October 2011
Managing Intellectual Property, Chinese edition
Authored by Esther H. Lim
In a global marketplace, national boundaries have become increasingly blurred and suits involving foreign companies have become more prevalent. Naturally, the question of whether U.S. courts can force a foreign company to defend a patent litigation in the United States has caused significant concern for Chinese companies targeting the U.S. market. The concern is particularly acute with ubiquitous integration of activities across national borders for product research and development, manufacturing, marketing, and sales.
Revealingly, a survey by the American Bar Association involving hundreds of companies from forty-five countries identified threat of suit in a foreign court as a primary concern in conducting business across multiple jurisdictions over the Internet. That threat of suit grows with traditional business activities, including shipment of goods or components from China into the United States.
Under U.S. law, a court can exercise power over a foreign corporation to appear in a U.S. court if the foreign corporation has a "continuous and systematic" contact with a particular state, such as having a place of incorporation or a principal place of business (generally referred to as "general jurisdiction"). Alternatively, a U.S. court can exercise power over a foreign corporation if the suit is based on the connection between the forum state and the underlying controversy if the foreign company purposefully avails itself of the privilege of conducting activities within that state (generally referred to as "specific jurisdiction").
The notion of requiring a foreign company that has no office or employees and does not sell products directly in the United States to defend a lawsuit in a U.S. court may seem strange. But that is exactly the situation that the U.S. Supreme Court recently addressed in a pair of cases involving foreign companies in J. McIntyre Machinery, Ltd. v. Nicastro, No. 09-1343 (U.S. June 27, 2011), and Goodyear Dunlop Tires Operations, S.A. v. Brown, No. 10-76 (U.S. June 27, 2011). In two cases issued on the same day, the U.S. Supreme Court discussed when a foreign corporation can be subject to suit in a court in the United States.
The J. McIntyre case involved a foreign corporation and a product-liability lawsuit based on an accident in the state of New Jersey in the United States. J. McIntyre, a company based in England, makes metal-shearing machines in England and sells them in the United States through a U.S. distributor. A plaintiff injured his hand while using J. McIntyre’s machine in New Jersey. The U.S. Supreme Court reviewed the case to decide whether J. McIntyre is required to participate in a U.S. product-liability lawsuit when (1) J. McIntyre neither marketed goods in New Jersey nor shipped them there, (2) J. McIntyre attended trade shows in the United States but none in New Jersey, and (3) no more than four of J. McIntyre’s machines ended up in New Jersey.
In a highly divided opinion, the U.S. Supreme Court held that J. McIntyre is not subject to a U.S. product-liability lawsuit. According to the Court, even though J. McIntyre’s activities are targeted to serve the entire U.S. market, they do not show that J. McIntyre specifically targeted or identified New Jersey. The Court held that something more than merely foreseeing that the product might end up in a forum state is required for jurisdiction, such as activity purposefully directed at a state. In addition to a strong dissenting opinion, one of the justices in a separate opinion recognized that the law may need to change in view of "many recent changes in commerce and communication" with "full consideration of the modern-day consequences."
In the Goodyear case, North Carolina residents whose sons died in a bus accident outside Paris, France, filed a wrongful-death suit in North Carolina state court against Goodyear USA and three of its foreign subsidiaries organized and operating in Turkey, Luxembourg, and France, respectively, claiming that the accident was caused by defective tires manufactured at the foreign subsidiary’s plant in Turkey. Unlike Goodyear USA, its foreign subsidiaries contested jurisdiction.
Here, the Supreme Court held that because the bus tire involved in the accident was manufactured and sold abroad, North Carolina courts lacked specific jurisdiction. As well, just because tires reached North Carolina through the stream of commerce does not give rise to general jurisdiction over foreign corporations, which requires "continuous and systematic contacts" with the forum state. First, the foreign subsidiaries manufacture tires primarily for sale in European and Asian markets, and the tires differ in size and construction from those sold in the United States. Second, the foreign subsidiaries are not registered to do business in, or have any place of business, employees, or bank accounts in, North Carolina. Third, the foreign subsidiaries do not solicit business in North Carolina, or sell or ship tires to customers in North Carolina. Lastly, the small percentage of tires made by the foreign subsidiaries landing in North Carolina are distributed by other Goodyear USA affiliates. However, the U.S. Supreme Court also mentioned that had the plaintiffs asked for treatment of all Goodyear entities as a "unitary business," the Court might have entertained the question of whether overseas subsidiaries are also subject to jurisdiction when their parent corporation is required to participate in the lawsuit.
Although the two Supreme Court cases provide some guidance on when U.S. courts may require foreign defendants to participate in a U.S. lawsuit, uncertainties remain. Defending a patent-infringement action in the United States is costly and burdensome. Foreign companies sued for patent infringement in the United States should consider whether a procedural challenge to jurisdiction is appropriate in view of the facts and circumstances of a particular case. The Supreme Court signaled that the case law will continue to develop in light of modern-day commerce and evolving technology. In the meantime, Chinese companies with connections to the United States should carefully evaluate their operations and business contacts to avoid, if possible, the hotbed of patent litigation in the United States.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes and is not intended to constitute legal advice. This memorandum may be considered advertising under applicable state laws.
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