Doing Business In.. 2020

Last Updated July 15, 2020

Mexico

Law and Practice

Author



Becerril, Coca & Becerril, S.C. is an international law firm specialised in legal and business consultancy. With more than 50 years of experience, BC&B has streamlined its service offering, positioning itself as one of the top law and business firms in Mexico. The expert litigators cover a great variety of legal services in the areas of corporate, civil, business, family, and commercial arbitration law, and the firm has now enlarged its portfolio by specialising in intellectual property. In its quest to provide better solutions and more scope, in 2019 the firm became part of the Velae Legal Group, an Ibero-American affiliation of multinational law firms with representation in many countries, which offers its clients diverse services and professional solutions.

In Mexico, the civil law legal system is applicable. 

The federal judicial power is vested in the district courts as the first instance of appeal, the federal circuit courts as the second instance of appeal, and the Supreme Court of Justice as the final instance of appeal.

For their part, the 32 state governments have judicial power to decide local civil and commercial matters and criminal controversies, while the federal judicial power decides federal matters, such as IP, foreign investment, commercial matters and criminal matters that fall under federal jurisdiction. 

In general terms, Mexico is open to foreign investment, although it is necessary to obtain authorisation for foreign investment to participate, directly or indirectly, in more than 49% of the capital stock of the following:

  • port services to vessels to carry out navigation operations such as towing, mooring of ropes and launch;
  • shipping companies dedicated to operating vessels exclusively in high traffic;
  • concessionary or permitting companies serving the public at aerodromes;
  • private preschool, primary, secondary, upper secondary, higher and combined education services;
  • legal services; and
  • construction, operation and exploitation of railways that are a general means of communication, as well as providing public rail transport services.

At the same time, some activities are restricted in terms of foreign investment, such as:

  • those strategic activities reserved for the Mexican state, including activities related to oil and hydrocarbon extraction and exploration; planning and control of the electrical system, nuclear energy, radioactive minerals, the postal service, and the currency and mint; and the control and supervision of the ports and airports. However, private entities, including those with foreign investment, may execute agreements with the relevant government departments to carry out certain activities in such sectors; and
  • activities with a limited authorised percentage of foreign investment participation:
    1. 10% in production co-operative companies;
    2. 25% in national air transportation, air taxi service or specialised air transportation;
    3. 49% in:
      1. the manufacturing and distribution of explosives, weapons, ammunition and fireworks;
      2. the printing and publication of newspapers;
      3. fishing;
      4. port administration;
      5. port piloting vessel services;
      6. fuel and lubricant supplies for vessels, aeroplanes and train equipment; and
      7. radio broadcasting.

In order to obtain authorisation for foreign investments, it is necessary to file the following documentation before the National Foreign Investments Commission:

  • articles of incorporation;
  • by-laws;
  • power of attorney of the legal representative;
  • questionnaire to request resolution from the commission; 
  • written communication in which the main characteristics of the project and the general identification data of the applicant are supplied;
  • proof of payment of government rights; and
  • audited financial statements for the last fiscal year.

Such authority has a maximum time of 45 business days in order to issue its resolution. Should the authority deny the authorisation, this means that the agreements, by-laws and all actions carried out by the parties are null and void, and therefore not enforceable with third parties.

Any foreigner who is involved in the act of incorporation of any company in Mexico or who at any future time acquires an interest in or participates in such company, shall be considered because of that simple act as a Mexican national regarding said interest or participation, as well as regarding the goods, rights, concessions, participations or interests which such company might acquire, or the rights and obligations derived from the agreements entered into by the company. Such foreigner therefore agrees not to invoke the protection of its government, under the penalty for failure to comply with same, of forfeiting said interest or participations in favour of the Mexican nation.

According to the Mexican legal system, all decisions rendered by the administrative authorities can be appealed before the Federal Court for Administrative Affairs (FCAA) through a Nullity Claim or, before the same authority that rendered the resolution to be appealed, through a Review Recourse.

Review Recourse

The Review Recourse is optional and can only be filed within a term of no longer than 15 working days after being served with the administrative decision that is to be challenged. The timeframe to obtain a definitive decision within the Review Recourse is usually about six months. The decision of a Review Recourse can also be appealed through the ordinary appeal remedy (Nullity Claim) before the FCAA.

Nullity Claim

On the other hand, the Nullity Claim can only be filed within a term of no longer than 30 working days after being served with the administrative decision that is to be challenged. The timeframe to obtain a definitive decision within the Review Recourse ranges from approximately six months to one year.

Those decisions rendered by the FCAA on Nullity Claims can only be appealed by the affected party within one last stage of appeal, namely the “Amparo” appeal.

The “Amparo” appeal, is a constitutional action the unique purpose of which is to revoke an administrative or jurisdictional ruling that has been unconstitutionally issued and therefore contravenes a person’s (individual or corporation) constitutional rights. The legal term foreseen in the Amparo Law to file the initial brief or complaint before a defendant authority is 15 working days, which shall be counted from the day on which the offended party was served notice with the ruling to be challenged, and afterwards the defendant authority will render its reply and remit the file to a Federal Circuit Court (FCC).  A final and definitive ruling is usually issued within a term of approximately six months to one year.

The General Law of Business Corporations provides for several types of companies in which a partnership can be organised. However, the main forms are Sociedad Anónima or SA, which is a stock corporation; Sociedad de Responsabilidad Limitada or S de RL, which is a limited liability company; and Sociedad Anónima Promotora de Inversiónor SAPI, which is regulated by the Securities Market Law.

Sociedad Anónima (SA)

The stock corporation may adopt the form of a fixed-capital company (SA) or a variable-capital company (SA de CV). The difference is that the variable capital company may increase or decrease its capital accordingly with its by-laws through a shareholders’ meeting without any of the formalities applicable to the SA. 

Each company in Mexico must be integrated by at least two shareholders (individuals or corporations). The shareholders' liability is limited to their shares or capital contribution and the directors are liable for the management of the company.

An auditor who will supervise the operations of the company must be appointed. This auditor may be integrated by one or more members, who may or may not be shareholders. 

Sociedad de Responsabilidad Limitada (S de RL)

The S de RL is popular among US corporations looking for a presence in Mexico, because they can reduce their tax liabilities in the US. 

The partners’ liability is limited to their partnership contribution and the directors will be liable for the management. However, in this corporation there is no legal requirement to appoint an auditor.

The shares, which represent the equity interests, are not freely transferrable and/or cannot be traded publicly.

Sociedad Anónima Promotora de la Inversión (SAPI)

This kind of corporation is regulated by the Securities Market Law. It is widely used as a vehicle to invest in Mexico because of its flexibility in corporate governance, which allows the obligations and contractual arrangements used by equity investors to be taken.

For the incorporation of a company in Mexico, it is necessary to define what the corporate legal name will be. Authorisation to use this legal name must be requested before the Secretary of Economy (SE).

Once the authorisation is obtained, the foreign investors may proceed with the creation of the corporate by-laws which include the following requirements:

  • corporate name;
  • corporate purpose;
  • shareholders or partners, which may be companies or individuals, foreign or national;
  • capital;
  • capital distribution;
  • corporation duration, this can be unlimited;
  • corporation's address; and
  • board or sole director/manager.

In the case of a SAPI, the company can be run by a board of directors. 

Auditors

It is worth mentioning that the S de RL is not required to name an auditor. It is up to the partners to appoint one.

Once the articles of incorporation or by-laws are drafted and the deed of incorporation has been signed before a notary public, it will then be mandatory to file such deed of incorporation in the Public Registry of Commerce for these documents to be public and to become effective. 

Additionally, the new company must be registered at the Taxpayers’ Registry in front of the tax authority Servicio de Administración Tributaria(SAT) and at the Foreign Investment Registry.

The execution of the incorporation deed before the notary public takes an estimated time of one week once the articles of incorporation or by-laws have been drafted. To file the deed before the Public Registry of Commerce takes an estimated one or two weeks. 

According to the General Law of Business Corporations, companies are obliged to hold an annual ordinary shareholders/partners meeting. In the case of the SA, this meeting must be held within the four months following the end of the fiscal year, meaning, up until 30 April.

In these meetings the shareholders or partners will be asked to approve the financial statements of the company and the sole director or manager's or board’s report.

Additionally, companies must renew their registration at the Foreign Investment Registry annually.

Moreover, all companies must submit an annual online report before SAT within the first three months of the year, meaning, up until 31 March. 

Companies in Mexico are run by either a sole administrator or a board of administrators, depending on whether they are an SA or an S de RL. 

In the case of an SA, it is run by a sole director or a board of directors. An S de RL, on the other hand, is run by a sole manager or a board of managers. 

This sole director/manager or board of directors/managers may also appoint executive committees within the company, as well as executive officers. 

A SAPI is run by a board of directors.

Shareholders’ liability in Mexican companies is limited to capital contributions; directors, on the other hand, are liable for their management in the company before such company, as well as before the shareholders and third parties. 

Likewise, directors or managers are jointly liable for the shareholders’ contributions, compliance with statutory requirements regarding the payment of dividends, accounting and corporate bookkeeping and all records required by law, to fulfil the shareholders’ resolutions. However, directors or managers are not liable for specific resolutions resolved by the board or actions carried by the management with which such directors or managers have expressly disagreed. 

Officers are liable for the fulfilment of the duties appointed to them. 

The corporate veil as conceded within the General Laws of Business Corporations applies to the shareholders or partners of the company and not the directors/ managers or officers. Directors who act against the company’s interests, and not under the specific directions of the equity holders, are personally liable for their actions towards shareholders and third parties.

The main regulations that govern labour law in Mexico are the following:

  • Mexican Constitution (Article 123);
  • Ley Federal del Trabajo (Federal Labour Law);
  • Ley del Instituto del Fondo Nacional de la Vivienda para los Trabajadores (National Fund for Workers’ Housing Institute Law); and
  • Ley del Seguro Social (Social Security Law).

These laws govern all employment relationships between unionised and trusted, Mexican and foreign employees. Even Mexican employees working abroad are subject to Mexican laws.

According to the law, there are two different jurisdictions, federal and local, depending on the industry and activities.

The Social Security Law governs security, nursery, medical and retirement mandatory benefits granted by the social security system to all employees.

The Federal Labour Law (FLL) provides that it is strictly mandatory to execute an employment agreement with all employees, since all the terms and conditions, as well as both the rights and obligations of the employee-employer are agreed upon. 

The execution of the agreement is the sole obligation of the employer. Even if an agreement has not been reached between the parties, the FLL provides that when an individual renders personal and subordinated work to another party in exchange for a contribution, the two parties have formed an employment relationship just as if they had reached an agreement. 

The FLL provides that the employment relationship can be for a specific task or definite term, for a specific season or indefinite term, and as applicable, such employment relationship can be subject to a trial or training period.

The most common type of employment agreements are entered into for an indefinite period of time.

An employer can hire employees for a definite time or specific tasks, or as limited and provided by the FLL. 

A seasonal agreement is used when an employer has an increased workload in specific periods of the year. 

Trial and training periods are limited to three months and to six months for a management position. These conditions must be agreed in writing and the employer must guarantee social security obligations. Also, trial periods may not be applicable simultaneously or successively to the same employee, whether in the same or different positions within the company.

According to the FLL, employees are entitled to one resting day per six working days with full payment, which will preferably be on Sundays. If the job requires continuous work, such resting day may be agreed between the employee and employer. If employees are required to render their services on Sundays, their employers must pay an additional 25% premium to their daily wage. 

There are three types of work periods in Mexico, as provided by the FLL, which are: 

  • day shift, from 6am to 8pm (maximum length of a day shift is eight hours);
  • night shift, from 8pm to 6am (maximum length of a night shift is seven hours); and 
  • mixed, which includes day shifts and night shifts, provided that the night shift is less than three-and-a-half hours, otherwise it will be considered as a night shift. The maximum length of a mixed shift is seven-and-a-half hours.

Furthermore, employees are entitled to at least half an hour to eat away from their working spaces; if employees cannot go out to eat, such time shall be calculated as time effectively worked. 

Employees, according to the FLL, are not obliged to render their services for longer than their agreed shifts, although shifts may be extended extraordinarily, without exceeding three hours daily or three times a week. Such extra time must be paid as an equivalent amount to the corresponding hourly wage. 

When extra time exceeds nine hours a week, the employer is obliged to pay 200% of the wage corresponding to the worked hours, notwithstanding the sanctions the FLL may impose.

The termination of employment relationships in Mexico is delicate, since an employer may not terminate a relationship at will, only according to the causes provided by the FLL, giving written notice and expressly identifying the dates of the actions carried out by the employee or employer so that the employee can be indemnified for the time worked for the employer.

It is important to note that in Mexico, the employer holds the burden of proof in case of controversy or litigation, therefore, the employer must have sufficient records of employees' conduct and causes. Also, if the employer fails to give due notice, this is considered to be an unjustified termination and is subject to a claim. Since it is a sensitive and difficult subject to prove before a court, employers in Mexico usually turn to settlements agreed with the employees, which can be carried out through the signing of a voluntary resignation letter and termination agreement.

There is no need for the employer to give notice to the union about the redundancy of the employee, provided that the union agreement does not contemplate such disposition, nor is it necessary for the employer to give notice to the government. It is a common practice in Mexico to offer a redundant employee full statutory severance in exchange for the execution of the termination agreement and voluntary resignation. 

According to the FLL, it is within employers’ and employees’ obligations to form different commissions regarding several work matters, such as civil protection, training commissions, internal working regulations, and profit-sharing commissions. These must be governed by at least one employer’s representative and one employees' representative. 

Moreover, employees have the right to form or be a member of an already organised union in order to negotiate working conditions with the employer and execute a bargaining agreement. The most important right of unions is their right to strike and to suspend their duties until their demands are satisfied. 

However, under Mexican regulations, employees do not have statutory rights to representation on the management board.

Mexican tax regulations state that employers are required to withhold the following taxes:

  • income tax (up to a maximum rate of 30%) – paid on gross income less the applicable or authorised deductions, carry-over losses, special reductions and certain taxation paid abroad;
  • social security contributions – the percentage payable by the employee depends on the employee's wage and ranges from 15–20%. Employers are responsible for withholding and paying the social security contributions to the IMSS (Mexican Social Security Institute);
  • tax on employee profit sharing – according to the FLL, employees are entitled to 10% of the employer’s profits; and
  • payroll tax – this depends on local government impositions. 

An individual is considered to be a Mexican resident for tax purposes if such individual establishes their residence in Mexico or if the individual’s centre of vital interests is in Mexico. 

Companies are liable to pay taxes in Mexico when such companies:

  • are resident in Mexico; or
  • are non-resident companies that earn income from Mexican sources.

Taxes in Mexico are divided into federal and state taxes.

Federal Taxes

These include income tax, value added tax and social security, among others.

Income tax (impuesto sobre la renta) – up to a maximum rate of 30% – is paid on gross income less the applicable or authorised deductions, carry-over losses, special reductions and certain taxation paid abroad.

Value added tax (impuesto al valor agregado) – at 16% – is paid on the sale of goods and services, granting the use of certain goods and the importation of goods. However, food and medicines are not subject to VAT.

State Taxes

Local taxes include the following:

  • real estate transfer tax is paid on the purchase of real estate – land and buildings – and each state has its own rate; and
  • real estate holding tax is paid annually by holders of real estate in the relevant state.

The tax incentive in Mexico is the reduction in VAT under certain and specific circumstances.

Tax consolidation is not available under Mexican regulations. 

The Income Tax Law states that interest related to the debts of a company in excess of three times its equity, arising out of debts with related foreign parties, will be non-deductible.

Additionally, the Corporate Income Tax Law states that companies that take on operations with related parties that are local or resident abroad will have to keep records of documentation that proves their income and deductions, according to the prices or payments made by independent parties in similar transactions.

Corporate Income Tax Law states that companies that take on operations with related parties that are local or resident abroad will have to keep records of the documentation that proves their income and deductions made, according to the prices or payments made by independent parties in similar transactions.

Taxpayers that undertake transactions with related parties are required to determine their revenues and deductions allowing for prices and amounts of consideration that would have been used with or between independent parties in comparable transactions, applying the transfer pricing methods.

Parties are related when one of them participates, directly or indirectly, in the administration, control or equity of the other, or when a person or group of persons participates, directly or indirectly, in the administration, control or equity of said persons. 

Mexican legislation recognises six methods for transfer pricing:

  • método de precio comparable no controlado (comparable uncontrolled price method);
  • método de precio de reventa (resales price method);
  • método de costo adicionado (cost plus method);
  • método de partición de utilidades (profit split method);
  • método residual de partición de utilidades (residual profit split method); and
  • método de márgenes transaccionales de utilidad de operación (transactional operating margin method).

According to the Income Tax Law, the rules for anti-evasion apply to interest and royalty payments made to foreign entities which qualify as tax havens.

Merger notification in Mexico is mandatory. In specific scenarios it must be notified to the Federal Commission of Economic Competition (COFECE), in order to grant certainty to the process. 

According to the Mexican Antitrust Law the following thresholds apply for merger notification to the COFECE:

  • when the value of the transaction, within Mexican territory, directly or indirectly exceeds approximately USD80 million; 
  • when the transaction involves 35% or more of one of the economic agents’ assets or stock, whose annual turnover in Mexican territory or assets in the country exceeds approximately USD80 million; or
  • when the acquisition of assets or capital within Mexican territory exceeds approximately USD37 million, and two or more of the economic agents participating in the concentration have an annual turnover or assets in Mexican territory exceeding, jointly or separately, approximately USD213.8 million.

The standard merger control procedure begins with the filing before the COFECE of a written merger notification, enclosing the proper documentation. 

If the written notification fails to comply with the requirements established by the Mexican Antitrust Law, the COFECE has 10 working days to issue a request for basic information (RFBI). Parties must respond in the same period, although this may be extended once for an additional 10 working days upon request.

Once the notification is admitted, the COFECE has 15 working days to issue an additional request for information (RFI). Parties must respond in the same period, which may be extended in duly justified cases.

The merger control procedure may last 60 working days, following the date on which the parties responded to the RFBI or RFI, as applicable until the moment when the merger unit has assessed the operation and the board has made a final decision. 

Upon conclusion of such period without the issuance of a resolution, it may be understood that the COFECE has no objection to the notified concentration.

This standard period can be extended once by 40 working days in exceptionally complex mergers. Where a merger raises competition concerns, the COFECE must inform the parties of such concerns within 10 working days before the board session’s agenda is made public, which allows the parties to propose conditions or remedies. Remedy submission and modifications of submitted remedies may restart the clock for another period of 60 plus 40 working days.

The average timeframe during which the COFECE analyses mergers is shorter that the maximum legal time period.

Cartels in Mexico are known as prácticas monopólicas absolutas (PMA) and are contracts, agreements or arrangements between competing economic agents, which are intended to:

  • fix prices;
  • restrict output;
  • segment markets by territory, clients, products, or suppliers;
  • rig bidding; or
  • exchange information for any of the above-mentioned purposes.

Through these agreements, the competing companies stop competing. These acts are prohibited by Mexican law as being harmful to the free competition process, since they create something similar to a monopoly market. They are therefore dealt with very severely.

Abuse of dominant position in Mexico is known as prácticas monopólicas relativas (PMR) and involves one or more companies that have substantial power in a certain market misusing their power to displace others, prevent access or establish exclusive advantages in favour of one or more agents.

Mexican law establishes that the following can all be regarded as PMR:

  • vertical contracts;
  • vertical price restrictions;
  • purchases or tied sales;
  • conditional sale or purchase;
  • refusal of treatment;
  • boycott;
  • predation of prices;
  • discounts or purchases subject to conditions;
  • cross subsidies;
  • price discrimination;
  • raising costs of competitors;
  • denial of access to essential supplies; and
  • narrowing of margin.

Definition

An invention is defined as any human creation that allows the transformation of matter or energy that exists in nature, for its use and to meet mankind’s needs. In consequence, an invention will be subject to patentability if the Mexican Industrial Property Law (MIPL) coincides with the international criteria for patentability, as an invention is patentable if it is new, involves an inventive step and is susceptible to industrial use. 

Patent documents should contain descriptions of scientific and technical concepts as well as practical details of the processes and apparatus required to enable the inventions. However, the following developments are not considered as inventions under the MIPL:

  • theoretical or scientific principles;
  • discoveries that consist of revealing something that existed already in nature;
  • schemes, plans, rules and methods to perform mental acts, games or business;
  • mathematical methods;
  • computer programs (copyright protection available);
  • information forms;
  • aesthetic creations and artistic or literary works;
  • surgical, therapeutic or diagnostic methods, applicable directly to human beings and animals;
  • the juxtaposition of known inventions or mixtures of known products, their variation in use, form, dimensions or materials; except for those cases resulting in industrial results or uses, or that are not obvious to those with knowledge in the field;
  • plant varieties (UPOV protection available);
  • essential biological processes for production, reproduction and breeding of plants and animals;
  • biological and genetic materials as found in nature;
  • animal species; and
  • the human body and its parts.

Term of Protection

A patent is in force for 20 years and is not renewable. This protection starts from the filing date or, if it has one, the international filing date and is subject to the payment of maintenance fees every five years. 

During such term, the exclusive right of use of the patented invention confers on the respective owner the right to prevent others from manufacturing, using, selling, offering for sale or importing the patented product or process without the owner's consent.

Procedure

The Mexican Institute of Industrial Property (MIIP) launched the current version of the system “inventions online” for the e-filing of patent and utility model applications and issued guidelines for their use. 

In general, e-filing has as an advantage a reduction in late filing and paper costs, faster examination of formalities, and the existence of electronic documents issued by the system that are considered originals given the electronic signature of the officers. However, e-filing is not feasible for same-day filings, all documents filed in the system as digital copies only may be required in original form by the MIIP at any time, and changes and corrections through the system are not possible once a case has been paid.

Formalities

Patents are filed before the MIIP in Spanish with the formalities set by the MIIP. Priority is recognised according to the Paris Convention and/or the Patent Cooperation Treaty (PCT). Filing a certified copy of the priority document and its translation along with the application, or within three months of the filing date, is mandatory for priority recognition under the Paris Convention, for which there is no express requirement from the MIIP.

In addition, assignments from the inventors are required when the applicant is not the inventor(s), and powers of attorney are required for filings through an agent in Mexico, which is necessary for foreign applicants because an address for receiving notifications within Mexican territory is mandatory. However, filing of assignments is not required for PCT national stage applications.

Applications are subject to a formalities examination and, upon compliance with all the formalities, they are published as soon as possible after 18 months of the filing or priority date. Utility model and design register applications are published as soon as possible after compliance with formalities.

Once the applications are published, any third party may submit observations regarding the patentability of the published applications within two months of the date of publication, which may or may not be considered by the MIIP during substantive examination.

Examination

After publication, patent applications are subject to a substantive examination to assess eligibility and determine novelty, inventive step and industrial applicability. If a patent is granted in a country where Mexico has a patent prosecution highway (PPH) agreement in place before the issuance of the first office action, examination may be accelerated through such PPH. Substantive examination may take from months up to five years more, once the application is published and there is a limit of four office actions for a given application and a maximum substantive examination time of five years.

Once the examination is concluded, the MIIP must issue a final decision, where the MIIP is responsible for issuing a decision on the granting or denial of the patent. Unfortunately, the MIIP does not issue partial grants or rejections when a patent contains both patentable and non-patentable subject matter, but a denial will affect all claims even if only one is not patentable. If a final decision denies a patent, there is the possibility to appeal and a further instance of revision. If the final decision grants the patent, granting fees and the first five years of maintenance must be paid. Renewals for the design register and annuities for the rest of the rights are due every five years thereafter.

Enforcement and Remedies

The only way to enforce a patent is through administrative proceedings (infringement action) before the MIIP, which is not a court of law, but a federal administrative office that, among other matters, grants patents. Therefore, the MIIP is technically competent to resolve a patent infringement case.

The MIPL regards the following as infringements:

  • the manufacturing or developing of goods protected by a patent without the consent of the owner thereof or without the appropriate licence;
  • the offering for sale or distribution of goods protected by a patent in the knowledge that they have been manufactured or developed without the consent of the owner of the patent or registration, or without the appropriate licence; and
  • using patented processes without the consent of the owner of the patent or without the appropriate licence.

If an infringement is declared, the MIIP will also sanction the infringer with a fine of up to MXP1,737,600 or USD86,880 (at an exchange rate of USD1 = MXP20).

Criminal action

Criminal action for patent infringement is only available for re-offence cases. In accordance with the provisions of Mexican IP law, re-offence is when a party infringes a patent after a final and beyond-doubt appeal decision from the MIIP declaring the infringement. This re-offence is considered a felony that can be pursued ex officio or ex parte through the federal prosecution office (FPO). This felony can be punished with up to six years of imprisonment and a fine.

Civil action

Remedies are available to the plaintiff through civil action. An IP right-holder is entitled to pursue a civil action filed before the civil courts to claim compensatory damages that cannot be less than 40% of the sale price to the public of each infringing product or service. However, to be allowed to claim damages, the affected IP right-holder must have an administrative infringement action decision declared as final and beyond the shadow of an appeal.

Definition

In accordance with the MIPL, trade mark registrations may be applied for by any individual or entity that wishes to distinguish its products or services, while the right to their exclusive use is obtained through a trade mark registration. 

In Mexico, trade mark protection is granted to any sign that is perceivable by the senses and that can be represented in a clear and precise manner which makes it distinguishable from other products and services in the market. 

The MIPL recognises the following signs available for registration:

  • denominations, letters, numbers, figurative elements and combinations of colours, as well as holographic signs;
  • three-dimensional shapes;
  • trade names and company or business names;
  • the name of an individual, provided that it cannot potentially be confused with a registered trade mark or published trade name;
  • sounds;
  • scents; and
  • trade dress.

Furthermore, the MIPL also foresees the possibility to register the following distinctive signs:

  • collective trade marks;
  • certification trade marks; 
  • slogans; and
  • trade names.

Term of Protection

In Mexico, a trade mark registration is in full force and effect for a 10-year period, with the possibility to file subsequent renewals for the same period. The 10 years are counted from the filing date of the corresponding application.

Due to the most recent amendments to the MIPL, declarations of use are compulsory at two different points:

  • within the three-month period following the third anniversary of a registration; and
  • when a renewal petition is submitted.

If the third anniversary declaration of use is not filed, the relevant registration will automatically lapse.

Registration Process

Trade mark applications are subject to two examinations during the process:

  • the first is performed to verify that all the information supplied complies with the formal requirements, and that the goods or services sought to be protected are duly classified; 
  • in a second examination called a “novelty exam”, the officer determines whether the proposed mark is inherently registrable in the light of prior registered or applied trade marks.

Once a trade mark application is filed, the MIIP will publish the same in the Official Gazette for opposition purposes within a 10 working-day period, counting from its filing date, granting a non-extendable term of one month to allow third parties to bring opposition against the application.

If no opposition is filed and the examiner considers that there is no legal requirement or objection in accordance with the MIPL, the authority will grant the certificate of registration.

Enforcement and Remedies

There are two ways to enforce a trade mark: through an administrative infringement action filed before the MIIP and through a criminal action filed before the FPO.

Infringement action

The MIPL establishes, among other matters, the legal hypothesis of infringement, as well as the penalties that can be imposed on an infringer (if it has demonstrated infringing conduct).

According to the MIPL, the following are considered to be trade mark infringements and the IP right-holder is entitled to start such action if someone:

  • uses a trade mark that is confusingly similar to another registered mark which protect products or services identical or similar to those protected by the registered mark; or
  • uses an identical registered trade mark without the consent of the owner or without the appropriate licence that protects products or services that are identical or similar to those protected by the registered mark.

Where the MIIP determines in a decision that aninfringement was demonstrated, such authority is obliged to impose one of the following penalties on the defendant: a fine (up to MXP1,737,600or USD86,880, at an exchange rate of USD1 = MXP20), an administrative arrest, or the temporary/permanent closure of the infringer's business.

Additionally, an IP right-holder is entitled to pursue a civil action filed before the civil courts to claim compensatory damages that cannot be less than 40% of the sale price to the public of each infringing product or service. However, to be allowed to claim damages, the affected IP right-holder must have an administrative infringement action decision declared as final and beyond the shadow of an appeal.

Criminal action

IP right-holders can also start a criminal action against any third party that falsifies trade marks, using the following steps:

  • criminal action – the criminal action brief has to be filed before the FPO, explaining the causes of the crime and enclosing evidence that supports the action; 
  • analysis – the FPO will analyse if a crime has been committed and, if so, will send the file to a federal judge; and
  • sentence – the federal judge will analyse the case and issue a decision. If a crime has been committed, the judge will impose the following penalties on the defendant: a fine (up to MXP1,737,600 or USD86,880, at an exchange rate of USD1 = MXP20), a prison term, and the destruction of the products.

Definition

The MIPL recognises the protection of industrial designs, including under such categories as industrial drawings and industrial models.

An industrial drawing is defined as any combination of shapes, lines or colours incorporated in an industrial product for ornamentation purposes and which provides a specific appearance of its own, whereas an industrial model is constituted to be a three-dimensional shape that serves as a model or pattern for the manufacture of an industrial product, giving it a special appearance that does not involve any technical effects.

Term of Protection

The registration of industrial designs is valid for a term of five years as of the filing date and is renewable for successive periods of the same duration up to a maximum of 25 years, subject to the payment of the corresponding fees. 

Enforcement and Remedies

The only way to enforce an industrial design registration is through administrative proceedings (infringement action) before the MIIP, which is not a court of law, but a federal administrative office which, among other matters, grants the registrations. The MIIP is therefore technically competent to resolve an industrial design infringement case.

The MIPL establishes as infringements:

  • the manufacturing or development of goods protected by an industrial design registration without the consent of the owner thereof or without the appropriate licence; and
  • the offering for sale or distribution of goods protected by an industrial design registration in the knowledge that they have been manufactured or developed without the consent of the owner of the patent or registration, or without the appropriate licence.

The sanctions and remedies are the same as for 7.1 Patents.

Criminal action

Criminal action for industrial design infringement is only available for re-offence cases. In accordance with the provisions of Mexican IP law, re-offence is found when a party infringes on an industrial design registration after a final and beyond-doubt appeal decision from the MIIP declaring the infringement. This re-offence is considered a felony that can be pursued ex officio or ex parte through the FPO. This felony can be punished with up to six years of imprisonment and a fine.

Civil action

Remedies are available to the plaintiff through civil action. A civil action can be filed once an administrative action has been resolved beyond the shadow of appeal. As a matter of principle, and in accordance with civil procedural law, the type of monetary relief that can be obtained from the courts is actual losses and lost profits. 

Definition

According to Article 11 of the Mexican Federal Copyright Law (MMFCL), copyright is the recognition given by the state to a creator of any of the literary and artistic works specified in the MMFCL and its regulations. The MMFCL grants the author exclusive prerogatives and privileges of a personal and economic nature. The former constitute moral rights and the latter economic rights.

The author is the individual who has created the literary or artistic work.

The categories of copyrightable works in Mexico are:

  • literary;
  • musical, with or without lyrics;
  • dramatic;
  • dance;
  • pictorial or drawing;
  • sculpture; 
  • cartoons and comic books;
  • architectural;
  • cinematographic and other audio-visual works;
  • radio and TV programmes;
  • computer programs;
  • photographic works;
  • applied art works, including graphic or textile design; and 
  • compilations, as in integrated collections of works, if they constitute an intellectual creation by reason of their selection or the arrangement of their contents or subject matter.

Term of Protection

Economic rights remain in force for:

  • the life of the author and 100 years after their death. When the work belongs to two or more co-authors, the 100 years are counted from the death of the last co-author; and
  • 100 years following disclosure of the work.

The author is the sole, original and perpetual owner of the moral rights.

Moral rights are regarded as vested in the author and they are inalienable, imprescriptible, non-renounceable and non-resizable.

Registration Process

Under the MMFCL, the basic requirements for obtaining copyright protection are:

  • fixation (the incorporation of the work in any form or material);
  • authorship (only individuals are susceptible to being granted an author's right); and
  • originality (original creations).

To obtain the registration of a copyright, an application needs to be submitted before the National Institute of Copyright (NIC), with all the formal requirements, as well as the respective original examples of the works to be protected.

Mexico follows the international trend of copyright protection. The Berne Convention for the Protection of Artistic and Literary Works is in force in Mexico and the provisions of this international treaty are incorporated into Mexico's national legislation. Therefore, artistic or literary works are protected at the time they are fixed into a material form and a copyright registration, in theory, is not necessary to achieve copyright protection.

The lack of obtaining copyright registration for a literary or artistic work should have no negative impact for the work or for the copyright owner, since copyright protection is granted at the same time the work is fixed into a material form. 

In practice, however, obtaining copyright registration from the NIC is highly advisable. The certificate of copyright registration constitutes proof of existence of the work and a presumption about copyright ownership on behalf of the registrant. It facilitates the exercise of commercial actions with the registered work and helps to expedite the initiation of enforcement proceedings before the MIIP.

According to Article 17 of the MMFCL, all works to be published must display a copyright notice with the following information:

  • the initials DR or the indication Derechos Reservados;
  • the copyright symbol ©;
  • the name and address of the copyright owner; and
  • the year of first publication.

Enforcement and Remedies

There are three ways to enforce a copyright: through an administrative infringement action filed before the MIIP, through a criminal action filed before the FPO, and through a civil action. 

Infringement action

According to the MMFCL, the following conduct is considered as copyright infringement and the owner of a copyright is entitled to start action if, for eg, someone:

  • communicates to the public use of a protected work by any means and in any form without the express prior authorisation of the author, their lawful heirs or the owner of the author’s economic rights; 
  • uses an image of a person without their permission or the permission of the successors in title; and
  • fixes, produces, manufactures, stock distributes, transports or markets copies of works, cinematographic and other audio-visual works, phonograms, videograms or books protected by copyright or by neighbouring rights, without the authorisation of the respective holders under the terms of this law; etc. 

Where the MIIP determines in its decision that an infringement was demonstrated, such authority is obliged to impose a fine (up to MXP7,422,400 or USD371,120, at an exchange rate of USD1 = MXP20) on the defendant, depending on the severity of the infringement. If the infringement action prevails, the MIIP could increase the fine.

Criminal action

A copyright-holder is entitled to pursue criminal action against any third party that fraudulently reproduces, imports, stores, transports, distributes, sells or leases, without the corresponding authorisation, works protected by the MMFCL, by taking the following steps:

  • criminal action – the criminal action brief has to be filed before the FPO, explaining the causes of the crime and enclosing evidence that supports the action; 
  • analysis – the FPO will analyse if a crime has been committed and, if so, will send the file to a federal judge;
  • sentence – the federal judge will analyse the case and issue a decision. If a crime has been committed, it will impose the following penalties on the defendant: prison plus a fine (up to MXP5,566,800 or USD278,340, at an exchange rate of USD1 = MXP20) .

Civil action

A copyright-holder is entitled to pursue a civil action filed before the civil courts to claim compensatory damages that cannot be less than 40% of the sale price to the public of each infringing product or service. Unlike inventions and trade marks, to be allowed to claim damages in a copyright case, it is not necessary to have an administrative infringement action decision that is final and beyond the shadow of an appeal. 

Trade Secrets

A trade secret is not registrable and the owner of such trade secret must follow several processes to limit access to the trade secret and keep it as confidential as possible.

Appellation of Origin/Geographical Indication

The MIIP recognises those that are protected abroad and in accordance with international treaties. The owner of an AO or GI protected abroad may apply for its recognition before the MIIP, enclosing the document showing its protection under the law of the corresponding country or according to the international treaties. 

Plant Varieties

Protection is available to plant varieties in Mexico by breeders' rights. These are governed by the Mexican Law of Plant Varieties, the provisions of which are in line with the UPOV Convention of 1978.

Software

This is protected as a copyright in Mexico.

The main regulations that safeguard individual data protection in Mexico are the Federal Law on the Protection of Personal Data Held by Private Parties (FLPPP), its regulations and Privacy Notice Guidelines, the last of which, are adopted by private parties in order to let their users know the treatment of the users’ data. 

These laws aim to:

  • establish rules aimed at the treatment or use of personal data by public and private organisations;
  • protect a person regarding the use of their personal information; and
  • make data controllers adhere to the principles of legality, consent, notice, quality, purpose, fidelity, proportionality and accountability established by law.

The right to the protection of personal data is provided within the dispositions of the Mexican constitution which:

  • gives people control over their personal information; and
  • empowers the individual to decide who, how, when and to what extent their personal information can be used.

The legal framework applicable to public government federal entities is the FLPPP, as well as the General Guidelines for the Protection of Personal Data in the Public Sector. 

The FLPPP does not have extraterritorial application, meaning that entities or individuals that process personal data outside Mexico are not obliged to comply with the FLPPP dispositions, even if those private parties target Mexican residents.

The agency in charge of enforcing the data protection regulations is the National Institute of Transparency, Access to Information and Protection of Personal Data or INAI (for its initials in Spanish). 

It is an autonomous public entity in charge of facilitating and guaranteeing people's access to public information and access to, and protection of, personal data, promoting the culture of transparency in public management and government accountability to society. It has authority in all the institutions, dependencies and organisations – public or private – that receive, generate or manage the public resources of the federation.

Becerril, Coca & Becerril, S.C.

Leibnitz 117 Ph1
Col. Anzures
Alcaldía Miguel Hidalgo
Z.C. 11590
Mexico City

+52 55 5263 8730

main@bcb.com.mx www.bcb.com.mx
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Trends and Developments


Authors



Mijares, Angoitia, Cortés y Fuentes, S.C. was established in Mexico City in 1994 by a team of highly qualified lawyers focused on offering professional, sophisticated and quality legal services to satisfy clients’ business needs. It is deeply committed to quality and responsiveness, and has consolidated its status as one of the pre-eminent full-service Mexican law firms. As the firm has gradually grown, it has attracted professionals with significant experience in the public, industrial and financial sectors, creating a team with the highest level of professional experience. Most of its lawyers and other professionals have completed graduate studies at foreign universities and have worked at law firms abroad, giving them a better perspective on international legal systems.

2020 will be remembered as the year when the world changed. The COVID-19 pandemic introduced major changes to the way we have typically seen the world, such as almost two months of worldwide lockdown, social distancing measures and a tremendous long-lasting effect on global economies. In late May and early June, governments around the globe began to ease up on some of the imposed restrictions. The decisions to lift the lockdown controls were not necessarily due to breakthroughs against the COVID-19 pandemic or to actual “flattened curves”, but rather were an attempt by politicians to salvage their severely maimed economies and political capital.

In Mexico, the measures against COVID-19 were imposed in early March. On 13 May 2020, President Andrés Manuel López Obrador – escorted by his labour and economy ministers – introduced the Federal Government strategy for the reopening of social, educational and economic activities, which had come to a halt following the health emergency.

The reopening plan contemplated three stages for a “gradual, ordered and cautious” return to the so-called “new normality”. The first stage commenced on May 18 with the reopening of a few municipalities that had not suffered any COVID-19 cases and that neighboured other municipalities where no cases were recorded. The second stage (from May 18 to 31) consisted of the introduction of protocols and training measures to assure a safe return to activities. The third stage began on 1 June and marked the end of the social distancing measures, allowed for the commencement of additional activities as essential activities (eg, automotive, mining, construction and beer production) and implemented a “traffic light system” that would supposedly allow for a staggered reopening of social, educational and economic activities.

The Mexican economy is expected to be among the hardest hit by the pandemic. Record-low oil prices and steep drops in tourism and foreign remittances, together with limited fiscal and monetary stimulus, set the stage for severe complications in the financing and M&A activity of Mexican corporations. Many Mexican publicly listed companies have seen declines in their market caps and debt ratings, posing significant challenges to their viability and financial health.

New Normality

During the first six months of 2020, the world faced a global crisis of great dimensions, perhaps the biggest in a generation. The decisions made by governments, individuals and businesses during this time will probably reshape almost every aspect of the way we live, interact with others and do business, for many years. Many processes that in normal times would have taken years of deliberation and testing, including work from home arrangements, remote contracting, virtual meetings and other internet-boosted processes, were fast tracked and will become part of our day-to-day lives. Public companies’ focus shifted partially from the once sacrosanct “shareholder first” to taking into account other stakeholders in a more “social” capitalism. Concepts such as environmental, social and governance impact investing and fairer wages may take precedence over blunt cash dividends and buybacks in the years to come. This accelerated reality may be beneficial as it facilitates the implementation of long-expected business environment measures, but could also pose some threats as it lacked the adequate experimental phase, with potential unexpected impacts in different areas.

Social distancing measures have forced a significant part of the workforce to stay home and work entire shifts from there, in front of sometimes tiny monitors. While some have found it liberating to give up the daily time lost to commuting and work at their own pace, others have found it stressful, feeling isolated at a time when companies are making cuts and furloughing workers. This has also been the case for legal services business. Most law firms around the world have implemented home working with – so far – promising results. However, the pandemic-forced confinement has also taken its toll in an already stress-prone and demanding sector.

The fast shift to home working has raised productivity, security and quality control concerns. With hundreds of employees working from home during the coronavirus pandemic, companies have found themselves looking for ways to ensure that employees are doing what they are supposed to be doing. Consequently, demand has surged for tools to monitor employees. While employees are used to some levels of tracking, such as security cameras and entry registration devices, the arrival of COVID-19 took surveillance to higher levels, raising privacy questions about where the line between maintaining productivity from a homebound workforce and bold surveillance is drawn. This may mark a new chapter in the debate over privacy, and the trade-offs people are willing to make for safety. Privacy issues in the workplace became a mainstream topic of discussion several years ago, when the ability of employees to access the internet from their workstations posed concerns about employees using work instruments and facilities for non-work related matters. The guiding principle around these topics has been the premise that employees must use work-provided tools and facilities for work-related tasks, and employers may exert some level of surveillance solely to verify this. However, now that the dividing line between workplace and work-provided tools is blurrier (as employees work from home using their own computer and phones), employee privacy questions are yet to be resolved. One may anticipate some labour controversies along these lines in the near future.

The implications and new normality brought on by the pandemic and the measures adopted by society to combat it have been felt across practice areas and sectors. Most effective full-service firms have understood these new realities by giving appropriate attention to clients’ new needs, adjusting their service offerings, and laying the groundwork for long-term success.

New Normal in the Execution of Commercial Agreements

The ability to execute commercial agreements and other legal documents using electronic signatures is already regulated, but seldomly relied on. Social distancing measures, in-person meeting bans and other health concerns have bolstered the need to implement remote alternatives for the execution of agreements and other legal documents. Electronic signature requirements and the recognition thereof will take paramount relevance in the Mexican transactional arena; understanding them is key to both clients and lawyers alike.

Mexican law has recognised the use of electronic signatures in agreements for several years now. The Federal Civil Code provides that formal requirements in agreements are considered as fulfilled using electronic or optic devices, or any other technological means, if the information may be attributed to the obliged individuals and may subsequently be consulted. Similarly, the Mexican Commercial Code recognises the legal effects, validity and binding effect of acts carried out through data messages. Mexican law provides for three types of electronic signatures:

  • the simple electronic signature;
  • the advanced electronic signature which, by law, needs to satisfy several requirements regarding uniqueness, time and detection in order to qualify as such; and
  • the certified electronic signature, which is basically an advanced electronic signature but with the additional feature of being verified by an authorised service provider with the ability to issue the corresponding certificates.

Some notary publics in Mexico already accept certain documents (such as commercial agreements, shareholders’ resolutions and board of directors’ resolutions) executed by means of a certified electronic signature, as long as the electronic file is provided to consult the signature, and is included in the appendix of the notarial instrument (docx, pdf, html and xml documents along with the “hash” of the signature and printed copy of the “cer” – certificate of the electronic signature). Additionally, in the case of shareholders’ and board of directors’ resolutions, notaries require that the bylaws of the company include the possibility of executing this type of document through a certified electronic signature.

As a matter of Mexican law, the electronic signature has the same legal effect as a handwritten signature and is admissible as evidence in trial. The Federal Code of Civil Procedures recognises as evidence any information generated by electronic or optical means or any other technology, while the Commercial Code contemplates data messages as evidence. Both statutes provide that, in order to assess the evidentiary value of such information, the reliability of the method through which such information was generated, communicated, received or filed shall be considered.

However, even if the law recognises the legal effects and evidentiary value of electronic signatures, and as electronic information may be altered, it must be considered that, regardless of the type of electronic signature used, electronic signatures contained in a data message may always be disputed or objected against in the context of a court proceeding or arbitration (in the same manner in which a handwritten signature can always be disputed or objected against). In the case of an objection, evidence on technological matters would have to be provided, which may involve additional procedural challenges. In this regard, in a number of decisions, the Federal Courts have recognised the validity of commercial transactions executed by electronic means, and have concluded that a document executed with an electronic signature is reliable if it complies with the authenticity requirements established in the Commercial Code.

In the tax realm, authorities have rejected certain evidence and supporting documents provided by taxpayers in audit procedures, by arguing that it is not possible to confirm the existence of certain legal events based on private documents, as such documents lack a “reliable date”; as a result, the authorities have not recognised such evidence and documents as being valid for tax purposes.

This position was confirmed by Mexico’s Supreme Court of Justice indicating that “reliable date” is an enforceable requirement in private documents that are submitted with the tax authorities, and that in private documents “reliable date” is achieved when the document is recorded with the Public Registry of Property and Commerce, when the document is notarised, or on the date of death of any of the signatories thereof.

The new realities and the trendier use of the certified electronic signature will, sooner or later, force the courts to revisit past precedents to confirm if, in addition to the means of evidence listed by Mexico’s Supreme Court, the execution of a document using a certified electronic signature is also evidence to prove a “reliable date” on such a document.

New Normal in Contract Interpretation

In the contractual and transactional court, the global economic lockdown and the steep effects it caused in several industries prompted purchasers in M&A deals or lenders and borrowers in financing transactions to try to get out of previously executed deals where they believed that the situation at the time of execution, closing or enforcement had materially changed the business rationale of the transaction as originally intended. The COVID-19 pandemic and the measures adopted in Mexico, both by governmental authorities and by the private sector, raised various questions regarding potential exceptions to the fulfilment of contractual obligations and the corresponding enforceability of rights. “Material adverse effect”, “best efforts”, “ordinary course of business”, “force majeure”, “act of God” and similar concepts, some of them with no prior judicial interpretation in Mexico, became particularly relevant to the analysis of the rights and obligations of the parties to contracts, and to determining whether or not the conditions precedent to which closing or disbursement were subject were being met.

Mexican contract law provides for the "Pacta Sunt Servanda" principle, which establishes that what has been agreed upon by the parties must be complied with – ie, legally executed contracts must be faithfully complied with, notwithstanding the occurrence of unforeseeable future events that could alter the compliance of obligations. Following the principle of the parties' autonomy of will, in practice it is usual for contracts to contemplate specific cases in which it will be considered that an act of God, force majeure or material adverse effect (and other similar concepts) has occurred, as well as the consequences derived from such occurrence; this is in order to avoid discussions between the parties on whether or not a certain case of fact leads to a liability release of the obligor, to meeting certain conditions precedent, or to a party walking away from a deal.

In this regard, it is valid for the parties to agree on the cases in which it will be considered that an "act of God", "force majeure", "material adverse effect" or any other similar concept has occurred, as well as the legal consequences of such occurrence, with the parties being able to agree on the temporary suspension of their obligations, the termination of the contract without liability for them, or any other consequences they deem appropriate. In the absence of an agreement between the parties, it is necessary to refer to what the statutory and case law establish about such matters.

Mexican law has recognised that there are situations in which non-fulfilment of an obligation cannot be attributed to the obligor, because such person is prevented from performing by an event beyond its control, which it could not foresee or, even when foreseeable, could not prevent. Actually, some non-binding judicial precedents even support that individuals can be released from certain tax obligations when there is an act of God or force majeure event, under the principle that nobody is obliged to the impossible. However, in order for an event to be considered an act of God or force majeure, certain requirements must be met, such as generality, unforeseeability and irresistibility.

Furthermore, some local laws have adopted the "Rebus Sic Stantibus" clause, also called the Unforeseeability Theory, which allows the party affected by an unforeseeable event to request the early termination of the contract or, alternatively, to balance the reciprocal obligations between the parties, in the case of contracts of a successive nature, such as leases, gratuitous bailment contracts or mandates, among others, whenever such event makes it physically or legally impossible for one of the parties to comply with its obligations, or causes the obligations of one of the parties to be more onerous than originally foreseen. In this case, it is important to mention that some federal courts have determined that the Unforeseeability Theory is not applicable in commercial matters, since the Commercial Code adopts completely the principle of Pacta Sunt Servanda and establishes an absolute hierarchy of the autonomy of contracting parties over the equity and balance of benefits.

Therefore, in sum, it is valid for the parties to agree and incorporate concepts dealing with the ability of the parties to an agreement to walk away from the deal or to control the conduct of the seller in the period between the execution and closing of an agreement in the event of the occurrence of an "act of God", "force majeure", "material adverse effect" or any other similar concept, and to ascribe consensual legal consequences arising from their occurrence. However, in the event that contracts do not refer to the foregoing or if there is controversy regarding their interpretation, it will be necessary for the courts to interpret such concepts; in doing so, judicial authorities will most likely refer to the abovementioned principles. In addition, parties to any contract, including M&A agreements as well as loan and other financing agreements, must be very cautious as to the scope of concepts such as “ordinary course of business”, “past practices” and the like when negotiating covenants, where non-compliance could lead to a valid refusal to close. It is important to take into consideration that Mexican law also provides that parties to an agreement are bound not only by the terms of the agreements but also by the good faith principle, which requires them to act in furtherance of the agreement reaching its intended consequences (eg, to complete the acquisition or disburse a loan) and to not take action deliberately designed to sabotage or otherwise frustrate the performance of the contract. Accordingly, it is important for all parties to document their decision-making process both with their respective counterparties and internally to demonstrate that the party is acting in good faith and reasonably, based on the agreements and prevailing market conditions.

New Normal in the Mexican Energy Sector

The COVID-19 economic slowdown has coincided with a trend in the Mexican energy sector initiated by the government soon after taking office in 2018, of achieving reforms and going ahead with flagship infrastructure projects through administrative powers, rather than through major constitutional or legislative changes.

These actions have been aimed at strengthening Pemex and the state utility Comisión Federal de Electricidad (CFE) in their respective markets, to the detriment of the private sector. For instance, the Mexican government has cancelled energy auctions (for oil and gas, and renewable power generation), replaced the leadership of energy and environmental regulators with individuals that lack technical credentials, pressed for the renegotiation of certain natural gas pipeline contracts awarded by CFE, and repealed price regulation and transparency rules, as well as market instruments designed to foster renewables.

Furthermore, in late April, the Independent System Operator (CENACE) published a set of rules allegedly aimed at reinstating the reliability of the National Electricity Grid, arguing historic instability caused by wind and solar power plants, currently enhanced by a lower electricity demand due to the COVID-19 emergency. Notwithstanding that existing regulations – in particular the Grid Code – already foresee procedures for emergency scenarios, based on these rules only CENACE ordered the suspension of tests of solar and wind projects in the process of starting operations, and curtailed the operation of projects arguing transmission restrictions. At present, this resolution has been suspended by federal courts through definitive injunctions that will stay until the merits of the case are finally resolved.

Subsequently, Mexico’s Ministry of Energy fast-tracked a directive seeking to increase the discretionary powers of the regulator (CRE) and CENACE to restrict the development of new wind and solar projects, and to restrict the dispatch of already operational wind and solar assets, giving preference to facilities providing “reliability” to the grid (which are mostly owned by CFE), completely repealing the prior criteria that prioritised economically efficient generation. Environmental NGOs and numerous energy projects have filed amparo claims (constitutional review) against the directive, successfully obtaining definitive stays against such policy.

More recently, CRE approved an increase in wheeling costs for legacy clean energy (ie, renewable power plants developed prior to the Energy Reform of 2013, where a “postal stamp” wheeling methodology was put in place as a mechanism to foster this type of generation). This is despite the fact that legacy projects are grandfathered by the electricity statute and an acquired rights principle. While wheeling costs for legacy projects have only been updated on a monthly basis according to inflation over the last ten years, the latest increase result in rates approximately 500% to 900% higher than those in place for June. Action from energy projects is in progress, and numerous legal challenges are expected to be brought by the sector.

The recent developments in the energy sector beg the question not only of whether the Congress’s sphere of competence has been unlawfully transgressed in the case of the Ministry of Energy’s directive, but also if, overall, the checks and balances of the Mexican system are at risk.

While autonomous agencies such as the Mexican Economic Competition Commission (COFECE) have identified possible negative effects from CENACE’s rules, they initially decided to take a soft approach on the issue. In particular, on 7 May 2020, COFECE issued a non-binding opinion of CENACE’s rules stating that certain provisions thereof could hinder competition in the electricity market. The opinion points out how such measures lack clarity and justification in their exposition. Likewise, it considers that they generate the temporal displacement of more efficient power plants in Mexico and how, in turn, the inefficient power generation would result in higher electricity tariffs for consumers or the need for increased governmental subsidies.

However, in a more decisive move, on 22 June 2020 COFECE announced that it had filed a constitutional lawsuit (controversia constitucional) with Mexico’s Supreme Court against the new SENER Policy – constitutional lawsuits may be brought by one agency or branch of the Mexican Government against another under the argument that the latter is overreaching in its authority, and are resolved directly by Mexico’s Supreme Court. In its press release, COFECE remarked that the new SENER Policy violates the basic antitrust principles enshrined in Mexico’s Constitution, as well as the electricity sector laws, seriously affecting the economic structure of the electricity sector, concluding by stating that the basic elements that are required for the electricity market to operate with competition conditions would cease to exist with the entry into force of the policy. Two states (Jalisco and Aguascalientes) have also announced that they have brought constitutional lawsuits against the SENER Policy, and six other states have announced that they will follow in due course.

Further anti-competitive claims filed with COFECE or ex officio investigations carried out by COFECE against the actions adopted by the energy regulators may be expected.

In the meantime, transactional deals of renewable assets face a slow-down. Buyers in M&A transactions may seek to walk out, while sponsors that have acquired debt through project finance may face hardship to repay their debt service. This is in addition to the fact that already stressed projects are facing claims from their EPC contractors and suppliers affected by COVID-19 delays and may have to invoke changes in law and force majeure provisions under their power purchase agreements and transactional documents in light of the uncertainty provided by the recent regulatory developments.

Looking Ahead

The COVID-19 pandemic and recent actions taken by the current administration in the energy sector – some of which are allegedly related to it – have posted new challenges in Mexico, particularly in M&A deals, financing transactions and the energy sector.

As disputes arise regarding topics such as the execution and interpretation of commercial agreements in the private arena, as well as the legality of governmental decisions in the public arena, Mexican courts and arbitrations will have a crucial role to ensure legal certainty, the rule of law and the integrity of the democratic system in Mexico.

Mijares, Angoitia, Cortés y Fuentes, S.C.

Javier Barros Sierra 540, 4th floor
Park Plaza I, Santa Fe
Alcaldía Álvaro Obregón
C.P. 01210
México City

+52 55 5201 7400

+52 55 5520 1065

macf@macf.com.mx www.macf.com.mx
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Law and Practice

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Becerril, Coca & Becerril, S.C. is an international law firm specialised in legal and business consultancy. With more than 50 years of experience, BC&B has streamlined its service offering, positioning itself as one of the top law and business firms in Mexico. The expert litigators cover a great variety of legal services in the areas of corporate, civil, business, family, and commercial arbitration law, and the firm has now enlarged its portfolio by specialising in intellectual property. In its quest to provide better solutions and more scope, in 2019 the firm became part of the Velae Legal Group, an Ibero-American affiliation of multinational law firms with representation in many countries, which offers its clients diverse services and professional solutions.

Trends and Development

Authors



Mijares, Angoitia, Cortés y Fuentes, S.C. was established in Mexico City in 1994 by a team of highly qualified lawyers focused on offering professional, sophisticated and quality legal services to satisfy clients’ business needs. It is deeply committed to quality and responsiveness, and has consolidated its status as one of the pre-eminent full-service Mexican law firms. As the firm has gradually grown, it has attracted professionals with significant experience in the public, industrial and financial sectors, creating a team with the highest level of professional experience. Most of its lawyers and other professionals have completed graduate studies at foreign universities and have worked at law firms abroad, giving them a better perspective on international legal systems.

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