Foreign companies sued to 'reach deep pockets'

Risk management strategies can provide some protection for foreign companies sued in the United States, Meryl R Lieberman, co-managing partner of New York law firm Traub Lieberman Straus & Shrewsberry told the 2017 Asia Pacific Insurance Conference in Singapore on 18-20 October.

She said plaintiffs sued foreign companies to:

• Reach the deep pocket
• Increase settlement values by raising the stakes on transactional costs
• Obtain broad discovery of the parent, subsidiaries or affiliated corporations, and
• Because they can.

The US had some "judicial hell holes" which foreign companies should avoid. The US Tort Reform Association published a list of states that had "bad judges, excessive settlements, and very lenient standards for expert witnesses".

Sometimes there was bias against foreign defendants. But, while "runaway verdicts" existed, they were "not as often as you think because you only hear about the big ones".

Ms Lieberman said the US had a "scorched earth" discovery process and some states experienced court congestion and delays, but alternative dispute resolution was reducing that. The trend for punitive damages was declining.

She warned that states with "long arm" statutes could have jurisdiction even if a foreign company had only minimal contact within that jurisdiction. It could be as simple as shipping from that state or advertising there.

"Procedural law gives a state court jurisdiction over an out of state or foreign company or individual whose actions caused injury in the state or to a state resident.

"The modern thought is to use an independent, nationwide distributor or subsidiary providing there was no foreign parent control and not to market specifically in the hell-hole states." Ms Lieberman said an interactive website may or may not be considered contact; a passive website was not.

Factors that could spark specific jurisdiction over non-residents included:

• A defendant's contacts within the state giving rise to the litigation
• Having a place of business and bank accounts there
• Shipping products from there
• In-state employees
• Selling to in-state customers
• Soliciting or advertising in-state
• Owning real estate there.

Merely placing product "in the stream of commerce" was insufficient; the defendant must have targeted the forum state.

Ms Lieberman said subsidiary companies were not immune if the subsidiary was the parent's agent (established by reasonable inference derived from evidence of the relationship) or the subsidiary was the parent's alter-ego (a mere facade for the parent company).

If a parent paid a subsidiary's employees; siphoned money from the subsidiary; the companies shared employees, insurance and administrative services without arm's length compensation; or the parent used the subsidiary's property as its own, the subsidiary would not be immune from litigation.

Ms Lieberman advised companies using distributors or sales representatives as agents to:

• Disclaim the agency relationship in writing
• Not exercise control over pricing, advertising or business decisions
• Not authorise the representative to accept service of process on the foreign company's behalf
• Require the representative to defend and indemnify the foreign company on claims of agency.

She said foreign companies should:

• Consider jurisdiction factors as part of business structuring
• Insulate assets from liabilities in US litigation
• Understand how marketing and distribution chains could impact on litigation risk.

She advised companies to plan in advance for lawsuits by:

• Documenting management systems
• Identifying their best corporate witnesses
• Developing attorney-client privilege protocols
• Identifying the risk of litigation (severity v frequency)
• Adopting prevention strategies for top risks
• Educating business people about US litigation process and their roles pre and post suit.

When a complaint was received, she advised:

• Immediately notify all potentially applicable insurers (including primary, excess, foreign and domestic)
• Check contracts for indemnification and insurance procurement provisions
• Note the date, time and method of service of process, which may be critical (do not discard the envelope)
• Preserve all relevant documents, do not destroy or delete anything
• involve counsel immediately before taking any action
• Consider a motion to dismiss for lack of jurisdiction
• Consider removing the case to the federal court
• Consider a motion to change the venue (the court considers convenience to parties and witnesses and fairness to the defendant balanced against the plaintiff's choice of forum).

An entity could consider seeking to waive a jury trial, but that was difficult. "We love them in the US, even as defence lawyers," Ms Lieberman said.

She said discovery was the single most costly aspect of US litigation. Foreign records may be considered under the defendant's "control" and therefore discoverable. Control meant "the right to obtain the documents on demand".

"When the defendant is the parent, control over a subsidiary's documents will exist ‘if the subsidiary acts as a direct instrumentality of and in direct cooperation with its parent ... and where the properties and affairs of the two [are]…inextricably confused as to a particular transaction'."

Where the defendant was the subsidiary, control over the parent's documents would exist if an alter-ego or "piercing of the corporate veil" was found; the subsidiary was an agent of the parent in the transaction; the subsidiary ordinarily secured documents from the parent for its own use; the subsidiary ordinarily had access to the parent's documents; or the subsidiary marketed and serviced the parent's products.

Ms Lieberman advised foreign companies to mitigate litigation risk through:
– protective contracts
– attention to corporate structure and jurisdictional contacts
– buying insurance and other risk transfer devices
– taking prompt action on notice of a dispute with a US party
– effective document management and consideration of attorney-client privilege
– motions to change the venue or contest jurisdiction
– litigation education.