McKasson & Klein LLC

Media

You’ve Been Sued in California, Now What?

Not everyone dreams of coming to California. While our sandy beaches and palm trees may be attractive to vacationers, non-U.S. companies understandably do not want the expenses or uncertainties of being dragged, sometimes halfway across the world, to defend lawsuits here. This article provides a three-prong defense to companies that have been sued in California.

Out of Africa

The firm a South African distributor of surgical equipment (the Client) who was sued in California by another South African company (the Rival) for allegedly interfering with a contract between the Rival and a California manufacturer. The Rival was already in litigation with the manufacturer in California (in the U.S. Federal Central District Court—Los Angeles) and wanted to save money by suing the Client there as well. The Rival gave notice of the lawsuit to the Client who promptly contacted its U.S. counsel.

The initial decision for the Client, as for any company in that situation, is a simple one: do we contest the lawsuit? There is no easy answer. Fighting the lawsuit means hiring U.S. attorneys and expending substantial time and money with no guarantee of success.

Ignoring the lawsuit, however, can be disastrous. The plaintiff can obtain a default judgment and, depending on the laws of the defendant’s country, can enforce the judgment by taking the defendant’s physical or intangible assets. Even if a company is willing to take that chance, the company may be prevented from doing any future business in California and the company’s management may be restricted from travelling to California.

In the South African example, the Client asked how it could challenge the lawsuit without spending years in U.S. litigation. U.S. counsel recommended a Motion to Dismiss. A Motion to Dismiss, prepared by U.S. counsel and filed with the court instead of a formal response to the complaint, does not argue the substance of the claims made by the plaintiff, but instead challenges plaintiff’s right to bring the lawsuit. The following are three valid bases for a Motion to Dismiss, each of which was raised by the authors on behalf of the Client.

Service

A Motion to Dismiss will succeed if the non-U.S. company was not properly “served” with the court papers. Under U.S. law that usually means someone must personally hand a copy of the official complaint and summons to a representative of the company at the company’s place of business. If the plaintiff also sued individuals such as company officers or directors, each must also be personally handed the documents.

Even if someone hands official-looking papers to a company employee, however, service is not necessarily proper. U.S. service laws are specific regarding the substance and procedure of the service. For example, the summons must correctly and precisely identify the name of the people and entities sued—no typographical errors are allowed such as “S.A.” when “S.p.A.” is correct. Also, the complaint and summons may not have any omitted pages. Further, many countries add their own regulations on service from foreign entities. The best advice is to contact U.S. counsel immediately so the attempted service can be fully analyzed.

In the South African case, while the Rival had a local South African sheriff hand the U.S. complaint and summons to a receptionist at the Client’s premises: 1) the complaint and summons were not served according to the provisions of the Hague Convention; 2) the sheriff did not explain the “nature and contents” of what he served, as required by South African law; and 3) a critical page of the complaint was missing. U.S. counsel included these arguments in its Motion to Dismiss and the judge ruled service had indeed been ineffective.

Jurisdiction

Another question to ask when your company has received court papers is whether the U.S. court has the power to force the company to defend the action in California. This is called “personal jurisdiction” and looks to whether it would be fundamentally fair to require the company to come to California for the lawsuit. It probably would not be fair, for instance, for a company based in Lisbon to have to travel to California when it has not conducted any substantive business in California, does not have any offices there, and has no other ties there.

Personal jurisdiction is clear if a company is a resident of California, was personally served in California, or has expressly consented to litigation in California (usually through a contractual provision called a “forum selection clause”). Absent one of these circumstances, U.S. courts will examine whether the company had sufficient “minimum contacts” with California to render forum in California fair. In essence, the court will look to all of the company’s activities related to California and decide whether the company has purposefully availed itself of the benefits of conducting business there. These activities can include, among many others, shipping products to California, providing services to California entities, travelling to California, advertising or soliciting business in California, and entering into agreements with California entities. Simply put, should the company being sued have reasonably expected that it may have to defend a lawsuit in California?

In the case example, the Client had no California offices, had not provided any services in California, and had not advertised in California. However, it had entered into a contract with the California-based manufacturer and sent employees there once for negotiating the contract and again for training. The U.S. court ruled those were sufficient minimum contacts to establish jurisdiction.

“Forum Non Conveniens”

Even with proper service and established jurisdiction, a company defendant can still get the lawsuit dismissed from California. Under the little-used doctrine of “forum non conveniens”, if the defendant can prove that California is not the most convenient place to hold the lawsuit, the case is dismissed and the plaintiff may re-file it in the defendant’s home country. This gives the defendant all the advantages of litigating in its own backyard, saving huge travel and attorney fees and knowing the lawsuit will be decided using its country’s laws.

Adequate Alternative Forum

The forum non conveniens test has two parts. In the first, the defendant must show that there is an “adequate alternative forum” where the lawsuit can be held. Only rarely will a forum be considered inadequate. Examples would be in countries that do not have an established court system, where the plaintiff’s claims would not be recognized, or where the country’s courts are so congested that the case could not be heard for many years (fifteen years or more as a rule of thumb). In the case example, there could be no doubt that South Africa was an adequate alternative to California courts. This would likely also be the case with most all European countries and the majority of Asian and African ones as well.

Private and Public Interests

Once the alternative forum is established, U.S. courts balance a number of private and public interest factors. If, on average, they indicate that trial in California would be unnecessarily burdensome, the Motion to Dismiss wins.

The private factors are: (1) the residence of the parties and witnesses (are the  key witnesses in the U.S.?); (2) the availability of a compulsory process for the attendance of witnesses (can unwilling witnesses be forced to testify in the U.S.?); (3) the costs of bringing willing witnesses to trial in the U.S. (the costs are evaluated in light of the defendant’s resources); (4) the access to physical evidence (where is the key evidence located?); (5) the enforceability of judgment in the U.S. (where would it be easier to enforce the final judgment?); and (f) all other practical problems of holding the lawsuit in the U.S. (securing witness visas, logistics of communicating with foreign parties, coordinating experts, etc.).

The public interest factors are: (1) the burden on local courts and juries, including court congestion (how much stress would this lawsuit put on the California and alternative forum courts?); (2) the interest in having the matter decided locally (does one country have a greater interest to have its courts decide the case?); and (c) the U.S. court’s familiarity with the governing law of the case (would the U.S. court have to apply foreign law to resolve the case?).

The South African case was a close call. On one hand, the litigation between the manufacturer and the Rival was already proceeding in the U.S. (in fact, it had been going since 2006) and much of the evidence and many of the witnesses in that case would also be needed for the Rival’s lawsuit against the Client. It would therefore seem efficient to have “one big trial” between all the parties rather than to force the Rival to start a new litigation against the Client in South Africa.

On the other hand, the Rival and the Client are both South African, some key foreign witnesses were protected by their countries’ laws from having to come to the U.S. to testify, the costs to the Client to bring the willing witnesses to the U.S. (counting travel, meals and lodging) would easily top USD $50,000, and South Africa had a greater interest than the U.S. in having a dispute between two of its citizens decided by a South African court.

The Client and the Rival both submitted written arguments for the judge and, in turn, the judge requested oral arguments from both counsel. After deliberations, the judge ruled that the respective interests of the U.S. and South Africa weighed in favor of moving the case to South Africa. The Client’s Motion to Dismiss was granted and sources close to the Rival have said that the Rival will not re-file the case in South Africa.

Lessons to Be Learned

The South African lawsuit represents a best-case scenario. The Client never had to litigate the merits of the Rival’s claims, did not have to travel to California, and was able to resolve the lawsuit in its favor in about two months. The Client also saved significant money in attorneys’ fees. However, that will by no means always be the result and a non-U.S. company who has been notified of a pending lawsuit in California must think carefully and immediately consult with a U.S. attorney to decide what option is best for its situation.

Article written by:
Neil Klein

Menu