Articles

The Prudent Foreign Attorney's Basic Guide to the U.S. Legal System

A. Background.

1. Purpose of the Guide.

The U.S. legal system is complex and, terminological similarities notwithstanding, differs in fundamental ways from the "civil law" systems found in most European countries. This brief guide is designed to enable you, the foreign attorney, to communicate effectively with your client and your client's American lawyers about some basic aspects of U.S. law, and nothing more. Some elementary but sound knowledge about the U.S. legal system can assist you in advising your client and will help you in dealing with an American attorney to resolve your client's legal problems.

2. Some Basic Features of the U.S. Legal System.

a. Federal v. State Law. The U.S. system of law and government is a federal system both in name and in fact. Large areas of law are more or less the exclusive province of the various states. Much of the law affecting the business activities of a foreign venture in the Unites States will be state law. Nevertheless, there are few legal issues facing a foreign business venture in the United States that do not at least potentially have federal components. It is therefore prudent to obtain advice regarding both federal law and the law of the state or states within whose jurisdiction the venture may conduct business. There can be significant differences between the laws of the various states on various issues. For the limited purpose of this guide, we shall for the most part disregard those differences, since the overall features of commercial law and civil procedure are very similar in most states.

b. Federal v. State Courts. The United States has several distinct, parallel and partly overlapping court systems: the federal court system, on the one hand, and the various state court systems, on the other. Drawing even an approximate jurisdictional line of demarcation between the various court systems is difficult and it is often hard to predict which forum will ultimately decide a specific dispute. Foreign litigants will, in cases involving substantial amounts in controversy, often have a right to a federal forum regardless of whether the law governing the resolution of the dispute is state law or federal law.

c. Federal v. State and Local Administrative Agencies. There are federal, state and local administrative agencies. Federal administrative agencies are mostly concerned with matters of a "national" character, such as defense, foreign policy and international trade, while state and local agencies are mostly concerned with "local" matters, such as intrastate trade and commerce, land use issues, and the like. A foreign venture should be prepared to deal with both state and federal regulatory agencies. As a general rule, it is hazardous to run afoul of any administrative agency, although enforcement action by state and local agencies may tend to be influenced by concern about possible harmful consequences to local interests and thus to be somewhat less heavy-handed than the enforcement actions of federal agencies. Enforcement actions directed against your client by any U.S. administrative agency require a careful response.

3. American Lawyers.

a. Licensing and Regulation of Attorneys Largely a State Matter. There is no national lawyers' bar in the United States. The licensing and regulation of lawyers are matters for the separate states and are in most states entrusted to state bar associations which enjoy a great deal of autonomy from state administrative agencies. The criteria for bar admission vary from state to state, and admission in one state does not ensure subsequent admission in another state. An attorney can act as trial counsel only in the state or states in which he has been admitted (unless he is admitted pro haec vice, and in that case he should - and in some cases must - associate with a local attorney). An attorney admitted to practice before the courts of a state will also be admitted, upon request, to practice before the federal courts situated within the state. A lawyer may not be able to offer advice in matters involving the law of states other than the state in which the lawyer is admitted to practice. In matters of importance involving the law of a particular state, it is prudent to seek the advice of an attorney admitted to practice in that state.

b. High Degree of Specialization. No formal distinction exists in the United States between trial attorneys and general practitioners similar, e.g., to the distinction between "barristers" and "solicitors" in the U.K. In practice there is, at least in the major metropolitan areas a distinction almost as absolute between "litigators" (i.e., barristers) and "transactional attorneys" (i.e., solicitors). Transactional attorneys do not try cases, even cases relating to matters as to which they have particular expertise. There are numerous subdivisions and subspecialties among attorneys. Perhaps the most significant subdivision from a practical point of view is the division within the ranks of tort litigators between the "plaintiffs' bar" and the "defense bar." Members of the "plaintiffs' bar" primarily (or exclusively) represent plaintiffs, while members of the "defense bar" primarily (or exclusively) represent defendants.

c. Attorney Compensation. The "standard" method of compensation for American attorneys is payment for the time spent on the matter at a prearranged hourly rate or a derivative or adaptation of an hourly fee arrangement.

d. Contingency (i.e. "No Cure - No Pay" Fee Arrangements. Fee arrangements making the lawyer's compensation a function (or "contingency") of what the client recovers from a lawsuit are unknown in most jurisdictions. Not so in the United States, where contingency fees have long been used to compensate attorneys representing plaintiffs. The use of contingency fees was originally limited to classical tort cases (i.e., primarily cases involving claims for economic compensation for physical injury and property damage) but has in recent years become more common in other types of cases as well, including business disputes.

4. Peculiarities of U.S. Civil Practice and Procedure.

a. Overview. Many of the features and characteristics of U.S. law, legal culture and approach to the resolution of legal disputes that a foreign observer may initially find puzzling flow directly from certain peculiarities of the U.S. system of civil procedure. What follows is a brief description of some of those peculiarities.

b. Jurisdictional Battles. Frequently, courts within two or more different court systems may arguably have jurisdiction over a particular dispute. With respect to a given dispute, the courts of several states may have concurrent jurisdiction, and state and federal courts may have concurrent jurisdiction. Courts in one jurisdiction may be perceived as more or less friendly or convenient to one of the parties than courts in other potentially available jurisdictions. For various strategy or convenience reasons there can be a lengthy battle over the appropriate forum, sometimes with an appellate interlude before the issue is finally resolved.

c. The Use of Juries as Finders of Facts in Civil Cases. Unlike most nations, the United States has a system of civil litigation that provides litigants in most civil disputes the right, if they so elect, to have their case tried before a jury acting as the "finder of fact." In fact, the right to have the factual issues in most civil (as well as criminal) trials decided by a jury is a constitutional right both under the U.S. Constitution and under the constitution of most of the several states. The use of juries in civil cases is commonly regarded as a significant advantage for plaintiffs because of the perception that jurors tend to be swayed by emotion and guided by sympathy, and tend to award monetary damages in substantially higher amounts than do judges.

d. No "Loser Pays" Rule. The United States does not have the rule, common in other jurisdictions, that the losing party pays the prevailing party's attorneys' fees. The absence of the "loser pays" rule removes a major disincentive to litigation. Parties to a contract frequently include in the contract a provision for prevailing party's attorneys' fees in disputes arising out of the contract, but the fees awarded in accordance with such a provision rarely match the actual cost of litigation, and the provision only applies to disputes arising out of the contract in question. There are, however, statutes which create the right to collect attorneys' fees in certain types of cases such as copyright cases, cases filed under consumer protection statutes and some other matters.

e. Widespread Use of Contingency Fees. Plaintiffs' attorneys in cases involving physical injury or physical property damage (the classical "tort" cases) are almost universally compensated through contingency fees and the use of contingency fees is, with increasing frequency, seen in other types of cases as well. Contingency fees usually range from 20 to 50% of the client's total recovery. The use of contingency fee arrangements removes another main disincentive against initiating litigation, i.e., the plaintiff's risk of incurring substantial expense in the form of fees to the plaintiff's own attorney without an offsetting gain, and gives the plaintiff's attorney a direct economic stake in the outcome of the dispute. Also, the difficulty of combining a practice based on contingency cases and a practice based on ordinary task based or time based billing has created the deep gulf within the legal profession between "plaintiffs' attorneys" (those who work on a contingency basis) and "defense attorneys" (those who work on an hourly fee basis). Many striking characteristics of the U.S. system of justice are a product of the resulting chasm within the legal profession. The plaintiffs' bar has become economically powerful and politically influential. Legislation, even legislation of a purely procedural nature is often the product of a political compromise between the plaintiffs' bar and industrial defendants and their attorneys, which accounts for some of the occasionally Byzantine aspects of American civil procedure.

f. Punitive Damages Frequently Claimed and Not Infrequently Awarded. Claims and awards of punitive (or "exemplary") damages are common features of U.S. style civil litigation. Punitive damages are awarded to punish the wrongdoer and are added to any actual damages recovered by the plaintiff. In recent years, claims and awards of punitive damages have proliferated greatly and punitive damages are frequently claimed and not infrequently awarded in what are basically business disputes. The average size of punitive damages awards has been increasing, and awards sometimes (but not as often as newspaper headlines may suggest) reach astronomical levels.

g. Punitive Damages Claims Exacerbate Conflict. An award of punitive damages requires, at least in principle, a showing that the defendant is guilty of egregious misconduct. For that reason, complaints and other pleadings filed in U.S. courts often contain allegations of serious wrongdoing, such as "fraud," "deceit," "malice," "oppression," "racketeering," "conspiracy" and the like. Consequently, the temperature of disputes before U.S. courts tends to run high, even in fairly run of the mill business disputes.

h. Punitive Damages Are Open-Ended and Uninsurable. In most states, claims for punitive damages are exempt from coverage in standard commercial liability insurance policies. Because punitive damages are also open-ended, punitive damages allegations expose the defendant to potentially catastrophic losses that will directly affect its bottom line and not just its future insurance costs. Such allegations therefore create a strong incentive to defend aggressively or potentially to settle even questionable claims.

i. Pre-Trial Discovery. Parties to litigation before U.S. courts have the right to conduct extensive pre-trial "discovery," including the right to inspect all relevant documents in the other party's possession and to "depose" (i.e., examine under oath before trial) the other party's witnesses and representatives. Foreign litigants are often unaware of the tremendous scope of pre-trial discovery under U.S. rules of procedure, and run the risk of inadvertently creating potentially harmful evidence through the conduct of internal investigations and the like without the necessary safeguards.

j. Complex Rules of Evidence. U.S. law includes a complex set of evidentiary rules drawing a distinction between evidence which is admissible at trial and evidence which is not. The rationale for these rules flows in part from the system's use of juries as finders of fact. The evidentiary rules are designed, at least in part, to ensure that all evidence presented to the jury is fundamentally reliable. For a foreign litigant, the most significant of the evidentiary rules from a practical point of view is often the rule rendering much "hearsay" evidence inadmissible. An immediate consequence of the inadmissibility of hearsay evidence is that most evidence can only be introduced by means of the oral testimony of live witnesses. This places distant litigants at a distinct disadvantage by imposing on them substantial expenditure and inconvenience in preparing witnesses for trial in an unfamiliar setting and transporting them to trial.

k. Class Actions. Another unique feature of U.S. law is the use of "class actions." In a class action, an attorney (the initiative for class actions often comes from attorneys) may represent hundreds or thousands of plaintiffs with identical or similar claims against one or more defendants. The class action device may make a lawsuit economically feasible where the magnitude of each individual plaintiff's claim would otherwise be insufficient to justify individual actions.

5. Characteristics of U.S. Administrative Law.

Anyone doing business in the United States may encounter regulatory and administrative agencies on the federal, state and local level. Historically, foreign observers have perceived U.S. administrative and regulatory agencies to be imbued with some of the same informality and "can do" spirit which otherwise characterize American society. To a certain degree this perception may, even in the past, have reflected an idealized and overly idyllic view of U.S. reality. However that may be, it is a perception that has become markedly less realistic in recent decades. U.S. administrative agencies on all levels have become noticeably more rigid and bureaucratized over the last twenty to thirty years, a development that may in part be the result of the relaxation of standing requirements for bringing lawsuits against administrative agencies to block or challenge their decisions. The increased risk of having to defend against lawsuits has made administrative agencies less flexible and more formalistic and rule governed. To deal effectively with government agencies in matters of any significance therefore normally requires the assistance and advice of an attorney.

6. Ways to Minimize Legal Risk of Foreign Ventures in the United States.

a. Overview. It may be practically or economically impossible for a foreign venture to protect itself against all legal risk associated with doing business in the United States. But much can be done to minimize legal risk at a relatively modest cost by establishing a legal risk management plan at an early stage of the venture.

b. Risk Management Planning. The foreign venturer should establish a legal risk management plan in consultation with an American attorney. The plan, which could require a very modest initial budget, might typically provide for: (a) transactional advice; (b) liability insurance; (c) protection from liability through formation of a corporate or other limited liability entity; (d) review of potential strategic asset structures; (e) tax advice; (f)advice concerning administrative law issues; and (g) advice re employment law and contracts.

c. Transactional Advice. An American contract is typically more voluminous and complex than what foreign attorneys are used to. Detailed analysis and discussion of all aspects of such contracts by an American attorney can be disproportionately expensive for smaller transactions but is essential for large transactions or where the protection of proprietary rights (copyrights, trademarks, patents, trade secrets or other rights) is involved. In smaller transactions a limited review of certain aspects of the contract need not be expensive, and can be very beneficial. A limited review would typically focus primarily on the major deal points and on dispute resolution, forum selection and choice of law provisions. Minor adjustments in such provisions could, for example, have the practical effect of a forum selection clause in favor of the foreign venturer's home courts by rendering a U.S. judgment based on the contract unenforceable in your client's home country.

d. Liability Insurance. Often, the most cost-effective way to obtain protection from legal risk is by means of liability insurance. A typical U.S. commercial liability policy will often provide protection from a surprisingly broad range of claims and lawsuits. The most valuable protection is not necessarily protection from liability, but rather the right to a defense paid for by the insurer. Under U.S. law, an insurer's duty to assume the insured's defense and pay his defense costs is much broader than the insurer's duty to ultimately pay for a judgment or settlement in favor of the claimant. An insurer has a duty to defend whenever there exists a possibility that the insured will ultimately be held liable to the claimant on a theory for which there is coverage. American attorneys can assist in the evaluation of the claim and in asserting your client's right to coverage against a reluctant insurance carrier.

e. Corporate Shield Against Liability. Another inexpensive way to shield against legal risk is by forming a corporation or other limited liability entity to limit liability to the entity 's assets. At an annual cost of between $500 and $1,000 (depending on the state of incorporation) a corporation could provide substantial protection against personal (or affiliate company) liability. The existence of a corporation may provide a formidable shield since, if properly planned, it may avoid jurisdiction in the United States over a foreign defendant and because "piercing the corporate veil" to open for personal (or affiliate company) liability is difficult and expensive. Moreover, the corporate shield can be further strengthened and improved as sufficient funds become available and operations develop. A carefully planned entity structure can be essential to minimize legal risks.

f. Planned Retention of Assets in the United States. Because U.S. judgments may be difficult or impossible to enforce in other jurisdictions your client's legal risk in the United States can, to a degree, be measured by the assets it owns or controls in the United States. Even in circumstances where U.S. judgments are ultimately enforceable in your client's home country, the absence of assets situated in the United States may nonetheless make your client a much less tempting target for a lawsuit. Legal risk analysis should therefore be a factor in your client's decisions about placing and retaining assets within the United States.

g. Tax Advice and Planning. Professional tax advice by a qualified professional is important and simple planning can sometimes generate substantial tax benefits. In the early stages of a venture the scope of the tax planning should be tailored to suit the size of the transaction.

h. Employment Law Advice. Employment law has become an area of proliferating litigation; the number of lawsuits claiming discrimination in hiring, promoting and firing employees is increasing and such litigation can be costly and disruptive to the employer. "Employment Practices" insurance is available in some jurisdictions and for larger ventures carefully drafted personnel handbooks and policies are essential. But, the surest way to limit employment-related legal risk is not to have employees. Legal risk avoidance is probably the main impetus behind the increasing use of "independent contractors" and "outsourcing" instead of regular employees to meet manpower needs. Such practices can also help the client avoid the increasing administrative burden imposed on employers by both state and federal authorities - although there is almost always a significant risk that the administrative agency may re-characterize the relationship as an employer-employee relationship if it is not carefully designed by counsel to meet legal requirements.

Recent federal and state legislation imposes significant burdens on businesses employing more than a certain number of employees. For example, the federal "Americans With Disabilities Act" imposes onerous burdens on businesses employing more than fifty employees.

i. Administrative Law Advice. A foreign business starting any kind of venture in the United States should conduct at least a basic survey of the regulatory landscape surrounding its business activities. In particular, it should try to determine the level of attention the type of activity it plans to engage in is receiving from governmental agencies. With respect to some activities which receive heavy scrutiny from federal regulatory agencies, such as, at the present time, activities that potentially affect "wetlands" or one or more endangered species, or which involve a risk of oil or hazardous materials pollution or consumer safety, the client may find the costs or barriers to doing business prohibitive.

With respect to certain business activities, state and local laws and authorities can have a material effect. For example, certain states and municipalities impose very onerous restrictions on residential landlords (such as rent controls), which can substantially affect the return from investments in residential housing within their jurisdictions.

7. When Planning Fails.

Even the best laid risk prevention plans sometimes fail, and a lawsuit or other adversary proceeding may be inevitable. Whether your client wishes to assert a claim, or is the party being sued (or pursued by an administrative agency), there are ways to contain cost and limit risk.

a. Your Client Has A Claim Against A Party Located in the United States. If your client has bound itself to dispute resolution before a U.S. forum, there is always some risk involved in bringing a lawsuit. Your client may, and often will, be met with a counterclaim which, depending upon the facts, could include allegations of fraud and the like and a demand for punitive damages. Even a totally meritless counterclaim can be expensive to dispose of, and your client will normally not be able to recover its attorney's fees absent specific contractual or statutory provisions. Occasionally, a dispassionate analysis will counsel resignation and a write-off of the claim or choice of an alternative (non-litigation) dispute resolution avenue, even when your client's claim is clearly meritorious.

If your client has retained access to its home courts, it may be in better shape. As a general rule properly obtained foreign money judgments are relatively easily enforceable in all the states of the United States. Your client may therefore be able to obtain a judgment from its home forum and take the judgment to the United States to be domesticated and enforced there. Your client must be sure to comply with the U.S. procedural requirements to ensure enforceability of the judgment, however. The assistance of an American attorney from the outset is essential, to ensure that the judgment your client obtains in the foreign forum will in fact be enforceable in the United States.

b. Your Client Gets Sued In the United States. There is no reason to panic, at least not immediately. There are a number of possible strategic alternatives, and as a foreign defendant your client may, and often does, have more litigation strategies available than its U.S. competitors. The following steps should always be considered.

(i) Look for Insurance Coverage. If your client has done its planning, it should have a commercial liability policy in place. The insurer may well have a duty to defend your client under the policy. With the insurer paying for your client's defense, your client may at least get some breathing space while it plans other measures, even if the insurer ultimately refuses to pay an award against your client for lack of coverage or because the award exceeds coverage limits.

(ii) Look for Jurisdictional Infirmities. U.S. law concerning jurisdiction, service of process and venue is complex, especially if a foreign defendant is involved, and there can be jurisdictional problems that a defendant may utilize to obtain a dismissal from the action. If your client successfully challenges jurisdiction, it may avoid suit in the United States (although the challenge will not be cost free - preliminary jurisdictional battles in U.S. litigation can become expensive but are usually significantly less expensive than defending the action on the merits). Even if your client does not ultimately prevail on its jurisdictional challenge, it may at least get a temporary reprieve allowing it to regroup, and while a jurisdictional challenge is pending, your client may be able to delay other costly pretrial proceedings, in particular pre-trial discovery.

(iii) Consider the Enforceability of a Judgment Against Your Client. Before your client spends money defending the case or even makes an appearance in court, you should try to determine if a judgment against your client is enough of a threat to justify major defense expenditures. If your client has few or no assets in the United States and does not expect to have such assets in the future, there may be little reason to fight an expensive battle, if a judgment by an American court is unenforceable in your client's home country or where your client otherwise does business.

(iv) If All Else Fails. Even if all shortcuts turn out to be blocked and the case has to be defended on the merits, there are ways to contain costs and position your client for a reasonable settlement or a strategically planned aggressive defense. For example, full-fledged trial preparation, including pre-trial discovery in a case against a foreign defendant is a complicated and expensive process for the plaintiff. There are many ways in which the plaintiff and his attorney can make tactical mistakes and technical blunders that can be used to your client's advantage.

8. Conclusion - Turning Legal Risk Into A Competitive Advantage.

The legal risk associated with doing business in the United States is significant but is largely predictable and containable. Even when the U.S. legal risk is, or is perceived to be, higher than the corresponding risk in your client's home country, it should not deter your client from engaging in U.S. ventures. The level of legal risk and the cost of obtaining legal services to contain the risk are generally reflected in the U.S. price level and thus in the business revenue your client can expect from its U.S. ventures.

Moreover, as the preceding discussion will undoubtedly suggest to you, a foreign owned business in the United States will often, given proper planning and appropriate precautions, enjoy procedural and substantive advantages under U.S. law that are not available to its U.S. competitors. The complexity of the U.S. legal system, which may at first blush seem intimidating to a foreign businessman, can thus be turned into a competitive advantage for his foreign-owned U.S. venture.