Avoiding U.S. litigation risks

Doing business in the United States without unnecessarily litigating in the United States
by Greg Schuetz

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The American market is crucial to the global strategy of many large European companies. But doing business in the United States carries significant legal risk and creates numerous challenges for global firms. As most international business leaders recognize, being sued in a U.S. court can lead to high defense costs, wide-ranging pretrial discovery, unpredictable juries and large damage awards that – at least to an outsider – often appear motivated more by sympathy than fact. Confronted with these uncertainties, it is hardly surprising that many foreign companies facing a U.S. lawsuit feel compelled to settle, regardless of the strength of their case. This article examines the jurisdictional risks facing multinationals doing business in the United States and recommends ways to reduce these risks.

Why avoid the U.S. legal system?
The American legal system is frequently criticized by outside experts, especially those who prefer the civil law systems of Continental Europe. Many of the attacks are exaggerated: They reflect a caricature of the system and are fueled by extreme anecdotes, such as an infamous $2.9 million verdict against McDonald’s handed down in New Mexico in 1994 for spilled hot coffee (see Liebeck v. McDonald’s Restaurants, P.T.S., Inc., No. D-202 CV-93- 02419, 1995 Westlaw 360309 [Bernalillo County, N.M. Dist. Ct. August 18, 1994]). The usual criticisms fall in two categories. First, the U.S. legal system is expensive and inefficient. Among other things, the critics focus on:

• the relative ease of filing suit for anyone able to pay a minimal fee;
• contingent fee agreements, particularly in personal injury matters, that incentivize lawsuits;
• no “loser pays” or “English” rule that deters frivolous and unfounded litigation by allowing the winning party to recover its legal costs and fees from the other
side; and
• extensive, intrusive and costly pretrial discovery (including wide-ranging cross-border discovery of paper and electronic documents, as well as the ability to compel testimony from company witnesses).
Second, the U.S. system is viewed as frequently leading to irrational and unpredictable results.

For example:
• Novel liability theories are more readily accepted.
• The widespread availability of civil jury trials means cases are decided by jurors without legal or subjectmatter expertise who can be influenced by emotion and sympathy.
• Judges, who at the state court level are often elected, not appointed, are of uneven quality. • Compensatory damage awards are high and often unpredictable.
• Punitive damages designed to punish wrongdoers and deter misconduct are available in many states and with little guidance to jurors.
• Potential conflicts between broad U.S. cross-border discovery orders and foreign privacy protections (such as EU data protection laws) force multinationals to decide which legal system to comply with and which to violate.
• “Mass torts” and class actions allow individual plaintiffs to combine their claims and thereby gain significant negotiating leverage.
• Defendants who wish to avoid protracted litigation are often forced to pay large settlements, notwithstanding the validity of the underlying claims. In practice, the U.S. system works better than its critics like to admit. Still, the image of the United States as overly litigious cannot be ignored, and overseas firms are understandably reluctant to find themselves before a U.S. court.

What is personal jurisdiction?
Generally, personal jurisdiction is the ability of a court located in a particular state to exercise power over a specific individual or company and: (1) force the individual or company to defend a lawsuit; (2) issue and enforce orders; (3) require a response to time-consuming discovery demands; and (4) impose damages. American courts can exercise two types of personal jurisdiction over foreign companies: specific jurisdiction and general jurisdiction.

Specific jurisdiction
As the name suggests, specific jurisdiction involves the court’s power over particular matters that arise out of the foreign company’s contacts within the state or with its residents. Actual physical presence in the state is not necessarily required (i.e., office, plant location or employees).
Acts that may subject a foreign company to specific personal jurisdiction within a state include:
• transacting business or contracting with a resident;
• agreeing to venue or choice of law in a contract;
• providing a parent guarantee or insuring a person, property or risk;
• owning property; or
• causing injury (i.e., committing a tortious or illegal

Some specific jurisdiction examples:
• Company A, a German firm, agrees to a parent guarantee in the State of Texas (or with a Texas entity) to support its U.S. subsidiary. Company A is therefore subject to specific personal jurisdiction in Texas for any dispute arising from the guarantee.
• A driver employed by company B, a Canadian firm, negligently causes a car accident while driving through the State of Maine on business to deliver a product to its U.S. subsidiary located in Massachusetts. Another driver is injured. Company B will be subject to specific personal jurisdiction in Maine in any personal injury action brought by the other driver.
• A UK firm, company C, enters into a single, isolated contract with a New York entity and agrees that New York law and venue will apply to any dispute. Company C will be subject to the specific personal jurisdiction of New York courts for any dispute arising from the contract.

General jurisdiction
Since specific jurisdiction typically is based on a company’s deliberate and intentional conduct, it poses relatively predictable risks. By contrast, general jurisdiction can lead to unexpected results. A court finding and exercising general jurisdiction can force a foreign company to defend any lawsuit naming the company, regardless of whether the claim is related to the company’s contacts with the state in which the court sits. Again, actual physical presence in the state is not necessarily required. There is no “hard and fast” rule determining whether general jurisdiction applies. Still, some acts that may subject a foreign company to general personal jurisdiction within a state include:
• appointing an agent for service of process (i.e., allowing formal delivery of lawsuits to a named representative in the U.S.),
• registering to do business within the state,
• regular and systematic product sales or
• soliciting or engaging in regular business.

Reducing the risk of having to litigate in the United States
For a global company with numerous U.S. subsidiaries, the risk of having to litigate in the United States can never be completely eliminated. Different courts in different U.S. states may apply different legal standards, creating unavoidable uncertainty. Still, a foreign parent can reduce and help to manage this risk by taking certain steps:

1. U.S. business should be transacted through an appropriate U.S. subsidiary whenever possible. This includes, but is not limited to: sales and procurement agreements, engineering contracts, license agreements, operating agreements, financing agreements, lease and rental contracts, etc. It would also include joint ventures.

2. The parent should not name agents in the United States for accepting service of process (i.e., should not allow formal delivery of lawsuits to a representative in the United States).

3. Whenever possible, the parent should avoid contractual provisions reflecting: (i) choice of U.S. law or the law of any specific state or (ii) acceptance of U.S. jurisdiction or the jurisdiction of any specific court located in the United States.

4. The parent’s employees should not be physically located in the United States as their regular workplace. Employees located in the United States as their regular workplace should be employed by a U.S. subsidiary, and this should be reflected on their business cards, letterhead, etc.

5. Parent guarantees in support of its U.S. subsidiaries should be avoided. The U.S. subsidiary should provide the guarantee (or other form of surety, such as a bond).

6. The parent should refrain from making direct payments to U.S. bank accounts held by unaffiliated third parties. Similarly, payments to non-U.S companies should not be routed through U.S. bank accounts.

7. The parent and its U.S. subsidiaries should observe all proper corporate formalities under the law applicable to the country/state of incorporation. The parent should not share identical officers with its subsidiary (although the parent may appoint a minority of the subsidiary’s board of directors to serve in a nonexecutive capacity in order to monitor the business and direct its policies, investments and financing).

8. The parent should not direct or control the day-today business operations of its U.S. subsidiaries. This would not, however, prevent the parent from (i) monitoring and overseeing the business activities of its U.S.-based subsidiaries and (ii) setting overall, global business priorities so long as the parent’s actions are carried out through proper channels that are consistent with its investor status.

9. In contracts with American business partners, consideration should be given for including arbitration clauses referring any disputes to respected independent tribunals, such as the ICC International Court of Arbitration.

Conclusion Litigating in the United States can be expensive and inefficient, often leading to questionable outcomes. Therefore, multinationals should conduct their American business carefully in order to minimize the chance of their being subjected to personal jurisdiction by a U.S. court.

Greg Schuetz, Head of Global Litigation and Dispute Resolution,
The Linde Group, New Jersey, United States