In a one-day Department of Justice Antitrust Division takedown last September, nine international companies based outside the United States pled guilty to criminal antitrust violations and agreed to pay more than $740 million in fines. In our increasingly globalized world, federal law enforcers have investigated and prosecuted numerous foreign corporations with limited presence in the United States for violations of U.S. criminal laws. Whether in cartel, corruption, or other international cases, foreign companies and their employees have chosen to submit to U.S. jurisdiction, sometimes facing hundreds of millions of dollars in fines and jail time.
With this background, it may come as a surprise to American corporations that their foreign counterparts—joint venture or business partners—may be able to successfully challenge U.S. criminal charges on a technical ground: failure to properly serve charges. The few foreign corporations to have attempted this argument have met with moderate success because the Federal Rules of Criminal Procedure do not address service of process overseas. Although the law on this topic is inconsistent, it is abundantly clear that American companies may stand alone in court if they are ever charged with criminal wrongdoing in conjunction with a foreign business relationship because their foreign partner may be beyond the reach of service of process by the United States.
Serving Charges in International Criminal Enforcement
The Department of Justice and other U.S. law enforcers have made international enforcement, i.e., prosecution of non-U.S. companies and individuals who violate U.S. criminal law, a priority. This, coupled with a broadening range of companies at risk in anti-corruption, antitrust cartel, and other investigations, has led to robust investigations of foreign entities. However, the procedural rules governing federal criminal litigation do not address the seemingly simple issue of how charges are served on companies with limited or no presence in the U.S.
Rule 4 of the Federal Rules of Criminal Procedure requires that prosecutors serve charges on corporate defendants, specifying that the summons (1) be delivered to someone able to receive service ("delivery requirement"), and (2) be mailed to the organization's last known address ("mailing requirement"). Fed. R. Crim. P. 4(c)(3)(C). For U.S. companies, this rule presents few barriers to service. However, foreign companies present in the U.S. only through a subsidiary or a joint venture may have no officers, agents, or "last known address" in the U.S., making service difficult.
Challenges to Service of a Summons
To counter challenges based on service by foreign corporate defendants, the U.S. government has relied on principles of agency and alter ego to justify its service of foreign corporations through service on U.S. affiliates or representatives. The law remains largely unsettled regarding how to establish service on an agent or on an alter ego. In a few instances, prosecution has been stalled because the government failed to demonstrate proper service, and in one instance, this delay led to a dismissal of all charges based on an inability to serve the foreign defendant. Delay is a significant complication for prosecutors striving to bring cases before juries while witnesses are fresh, evidence is readily available, and perceived harm is in the public's consciousness. The remaining alternative is to seek service via treaties with foreign nations, which raises its own complexities.
Fed. R. Crim. P. 4 references agency law principles in permitting service on a "managing or general agent" within the U.S. to satisfy the delivery requirement. In two recent cases, courts looked to federal agency law to determine whether service on a U.S. subsidiary as an agent of its foreign parent was sufficient, and reached different results.
In United States v. Kolon Industries, Inc., the court drew upon basic agency principles, namely, that the "mark of an agent is the ability, whether actual or apparent, to contract in the name of the principal and thereby bind him." 926 F. Supp. 2d 794, 810 (E.D. Va. 2013). There, the court held service was insufficient because the U.S. subsidiary was not an agent of its foreign parent—it did not bind its parent when making contracts. In United States v. Pangang Group Co., the court applied the Ninth Circuit's agency test, considering (1) whether the services rendered by the U.S. subsidiary are of such importance that, if the parent had no U.S. representative, it would undertake similar services itself, and (2) whether the parent exercises control over its U.S. subsidiary. 879 F. Supp. 2d 1052, 1058–59 (N.D. Cal. 2012). Finding the U.S. subsidiary's functions integral to its Chinese parent's business and parental control of its subsidiary, the court held that service on the subsidiary satisfied the delivery requirement.
Courts agree that the government can comply with the mailing requirement by serving an agent of the foreign corporation, but that is all courts agree on in this area. The formulations courts use of agency law, and the factors considered relevant to the analysis are quite different. Moreover, agency arguments only go so far—they have been applied only to determine completion of the delivery requirement, not the mailing requirement.
Alter Ego Analysis
As an alternative to the agency theory, the U.S. government has also argued that serving a U.S. alter ego of a foreign company meets both the delivery and mailing requirements. The five federal courts to consider this have taken inconsistent approaches, some applying federal law and some state law. The key factor for each was whether the U.S. entity and its foreign parent maintained (or failed to maintain) corporate formalities justifying separate treatment. Notably, facts that tend to prove agency (e.g., agent independence) often cut against the alter ego theory, and vice-versa.
In three of the five recent cases, courts applied federal law to determine whether a U.S. company is an alter ego of its foreign parent. The decisions echo "veil piercing" analyses. Applying the Eleventh Circuit's multi-factor test, one court determined that a U.S. company was the alter ego of its parent because the companies held themselves out as one company, shared a website, and shared common directors. United States v. Public Warehousing Co., No. 09-CR-490, 2011 WL 1126333, at *6–7 (N.D. Ga. Mar. 28, 2011). Another court, which focused on the subsidiary's contacts with the forum and on whether the subsidiary was a mere conduit for its parent's activities, determined that a U.S. subsidiary was the alter ego of its parent in part because the companies shared directors and the parent's employees held themselves out as employees of the U.S. subsidiary, including when contacting other U.S. companies.United States v. Chitron Electronics Co., 668 F. Supp. 2d 298, 305–06 (D. Mass. 2009). A third court applied the Ninth Circuit's two-prong test and found that a U.S. subsidiary was not the alter ego of its foreign parent despite their common directors, because the two lacked a unity of interest and there was no showing of fraud or injustice in the corporate structure. Pangang, 879 F. Supp. 2d at 1066.
The remaining two courts applied state law in assessing whether the government properly served a foreign parent through its U.S. alter ego. Under state law, a subsidiary is generally an alter ego of its parent if: (1) the corporation is a mere instrumentality of its parent with no independent legal existence, and (2) the corporate structure has been used to perpetrate fraud or injustice. In both cases, the courts found that subsidiaries were not alter egos because the companies maintained corporate formalities and were sufficiently capitalized. Service through the subsidiaries was therefore insufficient. Kolon, 926 F. Supp. at 817 & n.23; United States v. Alfred L. Wolff GMBH, No. 08-cr-417, 2011 WL 4471383, at *5–6 (N.D. Ill. Sept. 26, 2011). This alter ego finding was made in both cases even though in both cases the parent and subsidiary had common board members and the facts were sufficiently developed to charge both corporations as conspirators.
Improper Service: Dismissal or Delay?
Courts are hesitant to dismiss indictments based on lack of proper service, although one court has done so without prejudice on a motion from the government for inability to serve the defendant. Alfred L. Wolff, No. 8-cr-417, ECF. No. 199 (June 19, 2012). Part of this reluctance may be explained by the lack of clarity as to whether both delivery and mailing requirements must be met. Some courts view only the delivery requirement as necessary to effectuate service, while others deem completion of both the delivery and mailing requirements as necessary. Compare Kolon, 926 F. Supp. 2d at 801 (only delivery requirement necessary) and United States v. Dotcom, No. 12-cr-3, 2012 WL 4788433, at *1 (E.D. Va. Oct. 5, 2012) (same) with Pangang, 879 F. Supp. 2d at 1065–66 (mailing requirement necessary). In addition, courts are plainly concerned about creating barriers to prosecution that enable corporations to evade U.S. jurisdiction by "purposefully failing to establish an address here." Kolon, 926 F. Supp. 2d at 801. Nonetheless, failure to serve a defendant halts proceedings and stalls trials. In Pangang, the court ordered prosecutors to pursue non-rules based means of service on foreign defendants, including via Mutual Legal Assistance Treaties (MLATs), 879 F. Supp. 2d at 1069, and the government did so. For many reasons, including the fact that use of an MLAT requires assent by the treaty partner, this difficult, time-consuming alternative is not preferred by prosecutors and may not work for all countries or for all alleged crimes on which the indictments are based.
Conclusion: A Note of Caution for American Corporations
Service of criminal charges on foreign corporations is a surprisingly unsettled area of law and courts have struggled to balance the technical requirements of Rule 4 with the practical implications of allowing foreign companies to evade prosecution for crimes with a U.S. nexus. Whether the government can establish service using agency or alter ego theories is a highly fact-specific inquiry, and the facts that establish one avenue may not suffice for the other. The most important point for U.S. companies is that foreign business partners facing U.S. criminal investigations may not have sufficient contacts with the U.S. to be brought before an American court, even if their contacts are sufficient to establish the elements of the offense. Those same foreign organizations that refuse to surrender to the power of federal courts may not be compelled to appear in U.S. court.
The law regarding the exposure of foreign corporations to litigation in U.S. courts is still developing, which has led to surprising results. In addition to potentially successful service-related defenses asserted by foreign corporate defendants in criminal cases, unsettled issues of personal jurisdiction and other threshold questions are playing a large part in important cases involving foreign corporations, including multi-district litigation regarding LIBOR manipulation and aluminum warehousing. Recent trends suggest that foreign corporations may be able to stay out of U.S. courts by calling on principles of procedure and jurisdiction; defenses undoubtedly unavailable to their American counterparts and business partners.
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, any of its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.