Getting Sued and Suing in the U.S.

If your business has any involvement in the United States, it will get sued eventually. There are a number of things you can do to reduce risk, avoid suits and to minimize any claims made against your corporation, you personally or your representatives. Just for a change of pace, I have prepared this commentary in a summary point form for quick review.


Starting Right

1.   always incorporate a U.S. state corporation, preferably a Delaware one, before the U.S. business is commenced;

2.   don’t hold substantial assets in the U.S. corporation. Don’t buy a building, or hold cash or investments in it. Repatriate your investment and returns as much as tax and accounting principles allow;

3.   purchase appropriate insurance coverage as advised by a local reputable insurance broker; and

4.   establish a relationship with a local, qualified, reputable lawyer and accountant (no, your Ontario lawyer and accountant can’t help you very much).

Operating Right

1.   hire qualified reputable people to manage local U.S. operation: not transplanted Canucks;

2.   carefully check out prospective employees, suppliers, customers and partners before taking the leap with them. We sometimes let our love of Americans cloud our vision. The highest incidence of accounts receivable losses for Canadian corporations (per $100 of receivables) is from U.S. customers, not third world countries;

3.   keep your finger on the pulse of the U.S. operation, including such mundane items as reading the mail promptly, visiting the office, sometimes without notice, obtaining reports and financial information/monitoring. The sleeping dog of neglect will come to bite you in the ass, otherwise;

4.   address problems immediately.

When You’re Sued or Suing

1.   consult with your local counsel immediately; get a referral if specialized expertise is needed;

2.   never ignore a demand letter or statement of claim;

3.   ascertain range of economic values at risk, and determine if there is insurance coverage;

4.   if you are defending a claim, mandate your attorney to settle; re-visit settlement options often during the course of the action, don’t get lost in the process;

5.   if pursuing a claim, pursue it very hard at the outset to flush out weaknesses in your case and theirs, and to get a feel for recoverability against the defendant;

6.   remember, each party is responsible for their own legal costs in the U.S., generally speaking, unlike here, where if you win, the other side must pay your court-determined costs;

7.   if you’re being sued, you want to avoid a jury trial as they will greatly favour the local party. Civil jury trials are still prevalent in the U.S. courts;

8.   if your claim involves technical analysis, retain your experts at an early stage, ideally retaining the leading expert before the other side can do so;

9.   ask for interim legal bills, unless your attorney is doing it on a contingency plan, so you avoid ugly surprises.

As with Canadian litigation, remember that the job of litigators is to litigate. There are many exceptions, but most litigators seem to be focused on the process, rather than the economic result. You must counteract this bias, so that you keep on track: is this worth it?

Competition Law – A Sword and a Shield – Part I

Does a competitor get a better deal from a supplier than do you for the same product?

Is your rival making false claims for his product or service?

Has a manufacturer required you to buy products or services you don’t want as a condition to being able to buy the products you do want?

Are you being shut out of a market by a supplier that refuses to sell to you?

Well, if one of these situations applies to you, you should definitely read this article! (or, you could view the excellent website of http://strategis.ic.gc.ca) Relief could be at hand!

The Competition Act (Canada) (the “Act”) contains a myriad of lethal legal weapons that can be used by, or against you in the trenches of your business wars. You may be surprised to learn how many aspects of this legislation are applicable to your daily business activities and those of your competitors. The Act affects manufacturers, distributors and agents, retailers and consumers, and it can be used as either a sword, or a shield.

Due to the broad scope of competition law, I will be dividing my overview into three parts:

1. the criminal offences under the Act; and

2. the civil anti-competitives acts subject to enforcement by the Competition Tribunal; and

3. a practical guide as to how to attack or defend under the Act.

The Competition Act (Canada) is a federal law which governs business conduct in all parts of Canada. Its objective is to promote and protect competition. Though the high profile competition cases invariably involve large corporations, the Act applies to all businesses, big and small. What matters is the effect upon the state of competition in the particular market for a product or service. The Competition Bureau administrates and enforces the Act. The Act has both civil and criminal provisions. Yes, I said “criminal”. This is serious stuff!

Let’s first look at the more exciting criminal offences and penalties under the Act:

A.       Price Fixing & Conspiracy Offences (S. 45) – two or more competitors agree amongst themselves as to what prices will be charged to customers. Or, they agree to stifle transporting, producing, manufacturing, storing or dealing with any product, in order to “unreasonably” increase the price, or to lessen competition “unduly”.

B.       Price Discrimination (S. 50) – where a party discriminates against competitors which are purchasers of articles from him by giving a discount, rebate, allowance or price concession or other advantage that is not available to other purchasers. Or, if a party sells products in one geographical area of Canada at a cheaper price which has the effect of eliminating a competitor or lessening competition in that area.

C.       Allowances not Proportional (S. 51) – an allowance given to one purchaser must be proportional to the allowances given to other purchasers.

D.       False or Misleading Representations (S. 52) – materially false or misleading representations (not just puffery) are made knowling or recklessly in any manner or media. Mere exaggeration is not an offence: the misrepresentation must be material to the product or service promoted.

E.       Deceptive Telemarketing (S. 52.1) – this is when telephone calls to sell products or services contain false or misleading statements.

F.       Multi-Level Marketing and Pyramid Schemes – these activities are defined in a complex manner, and are subject to various defences.

G.       Bid-Rigging (Section 47) – if one or more bidders agree not to bid in a tender, or two or more bidders pre-arrange their bids to ensure the outcome, that is bid-rigging.

Resale Price Maintenance (Section 61) – A party cannot coerce a retailer to sell at a minimum price, or refuse to sell to that retailer because it knows the retailer will sell the product at prices below those attempted to be maintained by the manufacturer/supplier. We all know one or two manufacturers who have, over years past, tried to prevent any retailer from discounting their products.

Double-Ticketing – this is when a retailer has two prices on a product, and attempts to charge the higher price.

The penalties for the foregoing offences range from less than $10,00 to unlimited fines in the discretion of the Court, and from one to five years imprisonment. Some are indictable offences, some are summary, and some are hybrids (either) at the discretion of the prosecutor. These are criminal proceedings!

You may feel skeptical that anyone is ever convicted of these offences. Well, there are in fact few proceedings and fewer convictions. First, enforcement is largely driven by complaints, not by active market surveillance. Second, the law is complex, the burden of proof, being criminal, is onerous. It is difficult to convict, as there are defences and safe harbours in the legislation to ensure that activities which do not really harm competition, though prohibited, are not punished. Third, like any other governmental regulatory agency, the resources of the Competition Bureau and Competition Tribunal are limited.

However, over the last several years, the law has been strengthened quite a bit, and in certain cases, a victim of anti-competitive acts can initiate an action or proceeding on its own, instead of hoping the Bureau will take an interest in its case.