Study shows that foreign companies sued in the US are more likely to lose than their American counterparts

International
Study shows that foreign companies sued in the US are more likely to lose than their American counterparts
By Finfacts Team
Dec 13, 2006, 10:14

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Dr. Utpal Bhattacharya

Non-US public companies sued in the US are more likely to lose than their American counterparts of similar size facing similar claims, a study of 3,000 corporate defendants has found.

The study says that the mere announcement of a US lawsuit also hits non-US companies far harder.

On average, their value fell $930,000 on the day of the announcement compared with $366,000 for US firms, according to the study led by Utpal Bhattacharya, a finance professor at Indiana University's Kelley School of Business.

In an abstract, the authors say:

Using a comprehensive sample of 2,361 public U.S. corporate defendants and 715 public foreign corporate defendants in U.S. federal courts in the period 1995-2000, we find that the market reaction at the announcement of a U.S. federal lawsuit is less negative for U.S. corporate defendants. We find that this market reaction is rational; U.S. firms are less likely to lose than foreign firms controlling for year, industry, type of litigation, size and profitability. This may still reflect a sample selection bias. We control for this bias, and the results remain. We thus cannot rule out that U.S. firms have a home court advantage in U.S. federal courts.

The apparent “home court advantage” in the study is a risk factor for foreign firms doing business in the US. As the Democratic Party, which is strongly supported by tort lawyers, will take control of Congress in January, tort reform will not gain much traction. Republican support for tort reform is viewed as pro-business and anti-consumer by Democrats.

“If it’s a foreign firm that gets sued, they lose far more often and they lose higher dollar amounts,” Professor Bhattacharya said. “Foreign firms don’t think they get a fair shake in US courts.”

He said the companies studied were spread across the globe.

The study, co-authored by Bruce Haslem and Neal Galpin, also reveals that more non-US firms were becoming entangled in the US legal system.

In 1995, non-US firms made up 20 per cent of the public company defendants. By the end of the study period, their share had risen to 29 per cent.

Some non-US companies may choose to fight lawsuits that US companies would opt to settle.

The authors say that the most comprehensive estimates of tort liability direct costs come from a consulting firm, Tillinghast-Towers Perrin. Their 2003 report estimates a tort cost of $233 billion in the U.S. in 2002 (2.23% of US GDP). This has increased more than hundredfold from $1.8 billion in 1950 (0.61% of U.S. GDP). In Italy and Germany, the next two closest countries in terms of tort costs, tort costs were 1.7% and 1.3% of GDP respectively in 2000 (page 20, The Economics of U.S. Tort Liability: A Primer, October 2003.)

The study begins as follows:

The Loewen Corporation, a small Canadian firm that runs a funeral home chain, was sued by Jerry O’Keefe in the state of Mississippi in 1995. It seemed like a routine contract squabble.

The value of the enterprises at stake was estimated to be a mere USD 8.5 million. Yet, a percentage fee trial lawyer convinced a Mississippi jury to award USD 100 million and USD 400 million as compensatory and punitive damages respectively. These amounts would have wiped out the small firm’s net worth. A state judge refused to lower or set aside this verdict. The Mississippi Supreme Court asked for a bond of USD 625 million if the case was to be appealed. Loewen Corporation settled for USD 100 million. Its stock crashed from USD 41 to USD 8, and it almost became bankrupt.

The global nature of this case is not unusual. As globalization progresses, cross-border corporate lawsuits, where the plaintiff is from country A and the defendant is from country B, are becoming more frequent. The large tort award, also, is not unusual. Tort awards are much higher in the U.S. than in other countries. The presence of a percentage-fee trial lawyer in this international case, also, is not unusual. U.S. trial lawyers are globalizing their industry. What is unusual in this case is the crude appeal to patriotism that the plaintiff’s lawyers made. Walter Olson, covering this case for the Wall Street Journal of February 14, 1996, in an article titled “A Small Canadian Firm Meets the American Tort Monster,” analyzed the strategies of Mr. O’ Keefe’s lawyer. The ‘dump on outsiders’ strategy was particularly effective. It was mentioned in the closing arguments that Mr. O’Keefe “fought for his country” and was now willing to “stand up for America” by suing this rich, foreign company.