Companies considering expansion into the US need to be aware of the marked differences in the US court system, as opposed to that in England or Europe.
The US operates both a Federal and a state system. Federal courts are courts of limited jurisdiction; they deal with cases involving 'federal questions', ie cases involving US constitutional issues or statutes passed by US congress. They also deal with 'diversity' cases - those where the parties concerned are from different states. Federal courts are organised into trial courts (known as Federal District Courts), US courts of appeal (which are broken down into 13 circuits spread over the US) and the US Supreme Court.
State courts are courts of general jurisdiction and deal with pure state law issues - most contract, tort and criminal matters. It is very important to be clear about what laws may apply to a particular case, and to refer to the rules which govern conflicts between the US Federal and state courts.
Because Federal courts in the US are available to hear cases involving federal subject matter or diverse parties, it is not uncommon for commercial litigation to commence in the US Federal court.
Federal judges in the US are appointed. However, many state court judges are instead elected locally for set terms, and their salaries are set and paid by the state or locality. A result of this is that state courts are commonly perceived to be more susceptible to political and local concerns.
Depending on the nature of the litigation, this may be a significant factor.
In the US there is a constitutional right to a trial by jury for civil claims. Jury trials are therefore common in such claims, even the complex commercial claims which a company may face. The frequency of civil jury trials in the US tends to produce uncertainty of outcome, and is perceived to produce more bias against a rich corporate defendant, or against a foreign defendant. It is often thought that damage awards in the US tend to be higher than those in Europe, even in non-jury cases.
Generally speaking, in civil and commercial matters, the approach of the English courts is a compensatory one. A significant difference in US litigation is the power of the US courts to award punitive damages.
These are damages which are not aimed at compensating the claimant, are unrelated to the loss suffered by the claimant, and are made in order to set an example or deter other defendants from certain types of behaviour.
Generally speaking, punitive damages are a state law issue. Punitive awards are rare and limited to situations where a company recklessly disregards the evidence before it.
Another cultural difference which makes litigation a very different experience for companies in the US is that, except for very limited circumstances dealing with contractual disputes or civil rights claims, there is no cost shifting in the US system. Unlike the English legal system where the loser pays the costs of both parties, under the so-called 'American Rule', each side pays its own attorney's fees, win or lose. This suggests that there is a greater incentive in the US to bring law suits of questionable merit, because there is no risk that the losing party will have to pay the winner's legal fees. Companies which become embroiled in US litigation, even those with a strong position, are often well advised to settle questionable claims to avoid incurring significant legal fees.
Contingency fee arrangements are commonly used in the US, particularly by the plaintiffs' bar in personal injury, product liability, securities and anti-trust litigation. The use of contingency fee arrangements makes it easier for plaintiffs to retain capable counsel and prosecute an action in the US.
Another prospect which companies operating in the US have to face is that of class actions, which can be brought at both Federal and state level. Unlike the English legal system, both the Federal and state jurisdictions have specific litigation vehicles and procedural rules which make mass tort (complex litigation) and class action cases possible.
There is no cost disincentive in the US to acting as a representative plaintiff in a US class action. The plaintiffs' attorney's fees are recoverable from the settlement or court award, so that plaintiffs in class actions do not have to put their hands in their pockets to fund the litigation.
One of the biggest uncertainties surrounding class actions in the US is the outcome of a jury trial, and the potential for a jury to award astronomical damages.
In the US, so-called 'long arm statutes' set the parameters of who is subject to the jurisdiction of a particular state. These statutes allow a state to extend its jurisdiction to individuals or companies not residing or incorporated in that state, if they have sufficient contact or connection with the state. Therefore, if your company is expanding into the US, you need to consider where it will be carrying out business, and whether or not the courts of a particular state might be able to exert jurisdiction over any disputes involving the company. This might well influence the amount of contact or connection which your company wishes to have with a particular state, or indeed in which state or states it wishes to transact business.
One feature of dispute resolution in the US which might look familiar to the untrained eye is the use of arbitration to resolve contractual disputes. The procedural advantages of arbitration are reduced costs, with faster and more efficient resolution. The proceedings are informal, so that strict rules of law and evidence need not apply, and hearings are in private so that the proceedings are not a matter of public record.
The decision of the arbitrators is final, so there is no room for appeals, and the decision-makers appointed by the parties are knowledgeable about industry practice and procedure.
The disadvantages are limited or lack of exchange of relevant documents, which can give rise to 'trial by ambush'. It is not possible to review the arbitrator's decision and there is no requirement of reasoned decision - arbitration awards are like jury verdicts and are not subject to any meaningful review. This may result in satellite litigation being generated.
Because you need an agreement to arbitrate contained in a contract, arbitration is not useful in resolving multi-party litigation.
US arbitration is sometimes thought to result in 'industrial' justice or compromise decisions. However, given the pitfalls which companies face if they become embroiled in US litigation, arbitration is often perceived as an attractive alternative.
In the US, selecting the arbitrators is a critical step. Unlike court proceedings where parties have no role in selecting a judge, parties in an arbitration can have varying degrees of input into the selection of the arbitrators. The parties to the arbitration agreement determine the method of selecting the arbitrators and, under that agreement, may provide for selecting the arbitrators themselves. The most common method is for each party to select an arbitrator and those two arbitrators to select a third, sometimes referred to as the umpire.
Where parties each appoint an arbitrator, they expect that their arbitrator will be pre-disposed towards them. This may mean that the arbitral process becomes a question of which arbitrator is the better advocate and can convince the umpire or third arbitrator to adopt 'his' company's position.
The differences between US and English legal processes and style suggest some fairly obvious steps which companies can take to minimise the risk and costs of becoming involved in litigation. Legal expenses insurance cover is an imperative in the US system, since there is no recovery of costs for the winning party. Reviewing contractual arrangements to consider whether arbitration clauses might best assist swift resolution of any disputes is another simple, but effective, measure.
Employment issues
Labour or employment issues also require careful attention. The main difference between US and English employment law is that in the US there is no basic level of employment protection. In other words, employees in the US have no remedy of unfair dismissal. Employers often perceive this as a bonus, believing they may be able to hire and fire at will.
However, in certain states - for example California - the US is nudging towards some basic level of employment protection.
But the huge fear for corporations in the US is the risk of discrimination suits. Most US labour litigation arises from discrimination claims, involving sex, religion, race, disability or age. Generally speaking, persons aged 40 or more are protected.
Another important point is that US states vary in the degree of protection that they afford unions. Some states still have closed shops, where people need to be union members in order to obtain a job in certain industries, usually the transport industries such as the airlines or road haulage companies.
Another key piece of legislation is ERISA. US employers are not obliged to provide health care insurance to employees. However, if they do provide benefits such as health care insurance, pensions and long term disability benefits, then ERISA sets out many restrictions on how these benefits must be administered. In practical terms, the vast majority of US employers provide such employee benefits and their benefits packages are therefore covered by the ERISA legislation.
In England, companies can discriminate (apart from grounds of race or sex) with regard to the benefits packages that they give their employees.
For example, an English company can lawfully decide that none of the secretaries working in a company will get pensions, that all other employees will have money purchase pensions, and that the 'fat cats' will have final salary pensions.
In the US, if one class of employee is being provided with a particular benefit, then all the other classes of employees are entitled to it. There is an adjustment which is made pro rata, depending on the salary of the individual employee, but English companies need to be careful not to discriminate inadvertently.
Because of differences in labour legislation the cost of employing individuals in the US may be much higher than an English company would otherwise expect.
Given the US rule on legal costs, the availability of jury trials which tend to favour an individual pursuing a large corporation, the perceived size of awards compared to English damages, and the spectre of class actions by disgruntled groups of employees, employment protection insurance must be a serious consideration for any company considering expansion into the US.
Some of the other insurance considerations relevant to businesses operating in the US have been well publicised. For example, the increased threat of terrorism has made buying war and terrorism cover a more important issue for some businesses. However, it is important to think carefully about the impact that a major terrorist strike could have on your operations.
A good example is the cancellation of the Ryder Cup tournament following 9/11. Fortunately, the promoters had insured their profit against the risk of cancellation. So some types of insurance such as contingency or cancellation cover, which may not spring to mind when the threat of terrorism is mentioned, can nevertheless afford businesses much needed protection against loss of revenues.
Additional risks
Other risks may be affected by the differing location or geography in which your company chooses to do business. For example, while most UK organisations buy property insurance, they need to consider the different cover that they made need in the US, perhaps adding hurricanes and earthquakes in addition to the normal perils covered. Last year's US power failures also highlight the importance of appropriate business interruption cover.
The single largest risk which corporate directors and officers assume in the US is that of being sued. There is a trend towards increased numbers of class actions brought by investors, customers and others. Technology and pharmaceutical companies have been particularly vulnerable to such litigation. The primary source of claims is shareholders. These cases are expensive and often take years to resolve.
The Sarbanes-Oxley Act of 2002 (SOX) made sweeping corporate disclosure and financial reporting reforms, which expand the central liabilities of directors, officers and companies. It comes into force this November.
At the same time, following 9/11 and insurers' growing loss experience under the Private Securities Litigation Reform Act (PSLRA), there has been a dramatic rise in the cost of directors' and officers' liability (D&O) insurance.
In most circumstances, directors and officers will be indemnified by their company against any personal liabilities that arise from their acting on behalf of the company. However, in many US states such indemnification is prohibited under certain circumstances. All states preclude indemnification where shareholders bring a claim for the benefit of the company in the name of the company - so called 'derivative actions'. Most states prohibit indemnification if the court finds the director acted fraudulently or intentionally against the interests of the company. And the Securities and Exchange Commission has taken the position that it is against public policy to indemnify directors and officers for certain securities law violations.
Thus companies cannot completely protect their directors and officers against personal liability, and in any event the indemnity will be worthless if a company becomes insolvent or does not have significant resources.
D&O insurance is designed to address these limitations, and can also fill the gaps in liability protection left by other insurance products. For example, many of the exposures covered by a typical D&O policy are excluded under a commercial liability policy, which generally only responds to bodily injury or damage to property.
There is no standard form of D&O policy. As no two policies are alike, it is important to review the wording closely to ensure that your (usually significant) outlay of premium is well spent.
Another issue for manufacturers seeking a base in the US is whether they will be able to obtain the insurance they want at an affordable premium.
A captive insurance company may able to retain the risk in a more cost effective manner and, in some situations, with tax advantages.
Steven Blair and Mark Bunim are partners in Bryan Cave LLP and members of its risk management group. They practise from Bryan Cave's London and New York offices respectively, www.bryancave.com IS THE AMERICAN DREAM A RISK MANAGER'S NIGHTMARE?
Working with the one of the largest economies in the world has many commercial attractions but Bryan Tedford says businesses need to go that extra mile to get suitable protection for their overseas exposures
The UK and Ireland invested some $13bn in the US economy in 2003.
Unfortunately, these 'investments' are not regulated by one Federal system, but 50 different sets of state rules, laws and filings for civil law and insurance compliance. Coupled with the fact that the US is a far more litigious society, with plaintiff attorneys actively seeking out new potential class action suits, and that each US state presents unique loss and coverage scenarios, venturing across the Atlantic is a potential minefield.
ENSURING LONGEVITY According to the RIMS 2004 Benchmark Survey(1) the biggest concern for risk managers when protecting their company in the US is insurer financial security. For example, a change in the financial ratings of an insurance provider can affect a company's ability to do business with another company. With 72 property and casualty insurers failing in the US between 2001 and 2003(2) and four times as many downgrades as upgrades in 2003 (219 compared to 49)(3), finding a carrier with suitable US expertise and appetite, a comprehensive local presence, as well as the suitable financial strength can be hard.
A further consideration for risk managers is that of long-tail lines, as they may have claims that can mature over a number of years:
- motor liability - up to five years
- property liability - up to eight years
- product liability - up to 15 years (mass tort: 20+ years).
TRANSACTING BUSINESS IN THE US
- Is it worth it? Companies should examine the costs of working in the US versus their potential return. This will include the costs of adequate financial protection either in the form of traditional or non-conventional risk transfer. A knowledgeable broker is invaluable in these matters.
- Think American Approaching risk management and risk transfer from a UK perspective could leave a business badly under-insured and vulnerable.
Unlike the UK, product liability loss is probably one of the most exposed areas for any business in the US. Companies should accept the need for catastrophe coverage, that is, higher limits of insurance protection, and in general, think 'big'.
- Consider the alternatives As well as higher limits, consider investigating unconventional alternatives to 'ground up' insurance, which may make a previously nonviable proposition worthwhile.
- Use the law Contractual transfers, waivers and hold harmless agreements should be used to lower potential liabilities in the US.
- Consider your business partners Financially secure insurance carriers, with the relevant expertise in the US, as well as capacity, are not in abundance. Lawsuits do not disappear, so businesses, and their board members and shareholders, need the reassurance of suitable cover in place with a financially strong insurance provider. A strong claims team is also important. An insurance provider with a philosophy of robust defence of liability-related matters is essential, for preventing a one-off suit from becoming a class action.
References: 1) Business Insurance magazine 2) Standard & Poor's 3) Standard & Poor's
Bryan Tedford is US casualty manager at AIG Europe, 020 7954 8927
SCENARIO
A manufacturer works with a national retail chain, who insisted upon their suppliers holding insurance with carriers of a certain credit rating.
The manufacturer's insurer is downgraded below the level of acceptance of the retail chain. The retail chain could insist on charging the manufacturer for insurance and take on their liabilities under their own insurance arrangements or terminate their contract with the manufacturer until suitable cover is in place.
STATE VARIATIONS
LEAST LITIGIOUS STATES
Delaware: Virginia
Washington: Kansas
Iowa: Nebraska
Colorado: Utah
South Dakota: Connecticut
MOST LITIGIOUS STATES
Oklahoma: South Carolina
Montana: Arkansas
California: Texas
Louisiana: Alabama
West Virginia: Mississippi
Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Information Institute.
