Litigation in the US – the litigious United States of America
It is widely known that the court and trial system in the United States differs substantially from the systems in Germany and Austria. Fewer people are aware of the drastic economic consequences for litigants, even if they win in court.
And yet statistics show that more lawsuits are filed in the US than in Europe. However, 90 percent of all court cases end with a settlement rather than a court verdict. But this process can be very costly and time-consuming. In the absence of an order for payment procedure – which is well known and quite common in Germany – companies in the US in particular often have to resort to collecting their claims by taking legal action as a last resort, even if those claims are entirely justified.
What is more, in some fields, attorneys will take on clients on a contingency fee basis (and in certain areas of law, they will even take on additional claimants under the same lawsuit). This means that plaintiffs can initiate a lawsuit at no cost to themselves. These costs are accounted for later on – though only if the case ends in victory or settlement – but then involve contingency fees of between one third (33.3 percent) and 40 percent of the recovered amount. Furthermore, all costs and expenses for the legal dispute are reimbursed – which means that in some cases, there is little “revenue” left on the plaintiff’s side.
Regardless of the grounds for the lawsuit, a clear-sighted and cost-conscious strategy is essential. Therefore, every potential foreign investor in the US should be perfectly clear on one point: if they have to sue or if they should be sued, this has the potential to be a financial worst-case scenario. Below we are taking a brief look at why this might be the case.
System of courts
The court system in the US distinguishes – chiefly – between federal courts and state courts. This means that, depending on the legal claim pending in court, it will either be settled before
- a federal court or
- a state court.
There are areas of law that fall solely within the jurisdiction of federal courts and are heard and decided there exclusively by federal judges, such as:
- Claims under intellectual property law
- Patent law
- Bankruptcy law
In the case of civil claims, the court jurisdiction (federal or state court) may depend either on the amount of the claim (amount in dispute) or on whether the legal dispute is an interstate one, i.e., affects several states (cases are then heard by a federal court as a matter of principle). Otherwise, jurisdiction lies with the courts of the individual states. Court decisions can be made not only by judges but also by juries.
Procedural law in the US
Filing a (civil) lawsuit in the US – whether in a federal or state court – is extremely simple and relatively inexpensive. In the US, there is no such thing as court fees based on the amount in dispute. Whether the claim is over $100 million or over $5,000, the costs of filing the claim with the court are marginal. The document for filing a statement of claim generally requires only very basic information. The claim should be presented conclusively, but evidence – as with a typical German statement of claim – does not have to be offered in the complaint. From a German or Austrian perspective, this complaint system is therefore simple and inexpensive enough to start with. The unpleasant surprise the system has in store – only falls later once the proceedings have been set in motion by filing a lawsuit.
Unforeseen problems in the US claims system
Serving the statement of claim: once the lawsuit is filed in a US court, the US litigation Process, which is incredibly costly and cumbersome by German or Austrian standards, then begins. The claim is not served – as is customary in Germany or Austria – by a public court service, but by private process servers. They are instructed to serve the statement of claim (or other documents that are relevant to the proceedings and must be served) to the parties concerned, which is sometimes carried out in a rather absurd manner. In most cases, the defendant’s party is personally served with the statement of claim at an address for service that is known and recorded as such. If this is not possible because the party concerned cannot be found, the claim can also be served almost by stealth at any time of day or night, taking advantage of the element of surprise. This might be done by lying in wait for the defendant at various locations if the process server has gained a knowledge of where the defendant might be at certain times.
Refusing to accept the document is of little use because the process servers prepare an affidavit of service, which meticulously describes the recipient of the statement of claim. This allows them to later prove the identity of the person to whom the document was served and thus also prove that the statement of claim was lawfully served. It can take weeks or even months for a statement of claim to be lawfully served, and the costs for this are borne by the plaintiff.
Responding to the claim, evidence procedure, main hearing, and verdict
Once the statement of claim has been lawfully served, the defendant must reply to the statement of claim in due time if the claim asserted is to be contested. In this respect, the statement of defense also does not require a substantial response to the statement of claim. It is sufficient to conclusively dispute the claim made in the statement, all of which is done without requiring proof to the contrary.
However, the next step, the start of the process of obtaining evidence (called “discovery”), will exceed any German or Austrian notions of procedural costs and time and are an ominous precursor of the scale of the upcoming proceedings.
In US discovery processes, the plaintiff can make any possible but also (almost) any impossible allegations in order to request relevant – but also irrelevant – information from the other party to prove the alleged basis of the claim. Hardly any judge – who in US procedural law holds the position of a “rule overseer/arbitrator” rather than a trial manager – will deny requests for evidence if there is even a hint of suspicion that the requested information might somehow be relevant. The expense and scope of the process of obtaining evidence are determined solely by the parties themselves – and usually by the plaintiff’s side. The process can take the form of a request for records, documents (including emails), or even intangible information (“request for production”), or a request to answer certain questions in writing (“written interrogatories”), or an announcement that parties or witnesses are to be questioned (“depositions”). When it comes to imagining the content of such requests for evidence, there are hardly any limits.
For defendants, answering or handling these requests for evidence is often hugely costly and time-consuming. The costs can very quickly run into the tens of thousands of dollars. Each party has to bear its own costs – that is, those incurred in defending the claims as well – even if it later transpires that the claim and thus the lawsuit were unfounded. In principle, there is no equivalent regulation in the US to Para. 92 et seq. of the German Code of Civil Procedure. The party that subsequently wins the case also has to bear its own costs – and the very expensive costs of legal representation in particular – and has no recourse against the losing party!
If the evidence process has been exhausted and come to an end, and if the parties have not reached a settlement by then (not necessarily because of the merits of the claim, but for purely economic reasons, as described above), this is then generally followed by the scheduling of the main proceedings, which can then lead to a verdict. However, it may take several years to reach this point. The verdict is then essentially enforced by handing it over to the competent law enforcement officer, or sheriff.
Avoiding legal action
As noted above, the propensity for litigation in the US is very high despite the risks discussed above. The threat of legal action, followed by the potential filing of a lawsuit, is often used as a means of exerting pressure on the other party to reach a compromise, given the cost and other risks involved (such as the inability to predict or calculate the costs of court proceedings in the US – especially when a jury is allowed to rule).
A settlement is certainly a very good alternative for putting an end to disputes. The proceedings are then discontinued upon request, and the case is closed. More important, however, is considering how to use smart foresight and planning to avoid litigation in the first place. Precaution, prevention, and avoidance are crucial keywords here.
Summary
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