What Foreign Companies Need to Know about Litigation in America before Entering the U.S. Market

Despite the beginning of the “credit crunch” and the collapse of the housing market, 2007 was a banner year for foreign direct investment in the United States, which ranked second, behind China, in the number of new and expanded foreign projects. Behind the bad news is a silver lining – the decline in the value of the dollar against other currencies currently makes investment in the U.S. extremely attractive. With its dynamic economy, deep capital markets and resilient consumer spending, the United States is likely to remain an irresistible target for foreign companies seeking new business opportunities, yet hurdles remain.

Selecting a Business Location

Good corporate legal strategy in America begins by planning ahead to ensure that, if and when litigation arises, it occurs on favorable terms.  In that regard, the most critical decision a business must make initially is where to locate its headquarters.  There are, of course, a host of issues that must be weighed when choosing where to locate any new business, such as taxes, regulations, access to an educated workforce and whether unions have a strong presence.  However, carefully choosing the location of the principal place of business can go a long way toward minimizing the consequences of litigation by guaranteeing that a forum, friendly to business, hears any future disputes.  Such jurisdictions typically have a negligible union presence and a strong governmental commitment to attracting foreign investment.  The judges are conservative and the juries are well-educated, sensible and stingy.

The Best Defense is a Good Offense

Locating a company in a “pro-business” jurisdiction also allows it to take advantage of the Declaratory Judgment Act (DJA), which authorizes courts to rule on any legal issue presenting an actual controversy between two parties.  Often, a party that wishes to initiate suit will first send the other party a “demand letter” explaining the nature of its legal claim and threatening to sue the other party unless it is paid an outrageous sum of money.

The Benefits of Arbitration over Litigation
To avoid litigation altogether, foreign businesses should also seriously consider including provisions mandating arbitration of any disputes by the American Arbitration Association (AAA) in their contracts.  Arbitration requires the parties to submit disputes to a neutral decision maker and expert in the substantive law, with the authority to issue a binding decision.  The principal advantage of arbitration is that it allows a company to avoid having a jury decide its case.  This can be a real benefit to any corporate defendant, especially when a foreign company faces off against a hometown entity or individual.

The Litigation Process
If all else fails and a company finds itself in court, this need not be cause for despair.  The American judicial system is designed to repeatedly test the merits of the plaintiff’s claims and to dispose of the case at the earliest opportunity.  Indeed, despite its reputation as a no-holds-barred litigious society, only 4.1% of all cases filed in federal court ever reach trial, with the rest being settled by the parties or dismissed by the court. Cases typically begin with the filing of a complaint in court followed by service of the complaint on the defendant.  If the complaint is defective on its face, the defendant may immediately move for dismissal.

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