Business Errors Frequently Made by Foreigners in the US
By Aaron N. Wise, Attorney at Law © 2009
Foreigners have often made and still make many errors in their U.S. business endeavors. Some are commercial, some legal, but the majority of them have both commercial and legal components. The reason is that commercial is legal and legal is commercial----they are usually inextricably bound together. It is not possible in the space of this booklet to list all the errors that foreigners tend to make. Many have already been mentioned in previous Chapters. A few deemed particularly noteworthy are listed here.
• U.S. Product Approvals. Some products cannot be brought into the USA and sold without the approval of a particular U.S. federal or state government agency. For some products, there is a registration process (and thereafter, possibly, periodic report filings) rather than prior approval applies. Be sure you check out if any such requirement applies to your product. Be sure also that the data you receive is current study. In one instance, a European company (“ECo) wanted to export into and sell in the USA non-prescription sunglasses. ECo received information from the commercial section of its country’s trade office, both in its home country and in the USA, that prior U.S. Food and Drug Administration (“FDA”) approval of the sunglasses was required, which could take months of effort to obtain. ECo engaged your author’s firm to review the situation. It turned out that the information ECo had received was no longer correct----the FDA had changed its policy and rules a few months before. No prior approval was required. Instead, ECo and its U.S. sales subsidiary only had to register with the FDA. That process involved completing several forms, mailing them in to the FDA, and receiving back registration numbers. Thereafter, annual reports would have to be filed with that agency. The registration process was completed in a couple of weeks. The hard part was locating and contacting the specific FDA offices dealing with the process (there are many FDA offices in several different locations). The point: If there is any reasonable doubt whether a prior U.S. government approval, registration or similar process may apply to your product, or what that process is, you should engage competent U.S. counsel to deal with those issues.
• “Due Diligence” on Your Prospective U.S. Business Partner. A fair number of foreign business people meet someone at a trade fair or similar event, on the plane, through a friend, or in some other way. That someone says he/she (or his/her company) just loves the foreign party’s products or services and is ready to be its distributor, agent, licensee, partner etc. Without checking out very carefully, the foreign party agrees, either orally or in writing. That is a serious error. It could lead to business problems, legal problems or even a lawsuit. You need to investigate your potential business partners thoroughly (“due diligence”) before agreeing to or starting any business relationship. Your U.S. lawyer will usually be able to obtain valuable information about a prospective candidate. The point: Don’t get into bed with anyone without first carefully checking them out.
• Letting Someone Other Your Most Trusted Employee Handle Intellectual Property Filings. Some foreign companies permit their U.S. distributor, agent, joint venture partner, a friend, or someone other than one of the company’s most trusted employees handle the filing of the company’s intellectual property (patents, trademarks, copyrights, etc.). The result can range from an error to an outright fraud. On occasion, the person entrusted will file the application showing himself or his company as the owner-applicant, rather than the foreign company. The point: These items are at the heart of your business. Only a very trustworthy representative of your firm should handle these matters, working with competent U.S. counsel.
• Intellectual Property Filings in the USA (or in the Western Hemisphere) a Priority Item. One of the very first things a foreign company should do----and many are remiss---- is to file applications in the USA and, where applicable, in other Western Hemisphere markets, for patent, trademark, copyright and other intellectual property protection. You should have these applications in process before you start doing business in those territories. Certainly that is so for the trademarks, brand and trade names, slogans, logos and symbols that you plan to use there. That process will involve first checking whether some third party has already registered or applied for, or is using, that mark, name, etc. or one confusingly similar hereto. You should not use and might be sued for using a mark, name, slogan, logo or symbol that infringes a third party’s rights. Plus, if you have already started using such a mark, name etc., and have to stop, you will incur expense and possible difficulty in getting potential customers to recognize your new marks, brands, etc. The point: Putting your intellectual property situation in order should be a priority item.
• Don’t Let Anyone But Your Trusted Employee Handle Setting Up Your U.S. Company, Working With Your U.S. Lawyer (and Other Experts). A true story will illustrate this point. A foreign company (“FCo”) engaged what its owner (“FCo Owner”or “Owner”) believed to be an old friend to work for the U.S. subsidiary corporation that FCo intended to form (“USCorp”). The “friend” told the FCo Owner that under the applicable U.S. law, at least one shareholder of USCorp must be a U.S. permanent resident, which the friend was. In point of fact, no shareholders have to be U.S. permanent residents—the statement was false. FCo and its Owner intended that 1 share of USCorp’s stock be issued to FCo Owner, 1 share to the “friend” as a nominee share to satisfy the supposed “legal requirement”, and the balance of the 98 authorized shares to either FCo or a trust beneficially owned by FCo (whichever FCo should decide later). FCo Owner believed he had conveyed that information to the “friend” and that he understood and was in agreement. No written contract between FCo, FCo Owner and the “friend” was ever prepared or signed. The “friend” proceeded to form USCorp using a U.S. lawyer of his choice. They purported to issue 20 shares of its stock: 10 to the “friend” and 10 to FCo Owner. The “friend”, from then on, claimed that he was the 50% owner of USCorp. The “friend” also claimed that he was the President and CEO of USCorp and, along with FCo Owner, one of its two Board of Directors’ members. The substantial moneys (capital) invested in USCorp came from FCo. US Corp meanwhile signed a lucrative, fairly long term contract with a major U.S. customer to purchase FCo’s products from USCorp. FCo and its Owner tried to settle the matter amicably with “friend”, but to no avail. An expensive lawsuit in the USA and associated “pain” was the result for FCo and its Owner. The lessons: 1. Be sure you control the entire process of forming the U.S. entity; and 2. Make sure your agreements and “ground rules” are in writing, prepared by your U.S. counsel.
• Using Service Companies To Form Your Own U.S. Company. Ads circulate in many countries offering to form a U.S. company for a very low price. You should not hire any such company. In your author’s experience, these service companies do not do the complete job required to form and (in U.S. lawyer’s parlance) “organize” the company. That is particularly so when the company is a “corporation” formed under the laws of a particular U.S. state. Services companies typically do not attend to matters like the documentation to elect directors and officers, adopt bylaws, set forth and approve capital contributions, issue the shares, and certain other measures. With certain variations, the same general principle applies to using service companies to form other types of U.S. legal entities, like limited liability companies ("LLCs"). The result is too often a defective or incomplete organization of the entity. Attorney-author Wise has been engaged many times to complete and bring up to date the organizational and other documentation of U.S. corporations that clients have formed using “service companies”. Generally, it will be more costly and complicated to fix up the deficiencies and defects after the fact than if the job had been done thoroughly and correctly in the first instance.
Some “service companies” claim in the ads that if you form a U.S. corporation or LLC under the laws of a particular U.S. state, like Delaware, and the entity’s income is generated outside of the USA, it will not be subject to U.S. taxation on its income. That is false. A U.S. corporation or LLC is subject to U.S. federal income tax worldwide, except that the LLC operates as a “pass through” entity----its owners are the ones responsible for paying the taxes (both the LLC and the owners must file US federal income tax returns).
• First Class Contracts for the U.S. Market Are a Must. If you want to optimize your chances of getting paid, succeeding commercially, protecting your intellectual property, and staying out of legal, tax and other trouble, you will need well-drafted contracts for the U.S. market prepared by competent U.S. experts. A literally limitless number of cases can be cited where foreign parties have not adopted that course, and have paid the price later. Here is one example. A European company (“ECo”), without using any lawyer (let alone a qualified American one) signed a “cooperation agreement” with a U.S. manufacturer-seller of similar industrial equipment. The agreement contained a clause prohibiting ECo from selling its own or similar products anywhere in North America for 5 years after the agreement ended. The agreement ended with the U.S. party owing money to ECo. Per the agreement, all disputes were to be resolved by 3 arbitrators in the U.S. party’s “home town” (in Indiana), and under Indiana law. The U.S. party started arbitration claiming ECo owed it money, and more importantly, to enforce the non-compete clause. The result was a lengthy and expensive arbitration with the U.S. side having the “home court” advantage. The point: Had ECo engaged competent U.S. counsel to draft and help negotiate the agreement, this misfortune would, in all likelihood, never have occurred.
• Using Properly Drafted General Terms of Sale (“GTS”) Tailored to the U.S. Market. They offer very clear and important advantages to foreign exporters, including for their U.S. subsidiaries and affiliates. The benefits are too numerous to mention here. The guides cited at the end of this chapter explain what those benefits are.
• Be Careful when Terminating U.S. Distributors, Franchisees, Sales Agents and Licensees. Proceed carefully, with competent advice, before you attempt to terminate. Terminated distributors, franchisees, sales agents and licensees frequently sue based on alleged improper termination or raise improper termination counterclaims when suppliers, franchisors, principals, or licensors sue them (e.g., to recover moneys due). The two lessons: 1. Make sure any steps you take to terminate (or not renew) are done properly; and 2. If the distributorship, franchise, agency or license agreement is properly drafted by experienced counsel, the risk of successful improper termination claims or that they will be made at all, will be substantially diminished.
• Your U.S. Business Lawyer Should Be Part of Your Negotiating Team. Experienced U.S. business lawyers absorb quickly the key features of your business and that of your potential contract partner, the respective mind sets, what you want to achieve in your deal, and other practical and commercial information. They will be able to guide and advise you regarding your contemplated business transaction. They are accustomed to negotiating a variety of business arrangements. Since, in the final analysis, they will be the ones preparing the contract documents, their participation in the negotiations will facilitate their task and typically result in the best work product.