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Intellectual Property

Can I Sue a Foreign Company Whose Only U.S. Presence Is a Well-Insulated Subsidiary?

Sanford Warren | October 1, 2003

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What do you do if your patent is infringed by a foreign corporation without a U.S. office? There are a couple of far-from-obvious solutions available to the patentee. The Hague Convention treaty provides one option; the secretary of state offers another.

In American justice, sometimes a very deserving plaintiff never gets his day in court because of a legal technicality. For example, what happens when an isolated foreign corporation ships products that infringe a U.S. patent into the United States? Can the patentee just haul the foreign corporation into a U.S. court when the corporation has no U.S. offices or other contacts with America? Considering the following, you may see that the answer isn't obvious.

The Problem

GarageWorks, Inc. (GWI), a small Texas company, invents and patents a gear that will revolutionize the auto industry. Gutten Tag, Inc. ("Parent"), a German corporation, starts producing gears that look a lot like the GWI gears ... a lot like them! Parent distributes the gears in America using a poorly funded, well-insulated subsidiary. GWI wants to sue both companies for patent infringement. However, Parent has done all it could to "isolate" itself from such litigation by using its subsidiary to make all relevant contacts with America.

GWI could sue the poorly funded subsidiary, but that wouldn't be much fun if the company ends up being judgment-proof—a common reality. So, can GWI sue Parent directly, or can Parent hide behind the subsidiary claiming due process would be violated if it were forced to stand trial in Texas? The answer isn't easy considering Parent is based in Germany and has no contacts in the United States besides its subsidiary. However, GWI can sue Parent by selecting among a few legal options.

One Option

The Hague Convention treaty, a real page-turner, allows GWI to sue Parent in Texas because Parent's country, Germany, is a signatory to the treaty. The treaty helps protect foreign parties from suffering adverse judgments without first having been properly served papers regarding the suit. While the treaty has noble intentions, its mechanics are unwieldy and take months to negotiate.

A Better Option

Fortunately, GWI can bypass the treaty if it can serve papers on Parent without having those papers sent overseas. [See Volkswagenwerk Aktiengesellschaft v Schlunk, 486 U.S. 694, 699, 108 S Ct 2104, 2112 (1988).] GWI can do so with the Texas Long-Arm statute. [See Tex. Civ. Prac. & Rem. Code Ann. §§ 17.041 et seq.] Most states, if not all of them, have similar statutes that allow the long arm of, say Maine, to reach into another state, say Utah, in pursuit of defendants that committed bad acts in Maine.

Still, how does the statute grant access to a party "isolated" in Germany? Answer: by making the Texas Secretary of State (SOS) Parent's agent for service of process when Parent (1) conducts a bad act in Texas (patent infringement) (2) without having designated a person in Texas to receive papers. [See Tex. Civ. Prac. & Rem. Code Ann. § 17.044(a)(1).] Thus, serving the SOS is the "equivalent" of serving Parent. Then, Parent is compelled to show up for trial.

Of utmost importance, Texas law dictates that serving papers on the SOS completes service. Even though the SOS must eventually forward the papers overseas to Parent, the service was complete once the documents were served on the SOS. [See Bonewitz v Bonewitz, 726 SW2d 227, 230 (Tex App—Austin 1987).] If GWI were to pursue this tact in another state or using another Texas statute, this might not be the case. Consequently, because the papers did not need to be sent overseas to complete service of process, the Hague Convention and its associated headaches could be avoided in favor of state law.

In short, GWI will get its day in court after all ... now that could be fun!

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