Explaining The U.S. Commercial Litigation System To Foreign Executives And Lawyers

Sunday, February 1, 2004 - 01:00

Dynamics And Stages Of Commercial Litigation In The United States

When most people think about a lawsuit in the United States, they think of a process which ends in a resolution through a trial. They have usually acquired this belief by watching American movies or television, which tend to emphasize the drama of a trial.

In reality, very few commercial cases in the United States ever go to trial. In practice, the entire system is structured to produce settlements, not trials. Over 95% of commercial cases which are not dismissed as a result of pre-trial motions are settled prior to trial. This is a critically important concept to keep in mind because many foreign judicial systems are structured to produce judicial resolutions rather than settlements. Business people from those countries often believe incorrectly that the U.S. system is like that in their home country, so that the system will judicially resolve rather than settle the dispute.

Their misunderstanding of how the U.S. system actually works places them at a big disadvantage in dealing with their adversaries. It often also causes them to spend far more time and money on the process than they need to spend.

The U.S. litigation system produces so many settlements because of two key components - jury trials and discovery.

Jury Trials

Under the United States Constitution and the constitutions of all states, either party is entitled to demand a trial by jury in most types of lawsuits. The parties can also agree to have the judge try the case without a jury, in what is known as a "bench trial" (referring to the name by which the judge's desk in the courtroom is known). Parties will sometimes waive their right to a trial by jury in order to have the trial sooner, or where they are concerned about how a lay jury will react to their evidence and arguments.

At a trial, which can last days or even months, both sides present their witnesses. After swearing to tell the truth, the witnesses give testimony in front of the jury (or the judge alone in a bench trial) and are examined and cross-examined by the lawyers. @CM5 =

A jury usually consists of six to 12 average citizens, selected at random from lists of registered voters or those holding driver's licenses. They usually have no experience in the particular industry involved in the dispute, and have varying levels of education; many may have no experience in law or business.

While the judge decides what law applies to a case and instructs the jury accordingly, the jury is entitled to decide all of the factual issues in the case. This means that the jury will decide whether the party being sued acted improperly or negligently, or whether the defendant violated a statute. The jury also decides the amount of damages to award, although (contrary to the prevailing myth about U.S. damage awards) a large number of big jury verdicts are later set aside or reduced substantially by the trial judge or on appeal.

The fact that average citizens are deciding issues of liability and damages in complex commercial cases, which often have potentially high damages, gives the process a certain amount of unpredictability. This unpredictability promotes settlements because both U.S. and foreign companies often do not want to take the risk of a jury trial even when they have good defenses. For example, a European company defending itself in Europe could easily believe that there is far less risk before a panel of three judges in its home country than there would be with the same case before a U.S. jury. Even if it had exactly the same strong defenses in both cases, it might choose to settle the U.S. lawsuit to avoid the risk of a large damage award while taking the identical European suit to trial.

Discovery

The other key factor promoting settlement is the significant amount of discovery available under the United States litigation system. Discovery is the process by which each side investigates (discovers) what evidence (information) the other side and non-party witnesses have about the issues in the lawsuit.

The substantial amount of discovery available is the biggest difference between the U.S. litigation system and practically every other legal system in the world. Foreign businesspeople used to other legal systems are often shocked at the vast scope of discovery in the United States.

In U.S. litigation, a party can obtain every single piece of paper or electronic data that is arguably relevant to the litigation, subject to certain exceptions (e.g., communications between an attorney and client). This includes any kind of documents, correspondence, personal notes, emails, data on hard drives, and any other means of storing information. The standard of relevance is typically quite broad. There is, as a practical matter, no objection on confidentiality grounds as there is in some European countries. Instead, the court can order that confidential documents be provided to the other side but not be made publicly available, and can place restrictions on who may see the information. Accordingly, in most U.S. lawsuits, if they are persistent, the parties will be able to obtain most or all of the documents they need to fully understand the case, and more.

Depositions

The discovery process also allows lawyers to take wide-ranging depositions of the other parties' employees as well as of non-party witnesses. In a deposition, a lawyer for one party asks questions of the witness, typically in a conference room at the lawyer's offices, with no judicial officer present. The testimony is given under oath and a stenographer records everything the witness says. Often the proceeding will be videotaped as well. The witness is usually represented by a lawyer, and is normally required to answer almost all of the questions asked. The issue of whether particular answers or documents can be admitted into evidence at trial is determined later, when the trial takes place. Depositions usually last one day, but can sometimes last much longer.

Whether an officer or employee of a foreign company can be required to attend a deposition in the United States depends on a number of factors, which can vary from state to state. Even where personal jurisdiction over the foreign defendant clearly exists, its counsel can often successfully argue that the plaintiff 's attorney should be required to travel to the defendant's home country to take the deposition, because the U.S. court has discretion to decide where depositions should proceed. The court also has a great deal of discretion in deciding who should be deposed. It is often possible for defense counsel to argue successfully that forcing multiple employees located abroad to travel to the United States for depositions is unduly burdensome.

In addition to document requests and depositions, each party is also allowed to require the other party to answer written questions called interrogatories.

Discovery is the central part of any litigation in the United States. Discovery can consume anywhere from six months to two years or more. During that period, the parties will also often engage in motion practice (which is explained in another section of the Guide).

Discovery Leads To Settlements

Although discovery is often expensive and sometimes wasteful, it is also often very thorough. Where it is comprehensive, very little about a claim or defense can remain hidden and the process almost always leads both parties to a fairly clear understanding of the strengths and weaknesses of their positions. This understanding, coupled with the uncertainty and risk of jury trials, produces settlements in the overwhelming number of commercial cases. Litigants in the United States settle for a variety of reasons, including, among many others, their understanding of the relative risks of winning or losing (based on what they have learned through the discovery process), the risk of a jury trial, the cost of continuing, and the desire to end the disruption of normal business operations which litigation can create.

It is critical that a foreign businessperson or lawyer involved in U.S. litigation understand from the outset that, in practice as opposed to theory, the system is designed to produce a settlement by the parties, not a resolution by a judge or jury. Too many foreign companies which do not understand this central fact miss opportunities to settle a case at an early stage at the same cost for which it is settled years later, without incurring the substantial expense which often accompanies American litigation. In situations where the risks of liability and damages are real, it usually makes sense to consider the possibility of resolving the lawsuit sooner rather than later.

Other Unique Features Of U.S. Litigation

U.S. litigation has some unique features not present in most other legal systems. These include class actions, punitive damages, and contingency fees. Also, unlike some systems, each party pays its own legal fees. Each of these features is briefly described below. More complete descriptions can be found in the Guide.

Class Actions: In federal court, and in most state courts, a plaintiff is allowed to sue as a representative of a large class of people who have all been injured in the same way by the same actions of a defendant. If certain conditions are met, the law will allow one or more shareholders or buyers to sue as representatives of the whole class, without all the other members of the class formally becoming parties to the lawsuit.

Punitive Damages: In certain kinds of cases, juries are also entitled to award punitive damages, which are intended to punish the defendant for certain types of improper conduct. Some states place very strict limits on a jury's ability to award punitive damages, while in other states punitive damage awards by juries are much more common.

Contingency Fees: Unlike lawyers in the rest of the world, United States lawyers are permitted to represent a client based on a contingency fee agreement. This means that instead of billing for his or her time as the case progresses, or a flat fee, the lawyer's fee is "contingent" on some recovery after trial or by settlement. In that case the lawyer receives a percentage of the recovery (one-third is typical); but if the case is lost, the lawyer gets nothing.

Each Party Pays Its Own Attorney Fees: With certain statutory exceptions, the rule in the United States is that each party to a lawsuit pays its own attorneys' fees. Except for those exceptions, there is no "loser pays" rule as there is in some countries.

Richard E. Donovan heads the Commercial Litigation Practice Group of Kelley Drye & Warren LLP.

Please e-mail Mr. Donovan at rdonovan@kelleydrye.com with questions about this article.