Successor Liability Involving Foreign and Domestic Corporations

Authored by D. Brian Kacedon, John C. Paul, and Susan Y. Tull

Even after a successful litigation and award of damages, a patent owner may still face difficulties in obtaining the money awarded by the court.  For example, a judgment awarded against a corporate defendant may be uncollectible if the corporation cease its operations before any money is collected.  In some instances, rather than ceasing operations completely, a corporate defendant may pass its business on to another entity, a "successor company." In these scenarios, questions often arise as to whether that successor company can be held liable for damages awarded against its predecessor. These questions become even more complicated when the companies at issue are foreign entities subject to foreign laws.

Under U.S. law, a successor company may be held liable for a judgment against its predecessor under the doctrine of successor liability. Not all countries, however, recognize this principle. Thus, when foreign parties are involved, a U.S. court must first determine which country's laws apply before ordering judgment against a successor company for a predecessor's actions. A recent Federal Circuit decision, Funai Electric Co., Ltd. v. Daewoo Electronics Corp., No. 2009-1225, -1244 (September 1, 2010), held that a domestic entity with a foreign parent is not insulated from an adverse judgment in a U.S. court even if the judgment would not be enforceable under the laws of the parent's country. In Funai, the Federal Circuit emphasized the importance of the nationality of the named successor and predecessor. Even if related foreign entities are named as defendants to a litigation, the liability of the domestic entities is considered separately.

The Funai Decision

In Funai, four Daewoo entities were listed as defendants: (1) a Korean company, (2) its Korean predecessor, (3) a U.S. company that is a subsidiary of the Korean company, and (4) its U.S. predecessor. Early in the litigation, the Korean and U.S. predecessor corporations stopped participating in the litigation, presenting no defense and refusing discovery.  The district court entered default judgment against them and awarded damages which they failed to pay.  The patent owner requested that the damages of the predecessors be assessed against the Korean and U.S. successor companies who had participated in the litigation and were found to infringe the patent at issue. The district court held that neither successor company was liable for the judgment against its predecessor on the ground that the transfer of assets between the Korean predecessor and successor corporations was governed by South Korean law and that the  transfer of assets between the U.S. predecessor and successor companies was merely an outgrowth of the South Korean companies. South Korean law did not permit successor liability unless expressly assumed by contract.

On appeal, the patent owner appealed only the judgment against the U.S. company and its U.S. predecessor. Thus, the only question was the liability of the U.S. successor company for the default judgment against its U.S. predecessor, for infringing U.S. patents by doing business in the U.S. Because only U.S. companies were involved, the Federal Circuit reversed and held that U.S. law governed. In the court's view, this was not a choice of law issue because no foreign law was implicated. The court further held that a domestic entity with a foreign parent is not insulated from an adverse judgment in a U.S. court even if the judgment would not be enforceable under the laws of the parent's country. The U.S. had an overriding interest in the integrity of judgments of its courts with respect to violations of U.S. law by entities doing business domestically.

After determining U.S. law applied, the Federal Circuit then turned to the question of successor liability. Under the law of New Jersey, the state of incorporation, a company who receives corporate assets is not ordinarily liable for the debts of the company from whom it receives those assets. However, this is subject to several exceptions. The most relevant factor in the analysis is the degree to which the predecessor's business entity remains intact. In other words, the more a corporation physically resembles its predecessor, the more reasonable it is to hold the successor liable. In Funai, the U.S. successor company continued the business operations of its predecessor company, including sales of the infringing product. In particular, the U.S. successor company continued at the same address, with the same facilities, equipment, headquarters, management, and employees. Because the transfer between the U.S. predecessor and successor companies simply provided a “new hat" for that company, the Court found successor liability appropriate, and that the U.S. successor company liable for the infringement of its predecessor.

Strategy and Conclusion

This case illustrates a number of complex issues to consider when enforcing judgments against a combination of foreign and domestic defendants and their predecessors. It also illustrates issues to consider when transferring corporate assets between corporations. A U.S. successor company may more likely be held liable for the actions of its predecessor if the new company is simply a continuation of the old, for example having the same locations, employees, and business plan.  As a result, before transferring assets into a new company, it is useful to consider (a) judgments and potential liabilities of the old company and (b) how the choices in transferring the assets and structuring the new company affect whether the new company is liable for judgments or other claims against the old company under the doctrine of successor liability and related principles. 

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