When you’re launching your business in the US, there is a lot of “legal stuff” to consider. In this blog, Gary Guttenberg from Synch Law has summarized some of the most important ones. This post was originally posted on linkedin/GaryGuttenberg
Foreign companies pursuing U.S. business dealings should be mindful of:
- Exclusive Rights
- Products Liability
- The Four Corners Rule
- U.S. Taxes Imposed on Foreign Companies
- Intellectual Property (“IP”) Exposures
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Exclusive Rights
To close a major deal with a U.S. company, foreign companies may consider granting exclusive rights to the U.S. counterparty. Any exclusive rights must be carefully analyzed and commercially justified. Further, if the commercial justifications (e.g. minimum sales levels) for such exclusive rights fail to be achieved, your company must have the right, at your company’s discretion, to either terminate such rights entirely or convert such exclusive rights (in whole or in part) to non-exclusive rights. Merely converting exclusive rights to non-exclusive rights may be risky given such approach precludes your company from granting exclusive rights to another more worthy party for the same region and/or product coverage.
Additionally, the word “exclusivity” needs to be defined to avoid ambiguity. For example, the granting of an exclusive territory may mean the supplier (e.g. your company) will not appoint any other party distribution rights in that territory or it may also mean that your company will itself refrain from directly doing business with customers in the territory.
Finally, given the sheer scale of the United States, foreign companies entering into distribution or sales representative agreements with a U.S. partner should conduct due diligence of the potential partner to ensure such partner has the financial means, technical competence, and network to effectively manage prospects and clients throughout the entire United States. In many cases, it may make sense to have different partners servicing different regions / product portfolios within the United States.
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Products Liability
Many foreign companies are aware that significant damages can be awarded to U.S. claimants as a result of defective products. Products liability represents one of the largest exposures facing foreign product companies selling products, directly or indirectly, to U.S. customers. It is vital to understand, an impeccable and careful approach to safety in other countries may be insufficient for safeguarding foreign companies from U.S. products liability.
With the foregoing said, foreign companies can and do effectively manage products liability risks by developing, implementing, and maintaining a U.S. products liability strategy including: (i) strict compliance with U.S. regulatory requirements, (ii) using written contracts with risk limiting clauses (e.g. disclaimers and limitations of liability), (iii) appropriate labels and warnings with words (in English and Spanish) as well as pictures, and (iv) obtaining products liability insurance.
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The Four Corners Rule
According to the parol evidence rule—sometimes referred to as “the four corners of the contract” doctrine—parties who’ve entered into a written contract are prohibited from presenting evidence in court of any agreement (oral, implied or even written) that contradicts the written terms contained within the four corners of the contract.
Why is this important? When entering into an agreement with a US-counterparty, it is imperative to refrain from accepting a disagreeable term in the contract because there is an oral understanding or even a writing (such as an email) contradicting the contract. Such an understanding will not generally be introducible as evidence in a court proceeding unless such language is in a writing (such as a formal amendment to the contract in question) and signed by the party sought to be bound thereto.
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U.S. Taxes Imposed on Foreign Companies.
Foreign companies can unwittingly become U.S. tax subjects (i.e. required to report and pay taxes to the Internal Revenue Service) as a result of engaging in activities on the U.S. market which create a permanent establishment (i.e. a U.S. business presence under the eyes of the law).
Examples of activities potentially construed as a permanent establishment are a branch office, a U.S. sales representative operating as a U.S. agent of the foreign company (i.e. operating under the name of the foreign company and/or negotiating terms of agreement with U.S. customers), a factory, a workshop, as well as providing services to U.S. customers in the United States. Before engaging in any such activities in the U.S., a review of the tax implications should be undertaken to avoid expensive pitfalls.
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Intellectual Property (“IP”) Exposures.
For most (if not all) companies, there are certain IP implications for the service and/or product driven business in question. In light of this, before venturing into the United States—it is critical to ensure your company’s IP will be protected under U.S. law. For instance, trademarks and patents should be registered with the USPTO (the United States Patent and Trademark Office, uspto.gov) and copyrights should be registered with the U.S. Copyright Office (copyright.gov).
Further, for all agreements, it is advisable to include contract clauses wherein counterparties not only acknowledge the existence of your company’s specific IP but also agree that such IP belongs to your company and that the counterparty has not and will not file any IP registrations implicating any IP which is the same as or similar to your IP.
Finally, in the event your company is licensing IP to any counterparty, such license can be conditioned upon the counterparty refraining from engaging in any activities which are competitive with your products and / or services.
