September 5, 2011
Imp-Exp Executive Magazine
Authored by Esther H. Lim
Chinese companies exporting products into the United States or doing business with U.S. companies fear being sued in U.S. courts for intellectual property infringement. Consider the following scenario: A Chinese company makes and distributes products around the world. Although some of these products eventually enter the United States, the Chinese company has no offices in the United States, no employees in the United States, and does not sell any products directly in the United States. Can this Chinese company be sued in the United States? The answer might be yes.
The U.S. Supreme Court recently issued two decisions on the same day addressing this very scenario, 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). This article will explain how foreign corporations can be sued in the United States, review the U.S. Supreme Court’s decisions in J. McIntyre and Goodyear, and discuss related strategies for Chinese companies to minimize business disruption caused by IP infringement actions.
The power of a U.S. court to hear and decide cases is called “jurisdiction,” of which there are two types: “general jurisdiction” and “specific jurisdiction.” Under general jurisdiction, a foreign corporation is suable in a U.S. state if the corporation has a “continuous and systematic” contact with that state (such as being incorporated or having its principal place of business there). Under specific jurisdiction, a foreign corporation is suable in a particular state if (1) the corporation “purposefully avails” itself of the privilege of conducting activities in that state and (2) the lawsuit relates to that purposeful availment.
Based on the outcomes in the J. McIntyre and Goodyear cases, Chinese companies that do business with the United States should consider some strategies. Chinese companies, for example, should examine whether their contacts with any U.S. state are sufficiently “continuous and systematic,” thus subjecting them to lawsuits under general jurisdiction, and whether their actions are so “purposefully directed” toward (or “target”) a state that they could be sued under specific jurisdiction.
Also, although neither the J. McIntyre case nor the Goodyear case ultimately required the foreign corporation to participate in the lawsuit, both cases contained hints that the law on this issue might change. Therefore, Chinese companies should examine their own operations to evaluate whether they can successfully challenge jurisdiction in the United States both now and in the future.
In J. McIntyre, the Court was divided, with no clear majority. Three of the nine Supreme Court justices disagreed with the overall outcome, stating instead that J. McIntyre should have been suable because J. McIntyre expressed its intent to sell products in the United States generally and because McIntyre had a close working relationship with its U.S. distributor.
A similar argument was used as recently as February 2011 in Packless Metal Hose, Inc. v. Extek Energy Equipment (Zhejiang) Co. Ltd., No. 2:09-CV-265-TJW (E.D. Tex. Feb. 10, 2011), an IP infringement case in which the Texas court exercised specific jurisdiction over Extek, a Chinese company, merely because Extek shipped its products to a U.S. distributor in Michigan knowing they would be distributed throughout the entire United States (including Texas), some of Extek’s coils did end up in Texas, and one of the distributor’s employees had visited Extek in China. Therefore, Chinese companies should both monitor whether and how they express intent to sell products in the United States and evaluate their relationships with distributors. Moreover, Chinese companies should conduct IP clearance studies before exporting products into the United States.
Also, in the J. McIntyre case, two other Supreme Court justices noted that the law might change when the Court considers the modern consequences of online business. Therefore, Chinese companies should evaluate whether and how they market or sell products online and note which U.S. states are (or might be interpreted as) “targeted” by this online business.
Furthermore, the Goodyear decision hinted that the outcome might have been different had the foreign subsidiary been treated as part of a single “unitary business” with its U.S.-based parent corporation. Therefore, Chinese companies should also evaluate whether they are (or can be interpreted as) subsidiaries of a U.S. corporation.
By taking these steps, Chinese companies that do business directly or indirectly with the United States can better assess the probability of being sued in the United States and reduce the risk of getting caught in the net of U.S. IP infringement actions.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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