German companies that export to the US or set up a US subsidiary are often faced with legal difficulties. Whether it is jury trials, discovery, or punitive damages – they should be aware of these critical differences in the legal system.
When Germans think of a jury trial in America, they most likely associate it with high-profile criminal cases or former and designated President Donald Trump, who recently faced a jury of laypeople in New York. However, foreign companies involved in a legal dispute in the United States would also find themselves in front of a jury composed of US citizens.
This is just one of many significant differences between the German and American legal systems. Small and medium-sized enterprises, in particular, often lack international legal departments and are unaware of these nuances. The assumption that a codified body of law like Germany’s BGB would offer similar protection in the USA is a dangerous misconception. US law is based on British Common Law, a legal system that relies less on statutes and more on precedent-setting judicial decisions. This is especially important for German executives to understand, as the US market is extremely valuable for German businesses. The United States is Germany’s largest export market and its third-largest sourcing market. According to Germany Trade and Invest, the federal trade and investment agency, the numbers speak for themselves: In 2023, the value of German exports to the USA reached around 158 billion Euros – a continuous increase of 1.1 percent from the previous year. This makes the USA Germany’s top trading partner in terms of export value, a position achieved largely thanks to Germany’s small and medium-sized enterprises (SMEs).
The USA is known as the land of endless opportunity – but unfortunately, this applies to legal pitfalls as well. The legal and court systems differ fundamentally. While German law is rooted in the Napoleonic Code, US law is based on British Common Law (with the sole exception of Louisiana). In the US, past court decisions (known as “Case Law”) serve as the primary legal source. The American court system is fragmented: there are two parallel systems – federal courts and state courts – each with three levels. Moreover, the jurisdictions of federal and state courts sometimes overlap.
Jury Trial
Not every trial in the US involves a jury, but defendants have a constitutional right to one. In a jury trial, the “Fact Finder” role – determining the relevant facts – is assigned to the jury, while legal questions are decided by the judge. The plaintiff and defendant in a civil case may agree to waive the jury trial (instead: “Bench Trial”) or exclude it contractually (“Waiver of Jury Trial”). For instance, the US subsidiary of a German company successfully enforced a waiver of jury trial in a case against a former employee, despite her initial claim. The employee had accepted the waiver clause when signing her employment contract.
Arbitration
In the United States, parties can agree to resolve a dispute before an arbitration panel instead of a judge. The arbitration award is legally binding and can be enforced by a regular court just like a “normal judgment.” For instance, a German company’s US subsidiary implemented a contractual arbitration agreement with a rural Texas client to avoid potential local biases and maintain greater control over the dispute resolution process.
Discovery
The discovery process, a fact-finding stage before trial, is unique to the US and absent in Germany. Besides the obligation to produce documents and respond to written questions, depositions involve lengthy oral questioning of witnesses under oath. If a party fails to produce required evidence, the court can impose sanctions. A US subsidiary of a German company, for example, successfully obtained sanctions against an opposing party that repeatedly failed to attend depositions without justification.
Uniform Foreign-Country Money Judgments Recognition Act
A foreign judgment can only be enforced in the US if a US court has recognized it. Under the Uniform Foreign-Country Money Judgments Recognition Act, a final, enforceable judgment for a fixed sum serves as the basis for US court recognition. Once recognized and no longer subject to appeal, the judgment creditor can initiate enforcement. A German financial institution, for example, had a court-ordered judgment against American debtors recognized and enforced by a Texas court under this Act.
Alter Ego and piercing the corporate veil
Foreign companies expose themselves to full liability in the US if they sell products or services through their foreign entities. The foreign entity can also be held liable if its US subsidiary is deemed a mere “shell” or “puppet” of the parent company. This determination is based on a comprehensive assessment of all case circumstances, including the parent’s control over the subsidiary, shared personnel, and centralized accounting. Ignoring these factors risks significant potential liability. A German GmbH made this mistake, establishing a US corporation as a 100% subsidiary. All appointed directors and officers for the US subsidiary were located in Germany and the accounting was also centralized in Germany. A US court deemed the subsidiary the “Alter Ego” of the German GmbH, holding the German GmbH fully liable. This risk can be mitigated by establishing a US subsidiary as a “Blocker Entity” to “block” potential US liability against the foreign parent or its assets. Typically, this involves establishing a US corporation (Inc.) as a 100% subsidiary of the foreign entity to conduct all US business.
Choice of law clause
Every contractual choice of law provision requiring certain state law to apply must have a substantial connection to the contract. The selected state law should be based on the location where the contract is performed or the parties’ headquarters are located. However, the parties should always assess if the chosen state law would be beneficial in potential litigation. For example, the choice-of-law clause between two German companies’ US subsidiaries referenced Nevada law. However, both subsidiaries were incorporated in Delaware and based in Texas. A Texas court ruled that Texas law would apply here.
Punitive damages
Under US law, the remedies for contract breaches are usually compensation through damages. In addition to monetary damages (“general damages”) and foreseeable damages (“consequential damages”), “punitive damages” may also be imposed for conduct that is not only in breach of contract but also “outrageous.” Punitive damages aim to punish and deter such behavior. For instance, a company sued the owners of a neighboring property after their artificially constructed pond caused extensive damage due to excessive water overflow. The company was awarded punitive damages, as the neighbors had knowingly ignored and failed to rectify the issue.
American Rule
According to the “American Rule,” each party in a US lawsuit pays its own legal fees. Plaintiffs may, however, enter into a contingency fee agreement (typically 30-40% of the awarded amount). The “American Rule” can be contractually circumvented with a “Prevailing Party Attorneys’ Fees Provision,” requiring the losing party to cover all legal costs of the winning party. Court fees are independent of the dispute amount and charged per lawsuit. Through a contractual “Prevailing Party Attorneys’ Fees Provision”, a US subsidiary of a German company successfully recovered 100% of its legal fees in a dispute.
