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In 2007, 69% of recalls carried out by U.S. companies involved products that were manufactured in China or that contained Chinese-made components. The recalls ranged across all types of consumer products, from toys and pet food to toothpaste. In the consumer class actions that inevitably followed, many U.S. manufacturers sought to join their Chinese suppliers. Much of the commentary surrounding this litigation has focused on the strategies Chinese companies have used or can use to frustrate U.S. companies pursuing indemnity or contribution lawsuits. But this is not the whole story. Indeed, a topic that has largely been ignored is the potential for global litigation, in which U.S. companies may seek to initiate litigation or the enforcement of judgments in jurisdictions other than the United States and China. Suing foreign companies is always more difficult than suing domestic ones. But, in defending these lawsuits, Chinese companies are able to employ litigation strategies that are particularly effective because of the perception of many U.S. companies that their only options are to litigate in the United States or China. One strategy is for a Chinese company to challenge personal jurisdiction. This may be successful because it is far from obvious that a U.S. court will find personal jurisdiction, given that many Chinese companies conduct business exclusively in China and never on American soil. Indeed, the U.S. Supreme Court in Asahi Metal Indus. Co. v. Superior Court of Calif., 480 U.S. 102 (1987), explained that the exercise of personal jurisdiction depends on notions of due process, including foreseeability, purposeful availment and reasonableness. Many courts have used this analysis to hold that due process would not support calling a company that does business exclusively in China into a U.S. court. Bringing a case in China is fraught with difficulties Litigating in China may avoid these personal jurisdiction problems, but while the situation is improving, this approach still is fraught with difficulties. For example, some perceive Chinese law as limiting the ability to compel evidence production and placing obstacles in the enforcement of injunctions and seizure of assets. Also, some Chinese courts have had difficulty in enforcing their rulings, and this may create disadvantages for U.S. companies seeking recourse in China. Even assuming that personal jurisdiction could be established, a second strategy for a Chinese company is simply to take a default judgment. While a prevailing party may collect damages by attaching assets or securing money judgment liens on property, including lands, tenements, goods and chattels, many Chinese companies have no assets in the United States upon which collection could be made. Moreover, no agreement exists between the U.S. and China with respect to the enforcement of judgments, so attempting to enforce a U.S. judgment in China has proven futile. Because of these factors, the goal of the strategy is to force the U.S. company to litigate in a forum more favorable to the Chinese company � ideally, China. Under this strategy, a Chinese company may choose to litigate the merits and, at any stage of the litigation, elect to take a default judgment. Since U.S. companies perceive that their only options are to litigate in the United States or China, a Chinese company knows that it can first try to win on the merits, but later default and force the U.S. company to try to enforce the resulting judgment in China or litigate in China. These perceptions, however, are too narrow. Because many countries will enforce U.S. judgments through their court systems, both U.S. and Chinese companies must start “thinking globally” in deciding which course to take in their litigation. Specifically, even though a U.S. judgment may not be enforced in China, there may be assets of the Chinese company in other countries that enforce U.S. judgments. Indeed, China’s foreign investments grew from $12.3 billion in 2005 to $29.2 billion in 2007. Approximately 170 countries and regions receive foreign investment from almost 10,000 Chinese enterprises. The United States, Europe, Canada, Australia, Hong Kong, Thailand and Russia currently receive the highest concentration. If pursued carefully, these global assets may be targeted with a U.S. judgment. Sophisticated U.S. and Chinese companies must understand this and act accordingly. The first step is to locate where the company has assets and seek enforcement of the U.S. judgment in those countries. For example, assume a Chinese defendant has assets in the United Kingdom. If a party receives a money judgment in the United States, it could “convert” the U.S. judgment to an English judgment by presenting the U.S. judgment to the High Court and applying for summary judgment on it. Success in the U.K. courts would hinge on the following requirements: The U.S. court had jurisdiction to render the judgment according to the English rules of private international law; the judgment was not procured through fraud; and the U.S. judgment is not contrary to English law. If these conditions are met and an English judgment is obtained, other advantages follow, such as the ability to apply for injunctive relief to prevent the dissipation of assets. Adding to its potential reach, an English judgment also has full recognition and enforcement among members of the European Union. Addition-ally, the United Kingdom has agreements for the enforcement of judgments with Australia, New Zealand and Singapore, and a common law relationship with Hong Kong. Thus, in comparison to a U.S. judgment, because the United States has no bilateral treaty with any country on the enforcement of judgments, an English judgment is more globally transferable to seize the assets of a Chinese company. Similarly, a U.S. judgment also can be enforced abroad through comity, although this process is determined on a country-by-country basis. As already noted, many Chinese companies hold assets globally, for example in Canada, Australia, Singapore and Hong Kong. Because these countries have similar legal systems to that of the United States in terms of governing law and procedure, a U.S. judgment could be enforced under the principle of comity to seize and recover such assets. In light of the 2007 recalls, the U.S. Congress held hearings and considered several pieces of legislation, including the Consumer Product Safety Commission Modernization Act of 2007, H.R. 4040, and the Food and Product Responsibility Act of 2007, S. 2081. China also took proactive steps by passing legislation to raise national standards in food production. Additionally, the United States and China signed two import safety agreements, respectively covering food and animal feed, and drugs and medical devices. This changing landscape may help avoid some recalls and certain types of products litigation. However, the potential for significant litigation will remain, especially as U.S. companies increasingly sell products in the United States that are manufactured in China or that contain Chinese-made components. As U.S. and Chinese companies go forward in the global economy, they should consider structuring their business relationships to manage their litigation risks. Companies should consider arbitration agreements For example, U.S. and Chinese companies should consider negotiating a mutually acceptable arbitration agreement in their contracts. This is because approximately 142 countries, including the United States and China, are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention), although China limited its accession to arbitral awards in commercial disputes. Thus, arbitration can structure the business relationships of U.S. and Chinese companies by providing a recognized process of risk sharing. Of course, arbitration with Chinese companies is not a cure-all. Chinese courts have an inconsistent record in enforcing arbitral awards. Also, Chinese law requires many contracts between foreign corporations and Chinese enterprises to be governed by Chinese law, and Chinese companies sometimes prefer contracts to be arbitrated under the rules of the China International Economic and Trade Arbitration Commission (CIETAC). CIETAC has disadvantages for a U.S. company, including the fact that proceedings are in Chinese unless the parties agree otherwise; the quality of the arbitrators is uneven; and the evidentiary procedures and filing deadlines are sometimes ignored. Nonetheless, while arbitrating in China poses obstacles, the enforceability of an award increases the chances for recovery. U.S. and Chinese companies should also consider purchasing and maintaining products and general liability insurance from a reputable international insurance carrier. This will provide some protection for both companies in the event a recall or other products liability issue surfaces. As China advances in the global economy, options are available both to U.S. and Chinese companies to manage their litigation risks. But when litigation does occur, U.S. and Chinese companies must recognize that they will be litigating on an increasingly global battleground. Michael J. Lyle and David A. Hickerson are partners in the Washington office of New York-based Weil, Gotshal & Manges. Jonathan E. Carr and Eric C. Lyttle, associates at the firm, provided assistance with this article.

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