercial activity section of FSIA. 12 First, the plaintiff claimed that
the commercial activity was Izvestia's sales in the United States and
abroad. 6 3 The direct effects were the contract losses suffered by Mr.
Gregorian in the United States. 6 Mr. Gregorian also argued that section
1605(a)(5)(B) only grants immunity to noncommercial torts (libel)
and does not cover commercial torts (trade libel).'
The court rejected Mr. Gregorian's argument that activities are to
be classified by their purpose, not by their nature.' 66 According to the
court's analysis, the plaintiff claimed that "the alleged libel was published
with the purpose of injuring plaintiffs by avoiding commercial
obligations."(emphasis in original) 67 The Court contended that the nature
of the article was governmental. 68 The court also relied on Yessenin-Volpin
which held that Izvestia is the "official commentary of the
Soviet government.' 69 The court relied on the fact that Izvestia is an
"organ of the Soviets of Working People's Deputies, and is published
by the Presidium if the Supreme Soviet of the USSR."' 70 Due to the
governmental nature of Izvestia, the court held that the activity was
governmental, not commercial and therefore, no subject matter jurisdiction
existed under FSIA.1 71
The Soviet Union is a socialist state controlled by the communist
party. All publications are controlled by the state in one form or another;
consequently, all publications "belong" to the people. Since all
publications are censored or regulated by the government, there is no
free speech in the Soviet Union. 172 Therefore, any article in a Soviet
161. Gregorian, 871 F.2d at 1521-1522.
162. Id. at 1521.
163. Id.
164. Id.
165. Id.
166. Gregorian, 871 F.2d at 1521.
167. Id.
168. Id.
169. Gregorian, 871 F.2d at 1522, quoting Yessinen-Volpin, 443 F.Supp. at 853.
170. Gregorian, 871 F.2d at 1522. The court relied on amicus curiae briefs by the
United States, which described Izvestia as ". . .[a] voice of an official Soviet agency,
[and] determination of its contents can be carried out only by a government entity;
thus, publishing a particular article in Izvestia is a sovereign, governmental function."
Gregorian, 871 F.2d at 1522, quoting Statement of Interest of the United States at 24.
171. Gregorian, 871 F.2d at 1522.
172. In response to heavy government censorship, underground dissident publications
such as "Samizdat" flourished. There is, based on the recent developments in the
Soviet Union, an opportunity for some decline in government censorship, however, it is

92 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
publication, no matter how much it may seem to be commercial in nature,
will be considered "governmental," or official commentary of the
Soviet Union. Under FSIA, this gives the Soviet Union carte blanche
to publish any article, no matter how libelous, and claim that it is governmental,
protecting them from a suit under FSIA.
In Mr. Gregorian's situation, there is a strong case for trade libel,
a commercial activity, which would then allow a U.S. court to exert
subject matter jurisdiction over the defendants under the "direct effect"
clause of section 1605(a)(2). The libel directly caused sever financial
hardship to Mr. Gregorian's company. Mr. Gregorian suffered a
near collapse of his business and had to lay off many workers including
taking himself off the payroll. " '
There are many possible motivations behind the Soviet's printing
the libelous, false statement. Mr. Gregorian could have been an example
for the increasing number of American businessmen who will be
dealing with the Soviet Union in the future. 17"4 The Soviets may have
wanted to issue a warning to other businessmen who might be tempted
to exploit the Soviets for personal gain or engage in espionage. It is not
uncommon for the Soviet Union to arbitrarily deport an American
when a Soviet is reprimanded in the United States for espionage or to
use scare tactics to ensure that in the future, Americans will not be
tempted to commit some for of commercial espionage. Alternatively,
Mr. Gregorian may have been a part of the Soviet Union's budget
slashing. 175 When Mr. Gregorian lost his accreditation, the Soviet
Union signed a contract with the company that would enable the Soviets
to purchase the equipment directly, without the added cost of a
middleman."' All these explanations point to the fact that the statements
were not grounded in fact.
In light of the recent thawing between the Soviets and Americans,
we can expect increased contacts with the Soviets. With Gorbachev's
economic reforms, the Soviets will be looking to the West for innovative
"capitalist" ventures to stimulate a sluggish economy. If the courts
allow the Soviets to use libel to ruin an American businessman, the
courts are leaving the Soviets with an easy way to get rid of business
when they wish to pursue a more profitable opportunity. Unless the
courts carve out some sort of trade libel exception in the FSIA for com-
unlikely that the Soviet government will give up control of these vital organs of
propaganda.
173. HYATT, supra note 13 at 92.
174. Id.
175. Id.
176. Id.

1990]
GREGORIAN v. IZVESTIA
munist or socialist countries with state owned publications, the United
States is leaving its citizens unprotected and alone.
B. Breach of Contract Claim
The court of appeals found that the district court erroneously denied
the Soviet defendant's rule 60(b)(6) motion to set aside the default
judgment. 177 Since the court remanded the case on the basis of
the 60(b)(6) motion, the court did not have to consider whether FSIA
gave the courts jurisdiction over the breach of contract claim. 178 The
court did, however, provide its analysis of FSIA in relation to the
breach of contract claims. 1 79 While the Soviets may have deserved their
day in court to defend themselves, the lower court should at least find
jurisdiction under FSIA for the breach of contract claims and allow
Mr. Gregorian to recover for the unpaid equipment.
1. Rule 60(b)(6) Motion
The district court denied the defendant's Rule 60(b)(6) motion to
set aside the judgment "for any other reason justifying relief . . ." because
it found the defendant's nonappearance culpable. 180 The appellate
court found that the defendant's actions were not culpable and reversed
the district court's ruling. 81
The court took into account several policy considerations in deciding
the defendant's Rule 60(b)(6) motion. It noted that Rule 60(b) was
remedial in nature and should be liberally applied. 82 The court recognized
that default judgments are disfavored as cases that should be
tried on their merits. 8 The court noted that a court can deny a Rule
60(b)(6) motion if the plaintiff would be prejudiced by the setting aside
the judgment, if the defendant has no meritorious defense or if the de-
1 8 4
fendant's culpable conduct caused the default.
The court of appeals agreed with the district court that there
would be no significant prejudice to the plaintiff if the judgment was
vacated and that the defendants had a meritorious defense in that if
177. Gregorian, 871 F.2d at 1522.
178. Id.
179. Id. at 1526-1530.
180. Gregorian, 658 F. Supp. at 1238.
181. Gregorian, 871 F.2d at 1523.
182. Id.
183. Id.
184. Id.

94 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
the facts the defendants allege are true, they will prevail.' 8 " The appellate
court disagreed with the district court as to the question of culpable
conduct. The court found that the defendant's conduct was not culpable,
entitling them to relief under Rule 60(b)(6). 186 Plaintiff relied
on Meadows and claimed that the defendants' behavior was culpable in
that the defendants had notice of the action but failed to appear. 87
The court distinguished the present case by noting that since the Soviet
Government instructed the defendants not to appear, it was not a decision
made by the defendants. 88 The court held that the defendants'
nonappearance did not constitute culpable behavior if based on the Soviet
government's instructions to act within the Soviet's laws of immunity.
189 Also, the court claimed that the defendants acted on a reasonable
belief that they were not subject to jurisdiction."' 0 The court relied
on Jackson and found that a foreign defendant's nonappearance, based
on a reasonable belief that it is immune from a suit under FSIA, is not
culpable behavior under Rule 60(b)(6). 19 1 In Jackson, the court considered
the foreign policy implications of a default judgment and found
that the PRC's nonappearance was not a bar to a rule 60(b)(6)
motion.192
Even though the court relied on Jackson to reach its decision in
finding culpable conduct 1 3 , the court in Jackson did not base its holding
on culpable conduct. Instead, the Jackson court balanced all the
policy interests involved and looked at the foreign policy implications of
its decision."' The court in Gregorian claimed to be following Jackson
by finding culpable conduct but they neglected to consider the foreign
policy implications of their decision. A fear of upsetting the improving
relations between the USSR and United States, however, could have
influenced the Court's decision that the defendants' actions were not
culpable. While improving relations between the USSR and the United
States is an important endeavor, this should not be done at the expense
of a businessman who deserves redress for this wrongs. Further, FSIA
was enacted expressly to take the determination of immunity out of the
185. Id. See also Gregorian, 658 F. Supp. at 1237.
186. Gregorian, 871 F.2d at 1523.
187. Id. at 1524.
188. Id.
189. Id. at 1525.
190. Id.
191. Id.
192. Jackson, 794 F.2d at 1496.
193. Gregorian, 871 F.2d at 1525.
194. Jackson, 794 F.2d at 1496.

1990]
GREGORIAN v. IZVESTIA
hands of the executive branch, influenced by foreign policy considerations,
and place it into the hands of the judiciary which would base its
decisions on legal standards.' 95
It is possible, though, to find culpable behavior on the part of the
Soviets which would then preclude them from relief under 60(b)(6).
First, the Soviet Union regularly trades and does business with Western
nations. It is or should be aware of the business practices of Western
nations. It is unfair for the courts to allow the Soviets special privileges,
such as claiming deliberate disregard of the laws of the United
States to be non-culpable actions. It is absurd to think that a superpower
would not be aware of the theory of restrictive immunity in the
marketplace and honor it accordingly. Assuming that the Soviets are
aware of the theory behind FSIA, a blatant disregard for United States
law is culpable conduct.
2. Subject Matter Jurisdiction Under FSIA
The court does not reach a conclusion concerning personal and
subject matter jurisdiction under FSIA. 196 The court did provide guidelines
for a lower court to follow in making these determinations. " ' The
court considered the district court's finding of subject matter jurisdiction
under the third clause of FSIA which grants jurisdiction when a
commercial act based outside the United States has a direct effect inside
the United States. 98 First, the court interpreted "direct effect" to
be substantial and foreseeable. 1 99 To establish a direct effect, something
"legally significant" must occur in the United States."' Relying on
Zendan, the court found that mere financial loss by a plaintiff as a
result of actions abroad does not constitute a direct effect. 21
The court, applying the above considerations, suggested that the
plaintiff has alleged facts which may lead to subject matter jurisdiction.
2 The defendant visited California with regard to the contracts
under dispute and conducted negotiations regarding the equipment. 03
The contract stipulated for payments to be made in California. The
court does point out that these facts are in dispute and will be resolved
195. See supra note 99.
196. Gregorian, 871 F.2d at 1528.
197. Id.
198. Id. at 1526-1527.
199. See supra note 116.
200. See supra note 117.
201. See supra note 118.
202. Gregorian, 871 F.2d at 1527.
203. Id.

96 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
by a district court.' 4
Under the third clause of FSIA which grants jurisdiction for commercial
activity outside the United States with a direct effect in the
United States, the court could easily find subject matter jurisdiction.
The defendants breached a contract with the plaintiff which has a direct
effect on the plaintiff in the United States, causing him to lose
resources and much of his business. The breach resulted in American
and Soviet banks refusing to transfer funds into the plaintiff's account.
Although the court relied on Zendan and the stipulation that mere financial
loss does not constitute a direct effect, the court in Texas Trading
held that a direct effect can be found with a corporate plaintiff
when the defendant's actions cause financial loss. 20 5 Under Texas
Trading, the claim would fall within the commercial activity exception
as the plaintiff suffered financial loss as a result of the defendant's
actions.
3. Personal Jurisdiction under FSIA
Once the court established subject matter jurisdiction under
FSIA, the court must then determine if personal jurisdiction exists.
The appellate court in Gregorian recognized the need to satisfy the
minimum contacts due process standard found in International Shoe °
. 2 0
The court then considered if the defendant could be considered part of
the Soviet State in establishing minimum contacts necessary to gain
personal jurisdiction.
The district court concluded that the defendant trade organizations
were part of the Soviet State which is present throughout the
world in the form of diplomatic and trade missions. including the Soviet
Embassy in Washington D.C. and the consulate in San Francisco.
207 The district court also viewed the banks of the Soviet Trade
Organizations as agents of the defendants. 28 The defendants argue
that the defendant Medexport is a separate entity from the Soviet state
and only the defendant's contracts are relevant. 2 0 9 The appellate court
found that for purposes of establishing personal jurisdiction, the defendant
trading organization is a separate juridical entity from the So-
204. Id. at 1528.
205. See supra note 122.
206. Gregorian, 871 F.2d at 1529.
207. Gregorian, 658 F. Supp. at 1236.
208. Id. at 1235.
209. Gregorian, 871 F.2d at 1529. The defendants produced a Soviet lawyer who
attested to the fact that the defendant trade organization was a separate entity from
the Soviet state. Id. at 1530.

1990]
GREGORIAN v. IZVESTIA
viet State and the banks, restricting the court to consider on remand
only the defendants contacts when establishing personal jurisdiction. 21
In deciding the libel question, the court ruled that the Soviet newspaper
Izvestia was an organ of the Soviet state and incapable of commercial
activity. 21 ' For personal jurisdiction purposes, the court determined
that the foreign trade organization is not a part of the Soviet
State. 2 " 2 The court of appeals is clearly ignorant of the Soviet Union
and its economy. Until very recently, there was no free enterprise in the
Soviet Union. Every store, hotel, enterprise, and organization is a function
of the state. As is the case with publications in the Soviet Union,
commercial enterprises are entirely state run and can be considered a
part of the state for all intensive purposes. The district court recognized
this aspect of Soviet life, stating that "U.S. courts recognize the Soviet
State's monopoly over foreign trade . . . this Court concomitantly
views defendant trade organizations, both generally and specifically
• . .as integral parts of that State which enjoys representation through
diplomatic and trade mission around the world." 1 ' It is odd that the
court of appeals was so willing to accept Izvestia as a part of the Soviet
State but rejected the trade organization as an agent of the State.
V. CONCLUSION
With the recent improvements of USSR-US relations and the
push toward a more capitalist economy in the Soviet Union, American
businessmen will inevitably have more contacts with their Soviet counterparts.
As the number of transactions with the Soviet Union grow,
the potential for legal disputes will also increase. The judicial system
must be willing to provide a forum for resolution of disputes that may
arise between the American plaintiff and his Soviet defendant.
Although FSIA was enacted in response to the increasing number
of contacts between Americans and foreigners, FSIA does not always
provide protection from a Soviet defendant as was the case with Mr.
Gregorian. The court in Gregorian continually used FSIA to the detriment
of the American plaintiff. If FSIA is to operate to confer jurisdiction
on Soviet defendants, the courts will have to recognize the Socialist
nature of the Soviet State. If courts interpret FSIA under the direction
of the Ninth Circuit, it is doubtful that an American plaintiff will ever
have his day in court opposing a Soviet defendant. As long as the So-
210. Gregorian, 871 F.2d at 1530.
211. Id. at 1522.
212. Id. at 1530.
213. Gregorian, 658 F. Supp. at 1236.

98 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
viet Union wishes to do business with American businessmen, the Soviet
Union must be prepared to subject itself to the American judicial
system.
Jennifer Lasko

NOTE
THE ROLE OF INTERNATIONAL LAW IN DOMESTIC
COURTS:
WILL THE LEGAL PROCRASTINATION END?
In its recent decision, American Baptist Churches in the U.S.A. v.
Meese,' the U.S. District Court of the Northern District of California
addressed two important issues bearing on the applicability of international
law in domestic courts. These are the role of treaty obligations in
creating justiciable rights for individuals, and the applicability of customary
international law in the face of a conflicting federal statute.
On a motion to dismiss the plaintiffs' international law claims, the
court held that Article I of the Geneva Convention does not provide a
right of temporary refuge to Salvadorans and Guatemalans entering
the United States to avoid armed conflict in their home countries. 2 The
court further found that customary rules of international law do not
override duly enacted federal statutes and that, therefore, a showing
that temporary refuge has become a customary norm will not provide a
right to refuge where federal statutory law denies this right.'
This note will argue that, while the court's reasoning regarding the
applicability of treaties in domestic courts is sound, its rationale for
denying the plaintiffs' customary international law claim is flawed.
Though the court relies on legitimate case law, it will be shown that
several early judicial misconstructions have resulted in a series of cases
that perhaps fail to accord customary international law its proper place
in the domestic arena. It will be argued that, rather than being a settled
matter, this question is one which requires further clarification
from the highest Court.
I. STATEMENT OF THE CASE
For many years, both El Salvador and Guatemala have suffered
the tragedy of internal armed conflict." As a result, large numbers of
1. 712 F.Supp. 756 (N.D. Cal. 1989).
2. Id. at 770.
3. Id. at 771.
4. For over a decade, Guatemalans have been caught in the cross-fire between
the Guatemalan Army and counter-insurgents. Between 1978 and 1983, 440 villages
were destroyed, 50,000 to 75,000 people either disappeared or were killed, and as many
(99)

100 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
Salvadorans and Guatemalans have been both internally and externally
displaced through efforts to escape the political turmoil in their homelands.
5 Many of them have attempted to seek refuge in the United
States. Of the refugees seeking political asylum in the United States,
fewer than three percent of the Salvadorans and fewer than one percent
of the Guatemalans have been granted asylum. 6
In response to these circumstances, a number of organizations
have formed to assist Central American refugees in this country. In
addition, what has come to be known as the "sanctuary movement" (a
group who, under religious auspices, functions in a manner similar to
the nineteenth century's Underground Railroad) has arisen to aid this
same group in entering and remaining in the United States. 7
American Baptist Churches in the U.S.A. v. Meese 8 (hereinafter
referred to as American Baptist Churches) involved a suit brought by
several refugee organizations, two individual undocumented aliens and
four religious organizations participating in the sanctuary movement.
The plaintiffs sought an injunction barring the arrest and deportation
of Salvadoran and Guatemalan refugees; and an injunction against the
prosecution of workers in the sanctuary movement whose acts were performed
prior to November 6, 1986.1 The grounds upon which relief was
sought included infringement of the free exercise of religion, violation
of international law and the discriminatory application of immigration
laws in violation of the Equal Protection Clause of the Constitution.'"
The plaintiffs' international law claim was based on two arguments,
namely, that a failure to grant temporary refuge was a violation
as 200,000 children were orphaned. Schirmer, Waging War To Prevent War, THE NA-
TION, Apr. 10, 1989, at 478, 479. In El Salvador, more than 60,000 people have been
killed during nine years of fighting between guerrillas and government forces. In the
first half of 1988, 39 civilians were executed by right-wing death squads. In the first
half of 1989, this number rose to 55. During the first six months of 1988, guerrillas
killed a reported 27 civilians (not including casualties resulting from land mines placed
by the guerrilla forces). Lane, Death's Democracy, THE ATLANTIC MONTHLY, Jan.
1989, at 18.
5. See Hartman and Perluss, Temporary Refuge. Emergence of a Customary
Norm, 26 VA. J. INT'L L. 551, 567(1986).
6. 712 F.Supp. 756 (N.D. Cal. 1989).
7. See, e.g., A. CRITTENDEN, SANCTUARY: A STORY OF AMERICAN CONSCIENCE
AND THE LAW IN COLLUSION (1988).
8. 712 F.Supp. 756 (N.D. Cal. 1989).
9. On this date, Congress amended 8 U.S.C. § 1324(a) (1982), the criminal harboring
and transporting statute. Under the amended statute, employers rather than
sanctuaries are targeted for prosecution and, in fact, since the new law was enacted, no
sanctuaries or members of sanctuary movements have been prosecuted. Id. at 761.
10. American Baptist Churches, 712 F.Supp. at 759.

1990]
INT'L LAW IN DOMESTIC COURTS
of the Geneva Convention and that such a failure was a violation of
customary international law." In adjudicating the defendants' motion
for summary judgment, the court held that the Geneva Convention provided
no basis for the relief sought by the plaintiffs. 2 Further, the
court held that customary international law was not applicable since
the Refugee Act of 1980"s rejects a right of temporary refuge and this
explicit legislative act overrides customary international law."
The court, however, declined to dismiss the plaintiffs' claim that
discriminatory application of immigration laws governing the granting
of political asylum and the withholding of deportation could constitute
a violation of the Equal Protection Clause of the Constitution. 5
II. SUMMARY OF REASONING
The Supremacy Clause of the United States Constitution provides
that the "Constitution, and the Laws of the United States which shall
be made in Pursuance thereof; and all Treaties made, or which shall be
made, under the Authority of the United States, shall be the supreme
Law of the Land. . . .."' Thus, treaties are accepted as being
equivalent, hierarchically, to a federal legislative act.' A distinction
has long been made, however, between treaty provisions which confer
rights directly and those which require that implementing legislation be
enacted domestically before rights are created. 8 The courts have held
that these latter, non-self-executing treaties do not, in the absence of
the required implementing legislation, provide a basis for a private
lawsuit. 19
In determining whether a treaty is self-executing, the courts have
relied on a number of factors set forth in previous case law. 20 These
11. Id. at 767.
12. Id. at 769-770.
13. Pub. L. No. 96-212, 94 Stat. 102 (1980).
14. 712 F.Supp. at 767-68.
15. Id. at 773-74.
16. U.S. CONST. art. VI, § 2.
17. See, e.g., Foster v. Neilson, 27 U.S.(2 Pet.) 253 (1829).
18. 27 U.S.(2 Pet.) at 314.
19. See, e.g., Frolova v. Union of Soviet Socialist Republics, 761 F.2d 370, 373
(7th Cir. 1985).
20. Factors to be considered in determining the intent of the parties to the treaty
include:
(1) the language and purpose of the agreement as a whole; (2) the circumstances
surrounding its execution; (3) the nature of the obligations imposed by the agreement;
(4) the availability and feasibility of enforcement mechanisms; (5) the implications
of permitting a private right of action; and (6) the capacity of the judici-

102 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
factors essentially look to the language, circumstances and nature of
the obligations agreed to in characterizing the treaty. 2 1 The court in
American Baptist Churches, by applying these factors, determined that
Article 1 of the Geneva Convention, 22 on which the plaintiffs relied, is
not self-executing and that, therefore, no rights can arise from this provision
unless authorized by an implementing federal statute. 23
The plaintiffs' claim that a right to temporary refuge is mandated
by customary international law 2 4 was examined by the court in light of
the leading Supreme Court case, The Paquete Habana. 25 In an oftquoted
passage, the Court, in that case, stated that "[i]nternational law
is part of our law, and. . .where there is no treaty, and no controlling
executive or legislative act or judicial decision, resort must be had to
the customs and usages of civilized nations . .. 2
The district court, in American Baptist Churches, found that the
enactment of the Refugee Act of 1980 was intended to bring the
United States into full compliance with its obligations under international
law. 2 7 Relying on The Paquete Habana, the court held that the
Refugee Act constituted a "controlling legislative act" and that, thus,
customary international law was inapplicable. 28 The claim based on
customary international law, therefore, was dismissed. The issue of
ary to resolve the dispute.
Id. See also Tel-Oren v. Libyan Arab Republic, 726 F.2d 774, 808-810 (D.C. Cir.
1984), cert. denied, 470 U.S. 1003 (1985); United States v. Postal, 589 F.2d 862, 876-
77 (5th Cir.), cert. denied, 444 U.S. 832 (1979). In addition, if the intent of the parties
is clear from the language of the treaty, it has been held that the reviewing court need
not consider additional factors. Cardenas v. Smith, 733 F.2d 909, 918 (D.C. Cir.
1984).
21. 761 F.2d at 373.
22. Article I of the Geneva Convention Relative to the Protection of Civilian
Persons in Time of War of August 12, 1949 states that, "The High Contracting Parties
undertake to respect and to insure respect for the present Convention in all circumstances."
The plaintiffs relied on this Article by arguing that the deportation of
Salvadorans and Guatemalans to countries where violations of other, non-applicable
Articles are taking place is itself a violation of Article 1. Specifically, they argued that
Article 3, which provides that certain protections be afforded to civilians during noninternational
conflicts, is being continually violated in El Salvador and Guatemala. Article
3, however, only governs the behavior of parties to the armed conflict and thus
does not implicate the actions of the United States directly. American Baptist
Churches, 712 F.Supp. 756, 769 (N.D. Cal. 1989).
23. 712 F.Supp. at 770.
24. Id. at 770-71.
25. 175 U.S. 677 (1900).
26. Id. at 700.
27. 712 F.Supp. at 771.
28. Id.

1990]
INT'L LAW IN DOMESTIC COURTS
whether a right of temporary refuge exists as a customary norm was
not addressed since the court considered the point moot. 9
Finally, the plaintiffs argued that the Equal Protection Clause was
violated by the defendants' discriminatory application of the Refugee
Act. 30 The court divided its discussion of this claim into two distinct
issues. The first issue was the defendants' failure to grant extended voluntary
departure (EVD) -an extra-statutory grant by the Attorney
General which temporarily suspends the deportation of all aliens of a
particular nationality. 31 A number of cases in the circuit courts were
cited by this court supporting the implication that "a governmental policy
that makes nationality-based distinctions should at least be reviewed
for equal protection violations." 32 In denying the defendants'
motion to dismiss this claim, the court held that a determination must
be made as to the defendants' motive in denying EVD. 33 If this motive
stemmed from a "discriminatory animus" rather than from foreign policy
considerations, the court indicated that the action should be reviewed
by a more stringent standard than the traditional rational relationship
review. 3 '
The second equal protection issue considered by the court was the
defendants' failure to grant either political asylum or the withholding
of deportation to individual Salvadorans or Guatemalans. 35 The Refugee
Act allows a grant of asylum if an alien can prove a "well-founded
fear of persecution". 36 Alternatively, an alien may be eligible for with-
29. Id. at 770-71.
30. The court quoted the plaintiffs' complaint as follows:
Defendants engage in a practice of generally granting asylum, refugee status, extended
voluntary departure or other relief providing refuge to persons who are
fleeing unrest or disorder in countries they consider "Communist" or dominated by
the Soviet Union. ... At the same time, persons fleeing El Salvador and Guatemala
are denied the right to even temporary refuge in the United States because
the governments of those countries are considered to be political allies of the
United States.
Id. at 772.
31. Id. at 768. Granting extended voluntary departure is entirely within the discretion
of the Attorney General. No codified standards exist for the granting or withholding
of this protection.
32. Id. at 772. The court cited as precedent Shahla v. Immigration and Naturalization
Service, 749 F.2d 561, 563 (9th Cir. 1984); Ghajar v. Immigration and Naturalization
Service, 652 F.2d 1347, 1349 n. 1 (9th Cir. 1981); Yassini v. Crosland, 618
F.2d 1356, 1362-63 n. 7 (9th Cir. 1980). See 712 F.Supp. at 772-73.
33. 712 F.Supp. at 773.
34. Id.
35. Id.
36. 8 U.S.C. § 1158(a) (1982) authorizes the granting of asylum to those who

104 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
holding of deportation on the showing of a "clear probability of persecution"
upon his or her return to the country of origin."' In reviewing
the statutory standards for both forms of relief, the court concluded
that:
[I]t would appear [that]. . .Congress has instructed the Executive that
nationality may not be considered when applying section 208(a) of the
Refugee Act and section 243(h) of the Immigration and Nationality
Act. The Executive's allegedly chronic failure to abide by its Congressional
mandate could constitute a denial of the equal protection of the
laws. 38
The motion to dismiss this claim, therefore, was denied.
The court also addressed claims that the defendants' actions constituted
infringement of religious freedoms with respect to the sanctuary
movement 39 , and that deportation to a dangerous locale constituted
reckless endangerment 0 . Both of these claims were dismissed by the
court. " ' The court's reasoning in arriving at these conclusions will not
be discussed as these issues do not bear directly on the topic of international
law.
III. LEGAL CONTEXT
A. General History
A discussion of the role of international law in United States
courts must begin with a review of the nature and development of the
international legal system.
International law is defined as "the law which regulates the relationships
of nations to each other." 4 Its roots grew from the inevitable
need for a method of settling disputes among independent nation-states.
By the 1600's, when such states began to emerge, a burgeoning flow of
trade between states and improvements in navigation had led to a need
to systematize the growing body of custom, usage and practice governing
inter-state relations.
meet the "well-founded fear" standard articulated in 8 U.S.C. § 1101(a)(42)(A)
(1982).
37. Immigration and Naturalization Service v. Stevic, 467 U.S. 407, 430 (1984).
Withholding of deportation is codified in 8 U.S.C. § 1253(h)(1) (1982).
38. 712 F.Supp. at 774.
39. Id. at 762-64.
40. Id. at 774-75.
41. Id. at 764, 774-75.
42. BLACK'S LAW DICTIONARY 419 (5th ed. 1983).

19901
INT'L LAW IN DOMESTIC COURTS
One of the earliest definitive attempts to characterize international
law was made by Hugo Grotius in his treatise entitled De Jure Belli Ac
Pacis." s It was in this important work that Grotius proposed the theory
that international customs, treaties and practice were subject to review
against the tenets of natural law." The natural law philosophy teaches
that principles of natural law are derived from universal reason and,
therefore, must govern any legal system." 5
By the end of the eighteenth century, the theory of natural law
had been at least partially supplanted by a positivist philosophy. 46 The
positivist view, rather than assuming that reason should dictate law,
held that the practice of nations should principally define international
legal obligations. 47 Natural law was relegated to a secondary role.
The modern era of international law was ushered in first by the
post-World War I League of Nations and then by the post-World War
II United Nations. Both institutions represented a trend away from the
concept of international law as a set of rules respecting the sovereignty
of nations, and toward a philosophy embodying an organized effort at
imposing mutual obligations for the betterment of all."' One very important
result of this effort was the establishment of the International
Court of Justice (ICJ) as a neutral forum for the judicial resolution of
disputes between States. 9 The ICJ represents the current, definitive
authority on issues of international law in the international forum. In
keeping with the evolution of the natural law and positivist theories of
43. L. HENKIN, R.C. PUGH, 0. SCHACHTER & H. SMIT, INTERNATIONAL LAW
CASES AND MATERIALS, at xxxvi (2nd ed. 1987).
44. Id. at xxxvii.
45. Id.
46. Id. at x-xxviii.
47. Id.
48. U.N. CHARTER, art. 1, par. 1-3. The Purposes of the United Nations are:
1. To maintain international peace and security, and . . .to take effective collective
measures for the prevention and removal of threats to the peace, and for
the suppression of acts of aggression or other breaches of the peace, and to
bring about by peaceful means . . .adjustment or settlement of international
disputes...
2. To develop friendly relations among nations...
3. To achieve international cooperation in solving international problems of an economic,
social, cultural, or humanitarian character and in promoting and encouraging
respect for human rights and for fundamental freedoms...
49. U.N. CHARTER art. 92. Prior to the establishment of the ICJ and its
predecessor, the Permanent Court of International Justice, international law had
been applied by national courts in actions arising from disputes of an international
nature. See, e.g., Chisolm v. Georgia, 2 U.S.(2 DalI.) 419 (1793); Ware v. Hylton,
3 U.S.(3 DalI.) 199 (1796).

106 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
international law, the ICJ determines applicable law by looking for authority
to:
(a)international conventions. . .establishing rules expressly recognized
by the contesting states;
(b)international custom, as evidence of a general practice accepted
as law;
(c)the general principles of law recognized by civilized nations;
(d). . .judicial decisions and the teachings of the most highly
qualified publicists of the various nations as subsidiary means for the
determination of rules of law." 0
B. International Law in U.S. Courts
At the time of the American Revolution, increased international
trade and colonization of the New World had made international law
and its application an issue of obvious daily importance. The Founding
Fathers recognized this fact by including treaties along with the Constitution
and federal laws as "the supreme Law of the Land". 51 The
Constitution is silent, however, as to the role of customary international
law and the hierarchy of application between treaties and the other
elements listed in the Supremacy Clause. These issues have largely
been left to the discretion of the federal courts.
1. The Role of Treaties
The issue of priority of application where a treaty and a subsequent
statute conflict has been resolved by the adoption of what is
known as the "last in time" doctrine. This theory derives from the fact
that the Supremacy Clause, by its wording, affords equal weight to
both treaties and federal statutes. 5 As the Supreme Court stated in
Whitney v. Robertson,
Congress may modify such provisions so far as they bind the
United States, or supersede them altogether. By the Constitution, a
treaty is placed on the same footing, and made of like obligation,
with an act of legislation. Both are declared by that instrument to
be the supreme law of the land, and no superior efficacy is given to
either over the other. When the two relate to the same subject, the
50. Statute of the International Court of Justice, 59 Stat. 1055, T.S. 993, 3
Bevans 1179, Art. 38.
51. U.S. CONST. art. VI, § 2.
52. Id. The full text of the Supremacy Clause appears in text accompanying
n. 16.

19901
INT'L LAW IN DOMESTIC COURTS
courts will always endeavor to construe them so as to give effect to
both, if that can be done without violating the language of either;
but if the two are inconsistent, the one last in time will control the
other. . .
Thus, the Court provided what is essentially a two-part test for the
applicability of this doctrine. The first part requires that the judiciary
determine whether a conflict actually exists when the two provisions are
read in their most consistent light. Only if the two cannot be reconciled
should the court apply the last in time doctrine.
A further requirement which has been imposed by the Court is
that the treaty must be self-executing. This was rationalized by the
Court in Chae Chan Ping v. United States (The Chinese Exclusion
Case) as follows:
A treaty, it is true, is in its nature a contract between nations and
is often merely promissory in its character, requiring legislation to
carry its stipulations into effect. Such legislation will be open to
future repeal or amendment. If the treaty operates by its own force,
and relates to a subject within the power of Congress, it can be
deemed in that particular only the equivalent of a legislative act, to
be repealed or modified at the pleasure of Congress. In either case
the last expression of the sovereign will must control. 4
Clarification of the factors to be used in determining whether a
treaty is self-executing has been provided by the Seventh Circuit Court
in Frolova v. Union of Soviet Socialist Republics. 55 The essential element
of the test is a determination of the parties' intent to provide
specific, discernible rights and obligations as a result of the conclusion
of the instrument. Where this element is lacking and the treaty is, in
the words of the Court, "merely promissory" 5 , the treaty is non-selfexecuting.
In summary, the current standard for determining the applicability
of a treaty which appears to conflict with a federal statute requires
that the last in time doctrine be given force. The court, however, must
first determine that the two conflicting provisions cannot reasonably be
interpreted as consistent, and that the treaty provision is self-executing.
53. 124 U.S. 190, 194 (1888).
54. 130 U.S. 581, 600 (1889).
55. See supra notes 19, 20.
56. See supra note 54 and accompanying text.

108 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
2. The Role of Customary International Law
The role of customary international law in United States courts
has likewise evolved through federal court decisions. As was discussed
previously, custom, from the inception of a body of international law,
played a role in defining the duties and obligations of nations. 57 References
to the United States' duty to uphold customary international law
(or the law of nations), can be found in cases dating as early as 1793 at
which time the Supreme Court stated that
. ..the United States had, by taking a place among the nations of
the earth, become amenable to the law of nations; and it was their
interest as well as their duty to provide, that those laws should be
respected and obeyed; in their national character and capacity, the
United States were responsible to foreign nations for the conduct of
each State, relative to the laws of nations and the performance of
treaties. 58
In 1796, the Court reiterated this position in Ware v. Hylton. 59
There, the Court stated that "when the United States declared their
independence, they were bound to receive the law of nations, in its
modern state of purity and refinement." 60 The importance of customary
international law was further underscored by the Court in Brown v.
United States when it asked the question, "[d]oes it comport with the
interest and character of this government, to reject principles and usages,
calculated to ameliorate and mitigate the state of war and to promote
the interest of commerce, which it appears have been cheerfully
adopted by all the monarchies of Europe?"'"
Later still, in 1886, the Court, in a counterfeiting case, explained
that
The law of nations requires every national government to use "due
57. For a general discussion of the role of custom as a source of law in the
international arena, see supra pp. 7-9. On the international plane, it is conceded
that customary law, defined as customs accepted by all or a majority of nations as
legally binding, is enforceable subject to one exception. That exception is where a
State, during the formation of the custom unambiguously and persistently objected
to the recognition of the practice as law. See HENKIN, PUGH, SCHACHTER & SMIT,
supra note 43, at 64.
58. Chisolm v. Georgia, 2 U.S. (2 DalI.) 419, 474 (1793).
59. 3 U.S. (3 DalI.) 199 (1796).
60. Id. at 281.
61. 12 U.S.(8 Cranch) 109, 112 (1814).

19901
INT'L LAW IN DOMESTIC COURTS
diligence" to prevent a wrong from being done within its own dominion
to another nation with which it is at peace, or to the people
thereof; and because of this the obligation of one nation to punish
those who within its own jurisdiction counterfeit the money of another
nation has long been recognized. 62
By the end of the nineteenth century, therefore, the courts had
repeatedly indicated that customary international law was binding
upon the federal government. The limits of its applicability, however,
were not explored until the Supreme Court addressed the issue in the
watershed case, The Paquete Habana. 6 " Here, the Court stated
International law is part of our law, and must be ascertained and
administered by the courts of justice of appropriate jurisdiction, as
often as questions of right depending upon it are duly presented for
their determination. For this purpose, where there is no treaty, and
no controlling executive or legislative act or judicial decision, resort
must be had to the customs and usages of civilized nations. '4
In arriving at this conclusion, the Court relied upon the holding of a
previous case, Hilton v. Guyot (hereinafter referred to as Hilton). 6 " In
Hilton, the Court held that, in cases requiring the ascertainment of
applicable international law,
The most certain guide, no doubt, for the decision of such questions
is a treaty or a statute of this country. But when, as is the case
here, there is no written law upon the subject, the duty still rests
upon the judicial tribunals of ascertaining and declaring what the
law is. . . .In doing this, the courts must obtain such aid as they
can from judicial decisions [and]. . .the acts and usages of civilized
nations. 66
Since the Paquete Habana decision, a number of courts have cited
the quoted passage as precedent for the proposition that customary international
law is subservient in domestic courts to treaties and federal
statutes. For example, in Tag v. Rogers the Court of Appeals stated
that "it has long been settled. . .that the federal courts are bound to
62. United States v. Arjona, 120 U.S. 479, 484 (1886).
63. 175 U.S. 677 (1900).
64. Id. at 700.
65. 159 U.S. 113 (1894).
66. Id. at 163.

1 10 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
recognize [applicable treaties, statutes, or constitutional provisions] as
superior to canons of international law." 67
A further judicially imposed limitation on the applicability of customary
international law came with the Supreme Court's decision in
Banco Nacional de Cuba v. Sabbatino.1 8 Although the Court cautioned
that its holding was to be narrowly construed, its conclusion that the
Act of State doctrine superseded customary international law in cases
involving the taking of property within the United States by a foreign
sovereign nonetheless represented a further judicial narrowing of the
role of customary law. 69 The significance of this holding, however, was
negated by the passage of the Second Hickenlooper Amendment which
effectively overturned the Court's holding."
Though the general trend with regard to customary international
law has been to reduce the scope of its applicability in U.S. courts, two
recent cases have demonstrated that it is still a viable source of law in
certain circumstances. In Filartiga v. Pena-Irala 1 the court allowed a
suit to be brought against a Paraguayan police officer for the torture
and murder of a young Paraguayan. Jurisdiction for the suit was derived
from the Alien Tort Statute which provides a cause of action in
district courts for torts committed "in violation of the law of nations or
a treaty of the United States". 72 The court held that "an act of torture
committed by a state official against one held in detention violates established
norms of the international law of human rights, and hence
the law of nations." 73 In making this determination, the court looked to
such sources as the United Nations' Universal Declaration of Human
67. 267 F.2d 664, 666 (1959), cert. denied, 362 U.S. 904 (1960).
68. 376 U.S. 398 (1964).
69. Id. at 428. The Act of State doctrine is described as follows:
Every sovereign State is bound to respect the independence of every other sovereign
State, and the courts of one country will not sit in judgment on the acts of the
government of another done within its own territory. Redress of grievances by reason
of such acts must be obtained through the means open to be availed of by
sovereign powers as between themselves.
Id. at 416, quoting Underhill v. Hernandez, 168 U.S. 250, 258 (1897).
70. See 22 U.S.C. § 2370(e)(2)(1964). The Second Hickenlooper Amendment
forbids U.S. courts from declining to hear cases involving confiscation of property by
foreign sovereigns unless either the act of that sovereign is not in violation of international
law, or the Executive requests the application of the Act of State doctrine for
foreign policy reasons.
71. 630 F.2d 876 (2nd Cir. 1980).
72. 28 U.S.C. § 1350 (1980) which provides in full that "[tihe district courts
shall have original jurisdiction of any civil action by an alien for a tort only, committed
in violation of the law of nations or a treaty of the United States."
73. 630 F.2d at 880.

1990]
INT'L LAW IN DOMESTIC COURTS
Rights74' , the prohibition of torture in numerous treaties, and the prohibition
of torture in State constitutions.
Yet another case in which customary international law has been
applied by a federal court is Fernandez v. Wilkinson. 7 ' Here, the court
held that "indeterminate detention in a maximum security prison of
excluded aliens who have not been convicted of a crime in this country
or found to be a security risk is arbitrary . . 6 Citing many of the
same sources as the court had in Filartiga, this court determined that
"international law secures to petitioner the right to be free of arbitrary
detention and that his right is being violated. 7 7 Because the court concluded
that "perpetuating a state of affairs which results in the violation
of. . .fundamental human rights is clearly an abuse of discretion",
it ordered the release of the petitioner . 8 Resort was had to international
law in this instance because both Constitutional protections and
7 9
existing statutes were held to be inapplicable to the circumstances.
C. Immigration Statutes
Since customary international law has been judged to fill gaps left
by statutes and treaties, it is important at this juncture to review existing
statutes governing immigration, and the cases which have interpreted
this law.
A person seeking statutorily granted refuge in the United States
may do so either by applying for political asylum or by seeking the
withholding of deportation. Political asylum may be granted "in the
discretion of the Attorney General if the Attorney General determines
that such alien is a refugee within the meaning of section
1101 (a)(42)(A) of [the statute]." 8 A refugee is therein defined in ac-
74. G.A. Res. 217 (III)(A)(1948).
75. 505 F.Supp. 787 (D. Kan. 1980).
76. Id. at 794.
77. Id. at 795.
78. Id. at 799.
79. Previous federal court decisions have held that the 5th and 8th Amendments
do not extend protection to excluded or excludable aliens. See, e.g., Mir, et al v. Wilkinson,
80-3139 (D. Kan., Sept. 2, 1980, unpublished); Kwong Hai Chew v. Colding,
344 U.S. 590 (1953), citing Bridges v. Wixon, 326 U.S. 135 (1945 concurring opinion);
Kleindienst v. Mandel, 408 U.S. 753 (1972). In addition, the existing statutes govern
only the exclusion and temporary detention of aliens who have applied for admission.
See 8 U.S.C. §§ 1182(a); 1182(d)(5); 1225(b); 1227 (1982). Since the issue in Fernandez
v. Wilkinson is indefinite detention of a convicted criminal awaiting deportation
rather than temporary detention of applicants for admission, the petitioner falls into
what is essentially -a legal abyss.
80. 8 U.S.C. § 1158(a) (1982).

112 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
cordance with the United Nations Protocol Relating to the Status of
Refugees as
any person who is outside any country of such person's nationality
or, in the case of a person having no nationality, is outside any
country in which such person last habitually resided, and who is
unable or unwilling to avail himself or herself of the protection of,
that country because of persecution or a well-founded fear of persecution
on account of race, religion, nationality, membership in a
particular social group, or political opinion ... "
The withholding of deportation, on the other hand, must be
granted to any alien (with certain statutorily defined exceptions) "if the
Attorney General determines that such alien's life or freedom would be
threatened in [the country to which the alien would be deported] on
account of race, religion, nationality, membership in a particular social
group, or political opinion."1 82 The withholding of deportation, then, differs
from the granting of political asylum in that the former, unlike the
latter, is granted where the defined standard is met. It is not a discretionary
grant. As is illustrated by the case law which has interpreted
this statute, however, the level of proof required for withholding of deportation
is greater than that required for a grant of political asylum.
D. Case Law Interpreting the Immigration Statutes
The definitive case setting the standard for review of an application
for withholding of deportation is Immigration and Naturalization
Service v. Stevic (hereinafter referred to as Stevic). 83 Prior to the enactment
of the Refugee Act of 1980,84 the Attorney General was authorized
to withhold deportation of an otherwise deportable alien if the
alien would be subject to persecution upon deportation. 8 5 In addition,
the Attorney General was authorized to permit conditional entry of refugees
specifically from Communist-dominated states and the Middle
81. 8 U.S.C. § 1101(42)(A) (1982). The U.N. Protocol, to which the U.S. acceded
in 1968, bound all parties to comply with the substantive provisions of Articles 2
through 34 of the United Nations Convention Relating to the Status of Refugees, July
28, 1951, 189 U.N.T.S. 150.
82. 8 U.S.C. § 1253(h)(1) (1982). Exceptions to § 1253(h)(1) are listed in §
1253(h)(2). These include aliens who have committed serious non-political crimes
((2)(c)) and aliens who present a danger to security ((2)(d)).
83. 467 U.S. 407(1983).
84. See supra note 13.
85. 467 U.S. at 414.

1990]
INT'L LAW IN DOMESTIC COURTS
East if racial, religious or political persecution was likely. 86 In the withholding
of deportation, the standard for reviewing such cases was the
showing of "a clear probability of persecution" or a "likelihood of persecution."
18 7 For conditional entry, the standard was a "good reason to
fear persecution. 88
The Supreme Court, in Stevic, found the Refugee Act of 1980 to
be designed primarily "to revise and regularize the procedures governing
the admission of refugees."" The adoption of the United Nations
definition of the term "refugee" and the elimination of the geographic
and ideological distinctions made in the previous statute were
intended to bring United States practice into line with the United Nations
Protocol. 90 In the Court's view, the intent of Congress was not
that every alien meeting the definition of "refugee" was entitled to
withholding of deportation, but rather that "the alien had to satisfy the
standard under 243(h)." 91 This standard, as had been determined by
previous case law, was proof of a clear probability of persecution which
the Court defined as "more likely than not that the alien would be
subject to persecution on one of the specified grounds." 9 Thus, the
Refugee Act did not change the standard of proof required.
As is explicitly required by the previously quoted statute, 93 for an
applicant to be eligible for political asylum, he or she must prove a
well-founded fear of persecution. This standard has been accepted as
more liberal than the clear probability test. 94 A precise definition of
"well-founded fear" has eluded the courts. Several cases, however, provide
guidance on the level of proof required.
In one case, the Fifth Circuit held that "[a]n alien possesses a
well-founded fear of persecution if a reasonable person in her circumstances
would fear persecution if she were to be returned to her native
country." 95 The Seventh Circuit addressed the issue by requiring that
the petitioner provide "specific facts establishing that he or she has actually
been the victim of persecution or has some other good reason to
86. Id. at 415, citing 8 U.S.C. § l153(a)(7)(A)(i)(1976 ed.).
87. See, e.g., Cheng Kai Fu v. INS, 386 F.2d 750, 753 (2nd Cir. 1967), cert.
denied, 390 U.S. 1003 (1968); Lena v. INS, 379 F.2d 536, 538 (7th Cir. 1967).
88. See In re Tan, 12 1. & N. Dec. 564, 569-570 (BIA 1967).
89. 467 U.S. at 425.
90. Id. at 426-427.
91. Id. at 428.
92. Id. at 429-430.
93. See supra note 81 and accompanying text.
94. See e.g. 467 U.S. at 425; Vides-Vides v. INS, 783 F.2d 1463, 1468 (9th Cir.
1986); Bolanos-Hernandez v. INS, 749 F.2d 1316, 1321 (9th Cir. 1984).
95. Guevara-Flores v. INS, 786 F.2d 1242, 1249 (5th Cir. 1986).

114 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
fear that he or she will be singled out for persecution. . . ."I" A twotier
subjective/objective approach is used in applying these definitions.
The alien must first demonstrate a subjective fear, and then prove that
an adequate basis existed for the fear to be "well-founded.""
In contrast, proving a "clear probability" requires that there be a
"greater-than-fifty-percent chance of persecution." 98 Generalized evidence
of wide-spread violence will not suffice as proof. Evidence must
be provided showing that "(1) the applicant or those similarly situated
are at greater risk than the general population, and (2) that the threat
to the applicant is a serious one." 99
Agency action of this kind has been held to be subject to a narrow
standard of review. In Burlington Truck Lines v. United States, the
Supreme Court indicated that "a court is not to substitute its judgment
for that of the agency. Nonetheless, the agency must examine the relevant
data and articulate a satisfactory explanation for its action including
a "rational connection between the facts found and the choice
made." 100
In addition to the granting of political asylum or the withholding
of deportation, a third type of relief is available to aliens under certain
circumstances. Extended Voluntary Departure (EVD) may be granted
to all aliens of a particular nationality if the Attorney General so
chooses. 101 Since this is, however, an extra-statutory form of relief
which is purely within the discretion of the Attorney General, any review
of a decision to grant or deny EVD is only subject to limited review.
As the court indicated in Narenji v. Civiletti, "[d]istinctions on
the basis of nationality may be drawn in the immigration field by the
Congress or the Executive. So long as such distinctions are not wholly
irrational they must be sustained. 1 ° Thus, any challenge to such a
decision on the grounds of violation of the Equal Protection Clause
must meet an extremely high threshold of proof.
96. Carvajal-Munoz v. INS, 743 F.2d 562, 574 (7th Cir. 1984)(emphasis in
original).
97. Cardoza-Fonseca v. INS, 767 F.2d 1448, 1453 (9th Cir. 1985).
98. Id. at 1452.
99. Id. citing Bolanos-Hernandez v. INS, 767 F.2d 1277, 1284-85 (9th Cir.
1984).
100. 371 U.S. 156, 168 (1962). This holding is cited in Ishtyaq v. Nelson, 627
F.Supp. 13, 19 (E.D.N.Y. 1983).
101. See supra note 31.
102. 617 F.2d 745, 747 (D.C. Cir. 1979).

1990]
INT'L LAW IN DOMESTIC COURTS
IV. Analysis
As is clear from the reading of any number of early Supreme
Court cases, international law played a crucial role in the early development
of domestic law in the U.S. Having no other source of law from
which to glean guidance, the early U.S. courts would naturally look to
the law of nations and the law of various European nations. 10 3 The Supreme
Court, in fact, expressly embraced international law as part of
U.S. jurisprudence in two early decisions - Ware v. Hylton', and
Chisolm v. Georgia' 0 5 In both cases, the Court argued that, by virtue
of having become an independent nation, the United States was bound
to accept and administer the law of nations." 6 Likewise, the incorporation
of treaties into the Supremacy Clause of the Constitution points to
the intent of the Founding Fathers to give international law an important
place in U.S. law.
Later cases reinforced the view that international law was considered
a viable and important part of domestic law at least as late as the
first part of the twentieth century. For example, in the case of Kansas
v. Colorado, the Supreme Court stated that
The clear language of the Constitution vests in this court the power
to settle [disputes between States]. . . Nor is our jurisdiction
ousted, even if, because Kansas and Colorado are States sovereign
and independent in local matters, the relations between them depend
in any respect upon principles of international law. International
law is no alien in this tribunal. 0 7
A late nineteenth century case provides insight into the reason for this
broad acceptance. The Supreme Court held that the United States was
obligated to prosecute those who counterfeit the currency of another
country within its borders and explained
But if the United States can require this of another, that other may
103. See, e.g., Alexander Murray, Esq. v. The Schooner Charming Betsy ("The
Charming Betsy"), 6 U.S.(2 Cranch) 64 (1804), citing British court decisions and the
law of nations in deciding a case concerning seizure of a commercial ship by a U.S.
ship of war.
104. 3 U.S.(3 Dall.) 199 (1796).
105. 2 U.S.(2 Dall.) 419 (1793).
106. See supra notes 58, 59 and accompanying text.
107. 206 U.S. 46, 97 (1906). See also Tucker v. Alexandroff, 183 U.S. 424
(1901), citing British and international law to determine duties of the U.S. regarding a
deserting Russian soldier.

116 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
require it of them, because international obligations are of necessity
reciprocal in their nature. The right, if it exists at all, is given by
the law of nations, and what is law for one is, under the same circumstances,
law for the other. A right secured by the law of nations
to a nation, or its people, is one the United States as the representatives
of this nation are bound to protect. 108
It is an obligation of reciprocity, then, which early jurists felt required
the United States to embrace international law. This is fully in
accord with the treatment which treaties have historically been afforded.
A treaty, like a contract, is entered into when two or more parties
wish to secure certain promised behavior (or lack thereof) and are
willing to reciprocate for the promise by offering something of relatively
equal value.
Thus, the place of treaties as a hallowed part of our laws is understandable.
The nation's reputation rests in large part on its ability and
desire to fulfill specific obligations which it has, arguably, contracted to
undertake. To the Founding Fathers, presiding nervously over a
fledgling nation with an uncertain future, the need to build and maintain
that reputation would have seemed quite urgent.
Viewed in this context, the last in time doctrine also makes sense.
By the time the Supreme Court espoused this principle in 1888,109 the
independence of the nation was well-established so that the attention of
the courts could be turned more toward resolving internal legal conflicts.
More than 100 years had passed since the nation began - more
than enough time for the problems of outdated treaty obligations and
changing international circumstances to have come to the fore. The
Court's pronouncement on this point was unequivocal and its holding
was reasonable. If treaties, federal statutes and the Constitution are of
equal weight and the latter two can be amended through federal action,
then a mechanism must exist for amending a treaty at least with respect
to its application domestically.
Similarly, the line of cases explicating the principle that treaties
must be self-executing to override previous, conflicting legislation is
reasonable. If a treaty is "merely promissory" in nature, then, like a
contract provision which is too vague to define the rights and duties of
the contracting parties, it cannot be enforceable until its elements are
better defined. When non-self-executing treaties are viewed in this
light, it seems rational to consider that implementing legislation defines
108. United States v. Arjona, 120 U.S. 479, 487 (1886).
109. See supra n. 53 and accompanying text.

1990]
INT'L LAW IN DOMESTIC COURTS
the rights and obligations owed by the national government. Since this
legislation would not in any way differ from other federal enactments,
this latter statute (and not the treaty itself) would simply override the
previously enacted law.
By the foregoing reasoning, the holding of the court in American
Baptist Churches with regard to the applicability of the Geneva Convention
is sound. 110 Article I of the Convention reads, "The High Contracting
Parties undertake to respect and to ensure respect for the present
Convention in all circumstances.""" This language is clearly not
explicit enough to define any rights or obligations in a meaningful manner;
and thus cannot constitute a self-executing treaty provision.
The role of customary international law has evolved in a similar,
but less precise manner than that of treaties. As has been discussed
previously, the watershed case defining the role of customary international
law in domestic courts is The Paquete Habana." 2 In this case,
the Supreme Court held that "where there is no treaty, and no controlling
executive or legislative act or judicial decision, resort must be had
to the customs and usages of civilized nations .. ."'I" The Court indicated
that it was relying for precedent on a previous case, Hilton v.
Guyot."' Its holding differs from that of Hilton, however, in several
significant aspects.
The Court in Hilton rather pointedly indicated that international
law applies not only to controversies between nations, "but also [to]
questions arising under what is usually called private international
law. . .and concerning the rights of persons within the territory and
dominion of one nation. "15 This emphasis on applicability to private
rights among individuals is missing in The Paquete Habana.
Additionally, the Court in Hilton indicated that where no treaty or
statute exists, the court must resort to judicial decisions and the acts
and usages of nations. " 6 Thus, this Court places judicial decisions on
par with custom rather than on par with treaties and statutes, as The
Paquete Habana does. More importantly, however, the Court in Hilton
interjected its discussion with the statement, "[blut when, as is the case
110. 712 F.Supp. 756, 770 (N.D. Cal. 1989).
111. The Geneva Convention Relative to the Protection of Civilian Persons in
Time of War of August 12, 1949, art. I, 6 U.S.T. 3516, T.I.A.S. No. 3365, 75
U.N.T.S. 287.
112. 175 U.S. 677 (1900).
113. Id. at 700.
114. 159 U.S. 113 (1894).
115. Id. at 163.
116. Id.

118 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
here, there is no written law upon the subject, the duty still rests upon
the judicial tribunals of ascertaining and declaring what the law
is .... 11117 No such language appears in The Paquete Habana. The
clear implication of this phraseology is that courts are being instructed
not to find an issue nonjusticiable merely because no "written law" can
be found on the subject. To assume, however, that a hierarchy of application
is being established, as has been argued by scholars with regard
to the language of The Paquete Habana, is unwarranted.
Subsequent to the decision in The Paquete Habana, several courts
accepted this hierarchical interpretation and held that customary international
law was superseded by a conflicting treaty or statute. 118 This
raises two important questions, however. The first is whether The Paquete
Habana was intended to relegate customary law to a secondary
role; the second is the significance of the "judicial decisions" alluded to
in both The Paquete Habana and Hilton v. Guyot.
Although the court in American Baptist Churches apparently feels
otherwise, 119 the language of The Paquete Habana decision is by no
means entirely unambiguous. The Paquete Habana could be interpreted
as giving treaties and statutes precedence over customary law;
however, it could just as easily be read as a narrow holding based on
the specific facts of the case - namely an instance where an issue of
international law had arisen but no treaty or statute addressing the
question existed. This second interpretation is all the more reasonable
when The Paquete Habana is viewed in light of the earlier Hilton v.
Guyot opinion which exhorted courts to fulfill their duty to adjudicate
an issue where precisely such a void exists. Furthermore, although the
holding requires the application of customary law under the circumstances
existing in The Paquete Habana, this does not necessarily imply
that the Court intended to preclude its application under other circumstances
(e.g. where a conflicting treaty does exist). In any event,
the Court did not expressly hold that where a conflict exists between a
customary international norm and a treaty or statute, the custom must
yield; and because the Supreme Court has not subsequently addressed
the issue, the question remains open.
117. Id. (emphasis added).
118. See, e.g., supra note 67. See also Committee of U.S. Citizens In Nicaragua
v. Reagan, 859 F.2d 929 (D.C. Cir. 1988).
119. American Baptist Churches in the U.S.A. v. Meese, 712 F.Supp. 756, 771
(N.D. Cal. 1989). Citing The Paquete Habana, the court said, "The Supreme Court's
early cases involving the concept of customary international law make clear that 'it
applies only in the absence of any treaty or other public act... in relation to the
matter.' "

1990]
INT'L LAW IN DOMESTIC COURTS
As to the role of judicial decisions in these instances, this has not
been clarified by subsequent case law and, thus, remains something of a
mystery. In any court, past precedent will have some persuasive value,
so why did the authors of The Paquete Habana and Hilton v. Guyot
trouble themselves to include this obvious source of law? Especially
troublesome is the question of why it was included in the former opinion
on what appeared to be the same plane as treaties and statutes.
This surely was not intended to imply that past precedent was to be
interpreted as of equivalent stature with these other two sources. One
theory which makes sense in this context is that, as was previously postulated,
the authors in these cases intended that future courts, when
faced with questions of international law, should look to whichever of
the enumerated sources was able to provide guidance. It may well be
that the authors meant to say no more than the literal meaning of their
words, namely that customary international law was to be regarded as
a legitimate source of law along with treaties, statutes and judicial
precedent.
The theory that customary international law may not be automatically
superseded by statutes or treaties also is leant credence when
viewed in the overall context of international wrongs and the necessity
to provide a forum for the relief of such injuries. As was stated in
Hilton v. Guyot, international law must be viewed, not as limited to
relations between nations, but as encompassing wrongs between parties
of different nationalities. 1 "' Examined from this perspective, it seems
clear that a wrong stemming from a violation of customary law must
be allowed a forum just as a wrong stemming from the violation of a
treaty is. If the federal judiciary chooses to ignore treaties in domestic
courts, this does not preclude a cause of action on the part of the contracting
party. A forum exists to redress such a grievance (the International
Court of Justice). Since the ICJ only entertains suits brought
between nations, a private individual would have no forum for his suit
in the event that a statute precluded a cause of action based on a violation
of customary law. 121
120. See supra note 114 and accompanying text.
121. While the U.S. government could, if it chose to do so, represent an individual
before the ICJ, this is far less likely in the event of a violation of custom than in the
event of the violation of a treaty. Since a treaty is concluded between nations, a violation
of a treaty in force is a wrong against the nation itself. On the other hand, a wrong
resulting from a violation of custom may well be an injury solely to an individual. In
the case of a treaty, the injured nation, by having concluded the treaty, has made a
public policy statement regarding the substance of the agreement. If an individual citizen
has been wronged as a result of a violation of custom, however, his or her country

120 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
From a public policy point of view, it is desirable that federal
courts entertain suits deriving from violations of customary international
law for precisely the reason set forth by the Court in United
States v. Arjonal" - namely that reciprocity among nations requires it.
The old maxim that in order to demand equity one must do equity
summarizes this argument. If one nation wishes to secure a forum for
its grievances and those of its citizens, it must supply a forum in appropriate
circumstances to other nations. This is in keeping too with the
spirit of those very early Supreme Court cases which so readily embraced
international law as part of our jurisprudence. 123
Moreover, a review of cases which have cited The Paquete Habana
illustrates that judicial interpretations of the Court's words differ
considerably. Although several of the lower federal courts have embraced
the theory that customary international law must bow to an
inconsistent federal statute," 4 the reasoning of these courts in arriving
at this conclusion varies.
The D.C. Circuit in Tag v. Rogers accepts the constructionist view
that treaties, statutes and constitutional provisions are superior to custom
because the syntactical structure of The Paquete Habana dictates
so. 1 '25 In supporting its finding, the court indicated that the last in time
doctrine dictates applicability where conflicting treaties and statutes
are concerned and that, further, "[wihen. . .a constitutional agency
adopts a policy contrary to a trend in international law or to a treaty or
prior statute, the courts must accept the latest act of that agency." 2 '
This view, however, ignores the very basic difference between these
sources of law. A treaty or statute is essentially a policy statement or
promise made by a sovereign at a particular point in time. In contrast,
customary law is a principle which has evolved over time among the
nations of the world. By its nature, it is self-rejuvenating insofar as a
finding that a practice has risen to the level of custom is a finding that,
at this time, the consensus among nations is of a continuing, binding
may wish, for political reasons or for reasons of economic expediency, not to press the
issue.
122. See supra note 62 and accompanying text.
123. See supra notes 58-59 and accompanying text.
124. See, e.g., Tag v. Rogers, 267 F.2d 664 (D.C. Cir. 1959); Committee of U.S.
Citizens in Nicaragua v. Reagan, 859 F.2d 929 (D.C. Cir. 1988); U.S. v. Bell, 248
F.2d 992 (2nd Cir. 1918); The Over the Top, 5 F.2d 838 (2nd Cir. 1925); Zenith
Radio Corporation v. Matsushita, 494 F.Supp. 1161 (E.D. Pa. 1980); U.S. v. Howard-
Arias, 679 F.2d 363 (4th Cir. 1982); U.S. v James-Robinson, 515 F.Supp. 1340 (S.D.
Fla. 1981).
125. 267 F.2d 664 at 666.
126. Id. at 668.

19901
INT'L LAW IN DOMESTIC COURTS
norm. Attempting to apply a last in time doctrine, therefore, would
lead to the conclusion that as long as a given practice remained a custom,
it would always be the last in time.
This issue was neatly circumvented by the Second Circuit in The
Over the Top where the court argued that custom is only binding "in so
far as we adopt it, and like all common or statute law it bends to the
will of Congress.1 127 This argument, however, misstates the law. The
binding nature of customary law is not frustrated by a lack of active
acceptance. Rather, it is inapplicable only to those nations who during
the development of the custom, specifically and repeatedly opposed the
practice as a legally binding norm.' 28 An overt rejection of the custom
after it had become widely accepted, therefore, would not suffice to free
a state from an obligation imposed by customary law.
Yet another rationale for the superiority of treaties and statutes
over customary international law has been proposed by the D.C. Circuit
in Committee of U.S. Citizens in Nicaragua v. Reagan." 9 Here,
the court argued that such a hierarchy of application is implied by the
fact that statutes may override treaties, since abrogation of a treaty
violates customary international law.' 30 Such reasoning is circuitous at
best. Abrogation of a treaty certainly does far greater violence to accepted
treaty law than to customary law. In addition, the passage of a
statute whose provisions are contrary to those of a treaty does not necessarily
constitute an abrogation of that treaty. While such an act
might be sufficient to prove an anticipatory breach, a breach per se
would not occur until the government actually failed to fulfil the provisions
of the treaty when called upon to do so. Such a circumstance
might not arise for many years while, in the interim, additional legislation
could be enacted which would bring the government back into
compliance.
The Supreme Court also has had occasion to quote The Paquete
Habana in cases involving questions of international law. In Banco Nacional
de Cuba v. Sabbatino, the Court, in a very narrow ruling, held
that the Act of State doctrine precluded adjudication of suits involving
the taking of property by a recognized sovereign nation within its own
borders even if the taking violates customary international law. 1 3 ' Al-
127. 5 F.2d 838, 842 (2nd Cir. 1925). This view has also been adopted by a
Pennsylvania district court in Zenith Radio Corp. v. Matsushita, 494 F.Supp. 1161
(E.D. Pa. 1980).
128. See supra note 57.
129. 859 F.2d 929 (D.C. Cir. 1988).
130. Id. at 939.
131. 376 U.S. 398, 428 (1963). This holding was subsequently overturned by

122 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
though this holding seems to narrow the applicability of customary international
law in U.S. courts, the Court's reasoning provides insight
into the issue implicated in American Baptist Churches. In its opinion,
the Court states that ". . .[international law] establishes substantive
principles for determining whether one country has wronged another.
. .[however] the public law of nations can hardly dictate to a
country which is in theory wronged how to treat that wrong within its
domestic borders. '1 32 Thus, the Court was concerned with a very different
set of circumstances than that of refugees seeking political asylum
or the withholding of deportation. In the latter case, the injured party
is not the country in whose forum relief is sought. Presumably, this
implies that the Court might be less likely to narrow the application of
custom where the injury was borne by an outside party; perhaps because
such a party would have had no opportunity to effect a remedy
through legislative or executive action.
The continuing vitality of international law as a legitimate source
for domestic application was reiterated by the Supreme Court in First
National City Bank v. Banco Para El Comercio, a case involving a setoff
claimed by a U.S. bank against a Cuban quasi-governmental credit
institution. 3 ' Here, although no overt conflict existed between international
law and federal law, the Court nonetheless stated that ". . .international
law. . .as we have frequently reiterated, 'is part of our
law'. . . .[T]he principles governing this case are common to both international
law and federal common law, which in these circumstances
is necessarily informed both by international law principles and by articulated
congressional policies." 134 This language, and the Court's subsequent
citations to U.S. law, British law and an opinion of the International
Court of Justice 35 indicate the desire of the Court to integrate
the various sources of law rather than impose a strict hierarchy of application.
This harkens back to the principle set forth by the Court in
1804 that "an act of congress ought never to be construed to violate the
law of nations, if any other possible construction remains, and consequently,
can never be construed to violate neutral rights, or to affect
neutral commerce, further than is warranted by the law of
nations.
statute. See supra note 70 and accompanying text.
132. Id. at 422-423.
133. 462 U.S. 611 (1982).
134. Id. at 623, quoting The Paquete Habana, 175 U.S. 677, 700 (1900).
135. Id. at 624-28 and supra notes 22, 26.
136. Alexander Murray, Esq. v. The Schooner Charming Betsy (The Charming
Betsy), 6 U.S.(2 Cranch) 64, 118 (1804).

1990]
INT'L LAW IN DOMESTIC COURTS
In summary, while various federal district and circuit courts have
actively embraced a hierarchical approach which places customary law
beneath treaties and statutes, the Supreme Court has not specifically
adopted this point of view. In fact, the Supreme Court has reemphasized
the role of customary international law in recent years. Thus, a
reasonable argument can be made for the proposition that the role of
customary international law in domestic courts remains an issue in dispute;
and that a larger role than is presently afforded it may be appropriate
and more in keeping with original intent. There is, however, one
further issue with regard to American Baptist Churches which must be
addressed.
The court indicated that the aliens who had petitioned for an injunction
barring their deportation were entitled to a hearing on their
claim of discriminatory application of immigration laws. Whether the
administrative action at issue was a discretionary grant of political asylum
or extended voluntary departure, or was a non-discretionary grant
of withholding of deportation, such action is reviewable on equal protection
grounds. 1 37 Said the court with regard to the applications for
political asylum and withholding of deportation, "Because the statutory
standards are wholly neutral, however, it is far from certain that the
Attorney General can consider the applicant's nationality in determining
his or her eligibility for relief." 3 "
The plaintiffs contend that customary international law requires
the granting of temporary refuge to those seeking to escape widespread
armed conflict in Guatemala and El Salvador. The respondents argue
that the Refugee Act of 1980 was intended to bring the United States
into full compliance with its obligations under international law, 139 and
that, therefore, no additional relief is available. If, however, as the
court indicated, the Attorney General may not discriminate in the application
of immigration laws based on nationality, and if the Refugee
Act did impose an obligation to withhold deportation where the alien
would be subjected to persecution upon return to his country, does this
not in fact constitute a back-door acceptance of the norm of temporary
refuge? If the United Nations protocol from which the Refugee Act
definition of "refugee" derives is accepted as itself a codification of customary
international law, then the United States has, in fact, adopted
this customary norm both through its accession to the U.N. Protocol
and through its adoption of the Refugee Act. And the American Bap-
137. American Baptist Churches in the U.S.A. v. Meese, 712 F.Supp. 756, 773-
74 (N.D. Cal. 1989).
138. Id.
139. Id. at 771.

124 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
tist Churches case reduces to the question of whether the standard used
to apply this definition is in keeping with international custom.
The flaw in this argument is, of course, the fact that those who
qualify as refugees are eligible for a discretionary grant of political
asylum. The withholding of deportation (which is essentially temporary
refuge), as is discussed elsewhere, requires a stronger evidentiary showing
(clear probability of deportation) than that for political asylum
(well-founded fear of persecution). 1 0 As was explained earlier, however,
even a discretionary grant is subject to review for discrimination
in application. More to the point, though, this raises the issue of
whether the Refugee Act can be interpreted as consistent with customary
international law. If it can, then political asylum or the withholding
of deportation should be granted. It is incumbent on the court, however,
to determine whether the applicable federal statute can be construed
as consistent with a customary norm, not (as the court seems to
have done here) to determine whether the custom can be construed as
consistent with the law.
V. CONCLUSION
It is clear from the foregoing discussion that the role of international
law in our domestic courts has evolved from a major force at the
time of the Revolution, to a source of law of far more limited application.
The issue raised by the American Baptist Churches case is
whether the limitations which have come to pass have outstripped the
intentions of the Supreme Court and the requirements of an increasingly
interdependent international community.
The court in American Baptist Churches concluded that neither
the Geneva Convention nor customary international law provides a basis
for the plaintiff Salvadoran and Guatemalan refugees' request for
temporary refuge. Although the court's holding that a non-self-executing
treaty confers no justiciable rights is reasonable, its conclusion that
customary international law likewise confers no rights in the face of a
conflicting statute is not as firmly grounded in previous case law. A
review of prior Supreme Court cases indicates that while it has spoken
authoritatively on the treaty issue, it has not squarely addressed the
customary international law issue. And in addition, a review of the
early cases leading to The Paquete Habana casts some doubt on the
intentions of the Court with regard to the role of international law.
As increased international trade and international relations become
more common in our ever-shrinking world, the role of interna-
140. See supra note 94 and accompanying text.

1990] INT'L LAW IN DOMESTIC COURTS 125
tional law will certainly grow. The hierarchy of application of various
sources of law must be clarified to provide for consistent legal findings.
Therefore, the question presented by the present case is one which
should be definitively addressed by the Supreme Court. A final determination
of this issue must be made both to forestall future confusion
among the lower federal courts and to provide judicial guidance as to
the importance of international law in our domestic courts.
Margaret Hartka

BOOK ESSAY
OF MORALITY, POLITICS AND THE LEGAL ORDER
Sanctuary: A Story of American Conscience and the Law in Collision.
By Ann Crittenden.* Weidenfeld & Nicolson (1988), 393pp., $21.95.
Reviewed by Katherine L. Vaughns**
"When a stranger sojourns with you in your land, you shall not do
him wrong. The stranger who sojourns with you shall be to you as
the native among you, and you shall love him as yourself: for you
were strangers in the land of Egypt ... -
The practice of providing sanctuary is a "persistent and recurring
command" that dates back to biblical times - as demonstrated by the
Old Testament passage admonishing the faithful to care for the alien in
their midst.' Sanctuary relates the modern day story of those who responded
to this recurring biblical command when increasing numbers
of undocumented aliens seeking refuge from the turmoil and violence
occurring in their Central American homelands began crossing the
southwest border into the United States in the early part of the last
decade. The book also raises, but fails to answer completely, the moral
question: "What do we owe people who are not a part of our political
communities?" A satisfactory answer to this question, one of the old-
* The author, a former New York Times reporter, is now a writer based in Wash-
ington, D.C.
** Associate Professor of Law, University of Maryland School of Law. I am
grateful to Taunya Banks, William L. Reynolds and Judith D. Ford for their comments
on earlier drafts.
1. Leviticus 19:33-34 (King James).
2. I. Bau, Sanctuary, NEW CATHOLIC WORLD 97, 129 (May-June 1985); for an
excellent overview of the historical development of the law of sanctuary and the legal
status of the contemporary American sanctuary movement see generally I. BAU, THIS
GROUND IS HOLY: CHURCH SANCTUARY AND CENTRAL AMERICAN REFUGEES (1985);
see also Carro, Sanctuary: The Resurgence of an Age Old Right or a Dangerous Misinterpretation
of an Abandoned Ancient Privilege?, 54 U. CIN. L. REV. 747 (1986)
(for a detailed discussion of the historical development of the law of sanctuary).
3.A. CRITTENDEN, SANCTUARY: A STORY OF AMERICAN CONSCIENCE AND LAW
IN COLLISION (1988) [hereinafter CRITTENDEN]; Helton, Ecumenical, Municipal and
Legal Challenges to United States Refugee Policy, 21 HARV. C.R.-C.L. L. REV., 493
(1986) [hereinafter Helton] (this article discusses the international and domestic law
arguments which were raised in the context of the prosecutions of the Arizona sanctuary
workers).
(127)

128 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
est in political philosophy, is problematic, however, given the complexity
of the moral issues generated by the sanctuary movement and the
legal context in which they arise."
The answer to the moral question which Sanctuary raises is ultimately
one the reader must draw on his or her own. An answer may be
drawn from the story Ann Crittenden tells of the eleven clergy and lay
church workers who, guided by religious beliefs, engaged in a form of
4. The sanctuary movement raises issues that relate to the legal protection accorded
individuals who come to this country seeking refuge. These issues, however,
arise in the context of the law and policies relating to the admission and exclusion of
aliens, an area which courts consider a matter of sovereign prerogative. As the Supreme
Court stated in Fiallo v. Bell, 430 U.S. 787, 792 (1977) (quoting Oceanic Navigation
Co. v. Stranahan, 214 U.S. 320, 339 (1909)), "[Olver no conceivable subject is
the legislative power of Congress more complete than it is over the admission of
aliens."
The participants in the sanctuary movement contended, however, that the government's
refusal to grant refugee status to those undocumented aliens fleeing from Central
American countries violated international humanitarian law based on international
conventions and customary state practice. See Helton, note 3, at 512 ( Project on the
Sanctuary Movement). However, the legal status of all aliens who seek asylum in this
country, including the Central Americans in this story, is determined by immigration
officials pursuant to immigration laws based on filed applications presented to the
agency in accordance with regulations. Specifically, the Refugee Act of 1980, Pub. L.
No. 96-212, 94 Stat. 102 (1980), which has both an international and domestic component,
governs the nature of the legal protection accorded those seeking refugee status
and this Act designates the Attorney General to determine refugee status. See Immigration
and Naturalization Service v. Cardoza-Fonseca, 480 U.S. 421,427, 107 S.Ct.
1207,1211 (1987).
Although, the Central American aliens in this story are indeed refugees conceptually,
the legal definition of a "refugee" is narrower than the popular conception -
i.e., a victim of persecution, war, or natural disaster. "The most common legal definitions
of 'refugee' focus only on persecution. They do not recognize economic deprivation
or natural disasters, or even the outbreak of military hostilities in the homeland, as
the source of refugee status." ALEINIKOFF AND MARTIN, IMMIGRATION PROCESS AND
POLICY (1985) 615. Such is the case in the United States.
The Refugee Act of 1980 added a new section 208 to the Immigration and Nationality
Act which ties the grant of asylum only to applicants who show that they have
a "well-founded fear of persecution" if returned to their home countries "on account of
race, religion, nationality, membership in a particular social group, or political opinion."
Immigration and Nationality Act, § 208, 8 U.S.C. § 1101(a)42)(A) (Supp. 1989)
[hereinafter INA]. This 'well-founded fear of persecution' standard tracks United
States obligations under international law. See United Nations Protocol Relating to the
Status of Refugees, January 31, 1967, 19 U.S.T. 6223, T.I.A.S. No. 6577, 606
U.N.T.S. 267 (U.S. acceded to the Protocol in 1968.) This language is taken directly
from Article 33 of the United Nations Convention Relating to the Status of Refugees,
July 28, 1951, art. 33, 19 U.S.T. 6259, 6276, T.I.A.S No. 6577, 189 U.N.T.S. 137,
176.

1990]
POLITICS AND THE LEGAL ORDER
civil disobedience which came to be known as the American sanctuary
movement, a new underground railroad. 5 However, this form of civil
disobedience is distinctly different from the concept envisaged by
Thoreau or Gandhi, who advocated passive resistance rather than active
violations of criminal laws. 6
Participants in the contemporary sanctuary movement viewed
their involvement as a revival of the spirit that invigorated the midnineteenth
century underground railroad movement and claimed protection
under the religious freedom clause. These sanctuary workers, in
effect, defied immigration laws that prohibited the smuggling, harboring
and transporting of undocumented Central American aliens in the
United States. 7 The activity was similar to that in which the clergy and
laity, participants in the Underground Railroad movement during the
last century, engaged in defiance of the 1850 Fugitive Slave Law which
prohibited the harboring or assistance of runaway slaves in the United
States. 8 According to the sanctuary workers, the undocumented aliens
faced the constant possibility of deportation if arrested by immigration
officers. Thus, dissatisfied with the asylum process involving Salvadoran
and Guatemalan aliens who sought refugee status, sanctuary workers
urged them to avoid immigration officials. The workers viewed their
mission of providing sanctuary as one which, among other things, prevented
the virtually automatic deportation and almost certain death of
Central'Americans if they were returned to their homelands. The government
viewed the sanctuary mission quite differently. According to
the government, the workers' activities were criminal. 9 In order to
5. Beginning in Mexico, various sanctuary workers directed undocumented aliens
from Central America across the Mexican border to several churches in Arizona that
operated as self-described sanctuaries. See United States v. Aguilar, 871 F. 2d 1436,
1441 (9th Cir. 1989). From Arizona, the workers sent many of these aliens to Chicago
where they were dispersed throughout the United States to what was termed "safehouses."
Id.
6. For example, in a letter to then U.S. Attorney General William French Smith,
Rev. John Fife, one of the leaders of the sanctuary movement and minister of the first
church - Southside Presbyterian Church in Tucson, Arizona - declared the church a
sanctuary for undocumented Central American refugees in 1982, stated the following:
"We believe that justice and mercy require that people of conscience actively assert our
God-given right to aid anyone fleeing from persecution and murder. The current administration
of the United States law prohibits us from sheltering these refugees from
Central America. Therefore we believe that administration of the law is immoral as
well as illegal." Korn, Hiding In the Open, STUDENT LAW. 25,28 (Jan. 1986).
7. INA, supra note 4, § 1324(a).
8. Fugitive Slave Act, ch. 60, 9 Stat. 462 (1850).
9. The sanctuary defendants were charged with smuggling, transporting and harboring
illegal aliens; some defendants were also charged with conspiracy to transport

130 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
avoid prosecution or conviction, sanctuary workers attempted to base
their conduct on an exemption or a claim of legal privilege. However,
no statute or rule of law in American jurisprudence recognizes the concept
of sanctuary,'" and courts have upheld an exemption from criminal
prosecution based on religiously motivated activities in only a very
few cases. 1 '
Indeed, the authority for any provision of sanctuary today is moral
and religious rather than legal. 1 " Also, the modern day sanctuary
movement marks the first time in recent history that religious groups
engaged in the practice of sanctuary have ever sought a legal privilege
for their activities.' 3 However, the asserted claim of religious freedom
arises in an area of the law in which the nature of the sovereign's
power has consistently been upheld as plenary, 4 leaving thereby only a
limited role for the courts. Thus, the book sets the stage for the inevitable
collision between federal law and the American conscience.
The relationship of law and individual responsibility has always
been a source of tension and conflict. Although an individual has a
clear duty to obey the law, "the law cannot be the sole measure for his
conscience"; and when confronted with a moral dilemma, the choice is
not a clear one.' Ultimately, however, each person must resolve any
illegal aliens. United States v. Aguilar, 871 F.2d at 1441.
10. Warden, Maryland Penitentiary v. Hayden, 387 U.S. 294, 321 (1967) (Douglas,
J., dissenting).
11. Teitel, Debating Conviction Against Conviction-Constitutional Considerations
on the Sanctuary Movement, 14 HASTINGS CONST. L. Q. 25, 35 (Fall 1986)
[hereinafter Teitel]; see also United States v. Elder, 601 F. Supp. 1574, 1577
(D.C.S.D. Texas 1985) ("the enforcement of criminal laws can be constitutionally
achieved even if the laws interfere with the religious practices of individuals."[citing
Cantwell v. Connecticut, 310 U.S. 296 (1940)].)
12. I. Bau, supra note 2, at 133. Furthermore, the "moral obligation to assist
others crosses religious and denominational lines." United States v. Elder, 601 F. Supp.
1574, 1579 (S.D. Tex. 1985).
13. For example, participants in the nineteenth century movement made no claim
for legal recognition of the sanctuary activity. Members of the original underground
railroad "seemed less interested in receiving any legal privilege sanctuary than in providing
practical assistance to fugitive slaves. As abolitionists they were willing to violate
what they perceived as an unjust and immoral law and did not claim any special
privileges or immunities because of their religious character." I. Bau, Sanctuary, supra
note 2, at 123. Also, during the Vietnam War - no legal recognition of the privilege of
sanctuary was claimed. "Indeed it was precisely the illegality of the act - an act of
civil disobedience - that gave the concept of sanctuary its symbolic power as a confrontation
with an unjust and illegal war." Id. at 124.
14. Id.
15. Id. at 108 (see related article by J. Noonan, The Conscientious Citizen, NEW
CATHOLIC WORLD 108 (May-June 1985).

1990]
POLITICS AND THE LEGAL ORDER
doubt of conscience within his or her own mind. Furthermore, the person
who is guided by his conscience - as with Sir Thomas More -
accepts the consequences of such an act." With one notable exception,
17 whether the sanctuary workers depicted in the book were prepared
to accept the consequences of their disobedience to the law is
unclear. 18 Establishing a legal preference exempting their sanctuary activities
from prosecution appeared to be their paramount concern.' 9
Enter the lawyers who, perhaps unrealistically, 2 " raised expectations as
16. Id.; see also e.g., I. BAU, THis GROUND Is HOLY, supra note 2, at 170 (relating
to the prosecution of sanctuary seekers during the anti-Vietnam War activities).
17. Jim Corbett, the Quaker farmer and iconoclastic leader of the sanctuary
movement, also considered the father of the movement, is that notable exception. After
the trial, Corbett, who had been acquitted, stated: "We will continue to provide sanctuary
services openly and go to trial as often as is necessary to establish . . . that the
protection of human rights is never illegal." CRITTENDEN, supra note 3, at 324.
18. When debating the pros and cons of declaring a public sanctuary, some of the
sanctuary workers found the prospect of being charged with a criminal offense unappealing
because they could end up behind bars "with no opportunity to explain their
actions to the country." Id. at 61. Also, when two sanctuary workers were arrested in
Texas for doing similar activities, "the nerves of the 'border breakers' were rattled." Id.
at 124. Lastly, when returning to the courtroom to hear the jury's verdict, the defendants
felt confident that the jury would see "the rightness and justice of their cause." Id.
at 322. After the jury returned its verdict of conviction for eight of the eleven sanctuary
defendants, "[a] grim pall settled over the defendants' side of the room." Id. at
323. Interestingly, the author reports that the defendants showed more composure than
some of their lawyers. Id.
In the end, the author wrote that "a new note of anger and bitterness crept into
some of [the sanctuary defendants'] public comments." Id. at 328. "They had been
spied on, subjected to more than a year of criminal proceedings, and were now branded
as felons; this meant, among other things, that unless they succeeded in eventually
overturning the convictions, they had lost their right to vote. Psychologically many
seemed to be circling the wagons, to see the world even more as 'us against them,' the
good guys versus the bad." Id.
19. For example, early on it appeared that the sanctuary workers wanted to claim
a legal preference for their activities. In an episode involving an earlier arrest of one of
the sanctuary defendants, the author recounts that undocumented aliens traveling with
sanctuary workers were told to tell the truth about their nationality so that "the activists
could claim that they were not smuggling ordinary aliens but were assisting legitimate
refugees." Id. at 128.
20. "Conflicts between religious interests and the law have generally favored the
latter." Teitel, supra note 11, at 35 (1986). There have been a few exceptions. However,
they usually deal with behavior which is not like that in which the sanctuary
workers depicted in this story advocated. Id. at 35-36. The government's interest here
is identified as the uniform application of immigration laws in controlling its borders.
This interest has been analogized to a national security concern. United States v. Elder,
601 F. Supp. 1574, 1578-79 (S.D. Tex. 1985).
In the Elder case - another case involving the prosecution of a sanctuary worker

132 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
to the viability of a legal claim of privilege, contending that fundamental
constitutional issues would control the outcome. 21
Thus, Sanctuary acquaints the reader with some of the participants
in and opponents of the sanctuary movement (including their
lawyers and the judge who presided over the Arizona sanctuary trial),
their personalities and deeply held personal and religious beliefs. In
fact, the greatest strength of this book is its compelling character studies
that enable the reader to understand better how the movement got
started, its direction and why the government, lawyers, and judge responded
as they did. Although the beliefs of the adversaries at issue
were at opposite extremes of the religious and political spectrum, their
personalities depicted in this story were remarkably similar. 2 As the
author observes in the book's introduction, everyone has a reason for
the things he or she does in life, noting that "[riobes of self-righteousness
are not becoming, whoever wears them. ' 23 The explicit goal of the
book is to inform - "despite its unavoidable judgments" - the reader
of this discourse on contemporary history. '
Another commendable attribute of this book is the author's
steadfast resistance to the temptation to paint the adversaries in black
and white, using "right and wrong," "good and bad" terminology. Instead,
the reader finds the story line as impartial as possible given the
compelling circumstances of this case. The author accomplishes this
feat by adopting what she perceives to be a responsible approach, in
keeping with her "pragmatic, secular turn of mind." 126 The retelling of
this important episode in our recent history is based on many hours of
interviews with the principals on both sides of the story. As a result, the
reader is unable to assign easily any obvious labels to the participants
in and opponents of the sanctuary movement.
The Sanctuary narrative begins by focusing on the personal stories
of the parties involved in this essentially grassroots movement that
gained amazing popular support among members of mainstream
- this type of interest triggers judicial deference to congressional enactments and the
Immigration and Naturalization Service in implementing the laws. Id.
21. This was not the first time that such a claim or defense had been denied sanctuary
workers. See United States v. Merkt, 764 F.2d 266, 273 (5th Cir. 1985) (Merkt
I); see also United States v. Merkt, 794 F.2d 950, 965 n.18 (5th Cir. 1986) (reaffirmation
by different panel of Merkt l's rejection of this defense), cert. denied, 480 U.S.
946 (1987).
22. CRITTENDEN, supra note 3, at 115.
23. Id. at xi; see also id. at 155 ( "Where the sanctuary workers saw persecuted
individuals, the INS men saw dangerous radicals.").
24. Id. at xi.
25. Id.

1990]
POLITICS AND THE LEGAL ORDER
churches throughout the country. Crittendon's focus then shifts to the
events leading up to and encompassing the government's ten monthlong
undercover operation - ironically designated "Operation Sojourner"
- in which government agents and informants, among other
things, infiltrated church meetings; the various reactions and concerns
expressed by the sanctuary workers about the possibility of prosecution
are also set forth.
Federal prosecutors in Arizona indicted the sanctuary workers for
violations of the immigration laws. The prosecutor characterized this
case as a routine alien smuggling matter. However, as a defense attorney
commented, it was anything but routine." Admittedly, this case
was not routine, as so demonstrated by the book; rather, this case was
one of the most controversial cases that the Immigration and Naturalization
Service had ever undertaken. According to the government, providing
sanctuary in direct contravention to federal laws undermined the
whole immigration system.1 7 Therefore, participants in the sanctuary
movement could not be treated any differently than participants in
alien smuggling rings. 2
Sanctuary accurately captures the political overtones. From the
beginning, the trial in Arizona, while not the first involving the prosecution
of sanctuary workers, was considered the benchmark for the
movement. It was largely a public event, receiving widespread media
coverage and involving a significant number of sanctuary workers as
defendants. Indeed, the defense team's decision to try these defendants
together was an apparent tactical move designed to mount a "frontal
attack" against the administration's Central American policy. 29 The
government, on the other hand, saw this case as an opportunity to deter
further sanctuary activities. Not surprisingly, the real issues - legal
and moral - got lost because politics predictably permeated all facets
of both the case and the sanctuary movement.
Critics of the government's case maintained that the real issues
26. According to this defense attorney, a former assistant United States attorney,
"[ilf it was a routine criminal case, the decision would be to declined to prosecute
because the policy. . .was that the government does not prosecute cases like
this. . .unless there is some special element of violence". Lempinen, Right Place,
Wrong Verdict, STUDENT LAW. 34 (Jan. 1987) [hereinafter Lempinen].
27. Teitel, supra note 11, at 28.
28. Id.
29. In a subsequent account, one of the defense lawyers opined on the wisdom of
the decision to try the defendants altogether. Lampinen, supra note 26, at 35. Had
there been a severance, "the case might not have appeared to be such a frontal move on
the government." Id.

134 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
were never allowed to be heard in court. 3 0 While this accusation accurately
states the legal posture of the case, other alternatives were available
to the participants but were not pursued. 31 Even if the sole motive
of the participants in the sanctuary movement was religiously based,
the publicity that surrounded the offer of public sanctuary and the letters
that the leaders wrote to the administration, lent an unmistakably
political aura to the movement's direction.
The government viewed the sanctuary movement as political in nature
from the start, presenting the majority of its adherents with opportunities
to make political statements about the administration's policies
in Central America. According to its critics, the Reagan administration's
response to the Central Americans' flight from the dailey lifethreatening
dangers in their home countries seemed to be anything but
compassionate. 3 2 According to the critics, cold war ideology dominated
the asylum decision-making process, contrary to the politically neutral
30.E.g.,. Helton, supra note 3, at 494 (this article sets forth arguments which
were not presented to the jury in the Arizona sanctuary trial).
31. Schmidt, Refuge in the United States: The Sanctuary Movement Should Use
the Legal System, 15 HOFSTRA L. REV. 79, 96-100 (1986) (this article discusses the
alternatives not pursued by the sanctuary movement.) Also, in United States v. Aguilar,
the court found that the sanctuary defendants had failed to establish that no other
legal alternatives to violating the immigration laws existed. United States v. Aguilar,
883 F.2d at 693. The defendants had argued that immigration officials improperly handled
the asylum claims of the Central American aliens who sought refugee status.
However, the court noted that the defendants had failed to "appeal to the judiciary to
correct any alleged improprieties" and cited cases such as Orantes-Hernandez v.
Smith, 541 F. Supp. 351 (C.D. Cal. 1982) (granting provisional injunctive relief);
Orantes-Hernandez v. Meese, 685 F.Supp. 1488 (C.D.Cal.1988) (granting permanent
injunction) in which Salvadorans had effected changes in INS detention and asylum
procedures involving Salvadorans in California. Id.; see also Nunez v. Boldin, 537 F.
Supp. 578 (S.D. Texas 1982), appeal dismissed, 692 F.2d 755 (5th Cir. 1982) (granting
provisional injunctive relief affecting changes in INS detention and asylum procedures
involving Salvadorans and Guatemalans in Texas.)
32. Helton, supra note 3, at 500-501. However, as Judge Head observed in United
States v. Elder, 601 F. Supp. 1574,1579, commenting on similar criticism:
"Elder wishes to limit this Court's view solely to the violence in El Salvador; however,
the human condition remains miserable in many parts of the globe. Man's
inhumanity to man, as well as nature's, has been unrelenting throughout history.
Many people live on this planet who logically are no less worthy of Elder's Christian
charity than the Salvadorans. The consciences of others religiously motivated
may conclude that the starving and impoverished of North America, Asia, or
Mexico are equally entitled to enter this country without review by the INS.
"Obviously all cannot enter."

1990] POLITICS AND THE LEGAL ORDER
scheme which the Refugee Act contemplated by the Refugee Act. 3
Critics also asserted that the administration could have provided a
"safe haven" status '4 to these aliens but chose not to because it viewed
these Central Americans as economic, rather than political, refugees. 35
Disagreement existed within the movement over the goals."
Some workers viewed their actions as part of a religious and moral
33. Id. at 496; see also Teitel, supra note 11, at 30.
34. The term "safe haven" status refers to an executive prerogative to grant certain
groups of aliens "extended voluntary departure" status which, in effect, delays
their departure from this country until conditions improve in their home countries. In a
civil action addressing the administration critics' contention, the court concluded that
the executive branch was well within its discretion to decline to provide such status to
Central Americans. In Hotel and Rest. Employees Union v. Smith, 846 F.2d 1499,
1510 (D.C. Cir. 1988), the court observed that the decision to grant or to withhold
extended voluntary departure("EVD") status, which is a safe haven measure, falls
within the broad latitude the Attorney General enjoys in enforcing the immigration
laws. See INA supra note 4, at § 1103(a) (authorizing Attorney General to establish
such regulations and perform such other acts as he deems necessary to carry out his
authority).
On several prior occasions, the Attorney General has granted EVD status for several
groups of aliens. Regarding the Salvadoran aliens, the Attorney General determined
that circumstances did not warrant granting them EVD status. As the court
noted, this assessment was based upon: (a) the number of Salvadoran aliens already in
this country; (b) the current crisis in which our country is experiencing a "floodtide" of
illegal immigrants (sometimes referred to as the "magnet" effect); (c) the prospect of
inducing further immigration by Salvadorans; (d) the effect of illegal immigration on
the United States' finite law enforcement, social services, and economic resources, and
(e) the availability of statutory avenues of relief, including application for asylum. 846
F.2d at 1510 The court found these factors to satisfy its limited review based upon the
facially legitimate reasons standard, concluding, essentially, that the Attorney General's
decision not to extend EVD status to Salvadoran aliens was largely unreviewable.
Id.
35. This view still persists. In Congress recently, Senator Simpson once again expressed
the administration's view that economic motives dominate the flight of Central
American refugees in opposition to a bill providing for safe haven status for El
Salvadorans and Nicaraguans. Interpreter Releases, Vol. 66, No. 42, Oct. 30, 1989, p.
1199. Sen. Simpson also insisted "no proof that returnees' lives are in danger existed."
Id. He further commented: "The advocacy groups who pressed so obsessively for this
legislation, including the Sanctuary Movement, were primarily opponents of our foreign
policy in Central America; they thought Reagan was the Great Satan." Id.
36. CRITTENDEN, supra note 3, at 92-93. As reported in another article, "[alt the
core of the matter is the politicization of the sanctuary issue. Where Renny Golden [a
member of the steering committee of the Chicago Religious Task Force - the national
coordinating body for sanctuary churches, synagogues and Quaker meetings] views
sanctuary in terms of foreign policy, Jim Corbett sees it as a personal choice." Korn,
supra note 6 at 31.

136 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
imperative; others included a politically activist duty in that equation. 3 "
For the latter group, involvement in the sanctuary movement afforded
them an opportunity to raise public awareness about the administration's
policies, in the hopes of bringing an end to the conflict. Nonetheless,
it is difficult to neatly categorize the motives of the sanctuary
workers, a difficulty also present when categorizing aliens from Central
America who arrive with mixed motives insofar as their claims of asy-
lum are concerned.
3 8
Finally, a truly political confrontation existed between the sanctuary
workers and the government over the process by which Central
Americans fleeing civil strife in their homelands are granted asylum
status in this country. Initially, these workers attempted to work within
the system. However, they quickly realized that most Central Americans
were denied asylum and deported. For the sanctuary workers, the
government's actions were unlawful. Therefore, avoiding the law
seemed to them the only morally responsive activity under the
circumstances.
Sanctuary, in effect, underscores the yearning for a bygone era.
Given the tenor of the times in the early eighties, i.e., the dawning of
the "Teflon presidency" and the apparent complacency of society, it is
not surprising that participants in the sanctuary movement - and the
media's attraction to it - harkened back to a more active and contentious
time in this nation's history. Sanctuary allows the reader to reflect
upon a period in contemporary American history which the media
depicts as a time when the moral conscience of the country, once again,
37. See e.g., CRITTENDEN, supra note 3, at 234-35. For another example of the
political overtones of the movement reported in another context, the attorney for a
Texas sanctuary worker was quoted as saying:
The significance of these cases is that people like Jack Elder give help to these people
and act from religious impulse. To solve the underlying problem, the political situation
must be changed. Sanctuary workers aren't defining the parameters of the problem,
they are simply working with it.
I. F. Herrera, The Sanctuary Movement: When Politics and Religion Collide, L. A.
LAW. 24, col. 2 (nov. 1984).
And in another example, Renny Golden was quoted as saying:
I think we should say straight up, the sanctuary movement, we as religious people
intend to stop our government's interference and intervention in these [Central American]
countries.
Korn, supra note 6, at 30.
38. According to a former immigration official, the administration didn't recognize
that the refugees from Central America - who came here with a mixture of
economic and political reasons for their flight - presented the administration with new
realities which needed to be addressed in formulating asylum policies. CRITTENDEN,
supra note 3, at 61.

1990]
POLITICS AND THE LEGAL ORDER
seemingly resided in the clergy and church communities. The subject of
sanctuary aroused "passionate partisanship" 3 9 for some time and still
continues to be the subject of commentary.
Indeed, commentators have speculated on the negative motivations
for the administration's apparent "persecution" of the sanctuary workers.
40 This book, however, makes it fairly clear that the administration
- strange though it may seem -was goaded into prosecution by demands
from the media and others." 1 In fact, initially the government
adopted a "hands-off" approach in dealing with the movement, not
wanting to give administration critics a platform. 2 Admittedly, the
government could have adopted a more moderate asylum policy in responding
to its critics. Given the personalities of the officials the book
depicts together with the religious fervor and moral outrage that motivated
the sanctuary workers, the eventual decision by the government
to prosecute was predictable. All principal players in this engrossing,
real life drama were seemingly operating in the extreme.
Perhaps the most fascinating part of the book (certainly for lawyers)
is the retelling of the trial and the portrait painted of the lawyers
in the courtroom and of the presiding judge. The issues raised by the
sanctuary movement were complex from the beginning. However, in a
strategically critical move by the prosecutor on the same day the indictments
were made public, the use of the procedural device known as
the motion in limine considerably undermined the sanctuary defendants'
entire case. 3 Central to the sanctuary workers' defense was the
39. Id. at x.
40. Id.
41. The book describes it as "media baiting" and the "pressure to act." E.g., id. at
101, 105, & 115. Also, even after the investigation had been on-going for a considerable
period of time, the prosecutor "found his superiors [in Washington, D.C.] still wavering
over whether the government should prosecute sanctuary workers at all." Id. at
190. And in "a final indictment review, [slome of the most experienced prosecutors in
the [Phoenix] office were still dragging their feet." Id. at 192. On the local level, the
majority of the higher-ranking members of the Justice Department in Phoenix and
Tucson voted against indictment. Id.
42. See e.g., id. at 101-102 (the government, understandably, took a low-key approach
at first).
43. This device is used to preclude a party from introducing certain issues and
evidence at trial. One commentator observed that the government's utilization of this
pretrial device was novel and had rarely been employed in the manner utilized during
the pretrial stage of the Arizona case. Colbert, The Motion in Limine: Trial Without
Jury - A Government's Weapon Against the Sanctuary Movement, 15 HOFSTRA L.
REV. 5 (1986) [hereinafter Colbert].
The motion in limine is a pretrial evidentiary ruling made upon application by
either party to the trial court for the purpose of precluding the opposing party from

138 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
claim that the undocumented aliens from Central America, for whom
the government had indicted the defendants for smuggling, transporting,
harboring, and concealing, qualified as political refugees under the
Refugee Act of 1980 and the 1967 United Nations Protocol Relating to
the Status of Refugees. 4 Accordingly, the defendants contended that
they were acting in accord with United States and international law
and that the government was not.
In the motion in limine, the prosecutor asked the judge not to admit
any evidence relating to this defense or any evidence based on the
legal concept of justification." 5 In other words, any evidence relating to
a defense based on good motives or religious beliefs, tending to negate
any criminal intent to violate the laws as charged, was to be excluded.
The prosecutor also asked that the judge exclude any mention or evidence
in the courtroom of matters relating to the atrocities occurring in
Central American countries, past or present United States foreign policy
in Central America, and past or present policies relating to the
grant or denial of refugee or asylum status, including safe haven (i.e.,
extended voluntary departure) status.
The defense, momentarily stunned by the prosecutor's sweeping
motion, fired back with a barrage of motions in opposition, also seeking
to have the case dismissed, all to no avail. The book vividly depicts the
interplay of the personalities of the prosecutor, defense counsel, and the
judge throughout the trial. Some observers viewed the courtroom
proceedins as a "three-ring circus."' 6 The Arizona sanctuary trial, bitter
and contentious throughout its entire exhausting proceedings, became
a first class media event.'
In telling this part of the story, Crittendon captures all the power,
acrimony, tension, and nuances of courtroom drama. The reader soon
appreciates that the focus of attention is not on the prosecution's case
ever using a particular item of evidence at any stage of the trial proceeding. Id. at 7.
Commentators have emphasized that the primary purpose of the motion is to eliminate
prejudicial items or questions from being presented to the jury. Id.
44.CRITTENDEN,. supra note 3, at 221.
45. CRITTENDEN, supra note 3, at 219-20.
46. Lempinen, supra note 26, at 32, 35. Also, the defense supplemented their case
with attacks against the judge. Id. And while lawyers for the defense believed that the
conflicts between them and the judge were not played out in front of the jury, jurors
apparently sensed the tension according to a sanctuary trial observer. Id.
47. Defendants became "instant folk heros of the left, which had few enough in
the Age of Reagan, as the trial became a magnet for journalists, filmmakers, and activists
hoping for a replay of the great civil disobedience scenes of the 1960s. CRIT-
TENDEN, supra note 3, at 286.

1990]
POLITICS AND THE LEGAL ORDER
but on the judge, appointed to the bench by Jimmy Carter. 4 8 The defense
realized a limited victory during the pretrial proceedings, but for
the most part, the judge's rulings favored the government. The judge
ruled against all of the defense's most important motions relating to
constitutional issues raising first, fourth and fifth amendment violations.
Because of the judge's rulings, the defense was stripped of its key
arguments. The essence of the humanity of the defendants' case was
undermined considerably. Not surprisingly, the defense then focused
attention on finding evidence to discredit the government's key witnesses,
i.e., the undercover agents and informants who had participated
in the undercover investigation, as well as selecting jurors sympathetic
to their cause. However, the real focus of their attention was directed
toward the judge who had now become their enemy." 9
Perhaps there is a lesson to be learned here. A lawyer handling a
highly-charged, emotional case, ought not lose sight of his or her role.
In other words, having elected to play the game, certain established
rules must be understood and observed. Without devaluing his or her
social commitment to a just cause, a lawyer can still play the game
effectively. The book leaves the reader with the impression that some of
the defense lawyers may have lost their perspective in the courtroom
because of the strong emotional overlay of the case and the distinct
antipathy exhibited toward the judge. 5 ' The book describes the court-
48. Id, at 167.
49. See e.g, id. at 278-279 ("...the raw hostility in the air.") Judge Carroll became
the real adversary. Id. at 282-83.
50. In an article recounting the sanctuary trial, one of the defense lawyers stated
that "ItIhis trial was such an intense experience that it drew people's attention away
from the outside world and became our only reality." Brosnahan, Can Lawyers Afford
To Do What Feels Good?, THE COMPLEAT LAW. 38,40 (Summer 1987) [hereinafter
Brosnahan]. A reporter covering the sanctuary trial described it "as rancorous, emotional
and complex as the immigration issue itself. CRITTENDEN, supra note 3, at 321.
And an early chronicler of the sanctuary movement observed later that "[t]he sanctuary
movement has to be a movement for refugees, and not for the churches to experiment
with social justice, not for attorneys to test novel theories, and not for political
activists to broaden their coalitions of support." Korn, supra note 6, at 31.
51. For example, as described by the prosecutor in the case, the judge had "an
extremely difficult task in having to control eleven defense attorneys that persist in
violating the Court's orders blatantly, notoriously.... CRITTENDEN supra note 3, at
311. The prosecutor stated further that the defense attorneys were making personal
accusations against the court and that those accusations were "vindictive... [and]
hmean. . .". Id. at 312. Also, some local attorneys criticized the defense team's strategy
of taking the offensive in intimidating the judge suggesting that "the sanctuary defense
team should have shown a sitting judge more respect." Id. at 310.
After the trial, the acrimony and rancor that had permeated the courtroom spilled over
5 0

140 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
room as "a battlefield between the bench and the bar." ' 52 For the defense,
the case had become a "trial by ambush." 5 The prosecutor
called it the worse "judge-bashing" he had ever experienced. 5 4 In
Texas, two judges had ruled against sanctuary workers advancing similar
arguments, 55 yet defense lawyers in later accounts depicted the
judge in the Arizona trial, in effect, as evil incarnate. 56
In any event, the judge's rulings on the legal issues involving the
fundamental constitutional rights asserted as defenses by the sanctuary
workers were not aired in court nor considered by the jury. The defense
rested after the government's case. After the deliberations, the jury
found eight defendants guilty and acquitted three. Some of the jurors
were sympathetic toward the defendants but felt duty bound to follow
the law. 57 Defense counsel expressed confidence that their clients would
be vindicated on appeal and that the legality of the sanctuary workers'
conduct would finally be upheld. 8 However, such was not the case. The
Court of Appeals for the Ninth Circuit determined, for the most part,
that defendants' arguments were without merit. As described in that
outside as the author recounts the following:
As the spectators filed out of the courtroom, a red-faced William Walker approached
Don Reno [the federal prosecutor] and said, 'Reno, you are a stinking,
dirty dog.' It seemed a fitting end to the exhausting, acrimonious proceedings.
Reno told his wife, Carole, who was standing beside him during Walker's outburst,
that the defense attorney had snarled at him so often that 'by now I consider it
nothing more than the usual 'Good morning' greeting from Bill.
Id. at 321.
52. "The raw hostility in the air transcended anything reflected in the official record
of the trial, and at times various antagonists seemed to be almost choking as they
struggled to repress the rage boiling inside." Id. at 279.
53. Id. at 282.
54. Id. at 311.
55. Id. at 167-8. Another sanctuary worker was tried before a jury in Brownsville,
Texas with Judge Flemon Vela presiding. This particular judge refused to allow the
jury to consider any defense theories - similar to Judge Carroll's rulings in the Arizona
trial - relating to evidence involving the Central American refugees' applications
for asylum. 1. Bau, Sanctuary, supra note 2, at 108; see also, United States v. Elder,
supra note 12.
56. E.g., Lempinen, supra note 26, at 32. A defense lawyer believed the government
was out to "crush" the sanctuary movement and was "substantially aided" by the
judge. Also, this lawyer reported that: "[the judge] used to give us death looks - a
look as though he wished we were dead." Id. at 35.
57. In one news report, one of the jurors stated that he wished the defense had put
on its own case instead of arguing that the government had not proved the charges
against them. Jury Convicts 8 Sanctuary Defendants, The Washington Post, May 2,
1986, A12, col. 1.
58. Id.

1990] POLITICS AND THE LEGAL ORDER
court's opinion in the case: "The tension between [defendants'] mistake
of law explanation and their deliberate avoidance explanation is patent,
and it permeates this entire case.""'
Most trial observers and commentators tend to point an accusatory
finger at the judge for his rulings on the government's motion in limine
and defense motions. 60 Admittedly, the ultimate course of this trial was
59. United States v. Aguilar, 883 F.2d at 667. According to the court, defendants
- in asserting a mistake of law defense -- could not claim familiarity with the immigration
procedures for filing political asylum applications on the one hand and then
claim unfamiliarity with the requirement for presentment of those applications to immigration
officials which was critical to the asylum process. Id. at 667-68.
Defendants believed sincerely that the undocumented Central American aliens
were bona fide refugees under the Refugee Act of 1980 and that the government's
disapproval of their asylum claims amounted to misfeasance. Thus, at the trial, the
defendants attempted to establish a mistake of law defense by proffering evidence -
based on their statutory construction of section 1324 and that section's interaction with
the Refugee Act of 1980 - of their understanding of the aliens' status. The court,
guided by the principle of ignorantia legis non excusat, concluded that ignorance or
mistake of law was no defense in a case such as this one which involves a specific intent
crime. United States v. Aguilar. Id. at 673. In so holding, the court noted that two
practical considerations reinforced this doctrine. Specifically, "such a defense would
become a shield for the guilty" because the government would have difficulty refuting
this defense and such a defense would considerably undermine trial management because
"a defendant, in presenting this defense, easily could convert a trial into a protracted
and unruly proceeding." Id.
Also, the defendants' mistake of law defense was based on that part of the sanctuary
movement's strategy in carrying out which counseled the undocumented Central
American aliens to avoid immigration officials at all costs; but, if apprehended, counseled
deception about the Central Americans' nationality to avoid deportation to Central
America. The court declined to accept this posture of the case as part of the defendants'
mistake of law defense. Defendants had offered two explanations to justify
their counseling avoidance of immigration officials. First, defendants contended that
INS acted improperly in handling asylum applications involving Central American refugees.
Second, although defendants were aware of the procedures for filing asylum
applications, they were aware that such filing - along with presentment of the alien to
immigration officials - was a prerequisite to an alien's legal status as a refugee. According
to the court, defendants could not have it both ways. Id. at 667-68.
60. For example, one commentator viewed the grant of the government's motion
in limine as subverting "the historic role of the jury as triers of the facts." Colbert,
supra note 43, at 9. However, the court in United States v. Aguilar found the use of a
motion in limine appropriate in this case because the crux of the issues presented in the
government's motion were legal and not factual. 883 F.2d at 671-673, 692. Moreover,
the appeals court concluded that the trial judge had not erred in granting the governmnent's
motion in limine because the record demonstrated that the defendants had intended
to provide a series of minitrials as to each alien's well-founded fear of persecution
claim, contrary to sound trial management. Id. at 673. And, as an alternative
holding in this case finding no error in the trial judges's ruling, the appeals court con-

142 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
dictated by these rulings. Had the defendants been allowed to put on
their defenses, the Reagan administration's policy on Central America
would have been put on trial. The book correctly underscores the prosecution's
concern that the trial not devolve into discussions of refugee
policy and definitions of what qualifies someone as a refugee or what
constitutes religious freedom. 6 However, the concerns expressed were
tactical matters. Thus, the book fails to consider the fundamental problem
with this defensive posture, an area admittedly easier to discuss
now that these issues have received appellate review.
The appeals court decided that the crux of the matter was the
misapprehension of the laws on the status of aliens claiming to be protected
under the Refugee Act of 1980. At the heart of the defense was
the contention that this Act did not require either an alien's formal
presentment to the Immigration Service or an application for political
asylum to accord an alien legal status in this country. Accordingly, the
defendants were assisting bona fide refugees who were lawfully entitled
to refugee status in this country. 62 Under the pertinent provisions of
this Act, however, only the Attorney General may accord the refugee
status after the filing of an application for asylum.1 3 The defendants,
apparently, were aware of immigration procedures for filing asylum applications,
yet they had argued that they could consider the undocumented
aliens from Central America as refugees based on the defendants'
interpretation of the law. Later, this was asserted as a part of
their mistake of law and necessity defenses.
Not only did this defense highlight the fundamental misunder-
cluded that the defendants mistake of law defense - on which the proffered evidence
in opposition to the government's motion was based - was "objectively unreasonable."
Id. at 675, n.5.
61.CRITTENDEN,. supra note 3, at 219.
62. From the court's perspective, allowing the defendants to decide who qualified
as refugees under the Act was tantamount to "sanctioning the creation of religious
boards of review to determine asylum status." United States v. Aguilar, 883 F.2d at
693, n.28. However, "[tihe executive branch, not [defendants], is assigned this task."
Id.
63. Congress directed the Attorney General to "establish a procedure for an alien
physically present in the United States . . .to apply for asylum. 8 U.S.C. §1158. Notably,
the law places the burden on the applicant to establish his or her eligibility for
asylum status. Matter of Mogharrabi, Interim Dec. No. 3028 (BIA, June 12, 1987).
And any entitlement to asylum must be based on a filed application and an affirmative
grant under section 208 of the Immigration and Nationality Act of 1952, as amended.
8 U.S.C. § 1158. In addition to the provisions relating to asylum, the law provides that
no alien can be deported and sent to a country where he or she would be threatened on
account of race, religion, nationality, membership in a particular social group or political
opinion. Immigration and Nationality Act § 243(h)(1), 8 U.S.C. § 1253 (h)(l).

19901
POLITICS AND THE LEGAL ORDER
standing of the law permeating the proceeding, but, according to the
court, it also underscored the political nature of this case. From the
court's perspective, apparently, the sanctuary defendants disagreed
with the Reagan administration's policy on Central America and
sought to undermine the government's foreign policy in what appeared
to be a well-orchestrated public sanctuary movement. 6 " For the court,
however, a rule permitting such a strategy would have led to chaos in
the courtroom, exactly what the federal prosecutor sought to avoid
tactically. 65
Another critical defense was the defendants' contention that the
sincere belief they held about the aliens they assisted being bona fide
refugees under the Refugee Act should excuse their otherwise criminally
proscribed conduct. According to the appeals court, however, defendants
had confused intent with motive."' As a matter of law, the
court found that the defendants' sincere beliefs - which motivated
their activities in participating in the sanctuary movement - did not
negate their specific intent to bring these aliens clandestinely into the
country without inspection by immigration officials, thereby violating
immigration laws."' The key to establishing refugee status under the
Act is presentment to immigration officials and the filing of an application
for asylum. Thus, the defendants argument in this regard critically
overlooked the procedural formalities of the immigration laws. Nor did
the defendants' argument that they had a religious motivation for
transporting the aliens constitute a defense. Finally, the appeals court
held that the defendants were not entitled to a first amendment defense.
68 Thus, ultimately, the court concluded, notwithstanding the
length of its opinion, that this case could be treated as a simple anti-
64. See, e.g., United States v. Aguilar, 883 F.2d at 668, 673, 675, n.6.
65. Id. at 673.
66. Id. at 687. As long as the defendants intended "to directly or substantially
further the alien's illegal presence [in this country], it is irrelevant that they did so with
a religious motive." Id. (citation omitted).
67. United States v. Aguilar, 883 F.2d at 687.
68. The court concluded that "a religious exemption for these particular [defendants]
would seriously limit the government's ability to control immigration. Id. at 695.
The court also cited favorably the Fifth Circuit's opinion which rejected a similar
claim:
The statute under which [defendants] were convicted is part of a comprehensive,
essential sovereign policy. We cannot engraft judicial exceptions to the illegality of
transporting undocumented El Salvadorans without thereby de facto revising, for
the unique benefit of El Salvadorans, the legal conditions under which they may
abide in this country. This would create [chaos].
Id. at 694-95 citing United States v. Merkt, 794 F.2d 950, 956 (5th Cir. 1986) (Merkt
II), cert. denied, 480 U.S. 946 (1987).

144 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
smuggling case under the immigration laws. Thus, the vindication once
heralded by defense counsel was not to be.
In the end, the reader of Sanctuary might conclude that the answer
to the moral question posed in the beginning is two-fold. First,
what members of a political community owe strangers in their midst
depends on the law or established legal order that governs that community.
If individuals take issue with the "official" treatment of such
strangers, in this case undocumented aliens from Central America,
Congress is the most likely place to seek relief or address the grievance.
9 If dissatisfied with congressional action, or, more appropriately
in the case of the sanctuary movement, inaction, the "conscientious citizen"
may choose to seek recourse in the courts. Second, if unwilling or
dissatisfied with the outcomes in the foregoing pursuits, that individual
faces the moral dilemma of obeying the law or following the dictates of
7 0
his or her own conscience.
If the participants of the Arizona sanctuary movement ultimately
hoped to be vindicated by the court system, they pursued a course of
civil disobedience that was unrealistic as to the legal consequences of
their activities. But upon closer scrutiny the asserted claim of legal
privilege was seemingly their lawyers' conviction and not theirs. Admittedly
they were disappointed in the outcome of the trial in Arizona, but
Sanctuary conveys the impression that these individuals, if faced with
the same moral dilemma again would, as a matter of conscience, make
the same choice. 7 In the end, Sanctuary achieves its goal of informing
69. Indeed, the political branches have been active in this particular area for some
time. At this writing, a bill is pending in the Senate that would direct the Attorney
General to suspend deportation of Salvadoran nationals among others. H.R. 618, 100th
Cong., 1st Sess. §§ 301-303, U.S. CODE CONG. & ADMIN. NEWS 1986, 1812; see H. R.
REP. No. 212, 100th Cong., 1st Sess. 1 & 2 (1987).
70. In a fictionalized account, an attorney for a church congregation debating the
issue of public sanctuary underscored the reality of being prepared to accept the penalty
of civil disobedience if no claim of exemption is recognized for their sanctuary
activities. Teitel, supra note 11, at 35.
71. As one of the sanctuary defendants later concluded with respect to the available
choices:
I could lobby Congress; I could work for extended voluntary departure; I could
educate people; I could visit jails and detention centers. That could be my ministry.
Or I could get involved on a deeper level, with the sanctuary ministry. I studied
the 1980 Refugee Act and the international refugee laws and concluded that it
was the INS that was breaking the law. If the values I had been brought up by
meant anything, I had to get involved in sanctuary.
CRITTENDEN, supra note 3, at 98.
And as one of the attorneys for the Arizona sanctuary defendants observed:
"We began to understand what this case was all about. The defendants would hold

1990]
POLITICS AND THE LEGAL ORDER
and not merely condemning in its essay on an important episode in
contemporary history, a truly fascinating account of morality, politics
and the legal order.
to their principles of helping and caring for the refugees no matter what the personal
consequences. The lawyers weren't defending a case. We were learning a
way to live."
Brosnahan, supra note 50 at 40.

BOOKS RECEIVED
RESISTING PROTECTIONISM. By Helen V. Milner. Princeton:
Princeton University Press, 1988, 301 pp.
In Resisting Protectionism, Helen Milner attempts to answer the
puzzling question of why trade policy was markedly different in the
1920s and the 1970s when key economic and political pressures influencing
policy were uncommonly similar. Both periods were characterized
by declining hegemony and ailing international economies; however,
the 1970s (1971-1981) were notably less protectionist than the
1920s (1921-1931). The author claims that a change in the way domestic
and international economies are consolidated has affected the trade
preferences of domestic industries and has consequently influenced
trade policy outcomes. This study focused on trade preferences and did
not directly examine the influence of public opinion, ideology, organized
labor, domestic political structure, or other possible factors.
The book is basically divided into three sections. The first section
presents the principal question and main argument. The argument
brought forth is that the increased international economic interdependence
of the post-World War II period was the primary reason that
protectionism did not spread widely in the 1970s and early 1980s. It is
theorized that firms with greater international connections are less protectionist
than more domestically oriented firms. Thus, the entry of a
greater number of American industries into the international economy
transformed domestic preferences and ultimately hindered resorting to
the defense of protectionism as was observed in the 1920s.
In the second section, case studies are presented to examine trade
policy argument over time and across nations. The author specifically
examines three sets of cases: six U.S. industries in the 1920s, six U.S.
industries in the 1970s, and six French industries in the 1970s. The
central concern, in the analysis of each of these case studies, was to
ascertain the extent of the industries' international ties to determine
the effects of the nature of their trade policy preferences in the predicted
fashion.
The third and final section of the book uses the cases presented to
draw conclusions. Chapter 6 reviews the evidence about firms' trade
policy preferences in the three sets of cases and concludes that internationally
oriented firms are less protectionist than more domestic ones,
even under similar economic difficulties. Chapter 7 examines how divisions
among firms in an industry affect their ability to attain their pref-
(147)

148 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
erences. It also looks at other factors influencing firms' capabilities to
shape trade policy outcomes and finds that industry preferences are
among several important factors that shape trade policy. Chapter 8
compares the French and American trade policy processes and considers
how even a "strong state", that is, one which has a state-led policy
system highly resistant to industry pressure, like France, has firms
which influence trade policy.
Chapter 9, the final chapter, broadens the discussion of international
and comparative political economy. Broader ramifications discussed
are the relationship of the argument about rising international
interdependence to other arguments about interdependence, the insight
that the comparison of the French and U.S. cases may give on various
aspects of comparative politics, the relationship of this study's conclusions
to key theories in international political economy about the
sources of free trade and cooperation, and its policy ramifications.
In conclusion, it is emphasized that although increased interdependence
subjected the American economy to new foreign competition, it
also greatly augmented international economic ties for some firms.
These ties expressed themselves in the form of exports, imports of critical
inputs, multinational production, and global intra-firm trade. The
expansion of these international ties by American firms between the
1920s and 1970s reduced their interest in protectionism and thus promoted
a relatively open market in the 1970s, despite system pressures
for closure. Furthermore, the author goes on to generalize that (1) an
international economy with high levels of interdependence may promote
continued international cooperation in trade and (2) protectionism
will be most likely in sectors troubled by foreign competition and
lacking strong international economic ties.
Resisting Protectionism is straightforward and easy to read, even
to the lay person with a limited knowledge of economics. The author
presents her arguments clearly and provides a number of case studies
to back her position.

1990)
BOOKS RECEIVED
COFFEE AND DEMOCRACY IN MODERN COSTA RICA. By
Anthony Winson. New York: St. Martin's Press, 1989, 184 pp.
Anthony Winson's work presents a comprehensive survey of Costa
Rica's gradual transformation from an outdated political and socio-economic
structure dominated by a coffee oligarchy into a liberal democracy
with a diversified economy. Specifically, this book focuses on the
factors leading to the Civil War of 1948 and the repercussions for
Costa Rican class structure. Winson provides a unique critical analysis
of the political structure established by Jose Figueres Ferrer, the central
figure in Costa Rica's revolution. This foundation, put into place
by Figueres ultimately sets Costa Rica apart from its Central American
neighbors.
The first two chapters of the book depict the state of Costa Rica's
class system prior to the 1940s. This agrarian society consisted of three
basic class groups: a sizeable landless labor force, a mass of small and
medium coffee farmers, and a small group of large coffee farmers who
typically served as processors of the product. It is this latter group, the
beneficiadores, which controlled the political, economic and social
structures of Costa Rica.
As Winson points out, it is important to understand that before
1948 Costa Rica was (and still is to some extent) primarily dependent
on the coffee industry. Although farming and production costs were
relatively high compared to neighboring Latin American countries due
to a shortage of labor and a dearth of technology, Costa Rican coffee
established and maintained a niche in the world market because of its
superior quality. The so-called coffee oligarchy was able to dominate
Costa Rica for so long by virtue of its total control over the nation's
one-industry economy: it controlled the flow of credit to the coffee
farmers; it predominated the coffee processing arena; and it regulated
and controlled marketing and commercialization of the coffee product.
In essence, the coffee oligarchy was so influential that the State was
nothing more than a medium for its policies.
Chapter Three discusses the factors which ultimately resulted in
the transformation of Costa Rica. The world economic decline of the
1930s created a crisis for the Costa Rican coffee oligarchy and its agroexport
framework. In effect, this political bourgeoisie lost its grasp on
the State, and new political forces began to emerge in the 1940s. The
ultimate struggle was between the reactionary remnants of this oligarchy
and the progressive forces of the popular front. After a brief, yet
violent struggle, the eventual victor was the progressive camp under the
leadership of Jose Figueres.
The bulk of the remaining chapters illustrate the features put into

150 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
place by Figueres and his interventionist State and the effects this had
on the Costa Rican class structure once dominated by the
beneficiadores. The underlying formula for releasing Costa Rica from
the throes of its oligarchic past included the promotion of an "active"
State, developmentalism and ameliorative social reforms. Winson explains
in great detail the methods of implementation and the effects of
new technology, cooperative operations and public welfare programs
which collectively strengthened the role of the State at the expense of
the former coffee oligarchy. Fundamental to this dramatic transformation
were the increase of coffee productivity, the nationalization of the
banking system and the diversification of the national economy.
Winson concludes that the Costa Rican development under the
leadership of Figueres has the following implications: Costa Rica was
transformed from a backward technical basis to one of the most technically
advanced coffee economies in the world; the capitalist class of
growers/producers has emerged in a stronger position vis-a-vis the
processors who formerly controlled the oligarchy; and the general economy
of Costa Rica has benefited from diversification.
Although Costa Rica shares a common cultural heritage and early
history with its Latin American sister states, it stands alone in terms of
its development and transformation over the past 50 years. The crucial
difference lies in the decline of the coffee oligarchy in the early 1940s.
This enabled the progressive opposition to get its foot in the door. Unfortunately,
as Winson suggests, countries such as El Salvador and
Guatemala are bound to systems of strict class structure due to modern
military regimes which have proven to be staunch defenders of the oligarchies'
interests. Thus, even though Costa Rica provides an interesting
case study in the development of liberal democracy in Central
America, the conditions which facilitated the transformation of this nation
are no longer in place to make this a viable option for other countries.
Consequently, it is imperative that new models for implementing
and developing democracy must be considered in this region of everincreasing
importance.

1990]
BOOKS RECEIVED
THE TAIWAN RELATIONS ACT: A DECADE OF IMPLEMEN-
TATION. Edited by William B. Bader and Jeffrey T. Bergner. Hudson
Institute and SRI International, 1989, 149 pp.
On December 15, 1978, President Jimmy Carter announced the
establishment of full diplomatic relations between the United States
and the People's Republic of China (PRC). On April 10, 1979, President
Carter signed the Taiwan Relations Act (TRA) into law, establishing
a system of informal, yet direct relations between the government
of the United States and the government of the Republic of
China on Taiwan (Taiwan). On the tenth anniversary of the TRA, The
Taiwan Relations Act: A Decade of Implementation, provides an explanation
of the TRA itself and reviews the evolution of United States
- Taiwan relations since the TRA was passed. Chapters Two, Three,
and Four, written by various authors, review the political and diplomatic
relations, security relations, and economic relations, respectively,
with each chapter followed by commentaries of Congressional leaders
who were actively involved in the creation and implementation of the
TRA.
Chapter One reviews the evolution of the TRA, focusing on the
events which led President Carter to sever formal relations between the
United States and Taiwan. This chapter also outlines the remarkably
swift action Congress took to create a de facto international treaty, the
TRA, in response to the President's action.
Political and diplomatic relations is the focus of Chapter Two,
written by Harvey J. Feldman. The TRA as enacted, managed to establish
in law America's continuing concern for Taiwan's security and
the safety of its people. By stating that Taiwan shall be treated as a
state and its government as a sovereign government for all purposes of
United States' law, Section 4 of the TRA provides a stable, legal basis
for United States - Taiwan relations in the absence of diplomatic relations.
Additionally, the creation of two moderately unofficial instrumentalities,
the American Institute in Taiwan and the Coordination
Council for North America, has created the functional equivalent of a
diplomatic relationship.
Chapter Three, written by Dr. Stephen P. Gilbert, describes the
security relationship which has existed between the United States and
Taiwan prior to and under the TRA. Prior to 1979, the United States
and Taiwan had established a collective defense arrangement aimed directly
at the PRC. Taiwan's armed forces were equipped almost entirely
with American weapons and Taiwan relied heavily on American
military to offset the PRC's military power. After the implementation
of the TRA, things have not drastically changed. Gilbert is quick to

152 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
point out, however, that the future does not hold bright prospects. Because
the United States may play a substantially lesser role in world
politics in the upcoming decades, Taiwan's security may be impacted.
At present the United States is the only country willing and able to
assist Taiwan should the PRC attempt to reunify China. Gilbert therefore
asserts that Taiwan should 1) continue its cautious approachment
of PRC, 2) vigorously pursue becoming self sufficient in weaponry, and
3) remain economically strong and use this as a diplomatic tool to
strengthen relations with countries around the world.
Jimmy W. Wheeler and Andrew G. Caranfil in Chapter Four, discuss
commercial relations between the United States and Taiwan.
Without the legislative action of Congress enacting the TRA, commercial
relations would have been severely affected by President Carter's
decision to recognize the PRC. Not only would it have been impossible
to enforce contracts between the United States and Taiwan, but financial
exchanges and the resolution of outstanding disputes would have
been hampered. Fortunately, the TRA is both general and flexible
enough to deal with any commercial issues which arise and should continue
to provide an effective framework for managing United States -
Taiwan relations. The key challenge in the future is to deal with the
growing importance of Taiwan in the global trade and financial system.
Wheeler and Caranfil assert that the U.S. and Taiwan should work
together to develop an appropriate multinational role for Taiwan and a
strategy to achieve it.
Chapter Five is an overview by Bader and Bergner of the TRA,
the implementation of the political relationship, security and economic
relations under the TRA, and the challenges of the next decade. The
Taiwan Relations Act: A Decade of Implementation is a well written
book which provides a simple explanation of the history of the Taiwan
Relations Act and how it has stood the test of time. In addition, the
Commentaries at the end of Chapters Two, Three, and Four, by Senators
involved in the creation and implementation of the TRA, provide
useful insight into the Act itself.

1990]
BOOKS RECEIVED
WORLD ECONOMIC AND FINANCIAL SURVEYS - INTER-
NATIONAL CAPITAL MARKETS: DEVELOPMENTS AND PROS-
PECTS. By a Staff Team from the Exchange and Trade Relations and
Research Departments, Washington, D.C.: International Monetary
Fund, 1989, 138 pp.
International Capital Markets reviews the major trends in the financial
markets from the October 1987 stock market break to date.
Particular emphasis is given to the 'challenges confronting financial institutions
both in their domestic industrialized markets and in the developing
country markets. Also emphasized are the evolving strategies
for the management of risk in the international financial arena.
Chapter One presents an overview of the recent developments and
identifies the key issues that should be addressed. Important trends in
the geographic and functional integration of the financial institutions,
the multilateral coordination of supervisory control and debt financing
of the developing countries are revealed.
Chapter Two expands the analysis as it relates to markets in the
industrialized nations. The banking, securities and related derivative
products markets each receive separate coverage. The last item mentioned
pertains to the innovations, made possible by the liberalization
of capital controls, in financial instruments and techniques for the
transformation and reallocation of financial risk. Examples of such derivative
products commented on are interest rate futures contracts,
Eurodollar options contracts, currency futures and swaps.
Chapter Three stresses the developing countries and observes the
patterns of capital flows to these countries from the financial institution
lenders in the industrialized nations. Responses to the financial woes of
the developing countries and their lenders and new aspects of debt
management and financial packaging capture attention here.
Chapter Four examines the changing regulatory and supervisory
environments. This chapter describes driving forces behind the breakdown
of national borders as the financial services markets become increasingly
integrated internationally. The financial aspects of the two
largest motivational factors in this integration movement, the Canada -
United States Free Trade Agreement and the European Community's
Single Market Plan, are analyzed with particular concern for the necessity
of multilateral agreement on capital adequacy requirements for
banks and coordination of securities regulation.
Finally, Chapter Five concentrates on the equity markets and their
effect on macroeconomic stability. This chapter analyzes the difficulties
encountered by various stock exchanges during the heavy trading that
occurred in the stock market break of October 1987. The effect differ-

154 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
ences in trading systems, trading strategies and clearing systems had in
ameliorating or exacerbating the problems inherent in handling the
heavy volume of trading encountered on those days are each explored
in turn. In conclusion, this chapter summarizes the agreement and disagreement
found in the recommendation reports from various organizations
concerning regulatory, supervisory and structural changes compelled
by the market break.

1990]
BOOKS RECEIVED
TREATY CONFLICT AND POLITICAL CONTRADICTION:
THE DIALECTIC OF DUPLICITY. By Guyora Binder. New York:
Greenwood Press, 1988, 226 pp.
In the introduction of his book, Treaty Conflict and Political Contradiction:
The Dialectic of Duplicity, author Guyora Binder states,
"The modern international legal system rests on a paradox - its legitimacy
derives from the sovereignty of nations, yet its function is the
constraint of such sovereignty." It is an examination of this inherent
dilemma of international law - the tension between state sovereignty
and the need to impose legal order within the international community
that provides the basis for this interesting and well-written treatise on
the implications of conflicting treaties.
As the focal point for his discussion, Binder has chosen the Camp
David Agreements between Israel, Egypt and the United States which
were concluded in March of 1979. Prior treaties between Egypt and
other Arab nations had committed Egypt to a mutual defense alliance
with its Arab neighbors and to an advance of the cause of Palestinian
nationalism - aims which were in potential conflict with the requirements
of the Camp David Accord. The question raised by Egypt's actions
is which, if any, of the conflicting treaties prevails.
Binder tackles this question in a novel and richly thought-provoking
manner. Rather than simply analyzing current case law and current
legal opinion, the author instead leads his readers on a guided tour
of the political, social and philosophical history which provides a basis
for modern international relations. Beginning with the basic question of
whether a treaty obligation confers property rights (the remedy for
breach of which would be specific performance) or liability rights (the
remedy for which would be damages), Binder looks to philosophical
theory to explain the basis of each view. Having thus provided his readers
with a theoretical framework, the author discusses the evolution of
current thought through an analysis of the efforts of the International
Law Commission to codify the law of treaties. Finally, Binder looks to
political and social history to explain the continued support for the two
conflicting views of treaty obligation - namely, that either the later conflicting
treaty is void, or that both conflicting treaties should be treated
as enforceable.
The major strength of this book is its author's skill at keeping his
theme in focus. Throughout the discussion, which includes such disparate
elements as quotations from Hegel and Machiavelli, the author
relates the various theories to the basic conflict between the sovereignty
of nations and the existence of an international legal order which necessarily
curtails that sovereignty in at least some respects. This tension

156 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
between two opposing forces, those of nationalism and of internationalism,
provides the central thread around which the author has woven a
rich tapestry of political and legal analysis.
Treaty Conflict and Political Contradiction will not satisfy those
readers who require nothing more than a textbook exposition of current
views on the topic of conflicting treaties. On finishing this book, the
reader may well be left with as many questions as answers. However, it
is not the author's aim to provide "answers" in the sense of predicting
judicial behavior when faced with a given question. Instead, the author's
goal, as he himself put it, is to ". . .attempt to learn about political
conflict in the international system by reading legal argument as
political and social theory." At this, the author succeeds admirably.
However, by its nature, this approach yields a product far more theoretical
than practical and, thus, will best serve the needs of the reader
who seeks perspective rather than case law.

1990]
BOOKS RECEIVED
HUMAN RIGHTS AND DEVELOPMENT. Edited by David P.
Forsythe.
New York: St. Martin's Press, 1989, 369 pp.
While separate issues of development and human rights have been
a theme of numerous debates in recent years, the interrelationship between
development and human rights have been left relatively unexamined.
As a result of an international conference sponsored by the
Human Rights Committee of the International Political Science Association,
Human Rights and Development attempts to address the difficulty
in effectuating human rights policies in developing countries.
In the past, "development" and "human rights" rhetoric has been
ambiguous and undefined. Traditionally, the view taken by politicians,
financiers, and multilateral organizations defines development as economic
development. Proponents of this concept assume that economic
development automatically enhances human rights conditions. In doing
so, they ignore civil, political and social aspects of development.
In a compilation of twenty articles, the authors reject the traditional
view of economic development and reiterate the importance of
political choice in implementing human rights. The first section, with
contributors from Mexico, Nigeria, India, Norway and USA, details
private sector initiatives in support of human rights. For example, in El
Salvador, a women's group formed in response to missing family members
has evolved into a group for political change. In the Philippines, a
network concerned with human rights and the medical profession has
brought pressure upon doctors who participate in torture, mistreatment
and political murder to discontinue their heinous acts.
The second section analyzes the public sector through foreign aid
policies in the United States, the Netherlands, West Germany, and the
United Nations. Multilateral organizations, while espousing human
rights policies, rarely practice what they preach. The United States has
repeatedly tied foreign aid to political objectives, which understandably,
has had little effect on human rights development. Only the Dutch
have taken an integrated approach, recognizing that civil/political
rights are intertwined with economic, social, and cultural rights.
A third section examines private and public sector initiatives in
four country studies: Turkey, the Sudan, India and Bangladesh. The
tradeoff between economic development and human rights is a recurring
theme throughout this publication. The country studies show how
the political structure of a nation has the greatest influence on human
rights, particularly, the ruling elites who make decisions about who will
benefit - or be excluded - from economic growth. The editor comments
that there is a pervading absence of human rights where ruling

158 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
elites have no sense of obligation to govern for the well-being of all.
The final section presents two overviews of the process of development
and human rights. Jack Donnelly concludes that repression is unavoidable
during development stages where economic growth is the
only goal. The reader is left with the question of whether human rights
violations are therefore necessary for economic development. Kathleen
Pritchard takes a holistic approach. Pritchard argues that economic development
is a means to achieve conditions where people can utilize all
of their human rights (not just socio-economic rights). Therefore, development
is naturally interrelated to human rights. Most interesting is
her conclusion that national government revenue, rather than gross national
product, is the catalyst for improving human rights conditions.
In his conclusion, the editor suggests that perhaps both Donnelly
and Pritchard are correct in their analyses. A commitment by the elite
to human rights obligations combined with national government revenue
may be the effecting force necessary to improve political/civil and
socio-economic conditions . In any event, the future of human rights is
dependent upon the private sector.
Although this study provides only a brief capsule, it is an informative
overview of the issues underlying human rights in developing countries.
Most notably, it illustrates the problems associated with human
rights issues and emphasizes how little we really do know about human
rights.

1990]
BOOKS RECEIVED
HONG KONG COUNT-DOWN. By George L. Hicks. Hong Kong:
Writers' & Publisher's Cooperative, 1989, 136 pp.
Hong Kong Count-Down is an informative and insightful collection
of previously published articles regarding the impending transfer of administrative
control of Hong Kong from Great Britain to China. Its
author, George Hicks, is an Australian economist who has resided in
Hong Kong since 1975; his current research interests are the non-economic
factors behind East Asian economic growth.
The author is highly critical of British policy concerning the transfer,
and predicts highly destructive consequences for Hong Kong beginning
in 1990. He predicts the collapse of the Hong Kong economy as
the direct result of a middle class, professional and entrepreneurial
"Brain Drain." This "Brain Drain" will be caused by a lack of confidence
in the ability of China to maintain Hong Kong's prosperity.
Noting that no one is predicting that Hong Kong will be better off
after the transfer, the author reasons that people in Hong Kong are
very skeptical of Hong Kong's official optimism. He contends that this
skepticism is quite reasonable due to many factors, among which he
includes a critique of the concept of "one country, two systems" which
he says will result in both economic and ideological tension. He further
predicts that skepticism is the only way to save Hong Kong from financial
collapse, if that is possible at all.
He recommends that everyone who can do so obtain passports
which will enable them to leave Hong Kong and resettle. He reasons
that only the threat of vast migrations will keep the Chinese government
in line.
The author predicts that without a check on its conduct, China
will ruin Hong Kong. This is specifically due to the fact that it will not
be able to separate politics from economics. While he posits that even
an authoritarian capitalism might keep Hong Kong a financial leader,
he predicts that the best that China can do is "Red Capitalism." He
defines "Red Capitalism" as an unorganized mess of social and economic
goals and ideas, which, most importantly, is incapable of separating
the political and economic spheres which is necessary to the financial
health of Hong Kong.
Regarding British responsibility for Hong Kong's situation, Hicks
contends that the British have abandoned the residents of Hong Kong,
not unlike the way the world abandoned Polish and German Jews in
World War II. While the British government has the power to ensure
that the citizens of Hong Kong have elections and a fair degree of autonomy
until the transfer in 1997, the British government has merely
been passive in the face of China's efforts to stifle freedom. He charges

160 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
that the British government has abandoned its commitment to Hong
Kong in the interest of better relations with Peking.
The author calls the situation in Hong Kong the tragedy of the
20th Century and predicts that China will learn a lesson about capitalism
while causing the complete ruin of Hong Kong.

ARTICLES
FOREIGN CORRUPT PRACTICES ACT: AMENDMENTS OF
1988
BILL SHAW*
I. INTRODUCTION ................................... 162
II. FOREIGN CORRUPT PRACTICES ACT OF 1977 .......... 162
III. HISTORY OF THE ACT AND AMENDMENTS .............. 163
A. Support for the Changes ....................... 164
B. Opposition to the Changes ..................... 165
C. Purpose of the Amendments .................... 166
IV. PROPOSED CHANGES TO THE ACT ................... 167
V. CLARIFICATION OF THE ACCOUNTING PROVISIONS OF THE
A C T ............................................. 16 8
A. Criticisms of the Prior Standards ................ 168
B. Actual Changes: Adoption of the Prudent Person
S tandard .................................... 168
C. Effect of the Changes ................ ......... 169
VI. CHANGE IN THE STANDARD OF CULPABILITY FOR THIRD
PARTY PAYMENTS .................................... 169
A. Criticisms of the Prior Standard ................ 169
1. A m biguity ............................... 169
2. Im proper Standard ....................... 170
B. Changes to the A ct ........................... 171
1. Senate and House Versions of the Amendments 171
2. Final Version of the Amendments ........... 172
C. Effect of the Changes ......................... 172
VII. CLARIFICATION OF THE "FACILITATING PAYMENTS" Ex-
C E P T IO N .. . .. . .. . . .. . .. .. . .. .. . .. . .. .. . . .. .. . . .. . 17 3
A. Criticisms of the Prior Provision ................ 173
B. Change: Exception for "Routine Governmental Actio
n " . ...................................... 17 3
C. Effect of the Change ........................... 174
* Professor, Legal Environment of Business, Graduate School of Business, The
University of Texas at Austin. The author wishes to acknowledge the research assis-
tance of Lori Davidson, third year law student, The University of Texas at Austin.
(161)

162 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
VIII. CONCLUSION: A NEW FOREIGN CORRUPT PRACTICES
A C T ............................................. 17 4
I. INTRODUCTION
After eleven years and several failed attempts at modifying the
Foreign Corrupt Practices Act of 1977 ("the Act"), both the Senate
and the House of Representatives have reached an agreement on a direction
for the antibribery law,' a direction on which the Reagan Administration
concurred. 3 Because of opposition to the changes, supporters
buried the amendments to the Act deep within the omnibus trade
bil , 4 which promises to boost American exports and alleviate a staggering
trade deficit.5 The changes made to the Foreign Corrupt Practices
Act were, to some observers, unnecessary and unjustified.' This
article describes the provisions of the original Act, the 1988 amendments,
and addresses the supporting and opposing arguments surrounding
the modifications. In view of the expressed purpose of these
changes, this article analyzes three of the more controversial provisions
in the Act and determines whether these modifications are necessary to
effect the expressed purpose.
II. FOREIGN CORRUPT PRACTICES ACT OF 1977
In response to discoveries of foreign corruption involving major
U.S. corporations, Congress passed the Foreign Corrupt Practices Act
of 1977 which imposed strict accounting standards and antibribery
prohibitions on American businesses. 7 While these scandals caused embarrassment
to the nation and jeopardized American foreign interests
1. Foreign Corrupt Practices Act, Pub. L. No. 95-213, 91 Stat. 1464 (1977)
(codified at 15 U.S.C. §§ 78a; 78m; 78dd-1; 78dd-2; 78ff (1982) [hereinafter Foreign
Corrupt Practices Act].
2. H.R. CONE. REP. No. 576, 100th Cong., 2d Sess. 916-925 (1988).
3. Waldman, Back to Corporate Payoffs Abroad?, N.Y. Times, Mar. 22, 1988,
sec. A, at 31, col. 1.
4. Rushford, Business Lobby Hit for "Bring-Back-Bribery" Bill, Legal Times,
No. 16, 1987, at 1, col. 1.
5. 134 CONG. REC. S4,216 (daily ed. Apr. 19, 1988) (statement of Senator Byrd).
6. Business Accounting and Foreign Trade Simplification Act: Joint Hearing on
S. 430 Before Subcomm. on International Finance and Monetary Policy and the Subcomm.
on Securities of the Senate Comm. on Banking, Housing, and Urban Affairs,
99th Cong., 2d Sess. 3 (1986) (Statement of Senator Proxmire) [hereinafter Senate
Hearing].
7. Rushford, supra note 4, at 1, col. 1.

1990]
FOREIGN CORRUPT PRACTICES ACT
abroad, 8 the Act itself has provoked as much controversy as these initial
improprieties. The current law is an amendment to the Securities
Exchange Act of 1934, and requires issuers of stock, that is, publiclyheld
corporations, to "make and keep books, records, and accounts,
which, in reasonable detail, accurately and fairly reflect the transactions
. . . of the issuer" and to "devise and maintain a system of internal
accounting controls sufficient to provide reasonable assurances" of
management control over the firm's assets. 9 These accounting requirements
provide a "paper trail" that leads to corporate accountability. 10
The accounting requirements also serve as a mechanism for detecting
illicit payments to foreign government officials which is the other major
focus of the Act. Under the antibribery provisions, the Act prohibits
payment by an issuer or a domestic concern to any foreign official, except
foreign employees "whose duties are essentially ministerial or clerical,"
for the purpose of obtaining or retaining business." Similarly,
the Act proscribes such payments to a third party while "knowing or
having reason to know" that the money will be used for the above pur-
pose. 12 Under the original Act, both civil and criminal sanctions attach
to violations of the accounting and antibribery provisions. 1 3
III. HISTORY OF THE ACT AND AMENDMENTS
Since the Act's passage in 1977, numerous attempts to modify it
have proved fruitless. 14 In 1981 and again in 1983, changes almost
identical to the present amendments surfaced, but died, in the legislature.
1 5 Supporters attempted different means by which to institute the
changes, for instance, by seeking to amend the Export Administration
Act rather than directly amend the Foreign Corrupt Practices Act."
Until now, however, such efforts were unsuccessful.
8. Omnibus Trade Legislation, vol. IV: Hearing on H.R. 4389 Before the Subcomm.
on International Economic Policy and Trade of the House Comm. on Foreign
Affairs, 99th Cong., 2d Sess. 3 (1986) (Statement of Representative Wolpe) [hereinafter
House Hearing].
9. Foreign Corrupt Practices Act, 15 U.S.C. § 78m (1982).
10. 134 CONG. REC. S3,067 (daily ed. Mar. 25, 1988) (statement of Senator
Proxmire).
11. Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, 78dd-2 (1982).
12. Id.
13. Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-2, 78ff (1982).
14. Graham, Viewpoints: Don't Dilute Law Curbing Bribery Overseas by American
Companies, L.A. Times, June 15, 1986, sec. 4, at 3, col. 1.
15. Senate Hearing, supra note 6, at 1 (statement of Senator Heinz).
16. Gerth, Easing of Curbs in Law on Foreign Bribes Sought, N.Y. Times, April
16, 1986, sec. D, at 24, col. 1.

164 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
A. Support for the Changes
The amendment's supporters point to the unnecessary ambiguities
as justifying the changes. In their view, uncertainty under the law has
increased the cost of international business, made firms exceedingly
cautious, and prompted businesses to forego legitimate foreign opportunities
for fear of violating the law. 17 American firms alone have borne
the costs of the Act, and supporters contend some costs could be eliminated
with clarification." i These costs include the allocation of resources
to comply with the accounting standards, lost business, and
changes in business practices to meet the imposed standards. 1 9 Statutory
vagueness has caused firms to err on the side of excess to protect
themselves against violations of the Act. 2 "
The strongest criticism of the Act is that it puts American exporters,
particularly small and medium-sized exporters, at a competitive
disadvantage in world markets. 2 Others, however, contend that there is
no evidence of an adverse effect on American exports. 22 In a comparative
study of markets, John Graham found the Foreign Corrupt Practices
Act had no negative effect on export performance in markets
where the Act is considered a trade disincentive and those where it is
not. 23 Graham does admit, however, that the results of his study may
be the product of factors outside of the Act. According to Graham, the
lack of a competitive disadvantage to American exporters may result
from the loss of business by some American firms to other American
firms; from the fact that some intermediaries never actually remit bribery
money to foreign officials; or from the fact that American firms
could have attained the business without the payoffs. 2 4 In each of these
cases, the Foreign Corrupt Practices Act would not have an impact on
the foreign transactions. Still, other studies, such as a 1981 General
Accounting Office report on the Foreign Corrupt Practices Act, docu-
17. Senate Hearing, supra note 6, at 44 (statement of Malcolm Baldridge, Secretary
of Commerce).
18. H. Weisberg & E. Reichenberg, Research Report, The Price of Ambiguity:
More Than Three Years Under the Foreign Corrupt Practices Act, Chamber of Commerce
of the U.S. 2, 30 (1981).
19. Id. at 13.
20. Id. at 1-2.
21. Graham, supra note 14 sec. 4, at 3, col. 1.
22. 134 CONG. REC. S3,068 (daily ed. Mar. 25, 1988) (statement of Senator
Proxmire).
23. Graham, The Foreign Corrupt Practices Act: A New Perspective, 15 J. INT'L
BuS. STUDIES 107 (Win. 1984).
24. Graham, supra note 14, sec. 4 at 3, col. 1.

1990]
FOREIGN CORRUPT PRACTICES ACT
ment the deterrent effect of the Act. 25 Given the complexity of issues
that might influence trade, both sides tend to agree that the impact of
the Act on exports is difficult to measure with accuracy, but each side
claims empirical support for its position. 2 "
B. Opposition to the Changes
Opponents of the modifications focus on the effectiveness of the
current Act. Stating that the law has stopped the use of slush funds
and deterred corruption of foreign officials, Senator Proxmire points to
the policing aspects of the Act, that is, the fear of prosecution for violating
the Act. 27 Supporters of the amendments argued that the same
fear that deters corruption also deters the entrance into foreign trade
by American firms.
Other opponents of the amendments claim the Foreign Corrupt
Practices Act represents the moral judgment of the nation that bribery
is wrong and that in the long run, it is in our interest to prevent it. 28
The loss of business by American firms is to be expected and accepted
as a cost of that position. In this sense, our success in the free market
depends on others' perception of our ability to produce quality goods
and services without corruption. 29 Under the current Foreign Corrupt
Practices Act, that perception is reinforced. In fact, amendment opponents
claim the law has strengthened the integrity of American trade
since American goods presently are bought on the basis of quality and
price, not illegal payments." °
Supporters of the 1977 Act say that the amendments return to a
"soft line" on bribery, and that this will undermine confidence in
American integrity and American goods. 31 Corruption in foreign governments
tends to destabilize these governments, increase the threat to
American interests there, and undercut our ability to do business in
those nations. 32 Those who support the Act in its original form believe
that strong antibribery standards will minimize foreign corruption and
25. The Antibribery Act Splits Executives, Bus. WK., Sept. 19, 1983, at 16.
26. Brownstein, Financial Institutions Focus: Bribery Lessons, NAT'S J., Oct. 1,
1983, at 2019.
27. Senate Hearing, supra note 6, at 21 (statement of Senator Proxmire).
28. Burton, Business Forum: A Guarantee for Long-Term Trouble, N.Y. Times,
Mar. 20, 1983, sec. 3, at 2, col. 3.
29. Id.
30. 134 CONG. REc. S3,067-68 (dailey ed. Mar, 23, 1988) (statement of Senator
Proxmire).
31. Senate Hearing, supra note 6, at 20-21 (statement of Senator Proxmire).
32. Burton, supra note 4.

166 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
result in long run benefits for the United States as a trade nation.
Those who advocate change, like Representative Mica, say we need
''sensible legislation," but they pledge that they are not advocating
bribery or corruption. 33 Opponents answer, "If it ain't broke ... don't
fix it." '34
C. Purpose of the Amendments
Even those who oppose changes to the Act agree that clarification
of its provisions is appropriate." 6 Differences arise, however, regarding
the scope and extent of the changes. The stated purpose of the amendments
is to clarify certain provisions of the Act; to clarify standards of
conduct for business persons; and to provide more certainty in
enforcement. 6
The executive branch has not enforced the law vigorously, which,
in itself, may be sufficient reason to amend the Act. Primary enforcement
of the accounting standards lies with the Securities and Exchange
Commission. The Commission may bring action under the antibribery
provisions as well" The Justice Department, however, retains primary
jurisdiction over the enforcement of the antibribery provisions. 38
According to the Justice Department, there are fewer than 20 complaints
of violations involving bribery each year. Bribery cases are defended
vigorously and since the evidence is overseas, these cases present
unique investigative problems. 39 Still the policy of the Justice Department
remains to investigate all serious allegations of criminal behavior,
and if the evidence develops, to bring suit. 40
In addition to more efficient administration of the Act, legislators
hope that clarification will lessen "unnecessary paperwork" and alleviate
"needless concerns" about criminal liability. 4 ' For businesses, if the
ambiguities in the Act surrounding the accounting and antibribery
33. House Hearing, supra note 8, at 16 (statement of Representative Mica).
34. Rushford, supra note 4.
35. Senate Hearing, supra note 6, at 40 (statement of Senator Dixon); The Antibribrery
Act Splits Executives, supra note 25, at 16.
36. Senate Hearing, supra note 6, at 2 (statement of Senator Heinz).
37. Id. at 57-63 (statement of Edward Fleischman, Commissioner, Securities and
Exchange Commission).
38. Id. at 64-74 (statement of John C. Keenex, Deputy Assistant Attorney General,
Criminal Division, Department of Justice).
39. Gerth, Easing of Bribery Law Under Fire, N.Y. Times Apr. 30, 1984, sec. D,
at 1, col. 3.
40. Id.
41. 134 CONG. REC. S4,225 (daily ed. April, 19, 1988).

1990]
FOREIGN CORRUPT PRACTICES ACT
standards are resolved, these modifications may bring new opportunities
for foreign investment. At the same time, legislators recognize that
the amendments must proscribe bribery while improving the competitive
position of U.S. firms in global markets. 42
IV. PROPOSED CHANGES TO THE ACT
Under a scheme of clarification, the amendments make a number
of subtle, but significant, modifications to the Act. Changes in the accounting
provisions limit criminal liability to knowing falsifications of
accounting records, define reasonable detail and assurances by a prudent
person standard, and require an issuer who owns 50% or less of
the voting stock to exercise good faith influence on a subsidiary to assure
the subsidiary's compliance with the accounting provisions. 4 "
Amendments to the antibribery provisions replace the controversial
"knowing or having reason to know" standard with the requirement
that U.S. firms have actual knowledge that a third person may
bribe a foreign official. Further, these amendments (1) define prohibited
payments as those used to induce a foreign official to violate legal
duties, (2) clarify the types of "facilitating payments" that are allowed,
and (3) provide an affirmative defense for payments that are lawful in
the foreign country and payments that constitute reasonable and bona
fide expenditures directly related to business conducted in that
country. 44
Similarly, the modifications repeal the Eckhardt amendment.
Under the new Act, conviction of the company is no longer necessary
for prosecution of employees or agents who violate its provisions.
Other changes include increased criminal and civil sanctions, new civil
subpoena authority in the Justice Department, and a procedure by
which the Attorney General can issue guidelines regarding conduct
that may violate the Act. 46 Lastly, the amendments require the President
to pursue an international agreement to ban bribery abroad. 7
Having examined the major provisions of the new Act, this article
will focus on three problems that principally account for the impetus to
amend the Act: the "reasonable detail" and "reasonable assurances"
42. Senate Hearing, sitpra note 6, at 42 (statement of Senator D'Amato).
43. Foreign Corrupt Practices Act (amendments), Pub. L. 100-418, 102 Stat.
1415 (1988).
44. Id.
45. H.R. CONF. REP. No. 576, supra note 2, at 923.
46. Foreign Corrupt Practices Act, supra note 43, at 1417-1423.
47. Id. at 1424-1425.
4 5

168 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
standards; the "reason to know" standard of culpability; and the problem
of "facilitating payments."
V. CLARIFICATION OF THE ACCOUNTING PROVISIONS OF THE ACT
A. Criticisms of the Prior Standards
Criticism of the accounting provisions of the Foreign Corrupt
Practices Act of 1977 focuses on the lack of clarity and certainty
caused by the standards. Prior to the amendments, it was possible to
incur liability for just one inaccurate record. 48 Uncertainty as to the
interpretation of the provisions resulted in a proliferation of documentation
and increased accounting costs. 49 In fact, concern over enforcement
of technical and insignificant errors in records led to overcompliance
without necessarily advancing the purposes of the statute. 50 A
1981 General Accounting Office study found that, as a result of compliance,
accounting costs increased as much as 35 percent for many
companies and significantly more than that for some. 51 This increase in
accounting costs, however, did bring about certain positive results.
These firms received benefits from the mandated internal control, such
as, better management capability, more reliable data, and better information
for decision-making. 52
B. Actual Changes: Adoption of the Prudent Person Standard
The 1988 amendments to the accounting standards of the Act are
minor, yet significant in responding to these increasing costs. While the
original Act required "reasonable detail" in recordkeeping and "reasonable
assurances" from internal accounting controls, 53 legislators
failed to delineate the level of precision required under these provisions.
Business people were unable to determine what would be considered
reasonable in the eyes of the Securities and Exchange Commission
("SEC"). 54 As a result, the new provisions define "reasonable detail"
48. Senate Hearing, supra note 6, at 60 (statement of Edward Fleischman, Commissioner,
Securities and Exchange Commission).
49. House Hearing, supra note 8, at 34-35 (statement of the Honorable Alexander
H. Good, Director General, U.S. and Foreign Commerce Service).
50. Senate Hearing, supra note 6, at 74 (statement of John C. Kenny, Deputy
Assistant Attorney General, Criminal Division, Department of Justice).
51. House Hearing, supra note 8, at 34 (statement of the Honorable Alexander
H. Good, Director General, U.S. and Foreign Commerce Service).
52. Burton, supra note 28.
53. Foreign Corrupt Practices Act, 15 U.S.C. § 78m (1982).
54. House Hearing, supra note 8, at 2 (statement of Representative Roth).

1990]
FOREIGN CORRUPT PRACTICES ACT
and "reasonable assurances" at such "level of detail and degree of assurances
as would satisfy prudent officials in the conduct of.their own
affairs." 55 Similarly, the 1988 amendments limit criminal liability to
those who "knowingly" circumvent or fail to implement a system of
internal accounting controls or "knowingly" falsify books or records. 56
The SEC reports that enforcement of the original Act targeted
knowing and reckless conduct. The Commission, however, tolerated
certain deviations from the Act based on a rational cost-benefit analysis.
57 The new amendments' definition of "reasonable", and the limit on
criminal liability, more accurately codifies this policy. The SEC now
operates under congressional mandate rather than administrative
discretion.
C. Effect of the Changes
The effect of these changes will be less ambiguity in compliance.
By the imposition of the "prudent person" standard, a standard with
which businesses and courts alike are familiar, legislators expect that
the uncertainty that has been experienced heretofore will be replaced
with more efficient systems. With these relatively minor changes in the
1977 Act, the costs associated with maintaining and controlling accounting
records will decrease without offending the integrity of the
Act itself. If these modifications result in greater certainty for businesses
in the conduct of their affairs, we will lose very little, if anything,
in terms of carrying out the intent of the original Act.
VI. CHANGE IN THE STANDARD OF CULPABILITY FOR THIRD PARTY
PAYMENTS
A. Criticisms of the Prior Standard
1. Ambiguity
Like the accounting standards of the Act, the "reason to know"
provision that imposed liability for third party payments, caused considerable
anxiety among business executives. The difficulty lies in assuring
that U.S. employees or agents are not making illegal payments
abroad. 58 Under the 1977 Act, critics claim that American firms are
55. H.R. CONF. REP. No. 576, supra note 2, at 916.
56. Id.
57. Senate Hearing, supra note 6, at 58-59 (statement of Edward Fleischman,
Commissioner , Securities and Exchange Commission).
58. Brownstein, supra note 26, at 2019.

170 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
asked to determine with certainty that a third person will not engage in
illicit conduct, risking criminal prosecution if their judgment about that
person is wrong. 5 9 Congress was strongly influenced by testimony that
U.S. citizens should not be held strictly liable for the actions of foreign
agents. 60 To many, however, this standard is unnecessarily ambiguous,
and some commentators assert that the purpose of the Act could be
met by a more objective and predictable standard. 6 1 Under Justice Department
policy, the "reason to know" standard was never used as a
basis for prosecution, 62 but prior to the amendments, the possibility existed
that it could be so used.
Despite such provisions, due process requires that the legislature
give reasonable notice of what conduct is prohibited. 3 Those who supported
the 1988 amendments argued that the original Act did not'give
such notice, and, therefore, conceivably offended the constitutional
guarantee of due process. Douglas Riggs, General Counsel for the U.S.
Department of Commerce, related that under the 1977 Act, an executive
could be liable for an unauthorized payment simply because he
knew that payments are common in many parts of the world. 64 While
liability probably would not lie in such a scenario, the illustration
shows the breadth of the provision and substantiates the fear that executives
experience under the Act.
2. Improper Standard
Perhaps the strongest criticism of the "reason to know" standard is
that it is not a proper basis for imposing criminal liability carrying serious
felony penalties. 65 This standard has no analogue in domestic bribery
law. Thus, liability could exist for payments to foreign officials
where no liability would exist if the payments were made to U.S. officials.
6 Steven Brogan testified that liability under domestic law de-
59. House Hearing, supra note 8, at 76 (statement of Calman Cohan, Vice President,
Emergency Committee for American Trade).
60. Senate Hearing, supra note 6, at 54 (statement of Malcolm Baldridge, Secretary
of Commerce).
61. Id. at 45.
62. Id. at 65 (statement of John C. Kenney, Deputy Assistant Attorney General,
Criminal Division, Department of Justice).
63. House Hearing, supra note 8, at 21 (statement of Representative Berman).
64. Fanning, On the Docket: Am I My Brother's Keeper?, FORBES, May 4, 1987,
at 66.
65. House Hearing, supra note 8, at 97-98 (statement of Steven J. Brogan, Partner,
Jones, Day, Reavis, and Pogue).
66. Id. at 96.

1990]
FOREIGN CORRUPT PRACTICES ACT
pends on the person's status as an accomplice to the intermediary. To
be liable as an accomplice, the person must have acted with the intent
that the crime be committed. 67 The "reason to know" standard does
not require an intent that the crime be committed. Thus, U.S. firms
confront serious criminal penalties for conduct that is merely negligent;
such an outcome is inconsistent with modern criminal law. 68 Some
commentators have suggested, however, that the "reason to know"
standard, as interpreted by the courts, is tantamount to knowledge or
intent. They further contended that recklessness is also equated with
intent. 6 9
Lastly, some authorities have argued that the criminal liability imposed
for negligent conduct is modified by the word "corruptly" which
actually limits liability to circumstances where there is intent .7 This
interpretation, however, intensified the confusion over the provisions of
the original Act. If the word "corruptly" requires evil intent, then the
"reason to know" standard becomes unnecessary, if not contradictory. 71
B. Changes to the Act
1. Senate and House Versions of the Amendments
In view of these criticisms, the Senate version of the amendment
made it unlawful to direct or authorize expressly or by "course of conduct"
a third party to make an improper payment. 72 While the proposed
amendment did not define "course of conduct, '7 3 the Senate expressed
grave concern over the problem of an executive who sticks his
head "in the sand" and consciously ignores facts that indicate a bribe
will be paid. 74 In fact, Senator Proxmire, who opposed any change in
the Act, contended that no corporate official would expressly authorize
a bribe or even engage in a course of conduct that would connect that
official with a bribe. 5 In the wake of concerns that executives might
avoid liability by disregarding particular circumstances, as well as the
67. Id. at 95.
68. Id. at 97.
69. Elden & Sableman, Negligence Is Not Corruption: The Scienter Requirement
of the Foreign Corrupt Practices Act, 49 GEo. WASH. L. REV. 819, 828-837 (1981).
70. Id. at 823.
71. House Hearing, supra note 8, at 100-101 (statement of Steven J. Brogan,
Partner, Jones, Day, Reavis, and Pogue).
72. H.R. CONF. REP. No. S10,0004 (daily ed. July 15, 1987).
73. Id.
74. 133 CONG. REC. S10,0004 (daily ed. July 15, 1987).
75. 134 CONG. REC. S3,067 (daily ed. Mar. 25, 1988) (statement by Senator
Proxmire).

172 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
overriding purpose of clarification, the Senate was prompted to make
clear that such a "course of conduct" would not relieve one of
liability. 76
The House bill, on the other hand, imposed criminal liability on
persons who make payments to third parties knowing that the payment
will be used as a bribe. 7 7 The knowledge standard employed by the
House version encompassed awareness, substantial certainty, or con-
scious disregard for a high probability that a bribe would be paid.
Also under the House bill, civil liability would attach where the payment
is made while "recklessly disregarding" the fact that it would be
used as a bribe. The term "reckless disregard" was defined as awareness
and disregard of a substantial risk. 9
2. Final Version of the Amendments
After committee consideration, the Senate conceded to the House.
The final version employs a knowledge standard which includes a conscious
purpose to avoid learning the truth about the payment, but
deletes the "reckless disregard" element. 8 ° Since the knowledge standard
typically encompasses conscious disregard of facts which would
alert a reasonable person to probable violations, 81 congressional concern
over this problem is largely alleviated by the standard adopted. The
knowledge standard encompasses actual knowledge, as distinguished
from the "reason to know" standard which the committee likened to a
negligence standard. 82 For further clarity, the committee expressly
stated that mere negligence or inadvertance is not a basis for liability. 3
C. Effect of the Changes
Primarily aimed at alleviating the uncertainty that clouds the antibribery
provisions of the 1977 Act, these changes in the required degree
of culpability should stimulate foreign trade by small exporters
who refrained from all activity in foreign lands for fear of violating the
76. H.R. CONF. REP. No. 576, supra note 2, at 919.
77. Id.
78. Id.
79. Id.
80. Id.
81. Senate Hearing, supra note 6, at 100 (statement of Allen B. Green, Chairman,
Foreign Corrupt Practices Act Working Group, International Procurement Committee,
Section of Public Contract Law, American Bar Association).
82. Id.
83. H.R. CONF. REP. No. 576, supra note 2, at 920.
7 8

1990]
FOREIGN CORRUPT PRACTICES ACT
Act. In addition, larger American businesses will benefit from greater
predictability in the enforcement of these provisions.
VII. CLARIFICATION OF "FACILITATING PAYMENTS" EXCEPTION
A. Criticisms of the Prior Provision
Under the original Act, payments to foreign employees whose duties
were "ministerial or clerical" were not prohibited. 4 U.S. corporate
executives view these payments, often called "facilitating" or "grease"
payments, as necessary to conduct business in a foreign country. Since
American executives cannot be sure whether a foreign official's duties
are purely clerical, this exception alleviates very little uncertainty in
the enforcement of the Act. 85 While the nature of U.S. officials' duties
is sometimes difficult to ascertain, the problem is magnified in the case
of foreign government officials whose duties are rarely clearly defined
or articulated. 8 " The 1977 Act nevertheless required an executive to
determine whether the foreign official's duties were in fact "essentially
clerical or ministerial", risking criminal liability if the determination
was erroneous. 8 7
B. Change: Exception for "Routine Governmental Action"
The amendments to the Act shift the focus from the person to
whom payment was made to the purpose for which the payment was
made. Specifically, the inquiry is whether the purpose of the payment
falls within those permitted and whether such a payment is customary
in that foreign country to facilitate or expedite performance." 8 To accomplish
this clarification, the amendments create an exception for
"routine governmental action," 89 such that payments for this type of
expediting activity are not prohibited. Under the new provisions, "routine
governmental action" includes obtaining permits, processing government
papers, providing police protection and mail pickup, providing
utility service, loading and unloading cargo, and "actions of a similar
84. Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, 78dd-2 (1982).
85. House Hearing, supra note 8, at 31 (statement of the Honorable Alexander
H. Good, Director General, U.S. and Foreign Commerce Service).
86. House Hearing, supra note 8, at 79 (statement of Calman Cohan, Vice President,
Emergency Committee for American Trade).
87. Senate Hearing, supra note 6, at 45 (statement of Malcolm Baldridge, Secretary
of Commerce).
88. House Hearing, supra note 8, at 80 (statement of Calman Cohan, Vice President,
Emergency Committee for American Trade).
89. H.R. CONF. REP. No. 576, supra note 2, at 921.

174 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
nature." 9 The amendments clearly state that such routine action does
not include any decision by a foreign official involving the awarding of
new business or the continuation of business. 1
C. Effect of the Change
Clarification of the exception, will alleviate much foreign trade
disincentive for American firms. Many executives believe that such
''grease payments" are necessary to accomplish even the smallest of
tasks in some countries. If they are sure that such "facilitating payments"
will not result in criminal prosecution, foreign trade may become
a more attractive alternative.
VIII. CONCLUSION: A NEW FOREIGN CORRUPT PRACTICES ACT
The amendments to the Foreign Corrupt Practices Act promise to
alleviate some of the uncertainty surrounding the Act since its inception.
While opponents of the changes contend that the Act in its present
form has been effective in stamping out foreign corruption, supporters
claim the Act is costing America much in terms of lost trade
and wasted resources. Since American firms would prefer to do business
on a purely competitive basis, they support reasonable efforts to
eliminate bribery, 2 but, to many firms, the existing Foreign Corrupt
Practices Act is anything but reasonable.
Addressing these concerns, Congress effected subtle, but significant,
changes to the prior law. With clarification of the accounting
standards, accounting costs for U.S. businesses are expected to become
more manageable, or at least less burdensome. Similarly, the changes
to the antibribery provisions of the original Act promise to alleviate
some of the uncertainty with regard to compliance. Specifically, Congress
replaced the "reason to know" provisions with a knowledge standard
of culpability. This standard encompasses a conscious disregard or
deliberate ignorance of known facts. Finally, the amendments to the
Act clarify the exception for "routine governmental action" by clearly
defining what activities fall within this category, thereby promoting
even greater certainty and incentive for American businesses abroad.
90. Id. at 331, 336.
91. Id.
92. H. Weisberg & E. Reichengerg, supra note 18, at 30.

UNITED STATES v. VERDUGO-URQUIDEZ, THE FOURTH
AMENDMENT HAS LIMITED APPLICABILITY TO ALIENS
ABROAD
MICHELE LEVY COHEN*
It is generally accepted that the fourth amendment and exclusionary
rule apply to searches and seizures by United States officials
against American citizens, even when the operation takes place outside
the United States. Any evidence obtained in violation of the fourth
amendment will be excluded at trial.' It is also accepted that the exclusionary
rule generally does not apply to searches conducted entirely by
foreign officials. 2 Until recently it was unclear whether the fourth
amendment applies when United States officials, acting alone or in conjuncture
with foreign officials, seize evidence from foreign defendants
and then attempt to use the evidence at trial in the United States. 3 The
Circuit courts differed in their interpretations of the Constitution and a
solution to this problem.' The Supreme Court resolved this situation in
United States v. Verdugo-Urquidez, 5 decided in February 1990. The
Supreme Court, in an opinion authored by Chief Justice Rehnquist,
held that the fourth amendment does not apply when United States
officials, acting outside the United States, search and seize property
owned by a nonresident alien. 6
This decision is one of importance for several reasons. First, it set-
* Attorney, Ward, Klein & Miller; Member, Maryland Bar; B.A. 1986, Ameri-
can University; J.D. 1990, University of Maryland School of Law.
1. See Weeks v. United States, 232 U.S. 383 (1914). This case established the
exclusionary rule prohibiting the introduction of evidence illegally seized by federal
agents for use in the federal courts. The exclusionary rule was expanded in Mapp v.
Ohio, 367 U.S. 643 (1961) to apply to evidence introduced in state courts. Here the
Supreme Court implied that the rule was a necessary corollary to the fourth amendment
and was therefore incorporated into the fourteenth amendment. See Mapp, at
655-657.
2. See, e.g., United States v. Mount, 757 F.2d 1315 (D.C. Cir. 1985); United
States v. Hensel, 699 F.2d 18 (1st. Cir. 1983), cert. denied, 461 U.S. 958 (1983).
3. The decision in United States v. Verdugo-Urquidez did not address the issue of
searches and seizures made by United States officials while in international waters. It
only involved searches actually made in foreign countries.
4. "Courts that have considered the question of how much American participation
in a foreign search and seizure is required to mandate application of the exclusionary
rule have not been unanimous in their choice of the precise test to be applied." United
States v. Morrow, 537 F.2d 120 (5th Cir. 1976), cert. denied, 430 U.S. 956 (1977).
5. 110 S. Ct. 1056 (1990).
6. Id. at 1059.
(175)

176 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
ties a dispute that has raged among the Circuit courts for years 7 and
definitively answers the question of whether information collected from
a nonresident, outside the United States, may in fact be used at trial in
the United States. The decision also serves as yet another limitation on
the protections of the fourth amendment. Finally, the decision has a
substantial ramification on the international aspects of the "war on
drugs." There have been several United States-foreign joint law enforcement
operations in recent years as a result of increased drug trafficking
which frequently crosses national boundaries. 8 Given the worldwide
scope of this problem and the existing momentum in the United
States for a crackdown on narcotics importation, it is safe to assume
that United States law enforcement officials will continue to conduct
such operations with their foreign counterparts. The Verdugo-Urquidez
decision suggests that these operations now have judicial approval.
I. PRIOR METHODS OF CIRCUMVENTING THE WARRANT
REQUIREMENTS OF THE FOURTH AMENDMENT
Prior to the decision in United States v. Verdugo-Urquidez,
United States officials acting abroad were required to comply with the
warrant requirements of the fourth amendment. Warrants have no legal
effect outside the boundaries of the United States. Absent exigent
circumstances, officials were required to obtain a search warrant from a
United States magistrate, demonstrating the necessary level of probable
cause. If officials failed to obtain the necessary warrant, a nonresident
defendant facing trial in the United States was able to successfully
suppress any evidence found on his property during the
warrantless search.
However, the exclusionary rule generally did not require the suppression
of evidence seized by foreign police agents and later turned
over to United States officials. This evidence is admissible in United
States courts except where foreign police conduct shocks the judicial
conscience, American agents participated in the foreign search, or foreign
officers acted as agents for their American counterparts. 9 This
principle was generally accepted by all federal courts, 10 the rationale
7. See supra note 4.
8. See, e.g., United States v. Hensel, 669 F.2d 18 (1st Cir. 1983); United States v.
Paternina-Vergara, 749 F.2d 993 (2nd Cir. 1984), cert. denied, 469 U.S. 1217 (1985);
United States v. Peterson, 812 F.2d 486 (9th Cir. 1986).
9. Hensel, 699 F.2d at 25.
10. See, e.g., United States v. Molina-Chacon, 627 F. Supp. 1253 (E.D.N.Y.
1986); United States v. Stano, 690 F. Supp (E.D.Pa. 1988); United States v. Mount,
757 F.2d 1315 (D.C. Cir. 1985); United States v. Peterson, 812 F.2d 487 (9th Cir.

1990]
U.S. v. VERDUGO-URQUIDEZ
being that the exclusionary rule is meant to serve as a deterrent to
unlawful conduct by American officials." It has no such effect on foreign
officials. 12 However, if the foreign search falls within one of the
three exceptions listed above, a court will be justified in refusing to
admit the illegally obtained evidence.
A. Conduct By Foreign Officials That Shocks The Conscience
Most courts refuse to accept evidence obtained by foreign officials
abroad if the officers' actions are so outrageous that they shock the
judicial conscience. The issue was first raised in Ker v. Illinois" 3 , where
United States officials learned that Ker had fled to Peru, following embezzlement
and larceny charges. Instead of making a demand on the
Peruvian government for Ker's surrender, American officials forcibly
arrested Ker and transported him to the United States for trial. Ker
charged that the abduction denied him of his constitutional right to due
process of law. 4 The Supreme Court held that "forcible abduction is
no sufficient reason why the party should not answer when brought
within the jurisdiction of the court which has the right to try him for
[an] offense." 5 Due process was satisfied if the defendant received a
fair and impartial trial. 6 The Supreme Court unequivocally reaffirmed
its position in Frisbie v. Collins." In Frisbie, the defendant claimed
Michigan state officials forcibly and violently abducted him from Illinois
and took him back to Michigan to stand trial for murder. The
Court held that "this court has never departed from the rule [in Ker]
that the power of a court to try a person for crime is not impaired by
the fact that he had been brought within the court's jurisdiction by
reason of a 'forcible abduction.' "18
The Court in Rochin v. California" 9 broadened the "Ker-Frisbie"
1986).
11. See Mount, 757 F.2d at 1317. "The principal purpose of the exclusionary rule
is the deterrence of unlawful police conduct .. . [thus] foster[ing] obedience to the
mandate of fourth amendment."
12. "In circumstances where application of the rule does not result in appreciable
deterrence, its use is not warranted." Id. at 1317.
13. 119 U.S. 436 (1886).
14. Id. at 439-440.
15. Id. at 444. Note that the Court declined to answer the question of how forcible
and violent the seizure and transfer must be before a defendant can use this conduct
as a defense. The Court left this decision up to the state courts and common law.
16. Id. at 440.
17. 342 U.S. 519 (1952).
18. Id. at 522.,
19. 342 U.S. 165 (1952).

178 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
doctrine which held that the Due Process Clause of the fifth and fourteenth
amendments required only a fair trial and did not relate to the
methods in which the defendant was brought to trial, by setting aside a
state court conviction resting on evidence obtained through police brutality.
In Rochin, after an unsuccessful attempt to-forcibly extract capsules
swallowed by the defendant, state officials brought Rochin to a
hospital where an emetic was forced into his stomach, causing him to
vomit the capsules. 2 0 The capsules were later found to contain morphine.
1 Rochin claimed this treatment violated his right to due process.
2 " The Court held that the Due Process Clause required it to "exercise
[judgment] over the whole course of the proceedings ... in order
to ascertain whether they offend . .. decency and fairness . . .Due
process of law is a summarized constitutional guarantee of respect for
those [fundamental] personal immunities." 2 3 Several cases since
Rochin applied the principle that due process extends to the pretrial
2 4
conduct of law enforcement authorities.
Note, as the above cited cases suggest, that although the "shock
the conscience" doctrine began as a bar against improper conduct by
United States officials, courts extended it to apply to passive conduct
by foreign officials as well. However, not all improper conduct by officials
was enough to warrant dismissal of a case under the exclusionary
rule. 2 5 Rather, the exception was fairly narrow in that the improper
20. Id.
21. Id.
22. Id.
23. Id. at 169, citing Malinski v. New York, 324 U.S. 401, 416-417 (1944). Note
that the court held that the conduct complained of must "offend [more] than some
fastidious squeamishness ... This [must be] conduct that shocks the conscience." Id. at
172.
24. See, e.g., United States v. Russell, 411 U.S. 423 (1973).
The Second Circuit applied Rochin to its holding in United States v. Toscanino,
500 F.2d 267 (2nd Cir. 1974). Toscanino, an Italian national, was convicted of conspiracy
to import and distribute narcotics into the United States. The court reversed his
conviction because the conduct of the arresting officers, who kidnapped Toscanino from
Uruguay and tortured him, was so outrageous as to shock the judicial conscience. Toscanino,
500 F.2d at 274.
See also United States v. Fernandez-Caro, 677 F.Supp. 893 (S.D.Tex. 1987)(conduct
of foreign officials in beating defendant and applying electrical shocks to his wet
body, among other things, was sufficiently shocking to require suppression of evidence);
United States v. Morrow, 537 F.2d 120 (5th Cir. 1976), cert. denied, 430 U.S. 956
(1977); United States v. Maher, 645 F.2d 780 (9th Cir. 1981).
25. There are several Supreme Court decisions that have reaffirmed the Ker-Frisbie
doctrine. See, e.g., INS v. Lopez-Mendoza, 468 U.S. 1032 (1984); United States v.
Crews, 445 U.S. 463 (1980); Stone v. Powell, 428 U.S. 465 (1976). In fact, the Second

1990]
conduct had to be excessive.
U.S. v. VERDUGO-URQUIDEZ
B. Joint Ventures Between United States And Foreign Officials
The second major exception to the rule admitting evidence illegally
seized by foreign officials occurred when American officials participated
in the search to the extent that the search became a joint
venture. 2 " This exception was accepted among all the circuits, although
each circuit had its own way of analyzing the issue. 27 There was no set
standard for determining when there was sufficient participation by
American officials to constitute a joint venture. 28 However, an overview
of prior case law suggests that the courts were reluctant to find that a
joint venture had taken place.
The seminal case is Stonehill v. United States, 29 in which the defendant
allegedly avoided paying income tax. American and Philippine
officials held meetings at the home of the United States' official in
preparation for a search in the Philippines. 3 0 The Americans made suggestions
concerning the search and provided Philippine officials with a
diagram and a memorandum concerning two targeted buildings. 1 Additionally,
the United States agents located the most significant piece
of evidence during the search of a warehouse. 32 Despite this level of
involvement, the Ninth Circuit held that a joint venture did not exist
between the United States and the Philippines. 33
In United States v. Marzano, 3 4 the Seventh Circuit adopted the
Circuit later clarified its holding in United States ex rel. Lujan v. Gengler, 510 F.2d 62
(2nd Cir.) cert. denied, 421 U.S. 1001 (1975) restricting the rule in Toscanino to cases
involving "the use of torture, brutality and similar outrageous conduct." Lujan, 510
F.2d at 65-66.
26. Stonehill v. United States, 405 F.2d 738, 743 (9th Cir. 1968), cert. denied,
395 U.S. 960 (1969).
27. See, e.g., United States v. Rosenthal, 793 F.2d 1214, 1231 (1 1th Cir.), modified,
801 F.2d 378 (1986), cert. denied, 480 U.S. 919 (1987); Paternina-Vergara, 749
F.2d at 998; United States v. Hawkins, 661 F.2d 436, 455-56 (5th Cir. 1981); United
States v. Marzano, 537 F.2d 257, 269-71 (7th Cir. 1976), cert. denied, 429 U.S. 1038
(1977).
28. The court in Morrow observed, "The . . . courts that have considered the
question of how much American participation in a foreign search and seizure is required
to mandate application of the exclusionary rule have not been unanimous in
their choice of the precise test to be applied ... " Morrow, 537 F.2d at 140.
29. 405 F.2d 738 (9th Cir. 1968), cert. denied, 395 U.S. 960 (1969).
30. Id.
31. Id.
32. Id.
33. Id. at 746.
34. 537 F.2d 257 (7th Cir. 1976).

180 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
reasoning in Stonehill. Here, the court held that "providing information
to a foreign functionary is not sufficient involvement for the Government
to be considered a participant in acts the foreign functionary
takes based on that information."a The court further noted that
merely being present during a search does not make federal officers
participants. 36
The Ninth Circuit found that a joint venture existed in United
States v. Peterson. 7 The defendants in Peterson were convicted of possession
of marijuana in United States customs waters. 3 The Ninth Circuit
held that the degree of participation between United States and
Philippine officials constituted a joint venture. 39 Specifically, the court
noted that the United States agents termed their action a joint venture,
as they were involved daily in translating and decoding intercepted
transmissions and advised the Philippine officials of their importance. 40
The courts also distinguished joint ventures from legitimate law
enforcement cooperation efforts between the United States and another
country, where American involvement is minimal. This type of situation
arose in United States v. Maher. 41 Maher was convicted on various
drug charges. "2 He claimed that Canadian officials used an illegal wiretap
to obtain information given to American agents who used the information
as the basis for a United States warrant. 43 The Ninth Circuit
held that although the wiretap was illegal, the information gained from
the tap was admissible. 4 There was no evidence that American officials
participated in the wiretap and the Canadian officials denied any illegality
in obtaining the evidence. Furthermore, it was apparent that the
Canadians initiated and controlled the investigation, with only minimal
35. Id. at 270.
36. Id. See also Government of the Canal Zone v. Sierra, 594 F.2d 60 (5th Cir.
1979)(no joint venture where the search was solely under the jurisdiction of the foreign
government, even though American officials provided important information leading to
the search of the defendant's home and was present during the search); United States
v. Heller, 625 F.2d 594 (5th Cir. 1980)(fact that defendant was arrested by British
officials on a tip from American agents was insufficient to establish American participation);
United States v. Molina-Chacon, 627 F.Supp. 1253 (E.D.N.Y. 1986)(fact that
search was motivated by tip from United States officials is not sufficient justification to
apply the fourth amendment).
37. 812 F.2d 486 (9th Cir. 1987).
38. Id.
39. Id. at 490.
40. Id.
41. 645 F.2d 780 (9th Cir. 1981).
42. Id.
43. Id. at 782.
44. id.

1990]
U.S. v. VERDUGO-URQUIDEZ
support and assistance from the Americans. Therefore a joint venture
did not exist." 6
This was the state of the law with respect to searches of property
located outside the United States and owned by nonresident aliens
prior to the decision in United States v. Verdugo-Urquidez. This decision
would seem to negate the applicability of the joint venture exception
as American officials themselves need no longer comply with the
fourth amendment warrant requirements when operating abroad. However,
the "shock the conscience" exception probably remains valid because
it always applied to improper conduct by any official, including
foreign officials.
II. UNITED STATES V. VERDUGO-URQUIDEZ"
Rene Martin Verdugo-Urquidez is a citizen and resident of Mexico.'
7 Drug Enforcement Administration (DEA) officials suspected
Verdugo-Urquidez of being among the leaders of a large and violent
Mexican-based drug organization.' 8 He was also a suspect in the kidnapping
and torture-murder of DEA Special Agent Enrique Camarena
Salazar. 49 The DEA obtained a United States warrant for his arrest on
August 3, 1985. 5 0 At the DEA's request, Mexican officials arrested
Verdugo-Urquidez at his home in Mexico in January, 1986 and turned
him over to American officials in the United States. 51 Following the
arrest, DEA agents arranged with Mexican officials to search Verdugo-
Urquidez's Mexican residences for evidence of his drug smuggling activities
and his involvement in the Salazar kidnapping and murder., 2
The Mexican Director General of the Mexican Federal Judicial Police
(MF JP) authorized the DEA search. 53 The DEA and MF JP officers
then searched Verdugo-Urquidez's Mexican residences and seized certain
documents. 6 ' At no time did the DEA seek approval from the
United States Justice Department or the United States Attorney's Office.
The DEA did not request a search warrant from a United States
45. Id.
46. 110 S. Ct. 1056 (1990).
47. Id.
48. Id.
49. Id.
50. Id.
51. 110 S. Ct. at 1059.
52. Verdugo-Urquidez was later convicted of the kidnapping and murder charges
in a separate prosecution. Id.
53. Id.
54. Id.

182 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
magistrate. 55
The District Court for the Southern District of California granted
Verdugo-Urquidez's motion to suppress the evidence seized during the
searches, holding that the searches constituted a joint venture between
the DEA and Mexican officials5 " and therefore, the fourth amendment
applied. The fourth amendment's requirements were not met because
the DEA failed to obtain a valid search warrant and was unable to
justify searching the premises without the warrant. 5 7 A majority of the
Ninth Circuit affirmed, 58 relying on the Supreme Court's decision in
Reid v. Covert59 and INS v. Lopez-Mendoza.10 Based on these decisions,
the majority held that "[t]he Constitution imposes substantive
constraints on the federal government, even when it operates abroad," 6 "
and that Verdugo-Urquidez was entitled to the same rights enjoyed by
other aliens facing judicial proceedings in the United States. 6 2 The majority
also noted that an alien defendant facing trial in the United
States was entitled to fifth and sixth amendment rights, 3 and it would
be "odd" to grant Verdugo-Urquidez these protections, but not fourth
amendment protections. 6 4 Therefore, the DEA search was unconstitutional
because the DEA agents failed to obtain a search 6 5 warrant.
The dissenting judge argued that United States laws have no effect
in foreign territories, except with respect to American citizens, and
55. United States v. Verdugo-Urquidez, 856 F.2d 1214, 1215-1217 (9th Cir.
1988).
56. Id. at 1217. The court also held that a foreign national generally may seek the
suppression of evidence seized by American officials during a search conducted abroad
on the grounds that the search violates the standards set by the fourth amendment.
57. Id.
58. Id.
59. 354 U.S. 1 (1957). The Court held in Reid that American civilians tried by
United States military authorities in a foreign country were still entitled to fifth and
sixth amendment protections.
60. 468 U.S. 1032 (1984). The Supreme Court held in Lopez-Mendoza that illegal
aliens in the United States had fourth amendment rights.
61. 856 F.2d at 1218.
62. Id. at 1223. The court was referring to the fourth amendment rights of aliens
living illegally in the United States to be free from unreasonable searches and seizures.
63. The fifth amendment ensures that a defendant receives due process of law and
the sixth amendment guarantees a defendant the right to a fair trial. U.S. CoNsT.
amend. V, VI.
64. 856 F.2d at 1224.
65. The Court of Appeals noted that a search warrant would have no legal effect
in Mexico. However, a warrant would be of value in the United States because it would
show an independent finding of probable cause by a neutral magistrate. Additionally,
the warrant would also define the scope of the search. Id. at 1230.

1990]
U.S. v. VERDUGO-URQUIDEZ
Verdugo-Urquidez could not claim fourth amendment rights. 66 The dissent
also argued that the Constitution was intended as a "compact"
between the newly created government and the people of the United
States, and that the protections of the fourth amendment were limited
to United States citizens. 6 " The Supreme Court granted certiorari to
decide the important constitutional issues involved.
A five-member majority of the Supreme Court reversed the decision
of the Court of Appeals. 69 The majority held that the fourth
amendment does not apply to the search and seizure by American officials
of property located in a foreign country and owned by a nonresident
alien. 7 " The majority noted as a preliminary matter that fourth
amendment protections are triggered at the time the search and seizure
occur. 71 Here, the search took place in Mexico; any constitutional violation
could only have occurred there. 72 Next, the majority adopted a
"Compact Theory" interpretation of the Constitution, holding that the
wording and history behind the creation of the Constitution indicated
that the fourth amendment was intended to apply only to United States
citizens and aliens who had sufficient contacts with the United States
to bring them within the national community. 3 Verdugo-Urquidez, the
Court held, did not have sufficient contacts within the United States to
make him one of "the people" within the definition of the Compact
Theory. 74
66. Id. The dissent relied on the Supreme Court's holding in United States v.
Curtiss-Wright Corp., 299 U.S. 304, 318 (1936).
67. 856 F.2d at 1232. The dissent described at length the period leading up to the
Revolutionary War. "Prevalent during the period leading to the American Revolution
was the recurrent notion that a government was created by a compact among those
governed . . ."
68. 110 S. Ct. at 1060.
69. The majority consisted of Chief Justice Rehnquist, who authored the majority
opinion, and Justices White, O'Connor, Scalia and Kennedy. Justice Kennedy also filed
a separate concurring opinion. Justice Stevens filed an opinion concurring in the judgment.
Dissenting opinions were filed by Justice Brennan, joined by Justice Marshall,
and by Justice Blackmun.
70. 110 S. Ct. at 1066.
71. Id. at 1060.
72. Id. at 1060. The fourth amendment "prohibits 'unreasonable searches and
seizures' . . . and a violation of the amendment is 'fully accomplished' at the time of
an unreasonable governmental intrusion." Id. citing United States v. Calandra, 414
U.S. 338, 354 (1974). This is different from fifth amendment protections which are
fundamental trial rights. See, e.g., Malloy v. Hogan, 378 U.S. 1 (1964).
73. 110 S. Ct. at 1061.
74. Id., relying on United States ex rel. Turner v. Williams, 194 U.S. 279, 292
(1904)(alien was not entitled to first amendment rights because "[hie does not become
6 8

184 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
The majority went on to reject the argument that the Constitution
applies wherever the United States exercises its power, stating that this
theory was contrary to the Court's previous holdings in the "Insular
Cases ' " 75 and in Johnson v. Eisentrager. 7 ' Finally, the majority held
that a contrary decision would create serious difficulties in conducting
future United States foreign operations and suggested that the legislative
or executive branches impose restrictions on searches and
seizures."
Justice Kennedy filed a concurring opinion, in which he agreed
that no violation of the fourth amendment occurred. 78 However, he
stated that the Insular Cases did not stand for the proposition that the
Constitution never applies to nonresident aliens when the government
acts abroad. 79 Rather these cases stand for the proposition that the gov-
-ernment is not bound by the fourth amendment warrant requirements
where the circumstances presented would make adherence to the requirements
impracticable. 8 " In the situation presented in Verdugo-Urquidez,
it would be impracticable to require a search warrant, due to
"[t]he absence of local judges or magistrates available to issue warrants,
the differing and perhaps unascertainable conceptions of reasonableness
and privacy that prevail abroad, and the need to cooperate with
foreign officials all indicate that the fourth amendment's warrant requirements
should not apply in Mexico as it does in this country."'"
Justice Stevens also filed an opinion concurring in the judgment only. 82
He argued that Verdugo-Urquidez became one of "the people," entitled
to fourth amendment protections because he was being held in the
one of the people to whom these things are secured by our Constitution.
75. This line of cases stood for the proposition that certain constitutional provisions
do not apply when the government acts abroad. See, e.g., Balzac v. Puerto Rico,
258 U.S. 298 (1922), where the constitution was held not to apply even though the
United States government had sovereign power over the territory of Puerto Rico. See
also Downes v. Bidwell, 182 U.S. 244 (1901)(constitutional clauses relating to revenue
did not apply in Puerto Rico); Hawaii v. Mankichi, 190 U.S. 197 (1903)(provisions on
indictment by a grand jury and jury trial did not apply in Hawaii); Dorr v. United
States, 195 U.S. 138 (1904)(jury trial provisions did not apply in the Philippines);
Ocampo v. United States, 234 U.S. 91 (1914)(sixth amendment grand jury provisions
did not apply in the Philippines).
76. 339 U.S. 763 (1950).
77. 110 S. Ct. at 1066.
78. Id. (Kennedy, J., concurring).
79. Id. at 1067.
80. Id. at 1068.
81. Id. at 1068 (Kennedy, J., concurring).
82. 110 S. Ct. at 1068 (Stevens, J., concurring).

1990]
US. v. VERDUGO-URQUIDEZ
United States at the time of the search. 8 " However, Justice Stevens
stated that the use of the evidence at trial was proper as the DEA
search was reasonable. 4
Justice Brennan, joined by Justice Marshall, dissented, holding the
United States is a government of limited powers. 5 Therefore, the protections
of the fourth amendment were not meant to create rights only
applicable to certain classes of persons. 8 " Rather, the framers sought to
prohibit an infringement on pre-existing rights. 87 Justice Brennan also
noted that aliens are required to comply with United States laws, imposing
a reciprocal obligation on the United States government to follow
its laws with respect to aliens. 88 He discounted the majority's conclusion
that the fourth amendment only applies to aliens having a
voluntary or legal connection with the United States, noting that the
cases cited by the majority lacked these requisites and that the fourth
amendment did not impose these requirements. 8 9 In any event,
Verdugo-Urquidez would meet the requirements necessary to establish
a sufficient connection with the United States in order to claim fourth
amendment protections because he was in the United States legally,
although voluntarily. 90
Justice Brennan next attacked the majority's rational that American
foreign policy operations could be jeopardized if the fourth amendment
were to apply to aliens abroad. 9 He held that the doctrinal exceptions
to the fourth amendment would protect government
operations. 2 Justice Blackmun dissented separately, holding that while
the government generally is not bound by the fourth amendment when
acting abroad, Verdugo-Urquidez became one of "the governed" when
the government brought him to the United States for trial on criminal
charges.1 3 This opinion is similar to the conclusions reached by Justice
83. Id.
84. Id. at 1068 (Stevens, J. concurring). Justice Stevens held that the search was
reasonable in that Drug Enforcement Administration officials had the approval and
cooperation of the Mexican Federal Judicial Police. Additionally, he concurred in the
judgment, stating that American magistrates had no power to authorize searches in
foreign residences under the warrant clause.
85. Id. at 1069, 1072 (Brennan, J. and Marshall, J. dissenting).
86. Id. at 1071 (Brennan, J. and Marshall, J., dissenting).
87. Id. at 1071 (Brennan, J. and Marshall, J., dissenting).
88. 110 S. Ct. at 1068-1069 (Brennan, J. and Marshall, J. dissenting).
89. Id. at 1070 (Brennan, J. and Marshall,. J., dissenting).
90. 110 S. Ct. at 1070-1072 (Brennan, J. and Marshall, J. dissenting).
91. Id. at 1074-1075 (Brennan, J. and Marshall, J., dissenting).
92. Id. at 1075 (Brennan, J. and Marshall, J., dissenting).
93. Id. at 1078 (Blackmun, J., dissenting).

186 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
Stevens. 94 Justice Blackmun, however, was unable to concur in the majority's
judgment because he concluded that the DEA search was unreasonable
because the government did not show probable cause. 9 5 He
would vacate the Court of Appeals judgment and remand the case."
III. ANALYSIS
Although the majority cited several reasons against applying the
warrant requirements of the fourth amendment to searches of property
owned by nonresident aliens and located abroad, 97 in reality, the
Court's opinion rested primarily on its decision to apply the "Compact
Theory" of the Constitution instead of the "Enumerated Powers Theory".
98 This decision has a substantial impact on the judiciary's prior
treatment of cases involving this fourth amendment issue. Additionally,
the decision in Verdugo-Urquidez creates a new standard for determining
the application of the Constitution to nonresident aliens, including
issues other than tose presented by the fourth amendment. 99 The remainder
of this Note addresses the effect of the Court's decision upon
the earlier treatment of fourth amendment warrant claims brought by
nonresident aliens and examines the constitutional basis for the Court's
holding.
A. Effect of the Decision Upon Previous Methods of Determining
Fourth Amendment Violations
As stated previously, the Supreme Court's decision eliminates the
distinction between searches in foreign countries by foreign officials
which would not have been invalid for lack of a valid warrant, and
identical searches by American officials which would have required a
94. Id. at 1068 (Stevens, J., concurring).
95. 110 S. Ct. at 1078 (Blackmun, J., dissenting).
96. Id.
97. Id. at 1061-1066.
98. All of the majority's arguments against extending the fourth amendment protections
to Verdugo-Urquidez stemmed from the premise that the Constitution in general
does not to apply to nonresident aliens, absent some legal or voluntary connection
to the United States. See supra notes 107-140 and accompanying text. Once this premise
was reached, the majority merely distinguished the situation before it from earlier
cases in which aliens were granted some constitutional protections.
99. Although it appears well established that nonresident aliens are entitled to
such fundamental rights as the right to due process of law and the right to a fair trial
(see supra note 63 and accompanying text), the decision in Verdugo-Urquidez could be
read to deny other protections that are granted to American citizens.

1990]
U.S. v. VERDUGO-URQUIDEZ
valid search warrant. 100 This also eliminates the need for the joint venture
exception to the general rule that foreign searches conducted by
foreign officials are valid. 1 "' This will aid lower courts in deciding motions
to suppress evidence that arises in cases similar to United States
v. Verdugo-Urquidez. Rather than making a factual determination as
to whether sufficient United States involvement occurred to term the
foreign operation a joint venture, courts may simply deny the motion
on the grounds that no fourth amendment violation occurred. 02
Although the Verdugo-Urquidez decision will negate the importance
of the joint venture rule, it should have no effect on motions to
suppress evidence acquired through methods that shock the judicial
conscience.'0 3 This doctrine has never been limited to actions by Amer-
ican officials upon foreign nationals that shock the conscience.1
Rather, the right to due process, guaranteed by the fifth amendment, is
seen as a fundamental right that extends to the pretrial conduct of law
enforcement officials.' 0 5 This right may not be interfered with, even as
against a nonresident alien.'
B. The Constitutional Basis for the Decision
In holding that the fourth amendment warrant requirements do
not apply when the United States government acts against nonresident
aliens, the Supreme Court adopted the "Compact Theory" interpretation
of the Constitution as compared with the "Enumerated Powers
Theory." Proponents of the Compact Theory view the Constitution as a
reciprocal agreement, or compact, between the government and the
people of the United States.' 07 The people give the federal government
100. Note that the Supreme Court did not address the need for the search to
comply with the laws of the foreign country. This question should, and probably will,
be resolved as later cases, relying on this decision, arise.
101. See supra notes 26-45 and accompanying text.
102. See supra note 28 and accompanying text.
103. See supra notes 13-25 and accompanying text.
104. See, e.g., Rochin v. California, 342 U.S. 519 (1952)(American officials used
improper methods to retrieve drug capsules from an American suspect); United States
v. Fernandez-Caro, 677 F.Supp. 893 (S.D.Tex. 1987)(foreign officials tortured a foreign
suspect to obtain information later used at trial in the United States).
105. See supra notes 40-41 and accompanying text.
106. See, e.g., Mathews v. Diaz, 426 U.S. 67, 77 (1976)("[e]ven one whose presence
in this country is unlawful, involuntary or transitory" enjoys fifth amendment
rights); In re Ross, 140 U.S. 453 (1891)(the guarantees of the fifth and sixth amendments
apply to persons brought to the United States for trial).
107. See U.S. CONST. preamble "We the people of the United States ... do ordain
and establish this Constitution for the United States of America."
0 4

188 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
authority over them, and in exchange the government agrees to act in
accordance with the limitations set forth in the Constitution. 1 0 8 Because
the government was "ordained and established 'for the United States of
America,' and not for countries outside of [its] limits . . . [t]he Constitution
can have no operation in another country." 09 The Compact Theory
has been in existence since the formation of the Constitution itself
and there are many cases following the principle that "[tihe government
of the Union . . . is emphatically and truly, a government of the
people. In form, and in substance, it emanates from them. Its powers
are granted by them, and are to be exercised directly on them, and for
' 10
their benefit."
The majority in Verdugo-Urquidez rejected the Enumerated Powers
Theory, which stands for the proposition that the United States
government is bound by the limitations of the Constitution. Under this
view, there are substantive restraints placed on the government, even
when it operates outside the boundaries of the United States."' One of
the earlier cases utilizing the Enumerated Powers Theory with respect
to the extraterritorial effect of the Constitution is the landmark case of
Reid v. Covert." 2 There, a plurality held that the Constitution limits
United States' actions abroad. 1 1' Reid only addressed the applicability
of constitutional protections to Americans living abroad and did not
address the rights of aliens brought to trial in the United States. Some
proponents of the Enumerated Powers Theory argue that the Constitution
limits American officials who must act within constitutional limita-
108. See Stephan, Constitutional Limits on International Rendition of Criminal
Suspects, 20 VA. J. INT'L L. 777, 783-784 (1980).
109. In re Ross, 140 U.S. at 464.
110. McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 404-405 (1819). See also
League v. DeYoung, 52 U.S. (11 How.) 185, 202 (1850)("The Constitution of the
United States was made by, and for the protection of, the people of the United
States."); In re Ross, 140 U.S. 453, 464 (1891).
111. See Saltzburg, The Reach of the Bill of Rights Beyond the Terra Firma of
the United States, 20 VA. J. INT'L L. 741, 745 (1980).
112. 354 U.S. 1 (1957). This case involved an American civilian living overseas.
She was facing a military trial for killing her husband.
113. The Supreme Court stated in Reid that:
The United States is entirely a creature of the Constitution . . . It can only
act in accordance with all the limitations imposed by the Constitution. When
the Government reaches out to punish a citizen who is abroad, the shield
which the Bill of Rights and other parts of the Constitution provide to protect
his life and liberty should not be stripped away just because he happens to be
in another land.
Id. at 5-6.

1990]
U.S. v. VERDUGO-URQUIDEZ
tions, regardless of where the actions occur."" Other supporters of the
Enumerated Powers Theory look to the concept of natural or fundamental
rights to support the idea that constitutional protections apply
to aliens as well as United States citizens." 5
C. Application of the Compact Theory to Verdugo-Urquidez
In applying the Compact Theory to the situation presented in
Verdugo-Urquidez, the majority first noted that historical data, dating
from the late 1700's, indicated that the purpose of the fourth amendment
was to protect only American citizens from arbitrary actions by
the newly formed United States government and was not intended to
protect aliens in foreign countries from American operations."'
The majority then referred to a series of cases known as the "Insular
Cases" ' as well as to its decision in Johnson v. Eistentrager" 8 to
further support the notion that the Constitution was not intended to
extend to aliens." 9 The general rule gleaned from the Insular Cases is
114. See, e.g., Saltzburg, supra note 111, at 745. "Wherever and whenever [the
United States government] acts it relies on the Constitution as the source of its powers.
Whenever [the government] acts, it must . . . accept the [Constitutional] limits on its
power ....
115. See 1 B. SCHWARTZ, A COMMENTARY ON THE CONSTITUTION OF THE
UNITED STATES: RIGHTS OF THE PERSON 170 (1968). Schwartz wrote:
The dominant conception when the Framers wrote was that stated in Blackstone:
"By the absolute rights of individuals, we mean those which are so in
their primary and strictest sense; such as would belong to their persons merely
in a state of nature, and which every man is entitled to enjoy, whether out of
society or in it."
Id. This source interprets the Constitution's purpose as that of preventing arbitrary
government restraints on natural rights. See also Grey, Origins of the Unwritten Constitution:
Fundamental Law in American Revolutionary Thought, 30 STAN. L. REV.
843 (1978).
116. 110 S. Ct. at 1061, citing Boyd v. United States, 116 U.S. 616, 625-626
(1886). The majority also referred to § 1 of An Act Further to Protect the Commerce
of the United States, Ch. 68, 1 Stat. 578 (1798), enacted during a period when France
interfered with American commercial trade. This statute granted President Adams the
authority to permit American military vessels to seize French military vessels found
within the jurisdictional limits of the United States or on the high seas.
117. See supra note 75.
118. 339 U.S. 763 (1950). In Eisentrager, the Supreme Court denied writs of
habeas corpus by enemy aliens arrested in China and imprisoned in Germany following
World War II. The prisoners claimed their convictions violated their fifth amendment
due process rights. The Court held that although Constitutional provisions had in some
instances been extended to aliens with connections to the United States, there could be
no extraterritorial application of the fifth amendment.
119. 110 S. Ct. at 1063.

190 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
that people residing in United States territories were not guaranteed all
constitutional rights. 12 0 Instead, "[o]nly fundamental constitutional
rights are guaranteed to inhabitants of those territories."" 12 The majority
then analogized this rule to the issue before it, holding that if
United States territories were not guaranteed universal Constitutional
protections, "respondent's claim that the protections of the fourth
amendment extend to aliens in foreign nations is even weaker." '2 2 The
majority then referred to its earlier decision in Eistentrager, in which
fifth amendment rights were denied to aliens imprisoned outside the
territory of the United States, holding that "[i]f such is true of the fifth
amendment, which speaks in the relatively universal term of 'person,' it
would seem even more true with respect to the fourth amendment,
which [by its terminology] applies only to 'the people.' ",123
The dissent argued that the Court's decision in Reid v. Covert 1 4
severely restricted the holdings in the Insular Cases,'2 5 indicating that
Reid stood for the proposition that the fourth amendment restricts
2 6
American officials' actions wherever and against whomever they act.1
However, the majority, in turn, restricted the holding in Reid, stating
that the case merely stood for the proposition that American citizens,
living abroad, could claim fifth and sixth amendment protections. 27
The dissent also attempted to restrict the Eistentrager decision on the
ground that the defendants in that case were not entitled to Constitutional
protection because they were enemy soldiers, not because they
were aliens.128 This is a valid distinction, given the Court's rationale in
Eisentrager. Apparently, the majority in Verdugo-Urquidez chose to
120. Id. at 1062.
121. Id., citing Dorr, at 148; Balzac, at 312-313.
122. 110 S. Ct. at 1062.
123. Id. at 1063.
124. 354 U.S. 1 (1957).
125. 110 S. Ct. at 1074 (Brennan, J. dissenting), citing Reid, "[i]t is our judgment
that neither the [Insular Cases] nor their reasoning should be given any further
expansion." See also Note, The Extraterritorial Application of the Constitution -
Unalienable Rights?, 72 VA. L. REV. 649, 659 (1986)("[t]he Reid decision . . . represents
the abandonment of the nineteenth century concept of strict territoriality").
126. 110 S. Ct. at 1069-1070 (Brennan, J. and Marshall, J., dissenting).
127. 110 S. Ct. at 1063. The majority also noted that Reid was only decided by a
plurality and that the concurring opinions in Reid were substantially narrower than
plurality holding. This may help to explain why the Verdugo-Urquidez majority was
unwilling to give much deference to the Reid decision.
128. 110 S. Ct. at 1074, citing Johnson v. Eistentrager, 339 U.S. 763,771-772
(1950)("It is war that exposes the relative vulnerability of the alien's status . . .
[D]isabilities this country lays upon the alien who becomes also an enemy are imposed
temporarily as an incident of war and not as an incident of alienage."

1990]
U.S. v. VERDUGO-URQUIDEZ
disregard this part of the Eistentrager Court's rationale.
D. Verdugo-Urquidez's Claim of Substantial Connection to the
United States
Despite its application of the Compact Theory in Verdugo-Urquidez,
the majority conceded that fourth amendment protections
would apply to an alien who could claim a substantial connection to the
United States. 129 A substantial connection may occur through the
alien's voluntary or legal presence in the United States and his subsequent
development of ties to this country. 130 The majority held that
Verdugo-Urquidez could not establish the existence of such a connection
because his only ties to the United States were through his arrest
and involuntary transfer to the United States, 131 This connection was
not substantial enough because Verdugo-Urquidez had only been in the
United States for a few days when DEA agents searched his home in
Mexico. 13 2 One problem with the majority's analysis, as the dissent
noted, is that none of the cases cited by the majority, in support of its
contention that voluntary or legal connection to the United States is
necessary to invoke constitutional protections, specifically impose these
requirements.' Additionally, the majority failed to create a standard
to determine the point at which an alien has developed a substantial
enough connection to the United States to claim constitutional protections."
3 Finally, both dissenting opinions and one concurring opinion
held that even if an alien is required to establish substantial connections
to the United States before being permitted to claim constitutional
protection, the fact that Verdugo-Urquidez was brought to the
United States to face a criminal prosecution was sufficient to create the
129. 110 S. Ct. at 1064, citing Plyer v. Doe, 457 U.S. 202, 211, 212 (1982)(illegal
aliens may claim equal protection rights under the fourteenth amendment); Bridges v.
Wixon, 326 U.S. 135, 148 (1945)(resident aliens enjoy first amendment rights); Wong
Wing v. United States, 163 U.S. 228, 238 (1896)(resident aliens enjoy fifth and sixth
Amendment rights).
130. 110 S. Ct. at 1065. The majority seemed to view the necessary connection to
the United States as involving acceptance by the alien of societal obligations.
131. Id. at 1064. The majority held that a lawful but involuntary connection to
the United States was not the result intended by the cases cited in note 129, supra.
132. Id. The majority held that "We do not think the applicability of the fourth
amendment to the search of premises in Mexico should turn on the fortuitous circumstance
of whether the custodian of its nonresident alien owner had or had not transported
him to the United States at the time the search was made."
133. Id. at 1074 (Brennan, J. and Marshall, J., dissenting).
134. Id.

192 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
necessary connection to this country. 13 5 This proposition is supported by
the Supreme Court's decision in In re Ross, 36 where the Supreme
Court held that the Constitution applied to aliens "who are brought [to
the United States] for trial for alleged offenses committed
elsewhere. .. ."
While this argument is fairly convincing, there are some policy
reasons against accepting this argument. Creating an exception that
the fourth amendment warrant requirements do not apply to searches
of property owned by aliens located outside the United States would, in
effect, swallow the rule. 3 7 It would also force American law enforcement
officers to revert back to requesting the assistance of foreign officials
in obtaining evidence abroad, raising joint venture issues. It is better
to set a definite standard that can be applied uniformly throughout
the judicial system, even if the standard distinguishes between American
citizens and resident aliens on one hand and nonresident aliens on
the other.' 38 The judiciary may also choose, at a later date, to place
some restrictions on the actions of American law enforcement officers
by requiring any American operation abroad to comply with the laws
of the foreign country involved. 39 Additionally, the courts may also
require that any search by American officers be reasonable. This appeared
to be the opinion of both concurring opinions in Verdugo-Urquidez
and in one of the dissents."
135. See, e.g., 110 S. Ct. at 1078 (Blackmun, J., dissenting), "[W]hen a foreign
national is held accountable for purported violations of United States criminal laws, he
has effectively been treated as one of 'the governed' and therefore is entitled to fourth
amendment protections."
136. 140 U.S. 453, 464 (1891).
137. It is hard to imagine a scenario where law enforcement officials decline to
prosecute an alien defendant if evidence was found during a search of the alien's
property.
138. This suggestion has a foundation in prior Supreme Court decisions. See, e.g.,
Mathews v. Diaz, 426 U.S. 67, 79-80 (1976)("In the exercise of its broad power ...
Congress regularly makes rules that would be unacceptable if applied to citizens."). If
Congress is empowered to act in a discriminatory manner, the Supreme Court, within
the confines of its judicial authority, has similar power.
139. Note that this issue was not before the Supreme Court in United States v.
Verdugo-Urquidez, and therefore was not addressed.
140. See, e.g., 110 S. Ct. at 1068 (Stevens, J., concurring)(agreeing with the Government's
contention "that the search conducted by the United States agents with the
approval and cooperation of the Mexican authorities was not 'unreasonable' as that
term is used in the first clause of the Amendment"). Note also that both Justice Stevens
and Justice Kennedy held in their concurring opinions that it should be unnecessary
for American officials to obtain a United States warrant because "American magistrates
have no power to authorize such searches." Id.

1990]
U.S. v. VERDUGO-URQUIDEZ
IV. CONCLUSION
The Supreme Court stated in United States v. Paynor,' 4 ' that
"willfully lawless activities undertaken in the name of law enforcement.
. . . do not command the exclusion of evidence in every case of
illegality. Instead, they must be weighed against the considerable harm
that would flow from indiscriminate application of an exclusionary
rule." 42
There is a trend in society to allow the use of "draconian" measures
in combatting the drug problem that exists in this country. Congress
has already enacted laws to facilitate the arrest and conviction of
drug distributors 4 ' and some commentators have feared this attitude
has lead and will continue to lead the Supreme Court to justify illegal
actions on the part of American law enforcement in solving drug-related
crimes." The Court has taken a more active role in recent years
in directing the course of the fourth amendment. 45 The question of
whether the government won, or deserved to win, in these cases did not
appear to be important. Rather they represent an increased desire on
the government's part to expand its enforcement powers. Additionally,
it appears that when the Supreme Court weighs the collective public
interest in competent law enforcement against the individual defendant's
due process and liberty interests, the social interest generally triumphs.
4 The Court has expressly stated that "[t]he public has a compelling
interest in detecting those who would traffic in deadly drugs for
personal profit."' 14 7 This has lead some commentators to believe that a
"drug exception" to the fourth amendment is growing. 48
141. 447 U.S. 727 (1980).
142. Id. at 734.
143. Comprehensive Crime Control Act of 1984, 18 U.S.C. Section 1342 (Supp.
1986). See also the Anti-Drug Abuse Act of 1986, 18 U.S.C. 1956 (Supp. 1987) (imposing
some of the severest penalties in the Code for various drug related offenses).
144. See, e.g., S. Wisotsky, Crackdown: The Emerging "Drug Exception" to the
Bill of Rights, 38 HASTINGS L. J. 889 (1987). "[The Constitution]... is rapidly being
eroded by a positivist, bureaucratic attitude that we can-must-do whatever is deemed
necessary or expedient in waging the War on Drugs." Id. at 890.
145. Id. at 907. "The Supreme Court's 1982-1983 term was marked by 'the overwhelming
importance of the fourth amendment in drug cases' . . . the Supreme Court
put its imprimatur on the enforcement techniques of the drug agencies . . . ." Id. citing
the Supreme Court's term, 52 U.S.L.W. 3151 (U.S. Sept. 13, 1983).
146. Id. at 909. This result was particularly true if there existed a public perception
of a drug crisis.
147. United States v. Mendenhall, 446 U.S. 544, 561 (1980).
148. See generally Wasserstrom, The Incredible Shrinking Fourth Amendment,
21 AM. CRIM. L. REV., 257 (1983); Saltzburg, Another Victim of Illegal Narcotics:

194 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
The decision in United States v. Verdugo-Urquidez supports this
belief. The decision in this case can be justified by existing case law
and the Court may very well have reached the correct result. However,
it should be noted that the cases relied upon by the majority are much
older than the cases cited by the dissent and were, in some instances,
limited by the subsequent decisions. Additionally, the majority's reading
of prior case law seems strained at times. It could certainly be argued
that in United States v. Verdugo-Urquidez the majority of the
Supreme Court reached its conclusion first and then sought supporting
authority. Whether or not Verdugo-Urguidez is an extension of the
drug exception to the fourth amendment cannot be determined, but will
certainly be of interest in the future.
The Fourth Amendment, 48 U. PITT. L. REV. 1 (1986).

COMMENT
THE UNITED STATES' 1986 EMERGENCY ECONOMIC
SANCTIONS AGAINST LIBYA - HAVE THEY WORKED?
I. INTRODUCTION ................................... 196
II. THE PURPOSE AND SCOPE OF ECONOMIC SANCTIONS
AGAINST LIBYA ...................................... 198
A. The Purpose of Sanctions ...................... 198
B. Scope of Nonemergency Sanctions ............ :. 200
1. Nonemergency Laws ...................... 201
(a) Export Controls .................... 201
(b) Import Controls .................... 204
(c) Response to Libyan Involvement in Terrorist
A cts ......................... 204
C. Scope of 1986 Emergency Sanctions ............. 205
1. Em ergency Laws ......................... 205
(a) General Components of the Sanctions . 207
2. Prohibiting U.S. Contract Performance ...... 209
(a) Exceptions to the Prohibition of Contract
Performance .................. 209
3. Prohibiting Exports of Goods, Technology or
S ervices . ... . .. . . . .. ... ... .. .. ... ... . .. .. 2 1 1
(a) Direct Exports ..................... 212
(b) Export of U.S. Goods to Third Countries
for Possible Reexport to Libya ... 213
(c) Reexport of U.S. Goods to Libya from
Third Countries .................... 213
4. Prohibiting Imports of Goods or Services .... 214
(a) Direct Imports ..................... 214
(b) Indirect Imports .................... 215
5. Freezing Libyan Assets ................... 215
6. Regulating U.S. Travel to Libya ............ 218
III. THE EFFECTIVENESS OF JANUARY 1986 U.S. ECONOMIC
SANCTIONS AS A DETERRENT AGAINST LIBYA'S ENGAGE-
MENT IN STATE-SPONSORED INTERNATIONAL TERRORIST
A CTIV ITIES ....................................... 2 19
A. Standards of Success .......................... 219
1. Economic Leverage Theory ................ 220
(195)

196 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
(a) Improving Economic Leverage Through
Multilateral Support ................ 225
2. Sym bolic Success ......................... 230
(a) Taking a Stand Against State-Sponsored
Terrorism .................... 231
IV . C ONCLUSION ..................................... 231
I. INTRODUCTION
Former President Ronald Reagan enacted emergency economic
sanctions' against Libya on January 7, 19862 following terrorist attacks
on December 27, 1985, at the Vienna and Rome airports. 3 Convincing
evidence indicated that the Libyan government supported the Abu
Nidal terrorist organization, 4 which was responsible for the attacks. 5
1. An economic sanction can be defined as a course of action undertaken by a
nation intended to prevent, regulate or otherwise hamper another state's economic activity
for the purpose of changing its policies. See Moyer & Mabry, Export Controls
as Instruments of Foreign Policy: The History, Legal Issues, and Policy Lessons of
Three Recent Cases, 15 LAW POL'Y INT'L Bus. 1, n.1 (1983) [hereinafter Moyer &
Mabry].
2. Exec. Order No. 12,543, 51 Reg. 875 (1986), reprinted in 25 I.L.M. 173
(1986) (prohibits exports, imports, and other trade aspects with Libya). Reagan passed
additional sanctions the next day to freeze Libyan assets. Exec. Order No. 12,544 Fed.
Reg. 1,235 (1986) (freezes all Libyan assets held by American banks or persons), reprinted
in Documents Showing the Evolution of Sanctions Against Libya, 25 I.L.M.
173, 181 (1986) (hereinafter Evolution of Sanctions).
On June 23, 1986 the Department of the Treasury amended its regulations to
further restrict the shipment of goods to the Libyan petroleum and petrochemical industry.
U.S. GENERAL ACCOUNTING OFFICE, INTERNATIONAL TRADE: LIBYAN SANC-
TIONS 12 (1987) (hereinafter GAO REPORT). The government further amended the
sanctions in June and July of 1986: 31 C.F.R § 550.560 (1989) (clarifying travel restrictions);
31 C.F.R. § 550.409.901 (1989) (tightening prohibitions on exports from
the U.S. to Libya through third countries); and 31 C.F.R. § 550.605 (1989) (order-to
those U.S. corporations with affiliates engaging in Libyan transactions to report to the
U.S. Department of Treasury). Bialos & Juster, The Libyan Sanctions: A Rational
Response to State-Sponsored Terrorism?, 26 VA. J. INT'L L. 799, 801, n.5 (1986)
[hereinafter Bialos & Juster].
3. See President's News Conference of January 7, 1986, 22 Weekly Comp. Pres.
Doc. 22 (January 13, 1986), reprinted in Evolution of Sanctions, supra note 2 at 175
(discussing Qadhafi's involvement in the airport bombings and other terrorist acts).
4. The Abu Nidal Group ranks among the most dangerous, organized, and well
financed Middle Eastern terrorist organizations. Evolution of Sanctions, supra note 2
at 190. The group calls for the destruction of ruling "reactionary" regimes such as
Jordan, Egypt, and the Persian Gulf states. Id. Its ultimate goal is to use inter-Arab
and intra-Palestinian terrorism to obtain the liberation of Palestine. Id.
Moreover, the Abu Nidal Group has boldly attacked Jordanian, Egyptian, and

1990]
SANCTIONS AGAINST LIBYA
Reagan designed the sanctions to achieve certain foreign policy goals'
which included changing Libya's practice of supporting and assisting
international terrorism. 7 In 1989 President George Bush extended economic
sanctions against Libya.' This comment examines how effective
the United States' emergency unilateral economic sanctions 9 have been
in altering Libya's state policies toward international terrorism.
Section II identifies the current framework of both nonemergency
and emergency economic sanctions. Identifying limited nonemergency
sanctions is necessary to fully understand the context under which
emergency sanctions were enacted. Nonemergency sanctions failed to
coerce Libya into changing its policy of supporting terrorism. As a result,
former President Reagan declared a national emergency and enacted
emergency sanctions to deal with the Libyan threat.
Section III provides the actual analysis for measuring effectiveness.
This section advances the argument that economic sanctions are
most effective in the short to medium term, but less effective in the
long run. As time progresses, the Libyan economy adapts to any adverse
impact suffered under the sanctions. Despite long term ineffectiveness,
economic sanctions play an important policy role in the U.S.
government's ongoing efforts to curb international terrorism. These
sanctions send a stern message to Libya that the United States will no
United Kingdom interests. Id. Those countries have lost hundreds of lives to Abu Nidal
hijacking and terrorism. Id.
5. Id.
6. Foreign policy goals are changes sought by the sender state (the state imposing
the sanctions) in the political behavior of the target state (the state receiving the sanctions).
G. HUFBAUER & J. SCHOTT, ECONOMIC SANCTIONS RECONSIDERED: HISTORY
AND CURRENT POLICY 2 (1985) [hereinafter G. HUFBAUER & J. SCHOTT].
7. Scholars and politicians have encountered difficulty stating a working definition
of "international terrorism". The United States Code defines international terrorism as
"premeditated, politically motivated violence perpetrated against noncombatant targets
by subnational groups or clandestine agents . .. involving citizens or the territory of
more than [one] country." 22 U.S.C. § 2656(F)(d)(1)(2) (1988). See also S. KADISH,
IV ENCYCLOPEDIA OF CRIME AND JUSTICE 1529-1536 (1983) (generally discussing
terrorism and international terrorism from a historical, analytical, and legal
perspective).
8. On January 19, 1989 President George Bush publicly stated that he would continue
the economic sanctions that his predecessor, former President Ronald Reagan,
implemented. Since President Bush's statement, the original 1986 economic sanctions
against Libya remain in effect. See U.S. DEP'T STATE BUREAU PUBLIC AFFAIRS, BACK-
GROUND NOTES: LIBYA 7 (Sept. 1989) [hereinafter BACKGROUND NOTES].
9. The term "unilateral economic sanctions" refers to sanctions applied by a single
nation. Economic sanctions applied by two nations working together are referred to as
"bilateral economic sanctions". The term "multilateral economic sanctions" refers to
sanctions applied by more than two nations.

198 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
longer tolerate state sponsored terrorist acts. Economic sanctions are
often a more pragmatic alternative to using military force because military
action may compromise the United States' position in the international
community. However, when Libyan supported terrorist acts are
so heinous as to deserve stronger retaliation, military action serves as a
viable option. 1 "
II. THE PURPOSE AND SCOPE OF ECONOMIC SANCTIONS AGAINST
LIBYA
A. The Purpose of Sanctions
The Libyan economic sanctions are aimed at achieving three policy
goals. First, the United States desires to coerce Libya into changing
its terrorist policies or radical government. 1 The United States has
viewed the policies of Libyan leader Colonel Mu'ammar al-Qadhafi
with close scrutiny since he came to power in 1969.12 Since his rise to
10. When United States intelligence identified Libya's involvement in a Berlin discotheque
terrorist bombing that killed an American serviceman, the United States responded
by launching an aerial bombing attack against targets near Tripoli and Benghazi,
Libya in April 1986. Greenwood, International Law and the United States' Air
Operation Against Libya, 89 W. VA L. REV. 933, 934 (1987).
Former President Reagan attempted to legally justify the bombing on two rationales.
First, as a valid use of self-defense against anticipated Libyan attacks. See generally
Id. at 937-948. Second, to "preempt" Qadhafi from supporting future terrorist
acts. L. HENKIN, S. HOFFMAN, J. KIRKPATRICK, A. GERSON, W. ROGERS, & D.
SCHEFFER, RIGHT V. MIGHT: INTERNATIONAL LAW AND THE USE OF FORCE 46
(1989) [hereinafter L. HENKIN].
The United Nations Charter regulates the amount of force that a member nation
can apply against another state: "All members shall refrain in their international relations
from the threat or use of force against the territorial integrity or political independence
of any state, or in any other manner inconsistent with the purposes of the
United Nations." U.N. CHARTER art. 2(4). The U.N. charter makes an explicit exception
to article 2(4): "Nothing in the present Charter shall impair the inherent right of
individual or collective self-defense if an armed attack occurs against a Member of the
United Nations, until the Security Council has taken measures necessary to maintain
international peace and security." U.N. CHARTER art. 51. Reagan also asserted that
the bombing did not exceed the right to self-defense articulated in article 51. Mr. Henkin
disagrees. His interpretation of Article 51 does not recognize a right to use force to
retaliate for past terrorist attacks. Instead, the right to self-defense only extends to
concurrent attacks. L. HENKIN, supra note 12, at 62.
11. See Carter, International Economic Sanctions: Improving the Haphazard
U.S. Legal Regime, 75 CAL. L. REV. 1159, 1170 (1987) [hereinafter Carter].
12. On September 1, 1969 the Revolutionary Command Council (RCC) overthrew
Libyan King Idris. The new regime converted the country from its former monarchy
rule, to the present Libyan Arab Republic. Colonel Qadhafi and the RCC gov-

1990] SANCTIONS AGAINST LIBYA
power, Colonel Qadhafi has focused Libya's foreign policy agenda on
international terrorism 13 and subversion against moderate Arab and
African governments. His 1980 attempt to overthrow the government
of Hissen Habre in Chad resulted in international involvement and
many casualties, before foreign leaders eventually divided Chad. 14
The second goal underlying the economic sanctions against Libya
focuses on punishing that country for its subversive terrorist policies. 15
The punishment aspect of economic sanctions remains the most fundamental
rationale. Economic sanctions are imposed to punish a country
for its policies or actions when direct military response may not be po-
erned Libya exclusively until 1977. On March 3, 1977 Qadhafi convened a General
People's Congress (GPC) as a means of facilitating citizen participation in the government.
After this event, Qadhafi remained the de facto chief of state and Secretary
General of the GPC until 1980. Despite the fact that he holds no official office, Colonel
Qadhafi currently dictates Libya's foreign policy through appeals to the masses, security
forces, and revolutionary committees. BACKGROUND NOTES, supra note 8, at 3-4.
13. Libya finances, trains, and even harbors international groups that share
Qadhafi's revolutionary and anti-Western views. The Japanese Red Army, and the
Popular Front for the Liberation of Palestine General Command have been identified
as receiving Libyan assistance. Id. at 6. Qadhafi finances guerrilla movements, conferences
for radicals, and terrorists in the Dominican Republic, El Salvador, Honduras,
and Guatemala in order to subvert Latin American Countries and foster an anti-U.S.
climate. DEPARTMENT OF THE STATE, LIBYAN ACTIVITIES IN THE WESTERN HEMI-
SPHERE, 8 (August 1986). Qadhafi also provided financial assistance and military training
to the former Sandanista government in Nicaragua. Id. at 1.
Six countries in the Western Hemisphere have Libyan "Peoples' Bureaus" (embassies):
Argentina, Brazil, Cuba, Nicaragua, Panama, and Suriname. Id. at 5. Panama
and Suriname do not have embassies in Libya for economic reasons.
Qadhafi likewise extends his political reach by organizing Islamic groups in Barbados,
Curacao, Netherlands Antilles, and Nicaragua. These groups could very well be
establishing intelligence groups under the pretense of "religious groups" Id. The Libyan
also provide funding to Caribbean radicals in Antigua, Dominica, French Guiana,
Guadeloupe, Haiti, Martinique, and St. Lucia.
Most recently, U.S. and foreign intelligence has discovered that Libyan factories
are now producing mustard gas which can be used in chemical warfare. Despite the
fact that Libya lacks long range missiles to deploy the mustard gas, this event has
unquestionably alarmed certain countries. A group attempted to sabotage the plant by
setting it on fire. Newsweek, March 19, 1990, at 33, col. 1.
14. Qadhafi withdrew most of his troops from Chad in 1981 after receiving intense
international diplomatic pressure. The United States and France supported
Habre. In 1983 3,000 French troops, along with the Chadian government forced
Qadhafi to release some of his newly acquired Chadian territory. Nevertheless, Libya
still occupies most of the Aozou strip separating the two countries.
BACKGROUND NOTES, supra note 8, at 6.
15. See Carter, supra note 11, at 1170.

200 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
litically feasible." 6 In any event, the United States government makes it
clear that only so many terrorist acts will be tolerated before the U.S.
retaliates with military force. 17
The third goal of imposing economic sanctions against Libya centers
on symbolically demonstrating U.S. opposition towards Libyan policies.'"
This rationale reflects not only an attempt to inform Libya that
the United States is cognizant of its policies, but also to assure other
countries and United States citizens that the U.S. government is "doing
something" about Libyan sponsored terrorism. The Reagan administration
hoped that U.S. economic action against Libya would encourage
other countries to impose similar economic controls against
Libya.
The preceding goals underlying the imposition of economic sanctions
against Libya are consistent with U.S. foreign policy dealings
with other countries. Through the Department of the Treasury (hereinafter
"Treasury") the government imposes similar sanctions against
Iran,' 9 Nicaragua, 2 0 and South Africa. 2
B. Scope of Nonemergency Sanctions
United States economic sanctions are broadly categorized as limits
on: (1) United States government programs; (2) exports; (3) imports;
(4) private financial transactions; and (5) international financial institutions.
22 United States laws grant the President wide latitude to impose
economic sanctions for foreign policy reasons during. nonemergency
and emergency situations. Nonemergency controls provide the
fundamental framework for economics.
16. See generally, Comment, Economic Sanctions: An Effective Alternative to
Military Coercion?, 6 BROOKLYN J. INT'L L. 289 (1980) (hereinafter Economic Sanctions)
(discusses the effectiveness of economic sanctions imposed by the United Nations
on Portugal, Rhodesia, and South Africa).
17. See supra note 10 and accompanying text.
18. See Carter, supra note 11, at 1170.
19. 31 C.F.R. § 560 (1989) (Iranian transactions regulations enacted October
1987 have the effect of banning almost all imports from that country. Regulations were
passed because of that country's extremist anti-western foreign policies).
20. 31 C.F.R. § 540 et. seq. (1989) (Nicaraguan trade control regulations).
21. 31 C.F.R. § 545 et. seq. (1989) (South African transactions regulations enacted
to show disagreement with that country's policy of Apartheid rule, a system in
which the white minority rules the African majority through a racist caste system).
22. Carter, supra note 11, at 1164.

1990]
SANCTIONS AGAINST LIBYA
1. Nonemergency Laws
(a) Export Controls
The Export Administration Act of 1979 (EAA) 23 provides an effective
means of imposing economic sanctions on Libya through nonemergency
laws. Substantive EAA provisions are divided into national
security and foreign policy classifications. 24 Both sections authorize the
President to regulate the exports of goods, technology, and other information.15
All exports from the United States must have a general license.
Sanctions can be more effectively imposed by making export licensing
more difficult to obtain. Thus, certain items subject to stricter
export controls for national security or foreign policy reasons require a
validated license.
2 6
Although the EAA lapsed in 1983, Congress enacted the Export
Administration Amendments Act of 1985, (1985 EAAA) which effectively
renewed major provisions of the 1979 EAA. 27 The Congressional
policy of using export controls to prevent countries from supplying aid
or giving sanctuary to international terrorists remains virtually unchanged.
28 However, the 1985 EAA imposed additional time limits on
agricultural embargoes, 29 restrictions on the President's power to im-
23. 50 U.S.C. app. § § 2401-2420 (1982 & Supp. V 1987).
24. Abbott, Linking Trade to Political Goals: Foreign Policy Export Controls in
the 1970s and 1980s, 65 MINN L. REv. 739, 859 (1981) (hereinafter Abbott).
25. Id.
26. E.g. 15 C.F.R. § 776.16 (1989) (Pursuant to § 6 of the EAA a validated
export license is required for foreign policy purposes to export: (a) Military vehicles
and certain commodities used to manufacture military equipment identified on the
commodity Control List under CCL listings 2018A, 11 18A, 2406A, and 2603A, to any
destination except Australia, Belgium, Canada, Denmark, France, the Federal Republic
of Germany, Greece, Iceland, Italy, and Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Portugal, Spain, Turkey, and the United Kingdom. Therefore, a
valid export license is required to export the above mentioned articles to Libya.)
27. 50 U.S.C. app. § § 2401-2420 (Supp. V 1987) (originally enacted as Pub. L.
No. 99-64, § 102, 99 Stat. 120 (1985)).
28. 50 U.S.C. app. § 2402(8) (Supp. V 1987) declares that:
[iut is the policy of the United States to use export controls to encourage
other countries to take immediate steps to prevent the use of their territories
or resources to aid, encourage, or give sanctuary to those persons involved in
directing, supporting, or participating in directing, supporting, or participating
in acts of international terrorism. To achieve this objective, the President
shall make reasonable and prompt efforts to secure the removal or reduction
of such assistance to international terrorists through international cooperation
and agreement before imposing export controls.
29. 50 U.S.C. app. § 2406(g)(3)(A)-(B) (Supp. V 1987).

202 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
pose foreign policy controls, 0 and created a new provision for preserving
existing contracts. 1
The President may also exercise control over exports through the
Arms Export Control Act (AECA). 32 Congress empowers the President
to control defense articles in order to ensure United States and world
security. 33 Persons violating the requisite licensing requirements are
subject to criminal penalties. 34 In 1978 former President Carter used
the AECA to impose the first economic sanctions against Libya. The
ban prohibited all sales of military equipment to Libya. 36
Both the 1985 EAAA and the AECA effectively regulate United
States exports to Libya. In U.S. v. Malsom, 36 the Court of Appeals for
the Seventh Circuit upheld the defendants' convictions for attempting
to export, exporting, and conspiring to export, implements of war and
other controlled commodities from the United States to Libya without
proper export licenses. 3 7 The appellate court rejected defendants' argu-
30. 50 U.S.C. app. § 2405(f)(1) (Supp. V 1987) (the President may impose or
expand export controls only after consulting with the Congress, including the Committee
on Foreign Affairs of the House of Representatives, and the Committee on Banking,
Housing, and Urban Affairs of the Senate).
31. 50 U.S.C. app. § 2405(m)(1) (Supp. V 1987) (the President may not prohibit
export or reexport of goods, technology or other information in performance of a contract
executed prior to the date the President consults with Congress pursuant to 50
U.S.C. app. § 2405(0 (Supp. V 1987)).
32. 22 U.S.C. § 2778 et. seq. (1988) (originally enacted as Pub. L. No. 94-329,
90 Stat. 729 (1976)).
33. 22 U.S.C. § 2778(a)(1) (1988) states that:
[i]n furtherance of world peace and the security and foreign policy of the
United States, the President is authorized to control the import and export of
defense articles and defense services and to provide foreign policy guidance to
persons of the United States involved in the export and import of such articles
and services. The President is authorized to designate those items which shall
be considered as defense articles and defense services for the purposes of this
section and to promulgate regulations for the import and export of such articles
and services. The items so designated shall constitute the Unites States
Munitions List.
The munitions lists enumerates such articles as aircraft, amphibious vehicles, firearms,
and military explosives. See 22 C.F.R. § 121.1 et. seq. (1989).
34. See 22 U.S.C. § 2778(c) (1988) (any persons violating the provisions set forth
in § 2778 are subject to a fine of no more than $100,000 and imprisonment for no more
than two years).
35. G. HUFBAUER & J. SCHOTT, supra note 6, at 620.
36. 779 F.2d 1228 (7th Cir. 1985).
37. Id. at 1230. Donald Malsom served as the general manager of co-defendant
Tencom Corporation, a corporation engaged in supplying commercial and aviation
equipment and procuring military equipment. In 1980 the defendant's corporation
faced immediate bankruptcy. The company's president, Nedim Sulyak, obtained a con-

1990]
SANCTIONS AGAINST LIBYA
ments that they lacked criminal intent to violate export laws, and that
the lower court erred in failing to suppress evidence seized from
Tencom's headquarters. 3 8 The appellate court also found no lower court
error in its decision not to order a mistrial due to widespread media
coverage of Libyan military activities. 39 The prosecution presented sufficient
evidence to refute each appellate argument.
Recently, in U.S. v. Elkins," 0 the Court of Appeals for the Eleventh
Circuit upheld the defendant's lower court conviction for violating
the EAA, AECA, and United States conspiracy laws." 1 The defendant's
prosecution in Elkins stemmed from an investigation into the
shipment of two Lockheed L-100-30 aircraft to Libya during 1985.42
Both prosecutions in Malsom and Elkins illustrate how nonemergency
export controls play an important role in combating Libyan sponsored
terrorism. By imposing stringent licensing requirements the 1985
EAAA and AECA prevent United States citizens from providing Libya
with military equipment that could be used to commit international
acts of terrorism. Elkins clearly stated that export licenses for shipping
planes to Libya would surely be denied due to the statutory export
prohibitions. 4 ' 3 The 1985 EAAA also requires that applications for export
licenses to countries supporting terrorism be reported to various
Congressional and Senate Committees."
tract for $20 million to sell aircraft parts to Libya for use on C-130 Hercules cargo
transport planes and Chinook CH-47 Libyan helicopters. Tencom never applied for the
requisite State or Commerce Department license. Id.
Tencom successfully shipped parts to West Germany, with an ultimate destination
of Libya or Venice, Italy. Libya serviced its C-130 in Venice at a plant called Aeronavali.
In February and August of 1981, Tencom also shipped C-130 engines and
airplane propellers through West Germany to Libya. All of the above transactions violate
export restriction of controlled military parts enacted during 1978. Id. at 1231-
1232.
38. See id. at 1231
39. Malsom, 779 F.2d at 1233.
40. 885 F.2d 775 (11th Cir. 1989).
41. See id. at 781, n.4. A lower court jury found the defendant guilty of violating:
(1) the Export Administration Act of 1979, 50 U.S.C. § 2410(a); (2) the Arms Control
Act, 22 U.S.C. § 2778(b)(2) and 2778(c), 22 C.F.R. § 121 et. seq.; (3) 18 U.S.C. §
1001; and (4) 18 U.S.C. § 1343. Id.
42. Id. at 779.
43. Id.
44. 50 U.S.C. app. § 2405(j)(1) (Supp. V 1987) provides that:
[t]he Secretary and the Secretary of State shall notify the Committee on Foreign
Affairs of the House of Representatives and the Committee on Banking,
Housing, and Urban Affairs and the Committee on foreign Relations of the
Senate at least 30 days before any license is approved for the export of goods
or technology valued at more than $1,000,000 to any country concerning

204 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
(b) Import Controls
Executive authority to impose import controls for national security
reasons comes primarily from Section 232 of the Trade Expansion Act
of 1962.4 5 On March 10, 1982, the United States imposed broader economic
restrictions on Libya by placing an oil embargo on Libyan crude
oil imports. 46 The Reagan administration hoped the embargo would cut
off funds available for sponsoring terrorist activities. 47 The oil embargo
resulted in a significant decline in United States-Libyan relations.
(c) Response to Libyan Involvement in Terrorist Acts
During the early 1980's the Reagan administration exhibited increasing
intolerance towards Libya's involvement in international acts
of terrorism. Former President Reagan responded directly to specific
terrorist acts by passing certain nonemergency sanctions. In August of
1981, two Libyan SU-22 jets attacked two United States F-14 jets
while the U.S. planes flew maneuvers over the Gulf of Sidra. 4 Two
months after this incident, on October 28, 1981, the Reagan administration
imposed controls on exports of small aircraft, helicopters, and
aircraft parts to Libya. 49 The executive branch designed the ban to
thwart Libya's ability to support military acts in neighboring
countries. 5 "
In November 1981, officials reported the Libyan Government's involvement
in a plot to assassinate the United States ambassador to Italy.
5 1 Soon after officials revealed the assassination plot, terrorists
made an actual assassination attempt on the United States Charge
which the Secretary of State has made the following determinations:
(A) Such country has repeatedly provided support for acts of international
terrorism.
(B) Such exports would make a significant contribution to the military
potential of such country, including its military logistics capability, or would
enhance the ability of such country to support acts of terrorism.
45. 19 U.S.C. § 1862 (1988) (originally enacted as Pub. L. No. 87-794, § 232, 76
Stat. 872, 877).
46. Bialos & Juster, supra note 2, at 805, n.20, citing Proclamation No. 4907, 47
Fed. Reg. 10,507 (1982), renewed by Proclamation No. 5141, 48 Fed. Reg 56,929
(1983).
47. G. HUFBAUER & J. SCHOTT, supra note 6, at 621.
48. M. SICKER, THE MAKING OF A PARIAH STATE: THE ADVENTURIST POLITICS
OF MUAMMAR QADDAFI 116 (1987) [HEREINAFTER M. SICKER].
49. G. HUFBAUER & J. SCHOTT, supra note 6, at 620.
50. Id.
51. M. SICKER, supra note 48, at 117.

1990]
SANCTIONS AGAINST LIBYA
d'Affaires in Paris. 2 Then, on December 7, 1981, former President
Ronald Reagan asserted that Colonel Qadhafi had sent assassination
teams to the United States to murder him, former Vice President Bush,
and former Secretaries Haig and Weinberger 3 . The executive branch
responded to Libyan aggression by invalidating all American passports
used for travel to Libya as a safety precaution. 4 Even today, no United
States citizen may travel to Libya without a special validation on their
passport."'
The Reagan administration also restricted exports of sophisticated
oil and gas equipment, and technology destined for Libyan use. 56 Terrorist
bombings at airports in Rome, Italy, and Vienna, Austria drew
international outrage. In the wake of these incidents, the United States
no longer idly accepted Libya's policy of supporting international terrorism.
Government evidence indicated that Libya provided financial
5 7
support and sanctuary to terrorists involved in the three incidents.
C. Scope of 1986 Emergency Sanctions
1. Emergency Laws
On January 7, 1986 former President Reagan responded to
Libya's involvement in airport bombings in Rome, Italy, and Vienna58 by ordering widespread emergency economic sanctions against Libya. 5 9
52. Id.
53. See Id.
54. Bialos & Juster, supra note 2, at 805, n.18, citing 46 Fed. Reg. 60,712
(1981). The passport regulations states that:
[t]his action is required.by the unsettled relations between the United States
and the government of Libya, and the increased threat of hostile acts against
Americans. Travel to or residence in Libya by American citizens is hazardous,
because of the continued anti-American stance and hostile actions of the
Libyan Government. The Government of Libya has repeatedly demonstrated
a willingness to direct hostile acts against the United States Government, is
not in a position to provide diplomatic protection or consular assistance to
Americans in Libya. Under the circumstances, there is an imminent danger to
the physical safety of Americans traveling to or present in Libya.
Id.
55. See 22 C.F.R. § 51.73(a)(3) (1989) (requiring a specifically validated passport
for travel to a country in which there is imminent danger to the health or safety of
U.S. citizens).
56. Expansion of Foreign Policy Export Controls Concerning Libya, 47 Fed. Reg.
11,247 (1982) (now codified in pertinent part at 15 C.F.R. § 785.7(a)(1)(ii) (1989)).
57. See supra note 3.
58. Id.
59. See Supra note 2.

206 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
Reagan passed additional sanctions to freeze Libyan assets the following
day.: 0 The President derives statutory power to enact Libyan sanctions
from the Emergency Economic Powers Act (IEEPA)," the National
Emergency Act (NEA), 6 2 and the International Security and
Development Cooperation Act of 1985.63 Statutory language mandates
that the IEEPA only be invoked to impose economic sanctions when
"any unusual and extraordinary threat, which has its source in whole
or substantial part outside the United States, to the national security,
foreign policy, or economy of the United States" exists."' Upon a determination
that such a condition exists, the President must then declare a
national emergency pursuant to the NEA.1 5 The IEEPA simultaneously
vests the President with power to enact sweeping import, export,
and financial controls through licenses bans upon declaring the national
emergency. 66
Some controversy exists over Reagan's decision to utilize the
IEEPA to invoke economic sanctions against Libya. Libya's continued
involvement with international terrorism may not have constituted an
"unusual extraordinary threat" for IEEPA purposes. 6 7 Reagan justified
declaring a national emergency by citing Libya's increased involvement
in terrorist activities, and the United States' failure to change these
practices using current measures. 6 " Few would deny that the minimal,
nonemergency economic controls had little effect on altering Libya's
policy of supporting international terrorism. However, Reagan's deci-
60. Id.
61. 50 U.S.C. app. § 1701-1706 (1982 & Supp. V 1987) (specifically, former
President Reagan invoked his power under 50 U.S.C. § 1631 (1982)).
62. 50 U.S.C. § 1601-1651 (1982 & Supp. V 1987) (originally enacted as Pub. L.
No. 94-412 90 Stat. 1255 (1976)).
63. See 22 U.S.C. § 2349aa-8(a) (1988) (grants the President the power to prohibit
articles grown, produced, extracted, or manufactured in Libya from being imported
into the United States). See also 22 U.S.C. § 2344aa-8(b) (1988) (grants the
President the power to prohibit U.S. goods or technology from being exported to
Libya).
64. 50 U.S.C. § 1701 (a) (1982 & V Supp. 1987).
65. See 50 U.S.C. § 1621(a) (1982 & Supp. V 1987) (the section authorizes the
president to declare a national emergency when he feels such a situation exists, or when
faced with any special or extraordinary occurrence).
66. 50 U.S.C. § 1702 (1982 & Supp. V 1987) (enumerating the President's authority
pursuant to the IEEPA).
67. See Bialos & Juster, supra note 2, at 809.
68. President's Letter to the Speaker of the House and the President of the Senate
(January 7, 1986), reprinted in Evolution of Sanctions, supra note 2, at 174-175 (former
President Reagan described his statutory power and reasoning for invoking the
emergency sanctions).

1990]
SANCTIONS AGAINST LIBYA
sion to invoke the IEEPA still remains questionable. The airport bombings
took place in countries far away from United States soil, and
therefore did not directly threaten national security. A national emergency
could be rationalized by arguing that since Americans travel
abroad, random bombings at airports generally threaten the safety of
American tourists.
(a) General Components of the Sanctions
Executive orders Numbers 12,543 and 12,544 are implemented by
the Office of Foreign Assets Controls in the Treasury, through the Libyan
Sanctions Regulations." Since the Department of Commerce
(hereinafter "Commerce") shares export control power with the Treasury,
Commerce enacted regulations subjugating its export licenses to
the emergency export controls. 70 The broad framework of the economic
sanctions suggests that the Reagan administration sought to alter Libyan
foreign policy by eliminating all United States trade contributions
that could be used to either finance acts of terrorism, or provide the
terrorists with actual weaponry. Libyan emergency sanctions loosely reflect
the export, import and private financial transaction categories of
economic sanctions. 71 The Treasury chose not to adopt sanctions limiting
U.S. government program interaction with Libya. Poor United
States-Libyan relations previously resulted in any such programs being
canceled. 72 Similarly, the sanctions impose no limits on international
financial institutions. Institutions such as the International Monetary
Fund (IMF) and the Multilateral Development Bank (MDB) 73 exist
69. 31 C.F.R. § 550 et. seq. (1989) (originally enacted as 51 Fed. Reg. 1354,
1358 (1986)).
70. See 15 C.F.R. § 790.7(a) (1989) (revoking all existing export licenses conflicting
with 31 C.F.R. 550 et. seq., on February 1, 1986 at 12:00a.m. Eastern Standard
Time).
71. See supra note 22 and accompanying text.
72. Typical government programs are either categorized as providing foreign assistance
or landing rights. Carter, supra note 11, at 1183. Primary programs include:
"bilateral foreign assistance, low-interest credit, loan guaranties, special insurance programs,
fishing rights, port access, aircraft landing rights, and passports." Id. The
United States trade relationship with Libya previously involved mainly oil imports from
that country most of the listed programs are inapplicable.
United States passports for travel to Libya are only permitted with a special validation
from the Passport Office. See 22 C.F.R. § 51.73 (a)(3) (1989) (invalidating a
passport to a country or area in which there is imminent danger to the public health or
physical safety of United States travelers). Such passports are usually denied as a matter
of. general policy.
73. MDB's consist of the World Bank Group (the International Bank for Recon-

208 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
outside the United States' legislative jurisdiction. 74
The Libyan economic sanctions only apply to a "United States
person",71 and to exports and imports directly controlled by the United
States. A "United States Citizen" refers to any United States citizen,
permanent resident alien, juridical person, 76 or any person within U.S.
borders." The jurisdictional reach of the sanctions only extends to
United States citizens and U.S. controlled goods because the Reagan
administration sought to avoid any extraterritorial jurisdiction 7 1
problems. Such problems arise when other nations refuse to cooperate
with the United States' extraterritorial attempts at extending U.S.
sanctions for fear that their own foreign or economic policies will be
damaged. 79
Although the U.S. cannot compel foreign governments to honor
U.S. emergency sanctions, it can compel all U.S. citizens to comply
with relevant provisions. Provisions against evading the scope of emergency
sanctions ensure that creative individuals do not undertake complex
transactions to avoid the reach of Libyan economic sanctions. The
evasion section prohibits transactions designed to evade or avoid any of
the established prohibitions. 8 " For example, United States parent companies
cannot transfer Libyan contracts to foreign subsidiaries to evade
the sanctions."'
struction and Development, the International Development Association, and the International
Finance Corporation. Carter, supra note 8, at 1218, n.229), the Inter-American
Development Bank, the Asian Development Band, and the African Development
Bank. Id.
74. The United States has little policy influence over these banks since there is no
common governing. For example, the IMF's primary concern is promoting international
monetary cooperation and stability in foreign exchange. To fulfill this purpose it
necessarily remains apolitical to world events.
75. See 31 C.F.R. § § 550.201 - 550.209 (1989).
76. The term "juridical person" is actually a misnomer. A "juridical person" does
not mean person within the traditional context of the word. Instead it refers to a corpo-ration,
partnership, or sole proprietorship organized under United States Law. GAO
REPORT, supra note 2, at 8.
77. 31 C.F.R. § 550.308 (1989).
78. Juridical power which extends beyond the physical limits of a particular state
or country. BLACK'S LAW DICTIONARY 528 (5th ed. 1979).
79. See Feinberg, Economic Coercion and Economic Sanctions: The Expansion of
United States Extraterritorial Jurisdiction, 30 AM. U.L. REV. 323, 324 (1981).
80. See 31 C.F.R. § 550.208 (prohibits "[a]ny transaction for the purpose of, or
which has the effect of, evading or avoiding any of the prohibitions set forth ....
81. GAO REPORT supra note 2, at 9.

1990]
SANCTIONS AGAINST LIBYA
2. Prohibiting U.S. Contract Performance
A provision banning United States performance of United States-
Libyan contracts remains the most controversial emergency economic
sanction. The Treasury stated that "except as authorized, no U.S. person
may perform any contract in support of an industrial or other commercial
or governmental project in Libya." 82 A literal reading of this
provision suggests that United States persons are prohibited from entering
into new contracts, and performing existing contracts with the
Libyan government. 83 The U.S. government supports this interpretation.
Workers under contract with Libyan oil companies immediately
felt the impact of contract prohibitions when their employment contracts
became void.
In Chang v. U.S., 84 petroleum engineers under contract with Libyan
oil companies brought an action against the United States alleging
that the termination of their contracts and loss of wages resulted in a
Fifth Amendment taking. 85 The Federal Circuit upheld the contract
ban provision as constitutional. In reaching its decision, the court refused
to raise the government's interference to the level of a Fifth
Amendment taking. 86 The court reasoned that economic sanctions did
not totally prohibit the plaintiffs from marketing their services; the
workers could seek employment elsewhere. 87 The court further claimed
that legitimate state interests of national security far outweighed any
loss in wages suffered by the individual workers. 8 8 Most importantly,
the court noted that any United States person who enters into a contract
with a foreign nation to work in that nation, automatically becomes
aware that his employment is contingent on good relations between
the two countries. s9
(a) Exceptions to the Prohibition of Contract Performance
The contract ban provisions lack any extraterritorial reach. 9 "
82. 31 C.F.R. § 550.205 (1989).
83. In actuality, all existing contracts are retroactively banned. Bialos & Juster,
supra note 2, at 813.
84. 859 F.2d 893 (Fed. Cir. 1988).
85. Chang, 859 F.2d at 894. The relevant constitutional language provides that:
"nor shall private property be taken for public use, without just compensation." U.S.
CONST. amend. V.
86. Id. at 893.
87. Id. at 896.
88. See id.
89. Id.
90. See supra text accompanying note 74 (the Libyan economic sanctions only

210 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
Therefore, any person who is nor a "United States citizen", "permanent
resident alien", "juridical person organized under the laws of the
United States", or "person in the United States" can freely perform
contracts with the Libyan government. United States oil corporations
and the Libyan government engaged in joint oil venture agreements 9
on Libyan soil when the sanctions were first imposed in 1986.92 The
Treasury granted five major oil companies 93 a limited hardship exception
to the 1986 economic sanctions. If the Treasury compelled the oil
companies to abandon their contracts, Qadhafi could have kept the lost
profits.
The administration recognized Qadhafi's possible windfall and enacted
limited exceptions for the U.S. oil company's benefit. First, the
Treasury announced that United States firms must remove their property
or sell it to Libya, Libyan nationals, or other persons who would
not use the property in Libya. 94 Second, the Treasury granted the oil
companies a limited license to allow them time to remove their materials
from Libya. 95 The licenses authorized the companies to: (1) "continue
ownership of their property;" (2) "sell Libyan crude oil at Libyan
ports but not ship or distribute the oil"; (3) "participate in management
decisions"; and (4) "continue paying their share of operating
expenses." 96
apply to "United States" persons).
91. The joint venture can be classified as either concession agreements or exploration
and producing agreements. Concession agreements with the National Oil Corporation
required the United States Oil Companies to provide 49 percent of the operating
expenses, taxes, rents and royalties in exchange for 49 percent of the oil produced and
paid. The National Oil Corporation paid 51 percent of the expenses in exchange for 51
percent of the profits. Under exploration and production sharing agreements a smaller
percentage of the oil produced was received in exchange of rents, royalties, and taxes.
Operating expenses remained the same 49 to 51 percent ratio. GAO REPORT, supra
note 2, at 16.
92. United States oil companies held exclusive rights to Libyan oil prior to 1973.
In exchange the companies paid the Libyan government rent, royalties, and taxes. During
1973 the United States firms were required to sell Libya a 51 percent equity interest.
The Libyan Oil Corporation supplied cash, and managed the operations. Libyan
and Western European workers from countries such as Italy replaced United States oil
field workers. In 1986 United States oil companies provided financing engineering and
technology to the joint ventures. Id. at 15.
93. The five oil corporations included: Amerada Hess Corp.; Conoco, Inc.; Marathon
Oil Co.; Occidental Petroleum Corp.; and W.R. Grace & Co. Bialos & Juster,
supra note 2, at 824, n.78.
94. Id. at 824, citing DEP'T OF STATE ANNOUNCEMENT: LIBYAN SANCTIONS (February
7, 1986).
95. Id.
96. GAO REPORT, supra note 2, at 16.

1990]
SANCTIONS AGAINST LIBYA
On June 30, 1986, the Treasury revoked the temporary licenses.
The oil companies entered into a standstill agreement with the National
Oil Company and the government of Libya. The agreement provided
for continued ownership rights for 3 years. The American companies
could not receive any profits from newly produced oil, but they
also incurred no obligation to pay expenses. 97 The rationale behind this
limited exception proved questionable. At face value, limited exceptions
seem equitable to corporations who-have vested profits flowing from
Libyan oil productions. Unfortunately, limited exceptions to the contract
ban may have cushioned the sanctions effect on Libya. In any
event, the standstill agreement ensures that United States oil companies
will not totally loose their investments, thus creating an equitable
resolution to the issue of who bears the loss.
3. Prohibiting Exports of Goods, Technology or Services
If applied properly, export controls may influence a country into
changing its policies. The target country will succumb to the loss of
trade from the sender, and adapt its policies in order to receive the
needed goods or services. Ideally, export controls have the potential to
be the most effective weapon in the arsenal of economic sanctions. 98
Export controls are divided into three classes of exports: (1) direct
exports to Libya; (2) exports to third countries for possible reexport to
Libya; and (3) reexport of United States' goods to Libya from third
countries. 9 9 All three classes of exports are subject to licensing requirements
analogous to EAA requirements. Like the EAA requirements,
the Libyan sanctions' export controls mandate that most goods and
technology be subject to a general license. 100 Similarly, certain classes
97. Id.
98. Indeed, the United States often applies export controls against a target country
expecting positive results. These expectations accompanied the U.S. employed export
controls against Iran, and the U.S. grain embargo applied against the Soviet
Union when the country invaded Afghanistan. Moyer & Mabry, supra note 1, at 143.
The Iranian export controls on machinery proved effective because Iran depended on
the parts for the military and industry.
The Soviet grain embargo did not prove as effective, since the Soviet Union obtained
grain from alternate sources. While drafting export controls, the administration
remained cognizant to the fact that Libya did not totally depend on United Statessource
products and could possibly endure economic sanctions. GAO REPORT supra
note 2, at 8. The Executive Branch no doubt realized that results similar to the Soviet
grain embargo would probably follow.
99. Id. at 11-12.
100. See 31 C.F.R. § 550.801(a) (1989).

212 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
of goods require a "specific" license. 01 This type of license is the counterpart
of the EAA's "validated" license.
(a) Direct Exports
Direct export controls are the strictest of the three controls. Goods,
services, and technology directly exported to Libya from the United
States must have "specific license[s]". °2 Three exceptions to the specific
license requirement exist. Goods, services, and technology in
0 3
transit before the effective date of January 9, 1986 are not restricted.
This exception appears logical since any goods, services-and technology
shipped prior to the effective date are legal.
The Treasury also exempts "publications and donated articles intended
to relieve human suffering, such as food, clothing, medicine and
medical supplies intended strictly for medical purposes." 0 4 These exceptions
are made purely for altruistic reasons. The Reagan administration
invoked the Libyan sanctions to prevent Qadhafi from obtaining
materials that could be used for terrorist activities. No intention existed
for prohibiting medicine or food for the needy. 1 0 5 The Treasury makes
a third exception for exports authorized by the Department of Commerce.
0 Commerce allows such exports because the items do not directly
enhance Libya's ability to support international terrorism.
101. See 31 C.F.R. 550.801(b)(1)(2)(3) (1989) (detailing specific licenses requirements,
application procedures, and information to be supplied on the application).
102. GAO REPORT, supra note 2, at 11.
103. 31 C.F.R. § 550.404(b) (1989).
104. 31 C.F.R. § 550.202 (1989).
105. This viewpoint is consistent with Reagan's remarks during a press conference
held the day following the United States' bombing of selected Libyan targets. Ronald
Reagan indicated that the United States had no quarrel with innocent Libyan people.
Qadhafi and the terrorists are the United States' enemy. See ABC News Great T.V.
News Stories, Mu'ammar Qadhafi: Libya's Radical Ruler, (ABC Video/MPI Home
Video 1989) [hereinafter ABC Video].
106. 31 C.F.R. § 550.504 (1989). Commerce authorizes exports pursuant to the
following regulations:
(a) 15 C.F.R. § 371.6, General license baggage: accompanied and unaccompanied
baggage;
(b) 15 C.F.R. § 371.13, General license GUS: shipments to personnel and agencies
of the U.S. Government;
(c) 15 C.F.R. § 371.18, General license GIFT: shipments of gift parcels.
(d) 15 C.F.R. § 379.3, General license GTDA: technical data available to all
destinations.
Id.

1990]
SANCTIONS AGAINST LIBYA
(b) Export of U.S. Goods to Third Countries for Possible Reexport
to Libya
A specific license must be obtained in order to export goods, services,
and technology to a third country for possible reexport to
Libya. 1 " 7 Treasury requires a specific license in light of the possibility
that the items may eventually reach Libya. The specific license requirement
allows the Treasury to monitor transactions more closely. Exports
are permitted when: (i) "[t]he goods will be substantially transformed
or incorporated into manufactured products before export to Libya;"',,
(ii) "[tihe goods will come to rest in a third country for purposes other
than reexport to Libya;' ' 0 9 and (iii) "[tihe technology will come to rest
in a third country for purposes other than reexport to Libya." 110
On June 23, 1986, the Treasury amended its regulations to further
prohibit exports. Exports are prohibited even if substantially altered,
when the exporter knows the materials will be used in Libya in the
petroleum or petrochemical industry."' Exports are also prohibited if
the exporter knows the goods are scheduled for shipment to Libya without
coming to rest in a third country" 2 or the exported technology shall
be transformed into products to be used in the petroleum industry."'
(c) Reexport of U.S. Goods to Libya from Third Countries
Reexport of U.S. goods to Libya from third countries differs from
exports of U.S. goods to third countries for possible reexport to Libya
in that the former involves the movement of goods from one foreign
destination to another." 4 Reexported goods of United States origin
come within the sole authority of the Commerce Department. Some of
these reexport controls existed for foreign policy or national security
reasons before the emergency economic sanctions took effect."' The
107. GAo REPORT, supra note 2, at 11.
108. 31 C.F.R. § 550.409(d)(1) (1989).
109. 31 C.F.R. § 550.409(d)(2) (1989).
110. 31 C.F.R. § 550.409(d)(3) (1989).
111. 31 C.F.R. § 550.409(a)(2) (1989).
112. 31 C.F.R. § 550.409(a)(1) (1989).
113. 31 C.F.R. § 550.409(a)(3) (1989).
114. See 15 C.F.R. § 770.2 (1989) (the term "reexport" includes: "reexport, transhipment,
or diversion of commodities or technical data from one foreign destination to
another").
115. GAO REPORT, supra note 2, at 12. Reexports are included in the "Emergency
Sanctions" section of this comment because the application of the sanction is
similar to the 1986 emergency sanctions.

214 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
1986 sanctions do not undercut Commerce's authority over reexport
regulations. 116
Commerce maintains a policy of generally denying reexport to
four groups of technology: (1) Commodities controlled for national security
purposes and related technical data and oil and gas equipment
and related technical data not readily available outside the United
States;' 17 (2) goods and technology headed for the Ras Lanuf petrochemical
processing complex; 118 (3) off-highway wheel tractors with
carriage capacity of 10 tons or more except when used in reasonable
quantities for civilian use; 119 and (4) aircraft, helicopters, aircraft
parts, and other parts that could be easily converted to military use. 120
Reexport of other classes of commodities are allowed in conjunction
with a valid reexport license. Permissible commodities include
medicine and medical supplies, 12 ' food and agricultural commodities, 2
items permitted under special general license provisions, 2 3 non-strategic
products of United States technology manufactured in foreign
countries," and strategic products of United States technology manufactured
abroad and exported before March 12, 1982.126
4. Prohibiting Imports of Goods or Services
(a) Direct Imports
Import controls are the second major tool for imposing economic
sanctions against Libya. The Treasury's Customs Services Division reg-
116. See 31 C.F.R. § 550.101(b) (1989) ("No license or authorization contained
in or issued pursuant to this part relieves the involved parties from complying with any
other applicable laws or regulations").
117. See 15 C.F.R. § 785.7 (a)(1)(i) and (ii) (1989). Case by case exceptions are
made for goods and technology outside of the United States on March 12, 1982. 15
C.F.R. § 785.7 (a)(2)(i)(A) and (B) (1989). Exceptions are also made for United
States' articles that only comprise 20 percent of a foreign good. 15 C.F.R. § 785.7
(a)(2)(i)(C) (1989).
118. See 15 C.F.R. § 785.7 (a)(1)(iii) (1989). Case by case exceptions are made
for goods and technology outside of the United States before December 20, 1983. 15
C.F.R. § 785.7 (a)(2)(ii)(B) (1989). Exceptions are also made for United States articles
that only comprise 20 percent of a foreign good. 15 C.F.R. § 785.7 (a)(2)(i)(C)
(1989).
119. 15 C.F.R. § 785.7(c) (1989).
120. 15 C.F.R. § 785.7(d) (1989).
121. 15 C.F.R. § 785.7(a) (1989).
122. Id.
123. Id.
124. See 15 C.F.R. § 785.7(a)(2)(i)(B) (1989).
125. See 15 C.F.R. § 785.7(a)(2)(ii)(A) (1989).

19901
SANCTIONS AGAINST LIBYA
ulates goods entering the United States. At all borders and points of
entry, customs agents determine whether or not to allow goods to enter
the United States. 12 Treasury regulations prohibit goods or services of
Libyan origin27 from entering the United States unless specifically authorized.
128 Publications and materials imported for news service dissemination
are exempted from the general import ban. 9
(b) Indirect Imports
Imports into the United States from third countries of goods containing
Libyan raw materials are determined by a "substantially transformed"
standard. The Treasury allows the importation of goods containing
Libyan origin materials from third countries when the Libyan
raw materials are "substantially transformed." 1 30 Conversely, any
goods originating in Libya transhipped from a third country to the
United States are prohibited from entry, when not "substantially transformed.
1 3 1 The Treasury Department provides no explicit definition of
"substantially transformed," but this term can be interpreted to mean
changing the raw material into a new product. 1 32 Transhipment provisions
have the effect of allowing "substantially transformed" Libyan
crude oil into the United States. Whether or not the oil meets the "substantially
transformed" test remains a subjective matter which may
pose a risk to would be importers. To avoid "evasion" charges and
other criminal penalties, the importer may wish to refrain from the
1 3
transaction.
5. Freezing Libyan Assets
Former President Reagan froze all transfers of Libyan assets in
126. See GAO REPORT, supra. note 2, at 13.
127. The term "goods or services of Libyan origin" within the context of Treasury
regulations means: "(a) Goods produced, manufactured, grown, or processed within
Libya; (b) Goods which have entered into Libyan commerce; [and] (c) Services performed
in Libya or by a Libyan national who is acting as an agent, employee, or contractor
of the Government of Libya, or of a business entity located in Libya .... " 31
C.F.R. § 550.303 (1989).
128. 31 C.F.R. § 550.201 (1989).
129. Id.
130. 31 C.F.R. § 550.408(a) (1989).
131. 31 C.F.R. § 550.408(b) (1989).
132. See' WEBSTER'S NEW WORLD DICTIONARY 635 (1984) (the dictionary defines
the word "transform" as (1) "to change the form or appearance of;" and (2) "to
change the condition, character, or function of."
133. Bialos & Juster, supra note 2, at 827-828.

216 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
order to further increase economic pressure against Libya, and as a
preventive measure against Libya seizing United States assets.' 3 4 The
Libyan assets freeze broadly affects most transfers of Libyan assets,
including restrictions on judicial actions involving Libyan property.
Specifically, the Treasury prohibits all unauthorized transfers of Libyan
property, or property interests within the United States or controlled
by U.S. persons, or their overseas branches. 3 5 Libyan sanctions
prohibit almost all conceivable means by which one could transfer Libyan
funds from- the United States. Treasury's definition of "property"
and "property interests" can be consolidated into four categories: (1)
commercial papers and securities;" 6 (2) tangible property;' 37 (3) real
estate and interests therein;' 38 and (4) a variety of other financial property
interests.' 39 Securities registered in the name of the Government of
Libya are also explicitly prohibited from being acquired, transferred,
imported, exported, or endorsed.' 0
Freezing transfers of U.S. funds to Libya passes constitutional
muster. In Farrakhan v. Reagan,' the district court rejected arguments
that the freeze violated a religious group's right to engage in
symbolic free speech by transferring funds to religious brethren in
Libya.' 2 The Free Exercise Clause does not mandate that a religious
organization be allowed to transmit money to foreign governments during
a national emergency.'" The court reasoned that when the U.S.
subjects a nation to national security controls, no alternative exists that
134. 134. Id. at 832. Freezing Libyan assets gives the Executive branch a bargaining
chip for negotiating the resolution of the declared emergency. See Dames & Moore
v. Regan, 453 U.S. 654, 673 (1981) (the United States Supreme Court upheld former
President Carter's Iranian assets freeze as a valid use of power pursuant to IEEPA in
dealing with the declared national emergency).
135. 31 C.F.R. § 550.209 (1989).
136. See 31 C.F.R. § 550.314 (1989) (such items include money, checks, drafts,
bullion, bank deposits, savings accounts, stocks, and bonds)
137. Id. (among other things: goods, wares, merchandise, chattels, stocks on hand,
goods on hand, goods on ships).
138. Id. (real estate mortgages, deeds of trust, leaseholds, ground rents, vendor's
sales agreements, and interests in rents).
139. Id. This category includes "royalties, book accounts, accounts payable, judgments,
patents, trademarks or copyrights, insurance policies, safe deposit boxes and
their contents, annuities, pooling agreements, contracts of any nature whatsoever, and
any other property, real, personal, or mixed, tangible or intangible, or interest or interests
therein, present, future or contingent." Id.
140. 31 C.F.R. § 550.209(b) (1989).
141. 669 F. Supp. 506 (D.D.C. 1987).
142. Id. at 512.
143. Id. at 511.

1990]
SANCTIONS AGAINST LIBYA
permits an organization to speak through financial contributions. Such
speech prevents the government from "effectuat[ing] its legitimate and
compelling interest in national security." 144 Transfer freezes therefore
pass constitutional scrutiny because the government's compelling interests
outweigh any personal liberties.
Provisions defining the word "transfer" empower economic sanctions,
§ 550.210 et. seq., to freeze Libyan assets gained via judicial
actions. Among other things, the term "transfer" means "the appointment
of any agent, trustee, or fiduciary; the creation or transfer of any
lien; the issuance, docketing, filing, or the levy of or under any judgment,
decree, attachment, injunction, execution, or other judicial or administrative
process . ,,."" No parties have directly challenged the
freeze on Libyan asset transfers pursuant to judicial rulings in court,
but the United States Supreme Court upheld the constitutionality of a
similar freeze imposed on Iranian assets. 46 By requiring licenses for
transfers of Libyan funds, the Treasury essentially requires that all
United States' persons seek Treasury authorization to sue Libya. 4 7
Even if a party prevailed in the action, the party could not collect the
judgment since all assets are frozen.
One cannot help but question the policy underlying this result.
Since the sanctions are designed to financially weaken Libya, then
judgments against that country should be allowed. However, this argument
fails for two major reasons. Allowing private United States citizens
to collect judgments against Libya would compel the United
States government to either reopen certain financial and political channels
to transfer the funds, or seize Libyan assets under United States
control to satisfy United States court judgments. Neither alternative
seems attractive. Reopening channels for transferring funds to satisfy
judgments would erode the symbolic effect of isolating Libya. 148 Seizing
funds could tempt Libya to likewise seize monies owed to American
companies for their equity interest in Libyan oil fields. Despite its
shortcomings, the policy denying judicial recovery against the Libyan
144. Id.
145. See 31 C.F.R. § 550.313 (1989).
146. See Dames, 453 U.S. at 673 (freezing assets permit the President to maintain
foreign assets as a "bargaining chip" for negotiating a declared national
emergency).
147. Bialos & Juster, supra note 2, at 834.
148. If America deals with Libya on a limited economic basis, it could send Libya
the messages that the United States government is not completely serious about enforcing
the sanctions. Such a signal could jeopardize the "scare factor" underlying economic
sanctions.

218 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
government remains within the true intent of the emergency sanctions.
Economic leverage can only be applied against Libya if all channels
between the U.S. and Libya are closed.
The Libyan assets freeze also incorporates extraterritorial features
that control overseas subsidiaries of United States financial institutions.
149 Overseas subsidiaries are prohibited from relinquishing Libyan
assets, securities, credit, or other financial or real property in which the
Libyan government has an interest. In Libyan Arab Foreign Bank v.
Bankers Trust Company 15 (hereinafter "Bankers Trust") the United
Kingdom dealt the United States' assets freeze a heavy blow when it
ordered the subsidiary of the New York incorporated bank to release
Libyan funds."' The Bankers Trust holding raises questions as to
whether the extraterritorial provisions can actually be applied to foreign
subsidiaries if the country in which the subsidiary is located
chooses to ignore the sanctions. In Bankers Trust the holding resulted
as a matter of law. 152 To rectify future problems of nations ignoring the
assets freeze, the United States needs other countries to enact similar
laws. 153
6. Regulating U.S. Travel to Libya
Finally, Treasury regulations generally prohibit travel to Libya
from the United States, and from Libya to the United States. Unless
authorized by license, any transaction by a United States person relating
to transportation to or from Libya, 54 any transportation to or from
the United States from Libya by any Libyan person by air or sea,' 55
and airport ticket sales to any person on a plane stopping in Libya are
149. See 31 C.F.R. § 550.209(a) (1989) (assets freeze applies to U.S. persons and
their overseas branches).
150. 26 I.L.M. 1600 (1987) (reproduced from the text provided by the High
Court of Justice (Queen's Bench Division, Commercial Court)).
151. In Bankers Trust the Libyan Arab Foreign Bank sued Bankers Trust Companies
English branch to seek release of over $131.5 million deposited in a "call" account.
In reaching its decision to order a transfer of funds, the high court reasoned that
"[a]s a general rule the contract between a bank and its customer is governed by the
law of the place where the account is kept, in the absence of agreement to the contrary."
Id. at 1614. Therefore, Reagan's Libyan assets freeze did not necessarily bind
the United Kingdom.
.152. See id..
153. See infra comment section III.A.l.(a) entitled "Improving economic leverage
through multilateral support".
154. 31 C.F.R. § 550.203(a) (1989).
155. 31 C.F.R. § 550.203(b) (1989).

1990]
SANCTIONS AGAINST LIBYA
illegal. 156 The sanctions further prohibit a U.S. person from engaging
in a transaction relating to travel by any U.S. citizen or permanent
resident alien with the purpose of travelling to Libya or activities
within Libya. 6 7 Licenses are not required for: (1) transportation necessary
to assist a U.S. citizen or permanent resident in departing from
Libya;' (2) travel taking place prior to February 1, 1986; 151 or (3)
1 60
travel relating to journalistic activity.
Minister Louis Farrakhan directly challenged the constitutionality
of travel prohibitions, but the United States District Court for the District
of Columbia concluded that he lacked standing to sue." 6 The
1986 emergency travel prohibitions cooperatively work with the 1981
ban on United States passports to Libya. Since December of 1981 a
special validation has been required for such passports. The U.S. passport
office usually denies such passports.
III. THE EFFECTIVENESS OF JANUARY 1986 U.S. ECONOMIC
SANCTIONS AS A DETERRENT AGAINST LIBYA'S ENGAGEMENT IN
STATE-SPONSORED INTERNATIONAL TERRORIST ACTIVITIES
A. Standards of Success
A "successful" economic sanction ideally induces the target country
into altering its policies to meet the sender's requested policy
changes. 6 ' The 1986 emergency sanctions should generally be considered
effective if the sanctions achieve the first policy goal of discouraging
Libya from supporting international terrorism. 163 Continued Libyan
support of terrorist activities does not necessarily imply total failure.
Economic sanctions may still achieve the second policy goal of punish-
156. See 31 C.F.R. § 550.101(c) (1989).
157. 31 C.F.R. § 550.207 (1989).
158. 31 C.F.R. § 550.207(a) (1989).
159. 31 C.F.R. § 550.207(b) (1989).
160. 31 C.F.R. § 550.207(c) (1989).
161. Farrakhan, 669 F.Supp. at 509-510. On February 5, 1986, Minister Farrakhan
denounced the Libyan sanctions at the Washington D.C. Press Club. He also
stated that he intended to travel to Libya. On February 8, 1986 former United States
Attorney General Edwin Meese, II told a Chicago paper that if Farrakhan travelled to
Libya he would be prosecuted. Farrakhan did travel to Libya on March 12, 1986 and
stayed until March 29, 1986. Farrakhan asserted that he did not use his passport to
leave Libya. Meese never pressed charges. Id. at 508. Farrakhan lacked standing since
he failed to show that he was immediately threatened with arrest for contemplated
First Amendment Activity. Id. at 510.
162. G. HUFBAUER & J. SCHOTT, supra note 6, at 32.
163. See supra text accompanying note 11.

220 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
ing Libya for its policies."" The policy change standard of success can
also be broadened to include achieving ancillary symbolic domestic and
foreign policy goals.' 6 5
1. Economic Leverage Theory
Studies evaluating economic sanctions primarily adopt an economic
leverage standard for measuring effectiveness.' 6 In other words,
the sender country attempts to apply economic leverage against the target
country, hoping that the increased pressure will cause the target
country to alter its policies. The power to apply economic leverage ultimately
lies in the sender country's ability to control the supply of goods
or funds required by the target country.' 6 7 To fully exert leverage, the
target country must be isolated from ideological or commercial allies
who might supply substitute goods or purchase the country's exports.' 68
Isolation ensures that the target state's economic costs of complying
with the sending state's demands are less than noncompliance.' 69
164. See supra text accompanying note 15.
165. See supra text accompanying note 18.
166. See Bialos & Juster supra note 2, at 842.
167. See Economic Sanctions, supra note 16, at 296.
168. See id. Other countries that are willing to help a sanctioned country avoid
sanctions by supplying goods, undercut the sender country's successful implementation
of sanctions. In 1967 South Africa and Portugal continued to supply Rhodesia with
over $160 million worth of goods and fuel despite United Nations sanctions. Id. at 313.
The aid lessened the affect of the sanctions. Therefore, sanctions ideally should be multilaterally
imposed to truly isolate the target country from alternate supply sources.
169. See id. at 296.

1990]
SANCTIONS AGAINST LIBYA
FIGURE 1
UNITED STATES TRADE WITH LIBYA 1985 - 1989.
Date Exports Imports
(Dollars) (%)a (Dollars) (%)b
1985 311,000,000 .15 47,000,000 .01
1986 46,200,000 .01 1,600,000 (c)
1987 101,000 (C) 7,322 (c)
1988 29,660 (c) 46,749 (c)
1989 2,621 (c) 0 d (C)
a Libyan portion of all United States exports for that year.
b Libyan portion of all United States imports for that year.
c Less than .01 percent.
d Commerce reports a zero figure, but this amount may actually
be so small that it simply was not recorded.
Source: U.S. Department of Commerce
The United States simply lacks significant economic ties with
Libya to control its economy via direct export controls. For example, as
Figure 1 indicates, statistics show that in 1985 United States exports to
Libya amounted to $311 million. After 1986 emergency sanctions, that
amount dropped to $46.2 million. During the following years, the value
of exports to Libya further declined until in 1989, as Figure 1 indicates,
the values only amounted to $2,621. Such a sharp decrease suggests
that refusing to sell Libya United States technology, goods, and
machinery, or other resources may result in Libya lacking the personnel
or supplies to run its oil plants. However, these effects are likely to
only have a short-to-medium term impact on the Libyan economy.17
Other countries readily export technology, goods, and machinery
to Libya. In 1987, Italy, Germany, the United Kingdom, and Japan
exported $4.3 billion worth of such goods to Libya. 7 ' Libya particularly
depends on Italy, Germany, the United Kingdom, and Japan for
agricultural products since it is self-sufficient in few foods.1 7 2 The small
amounts of export dollars the U.S. derived from sales to Libya proba-
170. Bialos & Juster, supra note 2, at 844.
171. BACKGROUND NOTES, supra note 8, at 1.
172. BACKGROUND NOTES, supra note 8, at 5.

222 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
bly came from food, clothing and medicine sales to Libya. The Treasury
permits direct United States exports of these goods to Libya.1 73
Economic sanctions regulating the export of U.S. goods to third
party countries for possible reexport to Libya effectively supplement
direct export controls. Current regulations focus on a business person's
knowledge for determining whether or not to deny export. The Treasury
prohibits exports when the exporter knows the materials will be
used in the Libyan petroleum or petrochemical industry.1 74 Exports are
also prohibited if the exporter knows the goods are scheduled for shipment
to Libya without coming to rest in the third party country or that
the exported technology is to be transformed into products used in the
petroleum industry. 175
Without these more specific export controls, a loophole in the export
prohibition scheme would exist. An ingenious exporter could circumvent
direct export controls by shipping goods to a third party country
and later exporting them to Libya. The "businessperson's state of
mind standard" may create some degree of uncertainty when attempting
to prove a subjective state of mind, but objective factors such as
correspondence or testimony could go towards proving intent.
Reexport controls similarly fill a gap in the overall export prohibition
scheme. Even though the government enacted certain aspects of
the reexport controls before the 1986 emergency sanctions, the reexport
controls contribute to the United States' ability to prevent Libya from
circumventing the emergency sanctions. Commerce maintains "longarm"
control over United States manufactured goods subject to national
security controls even after the goods arrive in third party countries.
176 By utilizing licensing provisions, Commerce prevents Libya
from gaining access to American goods and technology by purchasing
goods from a third party country willing to reexport the goods to
Libya. The effectiveness of reexport controls therefore lies in their ancillary
role as enforcers, as opposed to their active role as appliers of
economic leverage.
173. See supra note 105 and accompanying text.
174. See supra note 111 and accompanying text.
175. See supra notes 112-113 and accompanying text.
176. 15 C.F.R. § 785.7(a) (1989) states that:
a validated license or reexport authorization is required for all U.S.-origin
commodities or technical data, as well as foreign produced products of U.S.
technical data exported from the United States after March 12, 1982 subject
to national security controls for which written assurances against shipments to
Libya are required under § 779.4 of the Export Administration Regulations.

19901
SANCTIONS AGAINST LIBYA
FIGURE 2
TOTAL IMPORTS OF LIBYAN CRUDE OIL, NATURAL GAS LIQUIDS AND
REFINERY FEEDSTOCKS BY LIBYA'S OIL IMPORTERS EXPRESSED AS
THOUSANDS OF METRIC TONS.
Country 1985 1986 % of 1987 % of 1988 % of
change change change
France 3059 2426 -20.7 2158 -11.1 3778 75.1
Germany 9460 6717 -29.0 7077 5.4 11157 57.7
Greece 2906 1960 -32.6 2404 22.7 3630 51.0
Italy 13849 14257 +2.9 15477 8.6 17833 15.2
Spain 4315 6823 +58.1 4335 -36.5 4471 3.4
U.K. 1976 1860 -5.8 1491 -19.8 1967 13.8'
U.S. - - - - -
Source: Organization for Economic Cooperation Development, International
Energy Agency
This chart shows how much crude oil, natural gas liquids, and refinery
feedstocks were imported by Libya's major importers from 1985
to 1988. The United States no longer imports Libyan oil products.
However, this chart includes the United States figures for sake of contrast.
The following definitions are relevant for interpreting the chart:
CRUDE OIL - Mineral oil consisting of a mixture of hydrocarbons
of natural origin, yellow to black in color, of variable specific gravity
viscosity. It includes lease condensate (separate liquids) which is recovered
from gaseous hydrocarbons in lease separation facilities.
NATURAL GAS LIQUIDS (NGLs) - Liquid or liquefied hydrocarbons
produced in the manufacture, purification and stabilization of natural
gas. Their. characteristics vary, ranging from those of butane propane
to heavy oils. NGLs are either distilled with crude oil in
refineries, blended with refined petroleum products or used directly depending
on their characteristics.
REFINERY FEEDSTOCKS - A refinery feedstock is a product or a
combination of products derived from crude oil destined for further
processing in the refining industry other than blending.
United States import controls are similarly. ineffective under a
traditional economic leverage model. In theory, Libya should be very
vulnerable to economic sanctions which deprive the country of its oil

224 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
export revenues.' 77 The U.S. simply does not directly or indirectly import
Libyan products in significant enough quantities for a decrease in
importation to adversely effect the Libyan economy. Prior to the 1982
oil embargo, 178 United States imports of Libyan Pil reached a high of
$8.6 billion worth during '1980.'1 9 In 1983 the amount of Libyan crude
oil imported into the United States dropped to $900,000 worth. 8 '
When former President Reagan implemented the 1986 emergency
sanctions the U.S. only imported $1.6 million worth of Libyan crude
oil.1 8 1
Moreover, Libya directly offsets any lost U.S. oil sales by selling to
countries ready and willing to purchase its oil products. Libya primarily
sells its oil'to Italy, the Eastern bloc, the Federal Republic of Germany,
Spain, France, Japan, and the United Kingdom. As Figure 2
indicates, during 1986 Italy imported over 14 billion metric tons of
Libyan crude oil, NGLs, and refinery feedstocks. The next year, 1987,
Italy imported nearly 15.5 billion metric tons for a net increase of
8.6% 182 Italy drastically increased its Libyan oil products imports during
1988 when the country imported 17.8 billion metric tons. This figure
represents a 15.2% change over the 1987 figures. Unless the
United States can persuade Libya's major oil importers to cut back on
their own oil purchases, U.S. import controls shall continue to have a
limited impact on Libya's economy. 83
The Libyan assets freeze likewise fails as an instrument to coerce
Libya into altering its policy of supporting international terrorism.
When the emergency sanctions froze Libyan assets, Libya held less
than $1 billion worth of assets in the United States. 4 As is the case
with U.S. export and import trade with Libya, the U.S. does not control
a significant amount of Libyan assets to wield a large enough economic
club against Libya. Instead, the United States mainly froze Libyan
assets as a defensive measure to compensate U.S. oil firms in case
Libya seized their assets. 8 '
177. Libya depends on oil for 99 percent of its export revenues. GAO REPORT,
supra note 2, at 2.
178. See supra notes 46-47 and accompanying text.
179. BACKGROUND NOTES, supra note 8, at 5.
180. GAO REPORT, supra note 2, at 18.
181. Id.
182. During 1987 Libya earned $6.5 billion from oil sales to Italy, Eastern bloc
Germany, the Federal Republic of Germany, Spain, France, Japan, and the United
Kingdom. BACKGROUND NOTES, supra note 8, at 1.
183. See Bialos & Juster, supra note 2, at 845.
184. Id. at 845, n.151.
185. Id. at n.152.

1990]
SANCTIONS AGAINST LIBYA
Prohibitions against U.S. performance of United States-Libyan
contracts are devised as an additional tool for applying economic leverage.
In theory, removing skilled workers from Libya's oil industry
should have caused oil production to cease. However, in practice, the
ban yielded short-to-medium term success. In the short term, Libya
may have lacked workers for their oil plants, but as Figure 2 demonstrates,
Libya has obviously replaced these American workers. Libyan
oil plants are continuously producing oil for export. In 1988, Libya exported
40,869,000 million metric tons of oil products to its major trade
partners. This amount represents a 27% increase over the 32,183,000
million metric tons exported in 1986. Indeed, Libya could easily replace
American workers with Italian workers. During 1984, 12,000 to
15,000 Italians lived and worked in Libya.""
(a) Improving economic leverage through multilateral support
Increased long-term effectiveness of U.S. economic sanctions
against Libya invariably requires other nations to enact similar sanctions.
Other nations have indeed expressed a willingness to address Libyan
terrorism. On January 27, 1986 the European Community
(E.C.) 8 7 intensified its efforts to fight international terrorism. Foreign
Ministers of the twelve E.C. member states issued a statement in which
they decided to: (1) establish a permanent working body to promote
and monitor common action to discourage terrorism; (2) ban the export
of military equipment to countries supporting terrorism; and (3) prevent
their citizens and industries from taking commercial advantage of
antiterrorism sanctions.'
186. Bialos & Juster, supra note 2, at 817, n.64. Large numbers of Italians residing
in Libya are a result from the 1930s and 1940s preceding World War II. At this
time Libya came under Italian colonial rule. Mussolini intended to make Libya a
"fourth shore" of Italy in which thousands of Italians could live and grow crops. When
World War II ended the Allies liberated all of Italy's former colonies. Despite the
failure of the fourth shore, Italy currently has a valuable trade partner in Libya. C.
SEGRE, THE FOURTH SHORE: THE ITALIAN COLONIZATION OF LIBYA 182-186 (1975).
187. The European Community comprises Belgium, Denmark, France, Germany,
Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, and the United
Kingdom.
188. European Community News, January 28, 1986, reprinted in Evolution of
Sanctions, supra note 2, at 207-208. The statement does not specifically mention Libya.
However, the reference to the attacks at Rome and Vienna airports by the Abu Nidal
Group, known to be sponsored by Libya leaves no doubt that the E.C. were referring to
Libya. See supra notes 3-5, and accompanying text (documenting the bombings and
Libya's support for the Abu Nidal Group).

226 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
Likewise, in 1986 the United States, Canada, 189 the Federal Republic
of Germany (West Germany), Britain, Italy, France, and Japan
appeared ready to take a unified stand against Qadhafi and his terrorist
activities. The seven industrialized countries made Libyan sponsored
terrorism a key topic of their 12th annual economic summit held in
Tokyo, Japan. 9 ' The nations combined to produce a declaration on international
terrorism. 9 ' The sole trade restriction included in the dec-
189. On January 10, 1986, Canadian Prime Minister Brian Mulroney issued a
press statement on international terrorism stating the governments measures to combat
terrorism. Reprinted in Evolution of Sanctions, supra note 2, at 202. The government
immediately ceased all financial assistance to Canadian firms pursuing business in
Libya, and insurance coverage provided by the Export Development Corporation on
new Canadian business activities in Libya. Id. at 203. The controls supplemented existing
prohibitions against export military equipment to Libya. Id.
Canadian-imposed unilateral economic sanctions against Libya probably would
have an effectiveness similar to the U.S.-imposed sanctions. Canada also lacks significant
economic ties with Libya to exert economic leverage against that country. In 1988
Canada only exported $4 million worth of goods to Libya, and imported $49 million
worth of goods. INTERNATIONAL MONETARY FUND, DIRECTION OF TRADE STATISTICS,
1989 Y.B. 257 [hereinafter IMF STATISTICS].
190. See The New York Times, April 29, 1986, at A6, col. 1.
191. The Tokyo summit declaration on international terrorism states in pertinent
part:
1. We, the Heads of State or Government of seven major democracies and
representatives of the European Community, assembled here in Tokyo,
strongly reaffirm our condemnation of international terrorism in all of its
forms, of its accomplices and of those, including governments, who sponsor
it. . .
2. [W]e pledge ourselves to make maximum effort to fight against
[terrorism]. ...
3. Terrorism must be fought effectively through determined, tenacious, discreet
and patient action combining nationals measures with international cooperation.
. . . Therefore, we urge all like-minded nations to collaborate with
us . .. .
4. We specify the following as measure open to any government concerned to
deny to international terrorists the opportunity and the means to carry out
their aims, and to identify and deter those who perpetrate such terrorism.
We have decided to apply these measures within the framework of international
law and in our own jurisdictions[,] . . . and in particular of Libya,
until such time as the state concerned abandons its complicity in, or support
for, such terrorism. The measures are:
- refusal to export arms to states which sponsor or support terrorism;
- -strict limits on the size of the diplomatic and consular missions. ..
which engage in such activities...;
- denial of entry to all persons, including diplomatic personnel . . . convicted
of such a terrorist offense;
- improved extradition procedures . . . in respect of nationals of states

1990]
SANCTIONS AGAINST LIBYA
laration implemented a policy of refusing to export arms to states sponsoring
or supporting terrorism. 92 .The Soviet Union, one of Libya's
largest arms suppliers, later adopted the suggested ban on exporting
arms to Libya."' However, Libya turned to alternative suppliers such
as Greece, Brazil, and Yugoslavia for arms. 194
The dozens of nations participating in the E.C. meeting, and the
industrialized nations summit had a prime opportunity to enact widespread
multilateral economic sanctions against Libya. Instead, the nations
only agreed to a lone ban on military exports to Libya. Long-term
economic leverage can only be properly applied against Libya if major
markets and suppliers are eliminated.' Simply banning sales of military
equipment to Libya does not solve the problem of cutting off
Libya's ability to finance terrorist activities. Oil sales income provides
the life blood for Libya's economy. 9 ' Proceeds from oil sales enable
Libya to purchase machinery and transport equipment.' 97 The United
which sponsor or support terrorism;
- stricter immigration and visa requirements in respect of nationals of
states which sponsor or support terrorism;
- the closest possible bilateral and multilateral cooperation between police
and security organizations and other relevant authorities in the fight
against terrorism.
5. We will maintain close cooperation in furthering the objectives of this
statement and in considering further the measures ....
Reuters Wire Service, May 5, 1986 (emphasis added).
192. Id.
193. FEDERAL RESEARCH DIVISION LIBRARY OF CONGRESS, LIBYA: A COUNTRY
STUDY xx (1989) [hereinafter COUNTRY STUDY].
194. Id.
195. See supra notes 166-168 and accompanying text.
196. Oil products constitute Libya's chief export product. In 1988, export sales to
Libya's major market countries listed in Figure 2 amounted to nearly $5 billion. IMF
STATISTICS, supra note 189, at 257.
197. See BACKGROUND NOTES, Supra note 8, at 1 (listing machinery and transport
equipment as major imports).

228 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
99 Ger-
States must convince Libya's major trade partners 1 98-France, many, 200 Italy, 201 Spain, 20 2 the United Kingdom, 20 3 and Japan 2 4-to purchase oil elsewhere and sell their goods to another market. Together,
these countries represent the majority of Libya's trade
198. FIGURE 3
MAJOR LIBYAN TRADE PARTNERS 1985 - 1988
(IN MILLIONS OF U.S. DOLLARS)
Country 1985 1986 1987 1988
Exports
France 706 321 435 492
Germany 1,930 882 1,056 1,381
Italy 3,268 1,765 2,170 2,316
Japan 7 7 0 5
Spain 1,004 864 740 600
U.K. 360 183 199 L 182
Imports
France 268 248 266 318
Germany 568 564 562 697
Italy 1,380 1,039 1,226 1,382
Japan 281 216 330 663
Spain 190 137 141 138
U.K. 339 418 397 462
Source: IMF STATISTICS, supra note 189 at 257-258.
199. As figure 2 indicates, France imported 3.8 million metric tons of oil products
in 1988 from Libya. In 1988 France exported $318 million worth of goods to Libya.
See supra note 198.
200. As figure 2 indicates, Germany imported 11.2 million metric tons of oil products
in 1988 from Libya. In 1988, Germany exported $697 million worth of goods to
Libya. See supra note 198.
201. As figure 2 indicates, Italy imported 17.8 million metric tons of oil products
in 1988 from Libya. In 1988 Italy exported $1.4 billion worth of goods to Libya. See
supra note 198.
202. As figure 2 indicates, Spain imported 4.5 million metric tons of oil products
in 1988 from Libya. In 1988, Spain exported $138 million worth of goods to Libya. See
supra note 198.
203. As figure 2 indicates, the United Kingdom imported 1.7 million metric tons
of oil products in 1988 from Libya. In 1988, the United Kingdom exported $462 million
worth of goods to Libya. See supra note 198.
204. Japan exported $663 million worth of goods to Libya in 1988. See supra note

1990]
SANCTIONS AGAINST LIBYA
income. 2 "'
Western European and other nations, hesitate to criticize Libyan
policies too loudly. Commentators suggest this hesitation stems from a
dependence on Libyan trade, and Western Europe's close physical
proximity to Libya. 2 "' The assertion that certain nations hesitate to
criticize Libya's support of international terrorism for fear of jeopardizing
their oil supply ignores a rudimentary fact. Oil could be purchased
from other members of Oil Exporting Countries (OEC). 2 °7 The U.S.
government chose such an alternative in 1982 after passing the oil embargo
against Libya. 2 " 8
Immediately following the embargo, the dollar value of Libyan oil
imported into the U.S. dropped from $8.6 billion to $900,000.2 ° 9 In
1988, as indicated by figure 2, the U.S. continued to import only a
minuscule amount of Libyan oil products. The bulk of purchased oil
came from other OEC countries. 21 0 If other OEC members are willing
to sell oil to the United States during its Libyan oil embargo, certain
members may also be willing to sell to other countries boycotting Libyan
oil. It seems unlikely that other Arab oil producing countries would
hesitate to supply former Libyan oil to markets solely because of Arab
unity. Saudi Arabia's relationship with Libya remains strained at
205. In 1988, France, Germany, Italy, Spain, the United Kingdom, and Japan
comprised $49.8 billion or 64.9% of Libya's total export income. See IMF STATISTICS,
supra note 189, at 257-258. Likewise, in 1988, Libya purchased $36.3 billion worth of
goods from these countries. See id. These purchases amounted to 47.5% of Libya's
total import purchases. See id.
206. Bialos & Juster, supra note 2, at 818. The authors imply that if Libya's
major trade partners criticize Qadhafi's terrorist policies too loudly, Libya could retaliate
against the countries by decreasing their oil sales, or applying terrorist reprisals.
207. The IMF considers the OEC group to include Algeria, Indonesia, the Islamic
Republic of Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, the
United Arab Emirates, and Venezuela.
208. See supra notes 46-47 and accompanying text.
209. See supra text accompanying notes 178-180.

230 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
best. 21
The rationalization that Western Europe hesitates to criticize
Qadhafi too loudly due to its close proximity to Libya possesses some
merit. The United Kingdom and other Western European countries periodically
experience terrorist acts. The 1986 bombings of the Rome
and Vienna airports support this proposition. Nevertheless, Western
European nations must courageously take stern economic action
against Libya to discourage Libyan support for international terrorism.
2. Symbolic Success
Despite the long-term inability of the 1986 emergency sanctions to
apply economic leverage against Libya, other positive domestic and foreign
policy results did materialize. The 1986 emergency economic sanctions
have succeeded in achieving the long-term policy goal of symbolically
demonstrating the United States' intolerance toward Libyan
state-sponsored terrorism. United States Presidents most frequently apply
export controls as tools to symbolically "demonstrate opposition" or
"distance" the United States from repressive governments or similarly
express disapproval of "extreme acts". 12 Libyan sanctions reflect both
the Reagan and Bush administrations' disapproval of "extreme acts" of
Libyan terrorist activities.
210. FIGURE 4
Major U.S. Import Quantities of Crude Oil, NGL, And Refinery
Feedstocks from OEC Countries for 1988 Expressed as Thousands
of Metric Tons.
Country
Indonesia
Iraq
Saudi Arabia
Nigeria
Venezuela
Amount
9241
17530
52030
30177
28464
SOURCE: INTERNATIONAL ENERGY AGENCY, QUARTERLY OIL STATISTICS AND ENERGY
BALANCES: 2ND QUARTER 1989 328 (1989).
211. COUNTRY STUDY, supra note 193, at xxvii.
212. Abbott, supra note 24, at 823. The United States' imposition of economic
sanctions against South Africa to demonstrate opposition toward that country's racially
oppressive system of Apartheid most vividly illustrates this premise. See supra note 21,
and accompanying text.

1990]
SANCTIONS AGAINST LIBYA
a. Taking a Stand Against State-Sponsored Terrorism
Enacting economic sanctions fulfills the domestic policy goal of reassuring
Americans that their government is combatting terrorism.
While at first glance this may seem of minimal importance, the underlying
purpose has serious political implications. The public bases the
President's effectiveness on his ability to respond to international crises
and threats. To achieve success in the public eye, the President must
carefully tailor his responses to international incidents. 213 Public approval
of how the President responds to international crises and threats
translates into votes during reelection, and popularity for his political
party.
The 1986 emergency sanctions have likewise shown long-term Success
in achieving the foreign policy goal of increasing international action
against Libya and other nations sponsoring terrorist activities.
Members of the E.C. and nations participating in the industrialized nations'
summit took various non-military measures against Libya following
the U.S. sanctions. Although the responses did not involve substantial
economic sanctions, the measures nevertheless embraced the
American idea that Libyan terrorism requires a response of disapproval
by all nations.
At best, the travel ban achieves the third policy goal of symbolically
demonstrating opposition against Libyan policies. Preventing U.S.
citizens from travelling to Libya does not squarely fit into the sanctions
arsenal as a tool for applying economic leverage. The ban mainly seeks
to protect American citizens from Libyan reprisals. Theoretically, such
a restriction succeeds over the long-term by informing western nations
that travelling to, or residing in Libya poses a high safety risk.
IV. CONCLUSION
The 1986 emergency economic sanctions are an outgrowth of the
Reagan administration's intolerance for Libya's policy of supporting international
acts of terrorism. Nonemergency export and import controls
failed to coerce Libya into changing its policies, so former President
Reagan enacted widespread controls restricting exports, imports, finan-
213. When word reached America that an American died in the 1986 airport
bombings, public disdain for Qadhafi drastically increased. This public disdain transferred
into political pressure for former President Reagan to "respond". After the
bombing of Qadhafi's compound, few Americans expressed sympathy when preliminary
reports indicated that Qadhafi died. See generally ABC Video, supra note 105. An
argument can therefore be made for a general public approval of the bombing.

232 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
cial transfers, and contract performance between Libya and all U.S.
persons. Unfortunately, in 1986 the United States engaged in little
trade with Libya. Since the 1982 oil embargo on Libyan oil, the United
States has purchased very few products from Libya. Nor has the
United States sold a significant amount of machinery to Libya. From
the beginning, these two factors doomed the goal of applying economic
leverage against Libya to coerce the country into changing its policies.
The sanctions only adversely affected Libya for a short period of time.
As time progressed, Libya relied on is major trade partners such as
Italy to buy its oil and provide the much needed machinery.
Despite only short-term success in applying economic leverage that
adversely affected the Libyan economy, the sanctions realize long-term
symbolic success. The sanctions convey to the American people and
foreign nations a message that the U.S. will no longer stand idly by as
Qadhafi commits acts of international terrorism. Moreover, other countries
have followed the U.S. lead and enacted retaliatory measures
against Libya.
Colonel Qadhafi remains a nemesis to the United States and other
western countries. Intelligence reports indicate that Libya possesses the
ability to produce mustard gas for use in germ warfare. President Bush
realized the continued Libyan threat and chose to renew emergency
economic sanctions against Libya. Other nations must staunchly support
the "spirit" of the sanctions by enacting their own stringent economic
controls against Libya. Alternative purchasers and suppliers allow
Libya to earn the money it uses to finance international terrorism
from other sources. Unless Libya's major trade partners join the battle,
economic sanctions against Libya shall be confined to intangible symbolic
success.
John Frederick Cooke

NOTE
REEVALUATING THE "CORPORATE VEIL" METAPHOR IN
THE CONTEXT OF INTERNATIONAL TRADE: A CRITICAL
ANALYSIS OF HESTER INTERNATIONAL CORPORATION v.
FEDERAL REPUBLIC OF NIGERIA
I. INTRODUCTION ................................... 233
II. STATEMENT OF THE CASE ........................... 234
III. HISTORICAL PERSPECTIVE ............................. 235
A. The Nature of the Corporate Entity in General ... 235
B. The Corporate Entity in the Context of International
Trade .... ............................ 237
IV. ANALYSIS OF THE FIFTH CIRCUIT'S RULING IN HESTER . 239
A. Hester's Strict Reliance on Direct Control ........ 239
B. Equitable Principles and the FSIA .............. 240
C. A Consideration of Nigeria's Socio-Economic Backgro
und .................................... .. 24 3
D. HIC's Expectations ........................... 245
V. IMPLICATIONS OF THE HESTER RULING ................ 247
V I. C ONCLUSION . .................................... 248
I. INTRODUCTION
The recent case of Hester International Corporation v. Federal
Republic of Nigeria' revisits the often-debated concept of disregarding
the corporate entity in the context of international trade. Specifically,
the Fifth Circuit's ruling brings into question the standards and procedures
used to determine the existence of the -"alter ego status" of a
government-owned corporation of a foreign state.
This note suggests that the U.S. courts should take a broad view
when considering the validity of a corporate entity which is an agent of
a foreign state. Hester illustrates a judicial willingness to apply the domestic
principles of corporate law to an inappropriate situation. A thorough
analysis of the Nigerian context will demonstrate the distinctive
natures of domestic corporations and Nigerian corporations. Because of
such differences, the ruling in Hester is inherently flawed. Ultimately,
1. 879 F.2d 170 (5th Cir. 1989).
(233)

234 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
the courts should not be as hesitant to "pierce the corporate veil" in the
international context as they traditionally have been in the domestic
sense.
After reviewing the pertinent facts of the Hester case, this note
will briefly discuss the general nature of corporate entities. Thereafter,
the analysis will focus on Nigeria's relationship with its wholly-owned
company vis-a-vis the existing case law on international corporate entities
and the validity of their limited liability status. Finally, the Fifth
Circuit's ruling will be questioned in light of the existing Nigerian
context.
II. STATEMENT OF THE CASE
As part of a continuing program to develop the economic infrastructure
of Nigeria, 2 the Hester International Corporation (HIC) entered
into an agreement on April 9, 1981 with the National Grains
Production Company, Limited of Nigeria (NGPC) 3 and the State of
Cross River 4 to implement and develop the Bansara Rice Farm Project.'
The partnership among HIC, NGPC and Cross River dissolved
when the Nigerian government refused to guarantee a loan to HIC, 6
thus prompting a financial crisis and the ultimate abandonment of the
entire project.
HIC brought a breach of contract suit against the Nigerian government
on the basis that NGPC was an alter ego or agent of the
Nigerian government and consequently argued that Nigeria was bound
by a provision in the agreement to provide "adequate security" for the
2. See infra note 51 and accompanying text.
3. This company was wholly owned by the Federal Republic of Nigeria and its
Board of Directors was entirely appointed by the Nigerian government. The main objective
of the NGPC was to establish a 4,000 hectare mechanized grain farm in each of
the 19 Nigerian states. P. KOEHN, PUBLIC POLICY AND ADMINISTRATION IN AFRICA 98
(1990) [hereinafter KOEHN].
4. This is a political subdivision of the Federal Republic of Nigeria. NGPC is no
longer an actual party to the appeal before the 5th Circuit, but was nonetheless a
significant presence in determining HIC's frame of mind and the extent, if any, of
Nigeria's participation in the Bansara agreement. Hester, 879 F.2d at 172.
5. The vehicle for this project was a limited liability joint venture (Bansara Rice
Farms, Ltd.) in which NGPC and Cross River each owned 30% of the interest in the
project and HIC owned 40%. Id. at 171.
6. As part of the agreement HIC was obligated to secure all of the off-shore financing
for the project with the stipulation that the Federal Republic of Nigeria would
provide an adequate guarantee for any such loan. This concession (the guarantee) was
made by NGPC on behalf of Nigeria and did not directly involve the participation of
the Nigerian government itself. Id. at 171-72.

1990] HESTER v. FED. REPUBLIC OF NIGERIA
external financing.'
This case entered the federal arena on diversity grounds, and HIC
made its claim pursuant to the Commercial Activity Exception of the
Foreign Sovereign Immunity Act (FSIA). 8 However, the Fifth Circuit
never actually addressed this argument because, in affirming the lower
court's decision, NGPC was deemed to be an independent juridical entity
and not an alter ego or instrumentality of the Federal Republic of
Nigeria. Consequently, HIC's claim against Nigeria failed for lack of
subject matter jurisdiction over Nigeria.9
III. HISTORICAL PERSPECTIVE
A. The Nature of the Corporate Entity in General
It is axiomatic that the corporate form is a legally valid enterprise
which inherently enjoys the benefit of limited liability." Not surpris-
7. Id. at 172.
8. 28 U.S.C. §1604 provides:
[Siubject to existing international agreements to which the United States
is a party at the time of the enactment of this Act a foreign state shall be
immune from the jurisdiction of the courts of the United States and of the
States except as provided in sections 1605 to 1607 of this chapter.
28 U.S.C. §1605(a)(2) provides:
[A] foreign state shall not be immune from the jurisdiction of courts of
the United States or of the States in any case in which the action is based
upon a commercial activity carried on in the United States by the foreign
state; or upon an act outside the territory of the United States in connection
with a commercial activity of the foreign state elsewhere; or upon an act
outside the territory of the United States in connection with a commercial
activity of the foreign state elsewhere and that act causes a direct effect in the
United States.
9. In essence, the 5th Circuit held that Nigeria could not be sued under the Commercial
Activity Exception to the FSIA because Nigeria was not a party to the commercial
activity in question. It is this point that is questioned by this author's note.
10. "Separate legal personality has been described as an 'almost indispensable aspect
of the public corporation.' " First National City Bank v. Banco Para El Comercio
Exterior De Cuba, 462 U.S. 611, 625 (1983), quoting FRIEDMAN, GOVERNMENT EN-
TERPRISE: A COMPARATIVE ANALYSIS, IN GOVERNMENT ENTERPRISE: A COMPARATIVE
STUDY, 303, 314 (1970) [hereinafter FRIEDMAN]. "Limited liability is the rule, not the
exception; and on that assumption large undertakings are rested, vast enterprises are
launched, and huge sums of capital are attracted." Anderson v. Abbott, 321 U.S. 349,
362, reh. denied, 321 U.S. 804 (1944). It is important to understand that the concept
of limited liability suggests that the "owners" of a corporation will not be held liable
for the acts of the corporation itself. Applied to the instant case, the 5th Circuit implies
that Nigeria, the sole owner of the corporate enterprise (NGPC), will not be held responsible
for the breach of contract provoked by the NGPC. Hester, 879 F.2d at 181.

236 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
ingly, American courts have traditionally been reluctant to disregard
this notion of limited liability which is derived from the independent
status of the corporate entity." However, when corporations own other
corporations, 2 the basic foundation of limited liability begins to wear
thin. Judicial opinions continually warn against the use of overused
metaphors such as "piercing the corporate veil", "alter ego" status,
"sham corporation" and "mere instrumentality" as a substitute for detailed
factual inquiries.' 3
Nevertheless, the corporate form and the companion concept of
limited liability are in no sense absolute. There are three commonly
recognized scenarios in which a private corporation will not be regarded
as legally separate from its owners. The first such exception is
illustrated by the case of NLRB v. Deena Artware, Inc." in which the
Supreme Court ruled that a corporate entity can be so extensively controlled
by its owner that a relationship of principal and agent is thereby
created.' Within such a framework, one party (agent or principal) can
be held liable for the misgivings of the other.' 6
The second exception to the doctrine of corporate entity involves
the equitable principle that the corporate form will be disregarded
11. "This power to pierce the corporate veil, though, is to be exercised 'reluctantly'
and 'cautiously' and the burden of establishing a basis for the disregard of the
corporate fiction rests on the party asserting such claim." DeWitt Truck Brokers v. W.
Ray Fleming Fruit Co., 540 F.2d 681, 683 (4th Cir. 1976), quoting Pardo v. Wilson
Line of Washington, Inc., 414 F.2d 1145, 1149 (D.C. Cir. 1969) and County Maid,
Inc. v: Haseotes, 299 F. Supp. 633, 637 (E.D. Pa. 1969).
12. This basically refers to the traditional relationship of a parent corporation and
a subsidiary.
13. Judge Cardozo succinctly described the situation in Berkey v. Third Avenue
Ry. Co., 244 N.Y. 84, 94, 155 N.E. 58, 61 (1926): "The whole problem of the relation
between parent and subsidiary corporations is one that is still enveloped in the mists of
metaphors. Metaphors in law are to be narrowly watched, for starting as devices to
liberate thought, they end often by enslaving it." More than half a century later, Cardozo's
words maintain an enormous influence in judicial circles. See First City Bank v.
Banco Para El Comercio Exterior De Cuba, 462 U.S. 611, 623: "Justice Cardozo
warned. . .against permitting epithets to substitute for rigorous analysis." See also
Riguelme Valdes v. Leisure Group, Inc., 810 F.2d 1345, 1352 (5th Cir. 1987); United
States v. Jon-T Chemicals, Inc., 768 F.2d 686, 691 (5th Cir. 1985); Ramirez de Arellamo
v. Weinberger, 745 F.2d 1500, 1516 (D.C. Cir. 1984).
14. 361 U.S. 398 (1960).
15. "Dominion may be so complete, interference so obtrusive, that by the general
rules of agency the parent will be a principal and the subsidiary an agent." Id. at 403,
quoting Berkey, 244 N.Y. at 95, 155 N.E. at 61. This particular exception necessarily
involves a detailed factual analysis of the relationship between the owners (the alleged
principal) and the corporation (the alleged agent).
16. NLRB v. Deena, 361 U.S. at 403.

1990]
HESTER v. FED. REPUBLIC OF NIGERIA
when doing otherwise would result in fraud or injustice. 7 This exception
also requires a thorough investigation of facts on a case-by-case
basis as well as a consideration of the far-reaching implications of recognizing
the corporate entity in a particular situation. Although a court
which is well-versed in the intricacies of a given case is in a far superior
position to make such an analysis, I will attempt to make such an argument
below with regard to the Hester case due to an apparent void in
the Fifth Circuit's opinion. 18
An additional exception, which is typically considered a subset of
the fraud/injustice argument, is that courts will not give effect to a
corporation which is created to defeat public policy.' 9
Finally, the presumption of a corporation's independent status can
be.overcome if the corporate entity is found to be abusing the corporate
form."
B. The Corporate Entity in the Context of International Trade
The landmark Supreme Court case involving corporate instrumentalities
of a foreign state is First National City Bank v. Banco Para El
Comercio Exterior De Cuba. (Bancec) zl Specifically, this case purports
to set the standard for determining whether a governmental entity is
separate from the government itself. In 1960, the Cuban government
established Bancec as an official institution for foreign trade with full
juridical capacity of its own. While Bancec was attempting to collect
on a letter of credit issued by defendant Citibank, the Cuban government
seized and nationalized all of Citibank's assets through a "Bank
17. See Taylor v. Standard Gas Co., 306 U.S. 307, 322 (1939); Pepper v. Litton,
308 U.S. 295, 310 (1939). With regard to the latter case, it is important to realize that
the court allowed for equitable subordination on the basis that there was a fraudulent
conveyance made possible by the nature of the corporate form; in such a case there is
no need to even consider an "alter ego" argument since the fraud alone will suffice as a
justification for disregarding the corporate entity.
18. See infra notes 48-49 and accompanying text.
19. In Bangor Punta Operations, Inc. v. Bangor & Aroostook R. Co., 417 U.S.
703, 713 (1974), the Supreme Court observed: "Although a corporation and its shareholders
are deemed separate entities for most purposes, the corporate form may be
disregarded in the interests of justice where it is used to defeat an overriding public
policy." See also Anderson v. Abbott, 321 U.S. 349 (1944).
20. See Walkovsky v. Carlton, 18 N.Y.2d 414, 223 N.E.2d 6 (1966) in which the
court suggests that if certain formalities such as the corporate books, bank accounts,
officers and directors, meeting minutes, etc. are used in a peculiar manner, there might
be grounds for disregarding the corporate entity.
21. 462 U.S. 611 (1983).

238 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
Nationalization Law." ' 22 Subsequently, when Bancec brought suit
against Citibank on the letter of credit in Federal District Court, Citibank
asserted a right to set off the value of its seized Cuban assets
against the claim. The ultimate issue in the case was whether the acts
and liabilities of the foreign sovereign government of Cuba could be
attributed to the state-owned banking entity, Bancec." 3
The Supreme Court ruled that Bancec was not an entity independent
from the Cuban government. In doing so, the Court outlined the
common features attributed to an ordinary, separate government instrumentality,
as far as such an ideal can exist. This "Bancec Test" is
as follows: The instrumentality is set up as a separate juridical entity;
The instrumentality is primarily responsible for its own finances; and
The instrumentality is not subject to the same budgetary constraints
with which ordinary government agencies must comply. 24
Bancec serves as a model for defining the so-called typical separate
government-owned entity which is afforded a presumption of independent
status. However, the actual facts of Bancec paint a scenario which
has little in common with the Hester case. The former involves a U.S.
corporation seeking a remedy against a corporation of a foreign state
for actions of the foreign state itself. The latter implicates a breach of
contract remedy against the foreign state (Nigeria) for actions taken
by the state-owned corporation (NGPC). 2 5 Nevertheless, Bancec does
reiterate the three general exceptions to the corporate entity doctrine 26
and applies them to the realm of corporations owned by foreign states.
Thus, while Bancec is useful as a starting point to place the Hester
opinion in perspective, consideration of other more recent federal case
law is also necessary to properly analyze the Fifth Circuit's ruling in
Hester.
22. Id. at 614.
23. Hester, 879 F.2d at 177 (construing Bancec).
24. Bancec, 462 U.S. at 624. According to the Court, "[t]hese distinctive features
permit government instrumentalities to manage their operations on an enterprise basis
while granting them a greater degree of flexibility and independence from close political
control than is generally enjoyed by government agencies. These same features frequently
prompt governments in developing countries to establish separate juridical entities
as the vehicles through which to obtain the financial resources needed to make
large-scale national investments." Id. at 624-625.
25. Therefore, the two cases differ not only in terms of the type of action brought
but also in terms of the parties involved in the suit.
26. See supra notes 14-20 and accompanying text.

1990]
HESTER v. FED. REPUBLIC OF NIGERIA
IV. ANALYSIS OF THE FIFTH CIRCUIT'S RULING IN HESTER
The Hester case in and of itself does not represent a dramatic shift
in the law of corporations. However, it does serve to magnify the vulnerability
of the current domestic law in light of the global economic
situation 27 and prompts a reexamination of the process courts use to
determine the independent status of a foreign state-owned corporation.
A. Hester's Strict Reliance on Direct Control
The Hester opinion relies on Kalamazoo Spice Extraction Company
v. Provisional Military Government of Socialist Ethiopia (Kal-
Spice) 28 as a prime illustration of a situation where a government exercises
direct control over an instrumentality so as to preclude the independent
status of that instrumentality. In 1966, Kal-Spice formed and
incorporated the Ethiopian Spice Extraction Share Company (ES-
ESCO) under the laws of Ethiopia and commenced significant extraction
and trading in the spice industry. 2 " In 1975, the governmental
party, the Provisional Military Government of Socialist Ethiopia
(PMGSE), expropriated without compensation a substantial portion of
°
Kal-Spice's stock interest in ESESCO and thereby gained majority
control of this entity."' In order to substantiate its claim against
PMGSE (for the expropriation) under the Commercial Activity Exception
of FSIA,' 2 Kal-Spice needed to somehow impute the U.S. contacts
27. Hester is relevant in the sense that the international economic arena is constantly
changing and the laws must adapt to reflect these changes: Nigeria, with its 114
million inhabitants, is Africa's most populous nation. Furthermore, it is extremely rich
in natural resources. However, it remains one of the world's poorest nations with a per
capita gross national product of only $308. In fact, Nigeria is one of only 42 countries
considered to be a "low income economy" by the World Bank. Johns, A U.S, Policy For
Nigeria: Supporting Political and Economic Freedom, HERITAGE FOUNDATION RE-
PORTS, No. 730 at 1 (1989). Given Nigeria's recent attempt to bridge the gap between
its wealth of natural resources and the poverty of its population (see infra note 51 and
accompanying text), our legal system should look to help, rather than hinder, such
mutually beneficial investment opportunities between the U.S. and Nigeria.
28. 616 F. Supp. 660 (D.C. Mich. 1985).
29. Id. at 661.
30. Up until this point, Kal-Spice owned 80% of this stock and exerted control
over the operation of the company. Id. It was estimated that Kal-Spice's stock interest
had been reduced from 80% to 40% by virtue of the government's expropriation decree.
Id. at 662.
31. Although PMGSE was purported to have obtained only 51 % of the stock,
Kal-Spice alleged that without majority ownership and control, its stock would be virtually
worthless. Id. at 663.
32. See supra note 8 and accompanying text.

240 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
of ESESCO to PMGSE, the named defendant. 33 Consequently, the
Federal District Court of Michigan had to determine whether PMGSE
exerted sufficient control over ESESCO so as to overcome the presumption
of ESESCO's independent status.
The Kal-Spice court had no difficulty finding that PMGSE exercised
sufficient control over ESESCO, thus negating its, independent
status. Specifically, the Kal-Spice court articulated the following elements
which constituted such direct control: PMGSE appointed a majority
of the board of directors; PMGSE required that all checks in
excess of $25,000 be signed by one of these government appointed directors;
the Ministry of National Resources Development, the governmental
agency assigned to supervise ESESCO, approved all invoices for
shipments exceeding $13,000; and several ESESCO invoices for shipments
contained the seal of PMGSE. 34 After considering these factors
in aggregate, this court concluded that the independent status of ES-
ESCO should be disregarded and that Kal-Spice could impute the activities
of ESESCO in the United States to the Ethiopian government
so as to give Kal-Spice a viable medium for litigating its claim against
PMGSE for expropriating the stock.
Kal-Spice serves as a model for analyzing whether government
control of an instrumentality is so extensive as to overcome the presumption
of that instrumentality's independent status. Although the
Nigerian government did not necessarily exhibit the requ-isite control
over the day-to-day operations of the NGPC in the instant case, 36 it is
arguable that a strict adherence to the Kal-Spice formula is both inappropriate
and counterproductive. In essence, direct management of
daily corporate operations is not the only way for a foreign state to
exert "control" over an instrumentality. A thorough analysis of the totality
of the circumstances of the instant case reveals such alternative
possibilities of inferring control.
B. Equitable Principles and the FSIA
3 5
In reference to Nigeria's 100% ownership of NGPC, the Fifth
33. Kal-Spice, 616 F.Supp. at 666.
34. Id.
35. "To continue to recognize the separate legal status of ESESCO under these
circumstances would insulate the PMGSE from liability for its expropriation of Kal-
Spice's property interest in ESESCO while permitting the PMGSE, through ESESCO,
to profit from its commercial activities in the United States." Id. Therefore, in addition
to the primary argument that PMGSE exerted sufficient control, this case also involves
a consideration of avoiding injustice or inequity.
36. Hester, 879 F.2d at 181.

1990]
HESTER v. FED. REPUBLIC OF NIGERIA
Circuit in Hester was over-anxious in accepting the Eleventh Circuit's
somewhat analogous ruling in Hercaire International, Inc. v. Argentina
3 7 without performing a substantive analysis of the issues presented
in Hester. Because Hercaire is nothing more than persuasive law 38 , it
behooves the Hester court to give equal consideration to the arguments
articulated by the Hercaire trial court. 39 In light of the specific conditions
implicated in Hester, the principles espoused by the Hercaire
lower court should be applied so as to elicit a more equitable result.
In Hercaire, an American corporation (Hercaire) sought the execution
of a judgment received against Argentina for a breach of contract.
In an attempt to collect on its judgment, Hercaire seized an aircraft
which was owned by Aerolineas Argentina, a corporation wholly
owned by Argentina. 0 The central question, as posed by the Eleventh
Circuit, was whether the assets of this foreign state's wholly-owned national
airline were subject to execution to satisfy a judgment against
the foreign state, even though the airline was not a direct party to the
litigation and was not involved in the breach of contract underlying the
litigation. 4
The lower court considered a broad range of sources in finding
that Aerolineas was not to be afforded separate juridical existence for
the purposes of the judgment in question. The lower court first considered
that various agencies and instrumentalities of foreign states have
been recognized under FSIA as part of the foreign state itself. 4 2 As
emphasized by the Hercaire lower court, this often works to the advantage
of the state-owned instrumentality in the sense that courts will
shield these foreign agencies from harm by including them within the
definition of a foreign state so as to invoke sovereign immunity. 43 It
would be a serious violation of equitable principles to allow the agencies
of a foreign state to use this "shield" only when it works to their
37. 821 F.2d 559 (11th Cir. 1987).
38. Eleventh Circuit law is not binding in the Fifth Circuit.
39. 642 F. Supp. 126 (S.D. Fla. 1986).
40. This fact, first noted by the trial court at 642 F. Supp. 128, was undisputed by
all the parties.
41. Hercaire, 821 F.2d at 559. The actual breach of contract involved military
parts supplied to Argentina during the Falkland War Crisis in 1982. Id. at 560.
42. Arango v. Guzman Travel Advisors Corporation, 621 F.2d 1371 (5th Cir.
1980) found that an airline which was completely owned by the Dominican Republic
was actually a foreign state. This argument is even more relevant to Hester because
Fifth Circuit law is binding on this court.
43. Hercaire, 642 F. Supp. at 130. See also Alberti v. Empresa Nicaraguese De la
Carne, 705 F.2d 250 (7th Cir. 1983); Carey v. National Oil Corporation, 592 F.2d 673
(2d Cir. 1979).

242 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
advantage, but to disregard it when it hinders their interests."
Secondly, the trial court in Hercaire pointed out that the actual
text of FSIA 4 5 defines a foreign state as incliding "an agency or instrumentality
that is an organ of a foreign state or a majority of whose
shares is owned by the foreign state." '4 6 The Hercaire trial court concluded
that since Argentina owned all the shares of Aerolineas, the lat-
4 7
ter's assets were those of Argentina.
In reversing the District Court, the Eleventh Circuit in Hercaire
bases its entire argument on the Bancec model of a typical instrumentality
as well as the common exceptions. 4 As previously discussed, this
is a somewhat limited model which should be used only as a starting
point and is in no way intended to be an exhaustive list. 9 In effect, the
Eleventh Circuit erred when it refused to address these valid arguments
made by the Hercaire lower court and effectively ignored the actual
text of FSIA in making its decision. Likewise, the Fifth Circuit has
erred by strictly relying on Hercaire to dismiss the issue of Nigeria's
5 °
100% ownership of NGPC.
44. "It would be unfair to allow agencies to remove the statutory cloak when they
find it convenient, and then to replace it when the weather once again turns foul. Statutory
garb is permanent. This Court considers an agency or instrumentality of a foreign
state as the foreign state itself for all purposes under the FSIA." Hercaire, 642 F.
Supp. at 130.
45. HIC brought its claim under FSIA, and the Fifth Circuit maintained that
they did not reach this argument because HIC failed to prove that NGPC was an
agent of the Federal Republic of Nigeria. Nevertheless, the text of FSIA itself can be
used as an aid in determining agency or alter ego status.
46. 28 U.S.C. §§ 1603(b)(1) and (2).
47. Hercaire, 642 F. Supp. at 130.
48. See supra notes 24 and 26 and accompanying text.
49. The Bancec court stated:
Our decision today announces no mechanical formula for determining the circumstances
under which the normally separate juridical status of a government
instrumentality is to be disregarded. (footnote omitted) Instead, it is the
product of the application of internationally recognized equitable principles to
avoid the injustice that would result from permitting a foreign state to reap
the benefits of our courts while avoiding the obligations of international law.
Bancec, 462 U.S. at 633-634.
50. The courts generally agree that.one-hundred percent ownership is an insufficient
basis for applying the alter ego theory to pierce the corporate veil in the domestic
context: "Alter ego status is tautological with actual control of the subservient entity.
Unrestricted ownership of that entity provides a logical backdrop for domination, although
ownership alone will not support alter ego finding." Riguelme, 810 F.2d at
1354. See also John-T Chemicals, 768 F.2d at 691. However, specific factors in foreign
nations such as Nigeria tend to limit the application of this legal principle.

1990]
HESTER v. FED. REPUBLIC OF NIGERIA
C. A Consideration of Nigeria's Socio-Economic Framework
While this note does not advocate a full reversal of the traditional
approach of sovereign immunity and the presumption of independent
status of foreign state-owned corporations, it does question the extreme
amount of deference given to the sovereign government in Hester. Specifically,
Nigeria's legal structures have been accorded full recognition
and validity even though a thorough investigation of the conditions present
in Nigeria raises serious questions which would affect this ruling.
One fact that must be considered is that Nigeria is a relatively
underdeveloped country seeking to enter the realm of modern industry
and international trade. For example, the current government of Nigeria
has maintained a strong effort to utilize American capital and technology
in developing its agricultural economy. A 1980 meeting between
then Vice-President Walter Mondale and top Nigerian officials resulted
in a bilateral agreement which called for cooperative governmental efforts
to expand agricultural trade and encourage and facilitate participation
by American private businesses in joint farming ventures in Nigeria
(such as the Bansara Rice Farm). 51
While the collective aspirations of this nation are understandable
and admirable, we must be careful not to take anything for granted in
analyzing the economic, corporate and governmental structures of a nation
in such a rudimentary stage of development. 52 Consequently, any
direct comparison to domestic American government-corporate relationships
is inherently flawed and unacceptable. The facts of Hester
should be analyzed within the context of the Nigerian socio-economic
framework, 53 and then the appropriate law should be applied to such
facts. 54 The distinct nature of Nigerian legal-corporate relationships
places the instant case beyond the realm of traditional domestic corporate
law. Specific conditions prevailing within Nigeria, especially with
regard to corruption, justify a reconsideration of the status-quo mentality
exhibited by the Hester court.
In deciding on NGPC's status (independent or not), the Fifth Cir-
51. KOEHN, supra note 3, at 99. This cooperative accord reflected a possible attempt
to extend the previous political relationship of the two countries to the economic
and financial fields. NIGERIAN FOREIGN POLICY, ALTERNATIVE PERCEPTIONS AND
PROJECTIONS 47 (T. Shaw and 0. Aluko eds. 1983).
52. See supra note 27.
53. See infra note 66 and accompanying text.
54. As indicated by the Fifth Circuit, the appropriate law to be applied is that of
American and international law and not that of the chartering state. Hester, 879 F.2d
at 177.

244 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
cuit fell into the same trap as did the lower court 55 - they utilized the
domestic corporate context where it had no application. 5 For instance,
the Fifth Circuit alludes to the trial court's finding that NGPC's government-owned
stock was available for public purchase. 57 However,
they did not consider what meaning, if any, this had in the Nigerian
context. Was there actually a viable market facility for such securities?
Were there willing buyers? Or was this merely a facade used to protect
the Nigerian government by setting up a corporate shell? Although
these questions are not easily answered, the courts are nevertheless obligated
to consider such pertinent background information. In all
probability, the stock was not readily available for public purchase. The
susceptibility of the Nigerian marketplace to unscrupulous manipulation
is well-documented. 58 Furthermore, the ominous level of poverty in
Nigeria dispels the notion of a "public market" for corporate stock. 59
Thus, the Hester court's conclusion that HIC properly maintained its
independent status from Nigeria is significantly weakened.
The Fifth Circuit in Hester also misconstrued the finding of fact
that NGPC's 200 employees were not employees of Nigeria and were
not bound by the civil service rules and regulations." 0 This "fact" is
misleading in the Nigerian context. Unlike the established legal-governmental
structures which are in place in the United States, the situation
in Nigeria tends to be extremely informal. Personal contacts in
Nigeria play a significant role in work efficiency and career success. 6 "
Administrative affairs are greatly influenced by personal preferences,
loyalty considerations and face-to-face interactions. 6 2 Significant administrative
decisions are frequently made on an ad hoc basis without
use of written documentation. 6 3 Such a climate gives rise to suspicion
with regard to the allegedly separate status of the Nigerian government
and parastatal corporations such as NGPC. Within such an informal
framework, the American perception of the "corporate" entity and all
of its implications has little, if any, significance.
Neither the lower court nor the Fifth Circuit took the differences
55. 681 F. Supp. at 371. The lower court found "that the exhibits do not establish
an alter ego or agency relationship between Nigeria and NGPC, with regard to the
issue of attribution of liability among entities of a foreign state." Id.
56. See infra note 71.
57. Hester, 879 F.2d at 179.
58. KOEHN, supra note 3, at 122.
59. See supra note 27.
60. Hester, 879 F.2d at 179.
61. KOEHN, supra note 3, at 22.
62. Id.
63. Id.

1990]
HESTER v. FED. REPUBLIC OF NIGERIA
between Nigeria and the U.S. into consideration when applying the law
to Hester. On the contrary, they erroneously presumed the existence of
"American-type" corporate-legal structures in Nigeria. While they
have succeeded in maintaining the status quo and preserving the tradition
of sovereign immunity and independent corporate status, these
courts have committed a grave mistake. In short, the American courts
are far too anxious to transfer the domestic reluctance to "pierce the
corporate veil" to the international scene. Such an attitude has serious
implications not only for American foreign capital investors, but also
for the Third World nations which so desperately rely on them for their
most basic developmental needs.
D. HIC's Expectations
The Hester court's ultimate conclusion is also flawed in its failure
to consider HIC's subjective intentions at the time it entered into the
Bansara Rice Project. 4 The Fifth Circuit is quick to point out that the
stipulation in the Bansara agreement that Nigeria would provide an
adequate guarantee was not given by the Federal Republic of Nigeria -
in essence, Nigeria was not directly involved in the agreement in any
way. Rather, it was NGPC and Cross River, HIC's partners in the
Bansara Rice Farms, Ltd., who were responsible for the presence of
this provision. Nevertheless, the provision was included in the agreement,
and regardless of who proposed it, it is necessary to determine
what effect this particular stipulation had on HIC's decision to enter
into the agreement.
It is no secret that large capital investments in developing countries
are risky ventures at best. 65 And as this case illustrates, they are
potentially disastrous. Consequently, no rational corporate investor
would jeopardize a substantial portion of its assets without taking every
available precaution. Host nations often guarantee debt obtained by a
foreign investor in order to reduce the risk of such investment. This
mechanism is wholly logical: since a host nation is most likely to derive
a substantial benefit from the foreign investment, it should bear its fair
64. See supra note 5.
65. "Despite the tentative signs of improving relations between the U.S and the
Third World, tensions will not soon disappear. Feelings of economic nationalism continue
to run high in the developing countries. And foreign investors will likely find the
terms for investment tighter than they would like." McClenahen, A Welcome Mat For
U.S. Investment?, Industry Week, March 8, 1982 at 89. As a further acknowledgement
of the political and economic risks of large scale investments in Third World nations,
many U.S. firms are turning to the Overseas Private Investment Corporation (OPIC)
to help them reduce and/or insure against such risks. Id.

246 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
share of the burden of risk.
Although HIC certainly dealt with limited liability ventures in its
usual course of business and was undoubtedly familiar with the implications
of doing so, each company and each case must be evaluated
within its own specific circumstances. It is not far-fetched to imagine
that HIC did not consider NGPC to fall under the common definition
of a domestic corporate entity. As discussed previously, the socio-economic
climate of Nigeria places the "corporate entity" in a different
context - one whose "veil" should be pierced more readily. The regard
to be afforded a parastatal entity such as the NGPC should take into
account the pervasive customs in Nigeria. Among such customs is the
tendency of public decision makers at all levels to accept substantial
economic considerations from foreign and local firms in exchange for
the award of a contract, allocation of public housing or use rights, or
non-enforcement of a law or regulation." 6 The operation of such "customs"
and HIC's participation within such a climate lends support to
the argument that HIC had reason to believe it was not dealing with a
"corporation" in the American domestic context. Furthermore, the fact
that the security provision was included in writing in the agreement
strengthens this argument.
6 7
The final prong of this expectations argument involves analyzing
the concept of apparent authority. "Agency" and "apparent authority"
are legal terms of art which must be considered carefully with a high
degree of attention given to specific facts and the particular context.
The presence of the political subdivision of Cross River was a crucial
factor in Hester." 8 Although Nigeria never directly bestowed agency on
Cross River through written or spoken word, the mere act of creating
this political subdivision can be construed as a manifestation of authority.
Furthermore, it was well-known by all the parties involved in the
Hester case that NGPC was created and wholly owned by the Federal
Republic of Nigeria. The Hester court's attempt to argue that the
Nigerian government was "uninvolved" in the underlying agreement is
misguided. 6 9 In a nation like Nigeria, the act. of creating an agricul-
66. KOEHN, supra note 3, at 273.
67. Obviously, the Nigerian government never refuted the written agreement (until
the litigation at hand) which they undoubtedly were familiar with due to their contact
with the NGPC board. Although this does not make for conclusive law, it is somewhat
dispositive of Nigeria's frame of mind at the time of the formation of Bansara
Rice Farms, Ltd. This seems to represent a knowingly deceptive business practice.
68. See supra note 4.
69. Hester, 879 F.2d at 178-79.

1990]
HESTER v. FED. REPUBLIC OF NIGERIA
tural corporation is so monumental" 0 that the government cannot be
completely removed from any subsequent transaction entered into by
that instrumentality. Had the Fifth Circuit taken this broad perspective,
they would have concluded that HIC was, in fact, an agent of
Nigeria.
V. IMPLICATIONS OF THE HESTER RULING
This case presents an extremely relevant topic in light of the current
economic development in the international arena. Numerous underdeveloped
countries are in need of American capital to help finance
the implementation of major projects and support the growth and development
of their infrastructures. Implicit in these investment schemes
is the participation of international development corporations such as
HIC, which often enter into partnerships with enterprises closely linked
to the host developing nations. 71
However, the attitude reflected in the Fifth Circuit's opinion in
Hester threatens to stagnate investment in these needy countries. This
decision represents an inclination to transfer the domestic hesitation to
"pierce the corporate veil" into the international market. This is significant
because there is substantial room for a foreign host government to
take advantage of overseas investors who are restrained by the application
of their domestic legal principles. Basically, such investors are at
the mercy of the potentially deceptive practices of developing countries
and their governments. 72 The only way to avoid such problems and
maintain an amicable foreign investment climate is to encourage the
U.S. courts to approach the issue of "alter ego" status with an open
mind and a view towards the idiosyncratic nature of "corporate" structures
in host Third World countries.
In addition, the Hester opinion opens the door for underdeveloped
70. Due to an agricultural trade deficit, rising food prices and the bleak prospect
of further dependence on Western nations for basic food supplies, Nigeria's Third National
Development Plan (1975-1980) declared agricultural development as the country's
highest priority. KOEHN, supra note 3, at 86.
71. The benefits of such mechanisms are obvious:
[P]ublic enterprise, largely in the form of development corporations, has become
an essential instrument of economic development in the economically
backward countries which have insufficient j rivate venture capital to develop
the utilities and industries which are given priority in the national development
plan. Not infrequently, these public development corporations. . . directly
or through subsidiaries, enter into partnerships with national or foreign
private enterprises, or they offer shares to the public.
FRIEDMAN, supra note 10, at 333, 334.
72. See supra notes 61-63 and 66-67 and accompanying text.

248 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
governments to practice these deceptive tactics. In essence, foreign governments
will be able to maintain the shield of the corporate form so
long as they avoid the appearance of controlling day-to-day operations
as specified by Hester's strict adherence to Kal-Spice and Bancec. Consequently,
a government like the Federal Republic of Nigeria is practically
rewarded (and protected) for continuing its system of illicit contacts,
informal procedures, corruption and bribes so long as they avoid
crossing the bright line of "direct control" as it is defined in American
corporate law.
Although the Commercial Activity Exception 73 of FSIA purports
to protect the rights of the American investors in such developing countries,
it is limited in the sense that it cannot take effect if the foreign
governments are allowed to hide behind their ill-conceived "corporate
agencies."
VI. CONCLUSION
Hester International Corporation v. Federal Republic of Nigeria
is not a landmark case by any stretch of the imagination. In fact, the
Fifth Circuit acted well within its official bounds in finding that HIC's
claim against Nigeria lacked jurisdiction based on the theory that
NGPC was a separate juridical entity. In short, the opinion can be described
as "legally sound". However, in light of our dynamic international
market, the opinion serves to warn the legal community of the
potential danger in retaining the traditional rules of the domestic corporate
entity in the global context.
The U.S. judicial system must begin to recognize the inherent differences
between domestic government-corporate relationships and
those which exist in the foreign market place. Despite the judicial unwillingness
to "pierce the corporate veil" in the domestic context, basic
differences in this international arena warrant a different outcome.
To begin with, Hester's strict reliance on the limited principles illustrated
by Bancec and Kal-Spice preclude any consideration of the
realities that exist in Third World countries. Such a close-minded attitude
threatens the United States' role in assisting these developing
countries. Furthermore, the Hester court ignores the equitable principles
of law that surface in the international context. Basically, Hester
enables Third World countries such as Nigeria to invoke American corporate
principles only when it suits their needs. The third, and probably
most egregious flaw in the Hester ruling pertains to the actual politicallegal
climate which prevails in Nigeria. Clearly, our domestic corporate
73. See supra note 8.

19901 HESTER v. FED. REPUBLIC OF NIGERIA 249
law has no application in such an informal and volatile atmosphere.
Finally, the expectations which HIC developed as a result of Nigeria's
business climate and the activities of the Nigerian government demand
a reconsideration of the policies invoked by the Hester court.
Brooke A. Beyer, Jr.

MARYLAND COUNTERS APARTHEID: BOARD OF TRUSTEES
v. CITY OF BALTIMORE 1
Board of Trustees v. Baltimore is the first opinion in the nation 2
where a state's highest appellate court has upheld the constitutionality
of a municipal ordinance requiring the divestment from city workers'
pension fund of investments in companies doing business in South Africa.
The local law at issue in this case expressed the moral outrage of
the citizens of Baltimore against the system of apartheid and translated
this outrage into concrete action to direct the City's investments away
from enterprises connected with South Africa.
Other jurisdictions have passed statutes to express anti-apartheid
sentiments, but not all have survived intensive judicial scrutiny. The
Baltimore Ordinance may serve as a blueprint for citizens in other state
or local jurisdictions to articulate similar attitudes and effect positive
results. In fact, one commentator estimates that if all the state and
local legislation relating to divestment of United States funds in South
Africa were enacted, a cumulative liquidation of more than $17.8 billion
worth of investments in banks and companies with business in
South Africa would result.'
The purpose of this note is to synthesize the complex array of factual
and legal issues facing the Maryland Court of Appeals, to place
this decision within the context of other state and local divestment legislation,
and to offer some insight on how this particular decision may
affect the trend of the law. Part I sets out the facts of the case. Part II
analyzes the treatment of the issues by the Maryland Court of Appeals.
Part III briefly compares the Baltimore Ordinance to legislation in
other state jurisdictions. Part IV discusses the impact of this case on
United States foreign policy.
I. FACTS OF THE CASE
A. The Divestiture Ordinance
On July 3, 1986, the Mayor of Baltimore signed Ordinance Num-
1. 317 Md. 72, 562 A.2d 720 (1989).
2. Feeley, CA Rules Baltimore City Divestment Law is Legal, Daily Record,
Sept. 5, 1989 at 1, col. 3
3. Lewis, Kevin P. Dealing with South Africa: The Constitutionality of State and
Local Divestment Legislation, 61 TUL. L. REV. 469, 473-475 (1989). This section of
the article describes the various statutes that have been enacted and their total estimated
impact on investments in South Africa.
(251)

252 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
ber 765 as an amendment to the City Code. 4 It provides that no funds
of the Employees Retirement System (ERS) and the Fire and Police
Retirement System (F&P) "shall remain invested in, or in the future
shall be invested in banks or financial institutions that make loans to
South Africa or Namibia 5 or companies 'doing business' with those
countries." 6 Later, to avoid a possible oversight, the City Council
passed, and the Mayor signed, Ordinance Number 792 which applied
the City's divestiture program to the Elected Officials Retirement System
(EOS). 7
The Ordinance requires that organizations doing business with or
in South Africa "shall be identified by reference to the most recent
annual report of the Africa Fund entitled 'Unified List of United States
companies with Investments or Loans in South Africa and Namibia.' "8
The Ordinance further stipulates that the divestiture program shall occur
within a two-year period, beginning January 1, 1987. The Board of
Trustees for each of the systems would be empowered to suspend the
program during this two-year transition period for a maximum of
ninety days if the following specific findings are made: (1) the rate of
return on the funds is substantially lower than the average annual earn-
4. BALTIMORE, MD., CITY CODE, art. 22, § 7 (a)(13) (1987) (1983 & Supp.
1987).
5. Since 1921 until March 21, 1990, Namibia or "South West Africa" was a
territory administered by South Africa. In November'1989, Namibia held free, democratic
elections and is currently in the process of adopting a new constitution. In Board
of Trustees v. Baltimore, the Court included Namibia in its reference to South Africa.
It is unclear whether the Trustee will be required to divest funds from companies
doing business exclusively in or with Namibia after Namibia's independence. Presently,
companies doing business in or with Namibia are identified through correspondence
with the United Nations Office of the Commisssion for Namibia and the United Nations
Center for Transnational Corporations. See, Board of Trustees v. Baltimore, 317
Md. at 80-81, n. 4, 562 A.2d at 724.
6. BALTIMORE, MD., CITY CODE, art. 22, § 23(b) (1987) (1983 & Supp. 1987).
7. The total value of the three pension systems is approximately $1.2 billion. Of
the total, 40-50% of the funds are invested in either equity or common stock, and 40-
50% are invested in fixed income instruments or cash and short-term equivalents.
Board of Trustees v. Baltimore, 317 Md. 79-80. 562 A.2d at 723.
Each of the City's three pension funds is administered by a separate Board of
Trustees which is reponsible for ensuring that members and beneficiaries ultimately
receive the benefits to which they are entitled, including specific benefits and "variable"
benefits which depend on the rate of return of the funds. Under the variable benefits
program, if the rate of return exceeds-7.5%, then the amount greater than 7.5% and
less than 10% goes to the payment of additional benefits. If the rate of return exceeds
10%, then one-half of the amount over 10% goes toward the payment of additional
benefits, and the remaining half goes to Baltimore City. Id. at 80, 562 A.2d at 723.
8. Id. at 80-81, 562 A.2d at 724.

1990]
MARYLAND COUNTERS APARTHEID
ings on the funds over the past five years; (2) continued divestiture
under the Ordinance will be inconsistent with generally accepted investment
standards for conservators of pension funds, notwithstanding
the Ordinance; and (3) divestiture under the program will cause financial
losses to the funds. 9
B. The Challenge to the Ordinance
On December 31, 1986, Trustees for each of the three pension systems
and two employee beneficiaries filed an action against the Mayor
and City Council in the Circuit Court for Baltimore City. They asked
that the Court declare the Ordinance invalid for the following reasons:
(1) The Ordinance impermissibly delegated legislative power to a private
entity, the Africa Fund; (2) the Ordinance unconstitutionally impaired
the obligation of the City's pension contracts with the beneficiaries
under the systems; (3) the Ordinance was preempted by the
federal Comprehensive Anti-Apartheid Act of 1986; (4) the Ordinance
intruded on the federal government's exclusive power to conduct foreign
policy; and (5) the Ordinance violated the Commerce Clause of
the U.S. Constitution.
On January 9, 1987, four pension beneficiaries moved to intervene
on the side of the Trustees. They raised similar arguments and, in a
three-count complaint, asserted that the Ordinance intrudes on the federal
government's exclusive foreign policy power, violates the Commerce
Clause, and violates the property rights of the beneficiaries
under the "takings" clause of the Fifth and Fourteenth Amendments. 1 "
C. Crucial Findings of Fact by the Trial Court
The Trustees and applicants for intervention filed motions for summary
judgment, both of which were denied because the Circuit Court
found it necessary to determine the facts related to the financial impact
of the Ordinance on the pension systems. During a lengthy trial, both
parties presented massive amounts of technical information through a
variety of expert witnesses in the field of financial management."
At the outset of the trial, both parties agreed that the Ordinance
would not affect the funds' fixed income investments. 12 Later, the trial
judge held that the Ordinance would not impair the performance of the
9. Id. at 81, 562 A.2d at 724.
10. Id. at 83 n. 7, 562 A.2d at 725.
11. See Brief for Appellants, Board of Trustees v. Baltimore, Md. Court of Appeals,
Nos. 95 and 104, September Term, 1987
12. Board of Trustees v. Baltimore, 317 Md. at 84 n.10, 562 A.2d at 725.

254 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
pensions' equity funds." 3 However, the trial judge did find that the Ordinance
would affect the pensions' Short Term Investment Fund
(STIF) because the STIF included investments in companies doing
business in South Africa. Since comparable substitutes for the STIF
investments may not be immediately available, the pension systems
may be forced to increase their investments in lower-yielding obligations.
14 The trial judge also found that the divestiture re4uired by the
Ordinance would entail both initial one-time costs and on-going costs. 15
Ultimately, the trial judge calculated that the initial cost of divestiture
to the beneficiaries would amount to only 1/32 of 1 % of the total value
of the funds and that the on-going costs of the divestiture program
would amount to 1/20 of 1 % of the total value of the funds. 6
In addition to the inquiry concerning the costs of divestiture, the
trial judge considered the financial risk to the beneficiaries from divestiture.
The trial judge found that the Ordinance did not hinder the
Trustees from investing in a diversified portfolio, although it may have
affected their pursuit of an "active" management style. Rather, the
Trustees could manage a South Africa free portfolio without failing to
fulfill their duty of loyalty and prudence to the funds' beneficiaries.' 7
Due to the minimal impact of the divestiture program on the beneficiaries
and the "salutary moral principle" underlying the Ordinance,
the trial judge rejected all of the arguments by the Trustees and applicants
for intervention.' 8 They subsequently appealed to the Maryland
Court of Special Appeals. At the request of the Trustees, the applicants
for intervention, and the City, the Court of Appeals issued a writ of
certiorari to review the case.' 9
II. ANALYSIS OF ISSUES ADDRESSED BY THE COURT OF APPEALS
In its lengthy seventy-six page opinion, the Court of Appeals carefully
considered the merits of the issues presented by the petitioners. To
simplify the Court's analysis, the issues can be divided into three major
13. Id. at 84, 562 A.2d at 726.
14. Id. at 85-86, 562 A.2d at 726.
15. Initial costs would include, for example, the cost of replacing certain holdings
with South Africa-free investments. Ongoing costs would be associated with replacing
investments in the STIF and additional commissions. Id. at 86, 562 A.2d at 726-727.
16. The Court calculated the initial and ongoing costs of divestiture to be
$750,000 and $1.2 million, repectively, out of a total fund value of $1.2 billion. Id. at
87, 562 A.2d at 727.
17. Id. at 85, 562 A.2d at 726.
18. Id. at 87-88, 562 A.2d at 727.
19. Id. at 88, 562 A.2d at 727.

1990]
MARYLAND COUNTERS APARTHEID
categories: (1) procedure; (2) the specifics of the divestiture ordinance
as it relates to pension funds; and (3) the impact of local laws on the
conduct of foreign policy. This note will primarily focus on the latter
two categories. 20
A. The Impact of the Ordinance on Public Pension Funds
1. Permissible Delegation of Legislative Power
The Trustees initially attacked the Ordinance on the ground that
it impermissibly delegated a governmental function to a private entity,
the Africa Fund. According to the Trustees, by linking the divestment
to the companies identified by the list supplied by the Africa Fund, the
Ordinance would render the Trustees unable to make decisions about
investments for the beneficiaries of the pension systems. 21 The Court
responded by noting that the list from the Africa Fund was only a reference
for the Trustees, and, as such, it constituted a reasonable standard
for guidelines about United States companies doing business in
South Africa. The Court clearly held that the Trustees, not the Africa
Fund, had the final word on investment decisions. 22 in addition, the
Court suggested that the term "doing business" in or with South Africa
should be construed in the same way as it had been used in other Maryland
cases. 23 Thus, the Court of Appeals effectively connected the
20. In essence, the key procedural issue in this case concerned the motion by the
four pension fund beneficiaries to intervene on the side of the Trustees. The Court of
Appeals disagreed with the trial judge's application of Maryland Rule 2-214 (a)(2)
which states in pertinent part:
Upon timely motion, a person shall be permitted to intervene in an
action...
(2) when the person claims an interest relating to the property or transaction
that is the subject of the action, and the person.is so situated that
the disposition of the action may as a practical matter impair or impede
the ability to protect that interest, unless it is adequately represented by
existing parties.
The Court of Appeals reasoned that because the Trustees have obligations to the
City, as well as to the beneficiaries, the beneficiaries' interests are not identical to those
of the Trustees. See Board of Trustees v. Baltimore, 317 Md. at 91, 562 A.2d at 729.
The Court of Appeals modified the Circuit Court's decision and permitted the
applicants for intervention to have the status of a party in the case. Id. at 91-92, 562
A.2d at 729. It should be mentioned that this is the only point-which challengers to the
divestment ordinances won in this case.
21. Id. at 92, 562 A.2d at 730.
22. Id. at 98, 562 A.2d at 732.
23. Id. at 98-99, 562 A.2d at 733. The Court noted that it has previously construed
"doing business" in a geographical area to mean "doing a substantial amount of

256 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
issue of divestment based on moral principles to more ordinary issues,
such as contract disputes, that were typically resolved by the courts.
2. No Impairment of Contractual Obligations with Beneficiaries
The Trustees next argued that because the Ordinance interfered
with the relationship between the City and pension beneficiaries, 24 it
violated Article I, Section 10 of the U.S. Constitution, familiarly
known as the Contracts Clause, which states, "[n]o State. . .shall pass
any. . . .Law impairing the Obligation of Contracts. . . ." The Court
broke down this claim into three distinct sub-issues. 2 5 First, the Court
held that the City unquestionably imposed contractual obligations between
itself and the pension beneficiaries by establishing a pension system.
Second, the Court rejected the Trustees' contention that the Ordinance
constituted an indirect change in the way the pension funds
could be invested. Third, the Court, relying strongly on the trial court's
finding of fact which was held to be not clearly erroneous, firmly stated
that the insubstantial way in which the Ordinance modified Trustees'
investment decisions did not approach the constitutional standard for
an impairment of contract. 26
3. No Change in Trustees' Duty of Prudence and Loyalty to
Beneficiaries
The Trustees asserted that the Ordinance would significantly alter
their duty of loyalty and prudence to the beneficiaries in the following
ways: (1) The Ordinance would disturb the beneficiaries' expectations
that their benefits will be well secured; 2 7 (2) the Ordinance would imprudently
and radically alter the universe of eligible investments for the
pension systems; 28 (3) the Ordinance would mandate that the Trustees
consider social factors unrelated to investment performance; 29 and (4)
the Ordinance would require the Trustees to consider the interests of
business" or "engaging in significant business activity." See, e.g., Yangming Transport
v. Revon Products, 311 Md. 496, 504-509; 536 A.2d 633, 637-640 (1988); S.A.S. Personnel
Consultants v. Pat-Pan, 286 Md. 335, 339-340, 407 A.2d 1139, 1142 (1979);
and GEM Inc. v. Plough Inc., 228 Md. 484, 488-489. 180 A.2d 478, 481 (1962).
24. Board of Trustees v. Baltimore, 317 Md. at 99, 562 A.2d at 733.
25. In addressing this issue, the Court applied the framework for analysis that it
used previously in Robert T. Foley Co. v. W.S.S.C., 283 Md. 140, 151-152, 389 A.2d
350, 357 (1978).
26. Board of Trustees v. Baltimore, 317 Md. at 100-101, 562 A.2d at 733-734.
27. Id. at 102, 562 A.2d at 734.
28. Id. at 103, 562 A.2d at 735.
29. Id. at 105, 562 A.2d at 736.

1990)
MARYLAND COUNTERS APARTHEID
persons other than the beneficiaries and to manage the systems for purposes
other than providing benefits. 30 The Court easily set aside these
arguments by noting that economically competitive investments were
available to the Trustees and that the Ordinance permitted a gradual
two-year transition period; coupled with a suspension of divestiture
under certain conditions, before the divestiture program was completed."
1 In addition, the Court held that consideration of social factors
is perfectly proper in making an investment decision and emphasized
that trustees are not forced to achieve a maximum return on their investments,
only a reasonable return while avoiding undue risks. 3 2
4. No Taking by the Government
Intervenors in the case next argued the initial and ongoing costs of
divestiture would reduce the future earnings of the pension funds and
consequently reduce the amount of variable benefits payable to the beneficiaries.
They reasoned that such a reduction in the variable benefits
was a violation of due process under the Fifth and Fourteenth Amendments
of the Constitution and amounted to a taking of property from
citizens by the government. 3 The Court did not even find a due process
argument 34 and completely rejected any argument for compensation for
a taking for three reasons: (1) The Intervenors' right to receive benefits
does not mean that they have the right to direct or control the investment
of funds in the City's pension systems; (2) there can be no distinct
investment expectations from variable benefits which are, by definition,
speculative and uncertain; and (3) there is no taking because the
Ordinance promotes the common good and does not shift funds from
the beneficiaries to the government or anyone else. 5
30. Id. at 109, 562 A.2d at 738.
31. Id. at 105, 562 A.2d at 736-737.
32. Id. at 106-107, 562 A.2d at 736-737. The Court relied on the commentary of
Professor Austin W. Scott in his authoritative treatise, III A. W. SCOTT, THE LAW OF
TRUSTS, Section 227.17 (4th ed. 1988). See Also, Troyer, Slocomb, and Boisture, Divestment
of South African Investments: The Legal Implications for Foundations,
Other Charitable Institutions and Pension Funds, 74 GEO. L.J. 127, 156-157 (1985).
The authors of the above article note that the legal guidelines for directors who would
make decisions concerning the divestment of corporate stock from holdings in South
Africa are more flexible than those for trustees. Corporate directors need only appply
the "business judgment rule" to comply with the required duty of loyalty and care to
the stockholders. Id. at 134-136.
33. Board of Trustees v. Baltimore, 317 Md. at 110, 562 A.2d at 738.
34. Id. at lll n. 38, 562 A.2d at 739.
35. Id. at 113-114, 562 A.2d at 739-740.

258 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
B. Impact of the Ordinance on Foreign Policy
Much of the recent legal literature on U.S. anti-apartheid efforts
through the divestment of funds focuses on state or municipal divestment
statutes in terms of their constitutionality and their impact on the
conduct of foreign policy. 36 As in the earlier part of the Maryland opinion,
the Court of Appeals refused to accept any of the Trustees' or
Intervenors' arguments on the impact of the Ordinance on U.S. foreign
policy.
1. No Federal Preemption of Ordinance
The Trustees argued that the Ordinance violates the Supremacy
Clause of the Constitution and therefore is pre-empted37 by the Comprehensive
Anti-Apartheid Act of 1986 (CAAA). 38 The Court reasoned
that a federal law can preempt a state or local ordinance in three
fundamental ways: (1) by expressly stating its intention to do so; (2) by
"occupying the field," i.e., by including a federal regulatory scheme
that is so comprehensive that there is in effect nothing more that the
states can do; and (3) by conflicting directly with the state law. At the
outset, the Court observed that preemption is not lightly presumed, especially
in areas that are traditionally regulated by states such as the
pension systems at issue in this case.
The Court of Appeals proceeded to analyze the preemption argument
by examining the legislative history of the CAAA. Preemption
was first addressed in 1985 when Senators Roth and McConnell circulated
an amendment expressly calling for preemption under in- the
CAAA. This amendment was subsequently withdrawn, according to
36. See, e.g., Bowden, North Carolina's South African Divestment Statute, 67
N.C.L. REV. 949, (1989); Lewis, Dealing with South Africa: The Constitutionality of
State and Local Divestment Legislation, 61 TUL. L.REv. 469 (1987); Note: State and
Municpal Governments' React Against South African Apartheid: An Assessment of
the Constitutionality of the Divestment Campaign, 54 U. CIN. L.REv. 543 (1985);
Note: State and Local Anti-South African Action as an Intrusion upon the Federal
Power in Foreign Affairs, 72 VA. L. REV. 813 (1986). For an excellent general overview
of the constitutional implication of the states' involvement in foreign affairs, see L.
HENKIN, FOREIGN AFFAIRS AND THE CONSTITUTION, Chapter IX (1972).
37. Board of Trustees v. Baltimore 317 Md. at 114, 562 A.2d at 740.
38. Among other things, the CAAA prohibits loans to, other investments in, and
certain other activities in South Africa, prohibits U.S. imports from companies owned
or controlled by the South African Government, and prohibits new investments in
South Africa. Pub. L. No. 99-440, 100 Stat. 1089 (1986); 22 U.S.C. §§ 2151 n(f), (g),
2150, 2346(d), 5001-50016 (West Supp. 1989).
39. Board of Trustees v. Baltimore 317 Md. at 115, 562 A.2d. at 740-741.
3 9

1990]
MARYLAND COUNTERS APARTHEID
Senator Kennedy, "in the face of certain defeat." 40 In addition, at the
time of the amendment's withdrawal, Senators Pell, Cranston, Hart,
and Proxmire strongly objected to preemption. 1
The Court viewed the legislative history of section 5116 of the
CAAA as having a possible "preemptive effect" limited to state or local
procurement legislation which might cause a federally-funded contract
not to be awarded to the lowest bidder.' 2 However, the Court of
Appeals discounted this possible preemptive effect in light of the forceful
remarks of Senator Kennedy, the CAAA's co-author, who vigorously
asserted that the CAAA was to have no preemptive effect.' 3 Further,
the proceedings in the House of Representatives strongly
indicated no Congressional intent to preempt." Thus, the Court concluded
that there was no express Congressional intent to preempt state
or local legislation or to "occupy the field."
The Trustees also tried to show that the Ordinance 'represented
inflexible sanctions toward South Africa and therefore conflicted with
the approach of the CAAA.' 5 However, the Court interpreted the Ordinance
as merely relating to the conduct of businesses in which the City
invests, and not as sanctions against the government of South Africa." '
This interpretation may serve to broaden the scope of the market participant
exception to include foreign nations, as well as the more familiar
application to "foreign" states within the United States.
40. 132 CONG. REC. S12533 (daily ed., Sept. 15, 1986)
41. See 131 CONG. REC. S18835 and S 18330, S18224, S18787, S18784 (daily
ed. July 11, 1985)
42. 317 Md. at 118, 562 A.2d at 742. Section 5116 of the CAAA states the
following:
Notwithstanding section 210 of Public Law 99-349 or any other provision
of the law -
(1) No reduction in the amount of funds for which a state or local government
is eligible or entitled under any Federal law may be made, and
(2) No other penalty may be imposed by the Federal Government by
reason of application of any state or local law concerning apartheid to any
contract entered into by a state or local government for 90 days after October
2, 1986.
43. 132 CONG. REC. S12533 (daily ed. Sept. 15, 1986)
44. See remarks of Representatives Gray, Leland, Solarz, Weiss, Levine, Rangel,
Biaggi, Dixon, and Wheat. 132 CONG. REC. H.R. 6758-6767 (daily ed. Sept. 12, 1986)
45. Board of Trustees v. Baltimore, 317 Md. 72, 562 A.2d 720.
46. Id. at 120, 562 A.2d at 743.

260 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
2. No Interference with Federal Authority to Conduct Foreign
Policy
The Trustees next argued that the Ordinance impermissibly interfered
with the federal government's general authority to execute foreign
policy of the United States. 47 The Court rejected this argument by
distinguishing the holding of an important case, Zchernig v. Miller;, 8
from this case. In Zchernig, the Supreme Court barred the application
of a state alien inheritance law which required inquiry into the type of
government existing in particular foreign countries because it would intrude
into the field of foreign affairs which the Constitution entrusts to
the President and Congress. 9 As interpreted by Professor Laurence
Tribe, the Zchernig court held that "all state action, whether or not
consistent with federal foreign policy, that has significant impact on the
conduct of American diplomacy is void as an unconstitutional infringement
upon an exclusively federal sphere of responsibility." 50
Once again, the Court relied heavily on the trial judge's finding of
fact to overcome the hurdles presented by Zchernig. Because the Ordinance
represented a single general decision of the City to manage its
own investments, as opposed to addressing the intricacies of South Africa's
apartheid laws, the Court reasoned that the Ordinances did not
cross the boundary into federal areas of responsibility. 51 In addition,
the Court stressed that the purpose of the Ordinance was to express the
City's moral indignation towards apartheid, but that in fact, the Ordinance
had only a minimal and indirect impact on South Africa. 52 The
Court reiterated the internal focus of the Ordinance, especially when it
compared the ordinance with other cases where state or local jurisdictions
have unsuccessfully tried to enact anti-apartheid legislation or administrative
rulings. 53 Whether or not the Baltimore Ordinance and
47. Id. at 121, 562 A.2d at 744.
48. 389 U.S. 429, (1968).
49. Id. at 432.
50. L. TRIBE, AMERICAN CONSTITUTIONAL LAW 230 (1988).
51. Board of Trustees v. Baltimore, 317 Md. at 126, 562 A. 2d. at 746.
52. Id. at 131, 562 A.2d at 748-749.
53. The Court distinguished its holding here with the decisions of other courts
that have faced apartheid issues. See, e.g., New York Times v. City Commission on
Human Rights, 41 N.Y. 2d 345, 393 N.Y.S. 2d 312, 361 N.E. 2d 963 (1977) (where
newspaper advertisements for employment opportunities located in South Africa which
merely referred to that country as the situs of employment, and which did not recite on
the surface any discriminatory conditions, did not violate New York City's anti-discrimination
laws.); Springfield Rare Coins Galleries, Inc. v. Johnson, 115 I11. 2d 221,
503 N.E. 2d 300 (1986) (where disapproval of political and social policies of a foreign
nation does not provide a valid basis for a tax classification, and the state may not

1990]
MARYLAND COUNTERS APARTHEID
other sanctions embodied in federal legislation have had, in fact, only a
minimal and indirect impact on South Africa will undoubtedly be reexamined
in light of recent changes in the South African political
landscape.
3. No Violation of the Commerce Clause
The Commerce Clause of the Constitution affirmatively empowers
the Congress "to regulate commerce with foreign Nations, and among
the several States. . . ."5 In addition to this affirmative grant of
power, a judicially created doctrine, the "negative" or "dormant" Commerce
Clause has developed since the early days of our nation. 55 The
dormant Commerce Clause limits by implication the power of state and
local governments to enact legislation which affects foreign or interstate
commerce.
The Court of Appeals rejected the petitioners' arguments that the
Ordinance violated the dormant Commerce Clause by applying a relatively
new exception to the Commerce Clause, the market participation
doctrine. Enunciated initially in Hughes v. Alexandria Scrap Corporation,
56 this doctrine permits state and local governments to escape the
constraints of the dormant Commerce Clause when acting as a buyer
or a seller in the market, as opposed to a regulator in a distinct governmental
capacity. Just as a private merchant may elect not to do business
in South Africa, so too may the City choose not to do business
with a South African company under the reasoning of the market participation
doctrine. As the Hughes Court reiterated, the purpose of the
Ordinance was not to punish anyone, but to remove a "perceived moral
taint" from the City's investments. 57
The Court of Appeals had no guidance from the Supreme Court
as to whether the market participation doctrine applied to the conduct
exercise its wide-ranging taxing power for the purpose of encouraging the boycott of a
single nation's products.); Regents of the University of Michigan v. State of Michigan,
166 Mich. App. 314, 419 N.W.2d 773 (1988)(where State statute that prohibits state
educational institutions from making or maintaining an investment "in organizations
operating in South Africa" is unconstitutional as applied because the state constitution
grants the Regents plenary authority to allocate university funds); and Associated Students
of the University of Oregon v. Oregon Investment Council, 82 Or. App. 145, 728
P.2d 30 (1986)(where complaint dismissed for lack of standing by plaintiff).
54. U.S. CoNST. art. I, § 8, cl. 3.
55. See, e.g., Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, (1824) and Cooley v. Bd.
of Wardens, 53 U.S. (12 How.) 299, (1851).
56. 426 U.S. 794, (1976).
57. Board of Trustees v. Baltimore 317 Md. at 136, 562 A.2d at 751. See Also, 69
Op. Att'y. Gen. of Md. 87 (1984).

262 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
of state and local governments that affects foreign commerce. However,
the Supreme Court has indicated that a more extensive constitutional
inquiry is needed if the issue to be resolved involves foreign commerce,
as contrasted with interstate commerce issues. 58 Nevertheless, the
Court of Appeals reasoned that the purposes behind the dormant Commerce
Clause and the foreign Commerce Clause were essentially the
same, i.e., to prevent individual states from adversely affecting relations
with foreign countries that were properly coordinated at the federal
level. 59
The Court further noted that the power of the federal government
over foreign commerce is not totally exclusive. While the Court acknowledged
that the United States should speak with one voice in matters
of foreign policy, it declared that this voice need not solely belong
to the federal government. Because the Ordinances were broadly consistent
with federal policy as articulated in the CAAA and because
they did not undermine the federal government's ability to develop uniform
trade regulations toward South Africa, it is constitutional. 60
The Court further eroded the Trustees' dormant Commerce
Clause argument by stating that the Ordinance would survive constitutional
scrutiny even without the market participation exception."' In
reaching this conclusion, the Court relied on the three-pronged test established
in Pike v. Bruce Church, Inc. 6 2 which requires that the statute
at issue effectuate a legitimate public purpose, affect interstate
commerce only incidentally, and not burden such commerce excessively.
In applying the Bruce Church test, the Court found that the
Ordinance applies equally to the residents of Baltimore and to residents
of all other states; that the purpose of the Ordinance is indisputably
legitimate; and that the burden of the Ordinance is minimal in relation
to its benefits. 6 3
III. OTHER STATE STATUTES AIMED AT DIVESTMENT FROM SOUTH
AFRICA
Although the Maryland Court of Appeals wrote the first opinion in
the nation to rule on the constitutionality of divestment legislation,
neither Maryland nor Baltimore City were the first jurisdictions to en-
58. See, e.g. Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, (1979).
59. Board of Trustees v. Baltimore 317 Md.at 138, 562 A.2d at 752.
60. Id. at 146-147, 562 A.2d at 756-757.
61. Id. at 141, 562 A.2d at 753.
62. 397 U.S. 137 (1974).
63. Board of Trustees v. Baltimore 317 Md. at 142-143, 562 A.2d 754-755.

1990]
MARYLAND COUNTERS APARTHEID
act divestment statutes. Connecticut was the first state to enact divestment
legislation in 19821", and many other state and local governments
followed Connecticut's lead. According to the American Committee on
Africa, as of November 1989, twenty-five states, nineteen counties,
eighty-two cities, and the Virgin Islands have taken some form of eco-
6 5
nomic action against apartheid.
State statutes approach divestment of public funds from holdings
in South Africa in two alternative ways. The approach taken by Massachusetts
typifies the first alternative, full or absolute divestment. Simply
stated, no public pension funds from Massachusetts can be invested
in South African banks or in companies doing business with South
Africa." 6
Other states do not use such a bright line test in their divestment
statues. In addition to determining whether a financial institution or
company is doing business with South Africa, these statutes forbid
states from investing in entities that do not comply with specific standards
of conduct. For example, North Carolina applies this additional
condition to its divestment statute by prohibiting investments in companies
or financial institutions which are not signatories to the Sullivan
Principles 67 or which have received a failing performance rating for
compliance with the Sullivan Principles.
The Baltimore Ordinance represents a compromise between the
two general approaches used by states in divestment statutes. The Bal-
64. CONN. GEN. STAT. ANN., §§ 3-13(f)(1985).
65. See AMERICAN COMMITTEE ON AFRICA, SUMMARY CHART: STATES, COUNTIES
AND CITIES THAT HAVE TAKEN ECONOMIC SANCTIONS AGAINST APARTHEID (1989).
The American Committee on Africa classifies economic actions against South African
apartheid into three distinct categories:
(1) Divestment - the sale of stock and/or bonds from companies that do business in
South Africa;
(2) Banking - the withdrawal of funds and/or business from banks on the basis of their
ties to South Africa; and
(3) Purchasing - the policy that gives preference in the bidding process for the purchasing
of goods and services to those companies that do not do business in South Africa.
66. MASS. GEN. LAWS. ANN., ch. 32, § 23(1)(d)(ii).
67. As noted in Bowden, North Carolina's South African Divestment Statute, 67
N.C.L. REV., n.3, at 949 (1989), the Sullivan Principles were developed in 1978 by the
Reverend Leon H. Sullivan, a Philadelphia minister and Director of the General Motors
Corporation. In essence, the Sullivan Principles provide for equality in compensation,
employment, and access for South Africans of all races. It is interesting to note
that as of 1984, the Reverend Sullivan has repudiated his principles and has suggested
severing business ties between the United States and South Africa. The Sullivan Principles
are incorporated directly into North Carolina's divestment statute. See N.C.
GEN. STAT., §§ 147-69.2(c)(2).

264 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
timore Ordinance does not mandate absolute and total divestment by a
specific date like the Massachusetts statute, nor does it impose an elaborate
code of conduct on entities involved with South Africa like the
North Carolina statute. Instead, the Baltimore Ordinance, as interpreted
by the Maryland Court of Appeals, permits the expression of
two legitimate and occasionally competing interests: the financial interests
of pension beneficiaries who in retirement depend on the income
generated by their pension funds and the political and moral interests
of citizens who wish to direct public monies away from investments
they consider to be unacceptable. 8
IV. CONCLUSIONS
In evaluating the significance of this case, the court's interpretation
goes beyond the immediate concerns of the citizens of Baltimore
and general animosity towards apartheid. The structure of the Ordinance
and the reasoning of this opinion make it possible for citizens to
direct investments in public pension funds away from other entities that
are undesireable.
With respect to the impact of state or local laws on foreign policy,
it seems improbable that these types of statutes would survive judicial
scrutiny unless they were clearly harmonious with federal policy. Unquestionably,
the Court found the Ordinance to be consistent with the
federal CAAA. Absent a strong federal statute, there are too many
hurdles that the state and local governments must overcome in order to
assert themselves in the foreign policy arena.
In addition, the Maryland Court of Appeals repeatedly found that
the purpose of the Ordinance was to express the moral outrage of the
citizens of Baltimore at the legacy of slavery that South African
apartheid represents. As such, this opinion may significantly broaden
the impact of the market participant doctrine by allowing states greater
discretion to direct their financial and business choices without violating
the Commerce Clause. Absent a clear federal policy, however, this
type of legislation cannot be used to force divestment from public pension
funds of investments in companies doing business with or in foreign
regimes whose policies may be repugant to Americans.
At this time, much of the world's attention is focused on the issue
of apartheid. The election of President De Klerk and the recent release
of Nelson Mandela, the leader of the African National Congress, after
a twenty-seven year prison term have prompted intense media coverage
68. See supra at note 9 and accompanying text.

1990]
MARYLAND COUNTERS APARTHEID
of South Africa. 9 In the intricate negotiations that will inevitably follow,
it is obvious that some new type of political arrangement among
South Africans of all races will emerge.
The extent to which the United States can influence this process
through the continuation of sanctions established by the CAAA, traditional
diplomatic measures, and legislation such as the Baltimore Ordinance,
remains to be seen. However, it is unlikely that the United
States government will move immediately to revise the sanctions contained
in the CAAA. 7 ° Not only have influential legislators in Congress
expressed their support for keeping economic sanctions against South
Africa in place 7 ", but Bush Administration spokesman, Herman Cohen,
Assistant Secretary of State for African Affairs, characterized the
1986 sanctions as "wise" and helpful in encouraging "many whites [in
South Africa] to come to their senses." Ambassador Cohen added that
the Bush Administration is committed to "full implementation of all
provisions" of the sanctions law. 72
In sum, the Baltimore Ordinance upheld by the Maryland Court
of Appeals represents one of many elements in the mix that makes up
United States foreign policy on South Africa. Without question, the
Ordinance represents an idealistic strand of our policy which is not
based solely on classical "real politick," but extends the moral judgment
of citizens that is occasionally expressed through local and state
governments.
Cynthia Golomb
69. See e.g., Whitaker et al., Mandela is Free: Breakthrough in South Africa,
Newsweek, Feb. 19, 1990, at 36; Escape from Apartheid, Washington Post, Feb. 18,
1990, at B6, col.1; and Eddings, The Challenges Ahead for Mandela, de Klerk, Baltimore
Sun, Feb. 18, 1990, at 7G, col.1.
70. In contrast, the Thatcher government in the United Kingdom has already
lifted its bans on new investments in South Africa and on the promotion of tourism to
South Africa. See Los Angeles Times, Feb. 23, 1990, Part P, at 2, col.3.
71. S. Con. Res. 94, 136 CONG. REC. S1525, S1526 (daily ed., Feb. 22, 1990).
72. Quoted in Friedman, U.S. Law Makers: Don't Lift Sanctions, Newsday, Feb.
23, 1990, at 15.

BOOKS RECEIVED
PRIVATIZATION AND STRUCTURAL ADJUSTMENT IN THE
ARAB COUNTRIES. Edited by Said El-Naggar, Washington, D.C.:
International Monetary Fund, 1989, 269 pp.
Recent developments in the Soviet Union and Eastern Europe, as
well as the changes in the United Kingdom under Prime Minister
Thatcher, provide ample evidence to even the casual newspaper reader
that the socialist model of economic development has failed to provide
long-term prosperity to people in many nations. Thus, this review on
Privatization and Structural Adjustment in the Arab Countries was
initially approached with a great deal of enthusiasm. After all, what
could be more interesting than learning about privatization (the private
sector's gradual takeover and control of enterprises dominated by the
generally inefficient public sector) in an area of the world with a rich
tradition of trade, commerce, and private enterprise? However, enthusiasm
quickly subsided while reading. This reviewer's opinion was that
reading this book was akin to eating Moroccan couscous without any
accompanying spicy chicken stew - flat and boring with only a modest
amount of value.
The book consists of a series of papers on the theories of privatization
and of four case studies from Arab countries including Egypt, the
Gulf countries, Jordan, and Tunisia. A comment that purports to evaluate
each paper follows.
The most helpful papers were those written by the editor, Said El-
Naggar, and by Alan Walters. Mr. El-Naggar prepared an introductory
chapter which addresses the basic issues related to privatization in
a Third World economic setting. He discusses the general failure of the
public sector economic model to perform efficiently; the need to continue
public enterprise monopolies such as -public utilities, and industries
with high inadequacy of incremental privatization; and the
problems in the transition from the public to private sector, especially
with regard to the inertia and self-interest of the entrenched people
who run public sector enterprises.
Mr. Walters also offers some basic background on the theory of
privatization. But the interesting part of his essay deals with the British
experience with privatization under Thatcher's administration. This experience
includes Jaguar, British Telecom, National Freight Corporation,
and the British housing market.
(267)

268 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
With the possible exception of the case study on Egypt, the remainder
of the book attempts to explain the status of privatization in
several Arab countries. While the authors of the papers bemoan the
fact that they have insufficient statistical data to evaluate privatization
accurately, the reader is nevertheless expected to understand the failures
of privatization in selected Arab countries. It is difficult to see how
this is possible, absent an honest appraisal of the political situation in
the country or some specific case examples.
In conclusion, this book has some value in that it exposes the
reader to some of the modern economist's arguments concerning the
process of privatization in developing countries. It is unfortunately only
a modest beginning because the reader must do much more research
before he/she can get a true picture of privatization in the Middle
East.

1990]
BOOKS RECEIVED
RIGHT v. MIGHT: INTERNATIONAL LAW AND THE USE OF
FORCE. By Allan Gerson, Louis Henkin, Stanley Hoffman, Jeanne J.
Kirkpatrick, William D. Rogers, and David J. Scheffer. New York:
Council of Foreign Relations Press, 1989, 124 pp.
Right v. Might provides an enlightening discussion of the "great
debate of. the 1980s." Specifically, to what extent if any, should the
United States or any other country be allowed to invoke the shield of
international law when applying the sword of force. The book succeeds
in simplifying a potentially complex issue. The United Nation's [hereinafter
U.N.] Charter Article 2(4) provides the backdrop for all international
legal issues raised by this discussion. Article 2(4) requires
member countries to "refrain from the threat or use of force against
the territorial integrity or political independence of any state."
The book begins with a forward by John Temple Swing, executive
vice-president of the Council on Foreign Relations. Mr. Swing presents
the broad framework for the book. He focuses on specific historical
events such as the 1983 U.S. invasion of Grenada and the U.S. mining
of Nicaraguan harbors that caused the Council of Foreign Relations to
reexamine foreign policy under former President Reagan. The current
writers co-authored Right v. Might to examine international law and
the use of force, and to present the pros and cons of the Reagan
Doctrine.
In the introduction, David T. Scheffer, a senior associate of the
Carnegie Endowment for International Peace, narrowly evaluates the
issue of the appropriateness of using force against a nation in terms of
the Reagan Doctrine. The Reagan Doctrine articulates a U.S. right to
intervene on the behalf of democratic governments threatened by antidemocratic
forces. Traditional interpreters of the U.N. Charter, Article
2(4), suggest that the Reagan Doctrine liberally reinterprets the Charter
in such a way that will likewise enable the Soviet Union to justify
intervening on the behalf of communist countries facing anti-communist
insurgencies.
The co-authors of the second chapter, Jeane J. Kirkpatrick, a former
representative to the United Nations, and Allan Gerson, her colleague
at the American Enterprise Institute, justify the Reagan Doctrine
as consistent with previous American foreign policy doctrines of
furthering democratic governments. Ms. Kirkpatrick begins by asserting
that contrary to popular belief, the U.S. did not invoke the Reagan
Doctrine when intervening in Grenada, intercepting an Egyptian airline
carrying a suspected attacker of the Achille Lauro, bombing Libya,
and mining Nicaraguan harbors. They feel the true Reagan Doctrine
advances the view that armed revolt is justified as a last resort When

270 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
the rights of the masses are systematically violated. This view remains
consistent with the U.N. Charter's declaration that member-states respect
human rights and democratic self-determination.
Louis Henkin, president of the United States Institute of Human
Rights, concisely summarizes the history surrounding Article 2(4) and
various acts invoking Charter issues in chapter 2. He further notes recognized
exceptions to Article 2(4). Most noteworthy is Article 51
which permits self-defense when threatened by an armed attack. Mr.
Henkin firmly rejects the Reagan Doctrine of foreign policy as contrary
to the Charter. He recommends the Truman Doctrine as a more workable
foreign policy alternative.
Stanley Hoffman, a professor of the civilization of France at
Harvard University, examines the ethics and rules of the behavior between
the superpowers in Chapter 4. Mr. Hoffman points out that the
law of the U.N. Charter and informal agreements between the U.S.
and the Soviet Union reflect moral concerns. Contrary to Ms. Kirkpatrick
and Mr. Gerson, Mr. Hoffman finds little political or ethical justification
for the Reagan Doctrine. He feels that the United States will
need to play a larger role in "establishing ethically legitimate rules of
the game while the Soviet Union undergoes extraordinary changes internally
and in its external behavior."
In the concluding chapter, William Rogers, a senior partner practicing
international law at Arnold & Porter, admits that Article 2(4)
provides the abstract standard for measuring uses of force. Mr. Rogers
concurs with the book's other authors in that the ideal goals of the
Charter have not been realized. Yet he points out that the central premise
of Articles 2(4) and 51 is that states should stay out of each
other's way. This interpretation invalidates the Reagan Doctrine supported
by Ms. Kirkpatrick and Mr. Gerson. Mr. Rogers concludes that
the Charter's ideal goals of restricting force can best be achieved
through specific agreements between countries.
The book provides a thoughtful analysis of the game of using force
as a foreign policy tool. The layman and the foreign policy scholar will
similarly benefit from the book's discussion. As Americans we all often
wonder to what extent international law provides a justification for
American and Soviet intervention in other countries. Right v. Might
answers the question from both ends of the spectrum.

1990]
BOOKS RECEIVED
LAW UNDER STRESS: SOUTH AFRICAN LAW IN THE 1980s.
Edited by T.W. Bennett, D.J. Devine, D.B. Hutchinson, I. Leeman and
D. van Zyl Smit. Cape Town, South Africa: Juta & Co., 1988, 258 pp.
Law Under Stress: South African Law in the 1980s is a compilation
of essays written by South African lawyers describing the ways in
which South African law has reacted to changes in the country's political
and legal structure during the period between 1976 and 1986. The
changes which already have been witnessed by the people of South Africa
and the men who write about them can be traced to the twin considerations
of repression and reform. The stability and efficacy of the
legal system which stood unchallenged under apartheid have broken
down under newfound emphasis on fundamental rights and liberties
contained in the common law. This series of essays traces the changing
role of the legal system in the present and in the future South Africa.
The series, compiling nine separate essays, begins with a discussion
of the state of "political disaffection, punctuated by periodic outbursts
of violence, which reflected an endemic malaise in South African society."
Entitled "Unrest, Reform and the Challenges to Law 1976 to
1987", this first essay by T.R.H. Davenport introduces the major issue
of the unequal division of power in South Africa, and the beginning of
black protests with the rise of African nationalism. The essay discusses
confrontation in political and social spheres, from constitutional
changes, to rebellion in the schools, and the unions challenging the economic
power. The reform sought by the opponents of apartheid, found
in some part in power-sharing, was a frontal challenge to a political
system which stood in the way of racial equality.
The next three essays discuss in a provocative tenor some specific
areas of law in a changing South Africa. J.R.L. Milton, in "Criminal
Law in South Africa 1976-1986", gives the reader a' perspective of the
criminal justice system in South Africa through a discussion of its origin
in contrast to the recent period of reform in the past decade. Particularly,
the lack of procedural or normative safeguards for the preservation
of human rights and civil liberties in South African legal order
have become a target for reform.
L.J. Boulle, in "Constitutional Law in South Africa 1976-1986",
discusses how the allocation, exercise and control of state power in
South Africa in the past decade has been the source of considerable
political upheaval. Boulle shows the reader several facets of constitutional
law, from its social context, to formal state initiative, informal
developments, constitutional doctrine, and ending with a discussion of
its effects on the legal system.
"Labor Law in South Africa 1976-1986, The Birth of a Legal Dis-

272 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 14
cipline", by Johan Roos, discusses the new face of labor law in the
court system and within the legal system at large. There emerged a
new "legal" nature to the employment relationship, different from the
relationship governed by private law which had been the history of labor
law. Labor law underwent new regulation under a combination of
private law and public law principles.
Co-authors Jean Burdzik and David van Wyk, both professors at
the University of South Africa in Pretoria, outline "Apartheid Legislation
1976-1986", with a well-defined structure: (1) Political apartheid,
(2) Non-political apartheid, (3) Change (reform), (4) Apartheid legislation,
and (5) Reform of apartheid legislation. This essay embodies an
interesting discussion of how to define the phenomenon historians have
coined "apartheid".
On a larger scale, D.J. Devine theorizes about "International Law
Tensions Arising from the South African Situation 1976-1986". This
essay examines the strains which the internal South African situation
have placed on the system of international law over the past decade.
"Security and Integrity," by Etienne Mureinik, is a discussion
about the role of the judiciary and legislation in the past decade in
South Africa. The article concludes that the decade began in much the
same way as it ended - "with fresh libertarian initiatives from below,
and dour stultifying responses from above." However, the author does
admit of scratches in the surface of political establishment: Progress
toward a more equal South Africa in its political makeup.
D.M. Davis and John Dugard author the last two essays, which
focus on what has yet to come. Davis' essay, "Post-apartheid South
Africa - What Future for a Legal System?," poses the threat that
South African law could become a form of social engineering if the
pendulum of anti-discrimination swings too far to the left. At present,
the commitment is not so much to a protection of the rights of all
South Africans, but to dislodge the dominant political power at large
today. The role of law, according to Davis, depends on the nature of
dominant social practices.
Finally, Dugard's essay, "The Quest for a Liberal Democracy in
South Africa", proffers the opinion that the institutions and principles
of liberal democracies offer the best hope for a new South Africa.
Though liberals have been criticized for their efforts to create a political
environment through the advancement of civil rights, it is the author's
opinion that this is the optimal route for reform in South Africa.
The value of this compilation of essays on the state of the law in
South Africa is that it is seen through the glass of political reform. The
strain which has been placed on the legal system in South Africa in the
past decade is seen through a need for political reform. While some

1990] BOOKS RECEIVED 273
factions propose to change the law from within and others from without,
it seems clear to all that the present state of the law is unworkable
under the rubric of racial equality.