Cross-Border Fundamentals: Considerations For Canadian Business Expansion Into The United States

Monday, October 4, 2010 - 00:00

The United States and Canada enjoy the most comprehensive economic and trading relationship in the world. Through July 2010, $300 billion in imports and exports have been exchanged, with approximately $160 billion in imports from Canada.1As a result of the flourishing economic and trading relationship, Canadian and U.S. businesses regularly establish cross-border operations. While there are many similarities in the laws and customs of the two countries, there are several pitfalls Canadian companies typically encounter when expanding their business into the United States.

Of foremost importance, intellectual property rights are territorial and limited to the country in which they are obtained. Therefore, intellectual property protections afforded in Canada generally do not provide any measure of protection or freedom to operate in the United States.Before committing to import, manufacture, distribute or commercialize new products or services in the United States, Canadian businesses should consider pursuing U.S. intellectual property protection for their products and services. Intellectual property rights should be investigated encompassing the markets the business wishes to enter. Consideration should be given to obtaining legal opinions to avoid patent and other forms of intellectual property rights infringement. Additionally, Canadian businesses should clear and protect in the United States the trademark and branding strategies they intend to use in cross-border endeavors.

Canadian businesses often initiate their cross-border expansion by selling products to U.S. purchasers either through direct sales efforts or through indirect methods, such as U.S.-based resellers, distributors or franchises. In the United States, the sale of goods creates a contractual relationship between parties and is governed by Article 2 of the Uniform Commercial Code (UCC). The UCC facilitates the sale of goods and covers, among other things, rules regarding offers and acceptance relating to the sales of products, certain terms of sale, and express and implied warranties. Canadian businesses should understand the implications of the UCC as well as how to disclaim certain provisions when selling products in the United States.

U.S. entities are often formed by Canadian businesses to conduct operations in the United States. If structured properly, the formation of a business entity may provide many advantages to the Canadian parent organization, including gaining favorable tax treatment and the isolation and limitation of liabilities for U.S.-based operations.Legal entities are formed under and governed by state law and are often formed where business and tax implications are optimized - not necessarily where the business will actually be conducted. The types of entities most often formed in cross-border business expansions are limited partnerships, limited liability companies and corporations. Each has its own advantages and operating requirements, and the choice of entity is often dictated by the needs of the business. One of the most frequently selected entities is the limited liability corporation (LLC). LLCs are preferable to traditional corporate forms due to favorable tax attributes and the ease with which financial and membership interests may be made.

All businesses worry about transactions that sour. Dealing with the nightmare of uncertain expenses and unknown duration of litigation can be difficult. In the context of cross-border transactions, problems tend to multiply. Canadian businesses (and their U.S. entities) often find litigation in the United States to be more frequent, costly and less predictable than in Canada. However, businesses may reduce the risks involved with cross-border efforts and litigation through the careful transaction structuring and prudent use of choice of law, venue and mediation/ arbitration provisions in business agreements. If agreements are structured appropriately from the outset, they often contribute to the soundness of cross-border commercial relationships.

In summary, sound business structuring and a good measure of due diligence can provide a solid foundation for Canadian business expansion into the United States. With hundreds of billions of dollars exchanged annually for everything from raw materials to high-tech products and services, cross-border opportunities abound for Canadians who can successfully navigate the legal landscape in the United States.

1 Statistic from the U.S. Census Bureau (www.census.gov/foreign-trade/top/dts/2010/07/ balance.html).

Thomas E. Popek is an Attorney in Phillips Lytle's international practice group and concentrates his practice in the areas of intellectual property and corporate law.

Please email the author at tpopek@phillipslytle.com with questions about this article.