Gunned down - by the law

Foreign firms can be soft targets in the 'jackpot' mentality of US litigation, says David Bowen

It Is a little-known fact that ICI has bombed Arizona. But desperate times call for desperate measures and the chemicals giant had to go to these extremes to prove it was not responsible for the Oklahoma bombing in April 1995.

A month after the explosion, which killed 168 people, lawyers representing some of the victims - led by OJ Simpson's defence counsel, Johnny Cochrane - filed a suit against ICI Explosives USA. The allegation was that the company had sold ammonium nitrate as a fertiliser without ensuring that it had been made inert and therefore non-explosive. This could be achieved, the lawyers said, by following a recipe patented in 1968 by one Samuel Porter.

ICI hired a company called Failure Analysis to test the Porter patent. The company made a series of bombs, added his recipe, and detonated them near Phoenix. They all exploded. Mr Cochrane then tried another tack, but on 3 July last year Judge David Russell threw the charges out. "The only people responsible for the tragic bombing were the criminals who committed it," says Neal Mednick, director of public affairs for ICI Explosives USA.

Mr Cochrane has appealed. The affair will certainly drag on into next year and could, theoretically, land ICI with a massive bill. However thin a case might seem, it is unwise to underestimate the US legal system's ability to extract disproportionate amounts of money from the corporate world.

As GKN has just discovered. On Friday, a federal judge in North Carolina was deciding whether the British engineering group will have to pay $740m (pounds 460m) - or whether it will escape with a $350m fine. Either way, unless GKN appeals successfully, it will face grievous financial harm.

The company was astounded - which is not surprising, as the amount claimed by franchisees of Meineke Discount Muffler Shops, a GKN subsidiary, was just $31m. The dispute is complex, involving advertising commission that was allegedly kept by the company rather than being spent on promotion.

It is the way the $31m has multiplied that has caused such consternation. Just before Christmas a jury in Charlotte, North Carolina, decided the compensation payment should be $197m and added $150m in punitive damages. It decided, too, that the parent group, GKN, should be held liable for Meineke's actions. On Friday the judge was looking at whether the company had indulged in "unfair trading" - in which case the compensation could be tripled.

The eccentricity of American legal systems is bewildering to foreigners. Hotels dare not put diving boards by swimming pools in case people dive in when there is no water. Doctors have given up practising because they cannot afford the premiums to protect themselves against negligence claims.

When the system moves beyond eccentricity it can be a menace. Despite its postponement by the White House, the Helms-Burton Act could one day allow the authorities to exclude from the United States companies doing business with Cuba. This shocked the Europeans so much that they acted in unison - even the British agreed to a motion attacking the Act.

However, individual companies cannot count on governments coming to their aid in the battle against barminess. Barclays Bank led a fight against California's unitary tax, under which the state tried to tax the company's worldwide earnings. The measure seems to have gone into abeyance but it remains on the statute books.

But it is the running sore of litigation, so deep-rooted in the US, that causes most discomfort for corporations. And there is scant likelihood that it will be alleviated because the system is weighted towards that American hero, the little guy. It is a brave politician who takes on the little guy - or rather, the army of lawyers that lives by defending his interests.

Many foreign companies have found themselves in the legal mire - and because the UK is by far the biggest investor in the US, a good proportion of them have been British. In 1990 ICI bought an explosives group called Atlas and found itself being sued by the company's former president. He said Atlas had done everything it could to force the company he founded into bankruptcy - and a jury awarded him $450m. This was reduced to $36m, but only after ICI Atlas threatened to go into Chapter 11 protection from creditors.

T&N is fighting a "class action" brought by asbestos victims. Unilever is one of many companies being sued by Gulf War veterans for supplying products to Iraq that might have been used in chemical weapons in the war. BBA paid $20m to a Californian company over an alleged patent infringement. Lucas paid pounds 55m to avoid going to court to fight a lawsuit brought by the Pentagon.

Then there are the run-of-the- mill litigations that American companies regard as part of the cut-and-thrust of commercial life. Small companies regularly sue big ones for price fixing. Shareholders sue companies when a share price has gone down, alleging that the directors were withholding vital information. (These last actions have been made somewhat more difficult by the Securities Reform Act of 1995.)

Jeremy Epstein, head of the litigation department at the New York law firm Shearson Sterling, says there are three reasons litigation flourishes in the US.

First, the victor does not get costs from the vanquished. That means there is less financial risk for a litigant if he or she loses.

Second, lawyers can operate on the basis of contingency fees. If they win, they get a percentage of the award - typically 25 to 40 per cent. If they do not, they get nothing. This makes it attractive for the lawyers and easier for the little guy to sue.

Third, and most important, any action in common law in the US can be heard in front of a jury. In the UK, juries are rarely used in civil cases, with the chief exception of libel hearings.

The use of juries has two disadvantages for the defendant. First, Mr Epstein says: "In cases of technical complexity, they may not be able to comprehend the complexities of the case." Second, juries tend to make higher awards. "Judges operate on precedent, juries on emotion," says Chris Magrath, senior partner of Magrath and Co, a London-based law firm specialising in US cases. He points out that in Ireland, where juries are widely used, awards are much higher than in the UK. In the US the jackpot mentality seems routine. "It's hardly worth filing a complaint for less than $1m," says Mr Magrath.

A revealing comment came from Frank Spagnoletti, a Texas-based lawyer who has been co-ordinating a class action by Gulf War veterans against 100 companies who sold products to Iraq during the Eighties. Among these is Bedford-based Oxoid, until recently a Unilever subsidiary, which makes bacteriological cultures routinely used in doctors' surgeries. Mr Spagnoletti charged that these had been "negligently sold" and that the cultures had been a component in chemical weapons that had affected the American soldiers.

"Potential jurors will be from rural communities and will be well aware of the suffering of Gulf War veterans," he said in September 1995. "Damages will be whatever a jury thinks fair in order to teach these companies a lesson. The sky's the limit ... we've pleaded for in excess of a billion dollars."

Mr Spagnoletti's mention of rural communities is important because a good litigation lawyer will do his level best to make sure a case is heard in a "friendly" place. Mr Epstein says that in metropolitan areas foreign companies will not be at a disadvantage, but elsewhere they could face difficulties.

It is perhaps too easy to drum up an image of xenophobic rednecks determined to kick foreign butt, but it is undoubtedly true that small-town juries will give the home team an advantage. Mr Mednick says the fact that the Atlas trial was held in Decatur, a farming community north of Dallas, played a big part in the outcome. "It was a foreign company going up against a Texan," he says. GKN may well regret that it had to do battle in a southern courtroom rather than in a big city.

What can companies do to ensure they do not fall into these legal traps? There is general agreement that GKN's mistake was allowing the case to get as far as the jury. It could probably have settled out of court for much less, as BBA did when it agreed to hand $20m over to Tilton Engineering of California for alleged patent infringement. "My advice is to avoid a jury trial, especially if you're a foreigner going up against a local company," Mr Mednick says.

It should be possible for companies to protect themselves against contract litigation by writing a clause into the contract, says Mr Epstein. This could, for example, specify arbitration in a particular city (which need not be in the US), or it could say that both parties waive the right to have a jury trial.

Tort actions - non-contractual civil damages cases - are much more difficult. "There's a whole industry looking for mass torts," he says.

And that is the problem. The US system has bred a vast number of lawyers - more there than in every other country put together - and they are not going to push for changes that would destroy their livelihood.