1. law, govt and politics

How To Reduce the Risks of U.S. Litigation:
A Guide for Foreign Businesses
Steven C. Bennett
The foreign business client might not fully appreciate the extent of the litigation risk in the
U. S., so it is up to counsel to advise the client about the risks and to take steps to avoid
them.
Steven C. Bennett
is a partner with Park Jensen Bennett LLP in New
York City and teaches at Hofstra Law School and
New York Law School. In modified form, an earlier
version of this article appeared in Mealy’s International Asbestos Liability Report and Mealy’s International Arbitration Report.
FOR BUSINESSES HEADQUARTERED outside the
United States, but with some involvement in U.S.‑related
commerce, the risks of becoming involved in civil litiga‑
tion in U.S. courts require careful attention. This article
reviews steps that foreign businesses may consider to help
reduce those risks. The steps outlined are neither man‑
datory nor exhaustive. Each business must adopt its own
structures and processes to meet its particular needs and
circumstances.
UNIQUE RISKS IN U.S. LITIGATION • Foreign
businesses are particularly good targets for U.S. lawsuits
and threats of litigation. They may not fully understand
the U.S. business and legal milieu, and underestimate the
dangers of a lawsuit.1 They also may not appreciate the
As one English judge famously put it: “As a moth is drawn to the
light, so is a litigant drawn to the United States.” See Smith Kline
& French Lab. Ltd. v. Bloch, [1983] 1 W.L.R. 730, quoted in Paul D.
Carrington, Moths To The Light: The Dubious Attractions Of American
Law, 46 Kansas L. Rev. 673, 686 (1998) (“[A]s a moth is drawn to
the light, aggrieved plaintiffs afforded a choice will often be wise to
elect an American forum as the place in which their grievances are
heard.”); see also In re Air Crash Near Peixoto De Azeveda, 574 F. Supp.2d
1
The Practical Lawyer | 23
24 | The Practical Lawyer value in the U.S. climate of carefully drafted, Amer‑
ican-style contract protections. They often do not
bring an American lawyer into their planning ear‑
ly enough to help reduce the risk of lawsuits and
claims against the foreign party.
The U.S. litigation system includes features un‑
known, or rare, in other nations. Many of these
features can affect the risks presented to businesses
confronting U.S. litigation.2
Jury Trial
Under the United States Constitution and state
constitutions, either party to a civil lawsuit may de‑
mand a trial by jury in most types of litigation.3 The
parties may also agree to have a judge try the case
without a jury. Parties sometimes waive their right
to jury trial to permit an early trial, or where they
are concerned that a lay jury may not fully under‑
stand the evidence and arguments.
The fact that average citizens decide issues of
liability and damages in complex commercial cases,
often involving potentially high monetary awards,
gives the process a certain amount of unpredictabil‑
ity. This unpredictability can promote settlements
because companies often prefer a settled, known
result to the potential for a seemingly random jury
verdict.
272, 278-79 (E.D.N.Y. 2008) (“it is a fact that plaintiffs will
almost always select a forum in which they believe they will
maximize their recovery, as long as they have a reasonable
chance of remaining in the forum, and that forum is often
within the U.S.”).
See generally Anne Tucker Nees, Making a Case for Business
Courts: A Survey and Proposed Framework to Evaluate Business
Courts, 24 Ga. St. L. Rev. 477 (2012); Mary Kay Kane, Dispute
Resolution in the United States: Concerns and Opportunities in an Era
of Globalization of Securities Markets, 14 Hastings Int’l & Comp.
L. Rev. 405 (1990-1991).
2
See U.S. Constitution, Seventh Amendment (civil cases),
Sixth Amendment (criminal cases); see also Taylor v. Louisiana,
419 U.S. 522 (1975) (jury trial is safeguard against arbitrary
use of power); Strauder v. West Virginia, 100 U.S. 303 (1880)
(jury trial embodies judgment by peers).
3
June 2014
Discovery
Another key factor is the significant amount of
discovery available in U.S. litigation.4 Discovery is
the process by which each side investigates (discov‑
ers) what evidence (information) the other side and
non-party witnesses may possess concerning issues
in the lawsuit. The standard of relevance is quite
broad and limits on discovery typically depend on
a showing of “undue” burden. A court may order
that confidential documents be produced for the
litigation, but not made publicly available.
The discovery process also allows lawyers to
take wide-ranging depositions of an opponent’s
employees, and non-party witnesses. In a deposi‑
tion, a lawyer for a party asks questions of the wit‑
ness, typically in a conference room at the lawyer’s
offices, with no judicial officer present. The testimo‑
ny is given under oath and a stenographer records
everything the witness says.
Whether an officer or employee of a foreign
company can be required to travel to attend a depo‑
sition in the U.S. depends on a number of factors.5
Even where personal jurisdiction over the foreign
defendant clearly exists, counsel often successfully
argue that the plaintiff ’s attorney should be re‑
quired to travel to the defendant’s home country
to take the deposition, to reduce litigation burden.
Parties may also stipulate to such limitations.
Class Actions
In federal court, and in most state courts, a
plaintiff may seek to sue as a representative of a
large class of people, all injured or damaged in sim‑
Proposals to apply a specific “proportionality” standard
in federal discovery are under consideration. See generally
Thomas Y. Allman, Rules Committee Adopts “Package” Of
Discovery Amendments, 13. Dig. Discov. & E-Evid. 200 (2013).
4
See e.g., Community Federal Sav. & Loan Ass’n v. FHLBB, 96
F.R.D. 619 (D.D.C. 1983) (requiring showing that senior
company employee had “unique” personal knowledge of
facts); Baine v. Gen. Motors Corp., 141 F.R.D. 332, 334-35 (M.D.
Ala. 1991) (same).
5
Reducing Risk of U.S. Litigation | 25
ilar ways by the actions of a defendant.6 If certain
procedural conditions appear, the law will allow
one or more representatives to sue on behalf of the
whole class, without all other members of the class
formally becoming parties to the lawsuit.
Punitive Damages
In certain kinds of cases, juries may award pu‑
nitive damages, intended to punish (and deter) the
defendant for certain types of improper conduct.
Such damages must comport with constitutional
requirements of due process.7 Some states, more‑
over, place limits on a jury’s ability to award puni‑
tive damages, while in other states punitive damage
awards are more common.8 Certain statutes, such
as the federal Racketeer Influenced and Corrupt
In 2005, Congress enacted the Class Action Fairness Act
(“CAFA”), 28 U.S.C. §§ 1332(d), 1453, 1711-1715, in reaction
to widespread reports of “abuses of the class action device”
in state courts. See S. Rep. No. 109-14, at 10-27 (2005). CAFA
has succeeded in moving many large class actions from state
to federal court, even though some judicial opinions may
have made removal of particular cases more difficult than
Congress had intended. See Howard M. Erichson, Fairness to
Whom? Perspectives on the Class Action Fairness Act of 2005, 156 U.
Pa. L. Rev. 1593, 1612-14 (2008).
6
See, e.g., State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408
(2003) (limiting reprehensibility review to harms with a specific
nexus to the individual plaintiff; ruling that single-digit ratio
of punitive to compensatory awards applies in most cases; and
barring the use of irrelevant out-of-state conduct to support
a punitive award); Cooper Industries, Inc. v. Leatherman Tool Group,
Inc., 532 U.S. 424 (2001) (requiring de novo appellate review
of constitutionality of punitive damages awards); BMW of
No. America v. Gore, 517 U.S. 559 (1996) (setting out guideposts
for analysis of the constitutionality of punitive awards under
the Due Process Clause of the Fourteenth Amendment).
7
Caps on punitive damages, special standards (such as a
requirement of “clear and convincing evidence” to support
punitive damage awards) and other procedural devices to limit
awards of punitive damages are all part of a larger movement
in the U.S. toward “tort reform.” See generally Myungho Paik,
Bernard S. Black, David A. Hyman & Charles Silver, Will Tort
Reform Bend the Cost Curve?, 9 J. of Empirical Leg. Studies, 173
(2012); Thomas A. Eaton, David B. Mustard & Susette M.
Talarico, The Effects of Seeking Punitive Damages on the Processing
of Tort Claims, 34 J. of Legal Studies 202 (2005).
8
Organizations (“RICO”) law,9 and parallel state
laws, permit recovery of “treble” damages in cer‑
tain cases.
Contingency Fees
Unlike lawyers in most of the world, U.S. law‑
yers may represent a client on a contingency fee ba‑
sis.10 Instead of billing for professional time spent
as the case progresses, or a flat fee, the lawyer’s fee
is “contingent” on recovery after trial or by settle‑
ment. The lawyer receives a percentage of the re‑
covery (typically one-third). If the case is lost, the
lawyer gets nothing.11
No “Loser Pays” Rule
With certain statutory exceptions,12 the U.S.
rule is that each party to a lawsuit pays its own at‑
torneys’ fees. Generally, there is no “loser pays” rule
as in many countries. This rule may be varied by
agreement of the parties.
See 18 U.S.C. §§ 1961, et. seq. The RICO law, originally
designed to suppress organized crime, has become a
significant tool in civil litigation. See generally Pamela H. Bucy,
RICO Enterprises: The Mob And Fraud, 85 Temple L. Rev. 99
(2012).
9
See Barnes v. Alexander, 232 U.S. 117 (1914) (upholding onethird fee). The specific terms of the contingency fee agreement
generally control. See, e.g., U.S. Denro Steels, Inc. v. Lieck, 342
S.W. 3d 677, 682 (Tex. Ct. App. 2011) (where agreement
called for fee based on any “judgment” awarded, no recovery
by counsel where settlement of arbitration included dismissal
of parallel lawsuit).
10
Critics of the contingency fee system abound. See generally
Deborah L. Rhode, Frivolous Litigation And Civil Justice Reform:
Miscasting The Problem, Recasting The Solution, 54 Duke L.J. 448,
467 (2004) (claiming that contingency fees, among other
factors, cause the American justice system to be “excessively
expensive, . . . inaccurate and inconsistent”).
11
See Hensley v. Eckerhart, 461 U.S. 424, 429, (1983) (requiring
“express” statutory provision to shift attorney’s fees in
litigation). Courts also have inherent authority to award
attorney’s fees and costs for “bad faith” actions in litigation.
See Chambers v. NASCO, Inc., 501 U.S. 32, 45-46 (1991); see also
Vaughn v. Atkinson, 369 U.S. 527 (1962). Under Rule 11 of the
Federal Rules of Civil Procedure, moreover, federal courts
may award fees where “frivolous” litigation occurs.
12
26 | The Practical Lawyer Federalism
As a federal republic, the U.S. does not embody
a unitary legal system. Instead, two distinct, yet of‑
ten overlapping, sets of laws may apply: (1) federal
law, promulgated by the national government; and
(2) state law enacted by one or more of the fifty
states. Businesses operating in the U.S. may find
themselves confused as to whether state or federal
law controls their activities. Generally, businesses
must be prepared to comply with both state and
federal law, where the laws do not conflict. If they
do conflict, then federal law generally controls be‑
cause the U.S. Constitution makes federal law “the
supreme law of the land.”13
Similarly, two court systems operate in the
U.S.—the federal judiciary and the court system of
each of the fifty states. The federal constitution lim‑
its the subject matter jurisdiction of federal courts,
generally, to cases “arising under” federal law
(known as “federal question” jurisdiction) or cases
involving state law where the parties are citizens
of different states (known as “diversity of citizen‑
ship” or simply “diversity” jurisdiction), reserving
all other cases to the state courts.14 If both sides of
See U.S. Constitution, Art. VI, Cl. 2 (“This Constitution,
and the Laws of the United States which shall be made in
pursuance thereof; and all treaties made, or which shall be
made, under the authority of the United States, shall be
the supreme law of the land; and the judges in every state
shall be bound thereby, anything in the constitution or laws
of any state to the contrary notwithstanding.”). The process
of determining whether state law has been “preempted”
by federal law sometimes requires careful parsing of the
provisions of federal law. Compare Brueswitz v. Wyeth LLC, 131
S. Ct. 1068 (2011) (text and structure of national vaccination
statute preempted state design defect claims) with Williamson
v. Mazda Motor of America, Inc., 131 S. Ct. 1131 (2011) (no
preemption where no indication that preemption was a
“significant objective of federal regulation”).
13
See U.S. Constitution, Art. III, Sec. 2 (“the judicial Power
shall extend to all Cases, in Law and Equity, arising under
this Constitution, the Laws of the United States, and Treaties
made, or which shall be made, under their Authority; . . . to
Controversies between two or more States; —between a State
and Citizens of another State; —between Citizens of different
States;—between Citizens of the same State claiming Lands
14
June 2014
a lawsuit include foreign parties, no “diversity” ap‑
pears, and the matter may be heard in state court.15
If a defendant has been sued in state court, but the
case arises under federal law or involves parties of
diverse citizenship, the defendant may “remove”
the case from state to federal court. This “remov‑
al” procedure can be a powerful tool for businesses
because federal civil procedure rules can often be
more favorable to defendants.16
Extra-Territorial Application of U.S. Law
The American legal system operates under the
general presumption that U.S. laws will not apply
beyond U.S. territorial jurisdiction unless Congress
clearly intends such extraterritorial reach.17 Thus,
for example, where the plaintiff, the defendant, and
some allegedly tortious conduct lack any connec‑
tion to the U.S., the Supreme Court has resisted
application of U.S. law.18 Yet, where either “the
wrongful conduct had a substantial effect in the
United States or upon United States citizens,” or
some portion of the wrongful conduct “occurred in
the United States,” a U.S. court may apply U.S. law
to a foreign defendant.19
under Grants of different States, and between a State, or the
Citizens thereof, and foreign States, Citizens or Subjects.”)
See Universal Licensing Corp. v. Paola del Lungo S.p.A., 293 F.3d
579, 581 (2d Cir. 2002) (no diversity jurisdiction “where on
one side there are citizens [of a State] and aliens and on the
opposite side there are only aliens”).
15
The right of removal of cases does not appear in the U.S.
Constitution. It is, however, a right extended by Congress
since the early days of the Republic. The right to remove
a case from state to federal court is vested exclusively in the
defendant. 28 U.S.C. § 1441(A); 28 U.S.C. § 1446(a). See also
Shamrock Oil and Gas Corp. v. Sheets, 313 U.S. 100, 61 S.Ct. 868
(1941).
16
See Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010);
E.E.O.C. v. Arabian American Oil Co., 499 U.S. 244 (1991).
17
See Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct. 1659 (2013)
(presumption against extra-territorial application of U.S. law
applies to claims under Alien Tort Statute).
18
See Morrison, 130 S. Ct. at 2879 (citing SEC v. Berger, 322 F.3d
187, 192-93 (2d Cir. 2003)); see also Psimenos v. E.F. Hutton &
Co., 722 F.2d 1041, 1045 (2d Cir. 1983) (describing tests for
proper extra-territorial application of U.S. law).
19