How Your Overseas Operations May Expose You to Liability in the U.S

American business increasingly is becoming international business.

All you have to do is pick up the latest version of any business magazine and the message staring you in the face is: “If your business is not global, you are missing a golden opportunity, and, by the way, you’re way behind your competition.”

Without a doubt, international expansion has become the new standard for a growing and successful business—the world is your market now.

However, in the unrelenting push to perfect and enact their global strategic business model, launch their promising global operations and capture overseas market share, U.S. businesses are overlooking at least one critical piece of the puzzle–the possibility that the long arm of U.S. laws will reach out to the foreign country where they are doing business and hammer (and I mean hammer) the unwitting U.S. parent company.

Whether your business is a brick and mortar operation or B to B, old economy or e-commerce, there is a lurking danger in globalization that could hurt your business: the long arm of U.S. laws.

A state district court in Texas recently held that a U.S. company may be subject to jurisdiction in the U.S. court system and face liability for actions arising in a foreign country, involving foreign residents, and stemming from the actions of the company’s foreign subsidiary. Late last year, the defendant in Rodriquez-Olvera vs. Salant Corporation revealed that the case had settled for a whopping US$30 million after the trial court made the unprecedented decision to allow the plaintiffs’ case to proceed against the U.S. company.

The court’s decision and the ultimate settlement of this case, as well as other similar cases, demonstrates the dramatic increase in the exposure of U.S. companies to liability in the United States for actions arising in their foreign operations.

The Salant Case

In Salant, the plaintiffs brought a wrongful death and personal injury lawsuit in Texas state court against the Salant Corporation, a New York-based clothing manufacturer with subsidiaries in both Texas and Mexico. The lawsuit arose from an accident that had occurred in Mexico.

Twenty-six young Mexican workers at Salant’s Mexican subsidiary were killed or injured when the company’s bus, which was taking the workers to the clothing company’s maquiladora, overturned and burned in a sewage ditch. All the plaintiffs in the action were citizens and residents of Mexico, estates in Mexico, or heirs of residents of Mexico.

Salant filed a motion to dismiss the case, contending that the plaintiffs’ claims were actually against the maquiladora, not Salant, and that the action should be litigated in Mexico. Although Salant and Mexican trade officials protested having the case heard in Texas, the trial court would not dismiss the case because Salant’s subsidiary in Texas made certain operating decisions for the company’s Mexican operations.

Litigating Foreign-Based Employment Claims In the United States

Although unusual, the Salant case is not the first time a U.S. court has permitted a claim to be brought against a U.S. company for the death or injury of employees in foreign countries. In Rodriguez vs. Sierra Western, a sewing-machine mechanic at a Mexican subcontracting factory sued a Texas corporation based on allegations that the company was negligent in not providing him with safe transportation to work at the company’s operations in Mexico.

The plaintiff suffered injuries in a 1996 car accident in which an employee of the U.S. corporation was driving the plaintiff from a plant in Chihuahua, Mexico to his hometown of Juarez, Mexico. Late last year, the Texas jury awarded US$632,000 in favor of the injured Mexican worker.

In another Texas case, Mendoza vs. Contico International, a U.S. corporation had a subsidiary in Mexico. Two payroll workers, who were employed by the Mexican subsidiary, were ambushed and murdered while transporting the company’s cash payroll. The parents of the payroll workers filed suit in Texas against the U.S. corporation, alleging that the U.S. corporation was negligent in allowing the employees to carry such large sums of cash without armed security along a lonely stretch of Mexican highway.

Although the murders took place in Mexico, the lawsuit was filed in Texas. In 1994, a Texas district court judge ruled that Texas law applied because decisions about payroll came from the U.S. company’s headquarters. The U.S. corporation agreed to settle the case for an undisclosed amount, which has been estimated at approximately US$1.5 million.

In 1994, the Aguirre v. American United Global action was filed in California. In Aguirre, a Mexican subsidiary, which was wholly-owned by a Los Angeles-based corporation, was participating in “blatant and disgusting sexual harassment” against the Mexican employees. A company executive allegedly demanded that female employees perform a bikini show for him to videotape at a company picnic.

The 118 female plaintiff employees (all Mexican residents) originally filed the action in Mexico, but the officers of the U.S. corporation apparently refused to show up for trial in Mexico. Alternatively, the plaintiffs refiled the action in Los Angeles Superior Court and alleged violations under both American and Mexican law.

After the corporation’s motion for summary judgment was defeated, the case settled for an undisclosed amount and the corporation reportedly closed down its Mexican operations.

Sue, Sue, Sue

These recent court decisions, jury awards, and settlements will undoubtedly encourage more foreign workers to sue U.S. companies with operations outside the United States. And don’t think for a minute that these claims are restricted to incidents in Mexico.

Indeed, the plaintiffs’ bar is on the lookout for Salant-style litigants wherever U.S. companies are doing business. Attorneys for potential foreign plaintiffs are often interested in pursuing their claims in U.S. courts because many foreign jurisdiction have laws which provide a damage cap for injuries and wrongful death, whereas a jury in the United States has virtually unbridled discretion in awarding such damages.

Moreover, U.S. companies are thought to have “deep pockets,” a big consideration for plaintiffs’ lawyers who want your money.

Tactics and Strategy

The recent rulings and settlements provide huge incentives for U.S. companies to initiate efforts to reduce exposure to liability for actions arising from operations outside the United States. To reduce such exposure, you should review your management and operational relationships with your counterparts outside the U.S.

The most basic and important recommendation for reducing exposure is to ensure that decisions regarding non-U.S. operations are made from within the non-U.S. operation, not in the United States. Another method of decreasing exposure is to reduce and monitor practices or activities of the non-U.S. operations that may result in liability.

For example, U.S. companies may attempt to limit potential liability by improving its employees’ working conditions, improving worker safety, increasing awareness of safety precautions, imposing more stringent safety and health policies, and by taking other steps to improve the work environment for the employees working outside of the U.S.

No Silver Lining for U.S. Business

These recent Texas state court decisions demonstrate a trend toward allowing U.S. courts to hear cases brought by non-U.S. residents that are based on actions occurring in or arising outside the U.S. With the new trend, U.S. companies will face increased exposure to liability in the United States for actions stemming from their overseas operations.

Given these new realities, U.S. companies must make serious and concerted efforts to reduce potential legal exposure in the United States.

The bottom line: Look before you leap in the global marketplace.