Growing Pains: A Road Map for Chinese Companies Learning to Live with Complex US Litigation

Service of Process

US litigation begins with the filing of a complaint in a US Court. Next, the complaint must be "served on" the defendants within a few months after it has been filed. When a complaint is filed in US court, the clerk of the court issues a summons to the plaintiff. To effect service of process, the plaintiff must either serve on each defendant this summons together with a copy of the complaint or the defendant must waive service of process.

Generally, in cases involving foreign defendants, service is effected in one of two ways. First, through delivery of the summons and complaint to an officer, director, or an agent authorized to receive service of process, and mailing a copy to the defendant. Second, service may be effected pursuant to treaties in which the US and the country where service is to be effected are both parties. For Chinese corporations and individuals, the relevant treaty is the Hague Convention on Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (the "Hague Convention"). Under the Hague Convention, each signatory state must designate a "Central Authority," whose purpose is to accept requests for service from other signatory states. Service of process to Chinese individuals and corporations can not be effected through postal channels directly to the individual or corporation because of a reservation to the Hague Convention by the People's Republic of China.

As an alternative, a defendant may elect to waive formal service. In order to initiate the waiver option, plaintiff must notify defendant that an action has commenced and request defendant to waive service of process. A defendant is not obliged to execute a waiver of service. However, if a defendant chooses to exercise the right to be formally served with process, the defendant may be required to bear the costs of formal service. A foreign defendant who waives service of process has additional time to respond to the complaint. By executing and returning the waiver to plaintiff, defendant merely waives the right to be formally served and does not waive the right to other objections related to the complaint.

Jurisdiction

In order for the litigation to proceed, it is necessary that the US court possess "personal jurisdiction" over the defendants named in the complaint and "subject matter jurisdiction" over the issues raised in the complaint.

Personal jurisdiction refers to a US court's authority to adjudicate issues over a particular person, entity or piece of property. Accordingly, for an action to proceed against a Chinese company and its employees, the US court must possess personal jurisdiction over the company and the individuals named in the complaint. A US court will only have personal jurisdiction over defendants that have sufficient "minimum contacts" with the US. Courts consider a number of factors to determine whether it has personal jurisdiction over a defendant company, such as whether the entity transacts business within the US, whether the conduct complained of in the action took place within the US, or whether the company purposefully availed itself of US commerce such that it was foreseeable that certain actions could result in injury within the US. A US court's jurisdiction over a Chinese corporation does not necessarily confer jurisdiction over the corporation's officers and directors. Rather, jurisdiction over each employee must be assessed individually. However, if a court determines that it possesses personal jurisdiction over a foreign entity, it may likely find personal jurisdiction over an individual participating in the actions which formed the basis of jurisdiction over the entity.

Subject matter jurisdiction is a requirement that the conduct at issue in the complaint justifies the extraterritorial application of US laws to a foreign company and its officers. The analysis of whether a court possesses subject matter jurisdiction will vary based on the substantive causes of action alleged in the complaint. For example, two tests have generally been employed in the context of securities fraud suits to determine when extraterritorial application of US laws is appropriate: the "conduct test" and the "effects test." Under the conduct test, a court has subject matter jurisdiction over an action if the defendant's conduct in the US was more than merely preparatory to an alleged fraud, even if the particular acts or culpable failures to act within the US directly caused losses to foreign investors abroad. A court has jurisdiction under the effects test where the illegal activity abroad causes a "substantial effect" within the US. For example, US courts have addressed whether subject matter jurisdiction is proper in the context of a securities complaint on behalf of foreign purchasers of securities of foreign companies on a foreign exchange. Several courts have found that the mere filing of SEC reports, which were conceived, prepared and published in a foreign country is not sufficient conduct to provide US courts with subject matter jurisdiction over such complaints. Likewise, US courts have found that the effects test cannot be satisfied by a complaint alleging fraudulent acts that took place outside the US without allegations that US investors or US markets were impacted by the alleged fraud.

Motion Practice

A "motion" is a formal request by a party that the court take a specific action. Typically, a motion is made in writing by the party requesting the relief and the other side is given the opportunity submit a written opposition. The court will take the parties' arguments under consideration and will issue an order stating whether the motion is granted or denied. There are often a number of motions made throughout complex commercial litigations matters. In particular, there are three motions that may have significant impacts on the litigation: (i) a motion to dismiss, (ii) a motion for class certification, and (iii) a motion for summary judgment.

Motion to Dismiss