This article has been broken up and published in three separate parts: (1) The Effect of the Hague Convention on Service of US Actions in Germany, (2) The Effect of the Transatlantic Legal Conflict On Serving Parties in Germany, and (3) A Review of Recognition and Enforcement of US Rulings in Germany.
Compared to the German system of service of judicial documents, US law seems rather liberal. In the US, once a lawsuit has been initiated, it is the initiating party which takes care of service on the defendant. The usual US practice is to hire a process server who delivers a complaint and summons to the business address or domicile of the defendant. Even in cross border-cases, e.g. if the defendant is not a US entity and/or has no direct address in the US, under very special circumstances service can still be effected within the US - for instance on a foreign defendant’s US subsidiary1 if the daughter corporation is a mere instrumentality or alter ego of the foreign defendant or, vice versa, on a foreign defendant’s US parent entity.2 In case of “tag” or “gotcha jurisdiction” the mere physical presence of a defendant or defendant’s representative is sufficient not only to effect service but also to assume jurisdiction.3
However, service becomes more formal once the defendant has no address or representative in the US. In such cases, service requires support of the authorities of the foreign country where the defendant is domiciled or at least has a business address. Such support to effect service abroad is governed by the rules and procedures of the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters of November 15, 1965 (the “Hague Convention - HC”) to which the Federal Rules of Civil Procedure refer.4 However, in light of substantial differences in the system of civil litigation in the US and in Germany, such service abroad in Germany can become a highly problematic issue.
Transatlantic Legal Conflicts
There are concepts, procedures and rules in US litigation which are not only completely unknown to German litigation but clearly contradict or oppose established structures and principles of German law. Most of these concepts have their source in the US rules of proceedings rather than in the substantive US civil, commercial or tort law. The clash of the different legal cultures is best highlighted by the topics pre-trial discovery, jury trial, American rule of costs and contingency fees, punitive damages, treble damages and class actions. Except of class actions (until most recently), all of these have nothing comparable in German law and - moreover - are as far away from basic legal principles in Germany as the Earth is from the moon. This is why since the 70s and 80s of the last century every once in a while a legal conflict showed up which was later named the “transatlantic legal conflict” since not only Germany but also other European countries5 had difficulties coping with US litigation once its impact was located outside the United States. Such conflict calmed down during the last years but still left open issues which are closely related to the future development of US law especially with respect to class actions and punitive/treble damages.
No Recognition of Punitive Damages
The first landmark was reached in 1992 when the IXth senate of the Bundesgerichtshof (BGH - Federal Supreme Court) ruled that a judgment by the Superior Court of the State of California in and for the County of San Joaquin could not be recognized to the extent that plaintiff and applicant was awarded punitive damages which - in this case - exceeded more than twice the awarded damages under the US judgment including damages for anxiety, pain, suffering and general damages of that nature.6 Although the BGH correctly assumed that punitive damages are not a criminal charge but are rooted in US civil law, it denied recognition and enforcement of the US judgment insofar due to a violation of the German ordre public as governed in §§ 723 para. 2, 2nd sentence, 328 para. 1 no. 4 of the German Zivilprozessordnung (ZPO - German Code of Civil Procedure). The idea of punitive damages lies in punishment and deterrence in the interest of the public and such concept contradicts the German model of civil compensation. The case which led to the US judgment was certainly not a commercial dispute but the ruling that there is no recognition of punitive damages in Germany - and as a consequence neither of treble damages - remained.
Consequences on Service Abroad in Germany
The principle of ordre public is also known to the Hague Convention. According to Art. 13 para. 1 HC, a state may refuse to comply with a request for service if it deems that compliance would infringe its sovereignty or security. As a consequence, the argument was used that a lawsuit aiming at a judgment which could not be recognized and enforced in Germany could also not be served on defendants in Germany. In the first move, such argument failed. In 1994, the German Bundesverfassungsgericht (BVerfG - Federal Constitutional Court) which is the highest court in Germany ruled that there is no violation of the German constitution if a US lawsuit aiming at punitive and exemplary damages is served on a German company under the Hague Convention.7
Said ruling of the BVerfG established and confirmed the practice of serving class actions in Germany8, lawsuits aimed at punitive damages9 and even RICO-claims with treble damages.10 In all cases, the basic argument was that service as such did not limit or restrict the (German) defendants’ position or rights. By effecting service, the defendant merely becomes aware of the foreign lawsuit, is fully informed about it and has the best position to exercise his rights and remedies in the foreign litigation. If the defendant fails with respect to punitive damages etc., he is protected under the earlier BGH-ruling according to which no recognition will be granted. This was considered sufficient to protect the national defendants in a US or foreign lawsuit.11
The Bertelsmann/Napster Case etc.
The discussion - and the transatlantic legal conflict - came back to life in the years 2003 and 2005.
By granting injunctive relief, the BVerfG stopped service of a US class action against the German multimedia-enterprise Bertelsmann AG at Bertelsmann’s German headquarters located in Guetersloh. In 2002, Bertelsmann had granted several loans to and placed a “strategic investment” in the file sharing network Napster, which was later accused of several copyright infringements especially by music producers. This resulted in a class action against Bertelsmann alleging that Bertelsmann’s “strategic investment” was an illegal act of assistance to Napster. The claim sought damages in the amount of $ 17 billion simply by adding the individual damages for each illegal download. Bertelsmann argued that such amount was more than ten times the entire turnover of the US music industry, obviously exceeded Bertelsmann’s equity and was a clear and present threat to Bertelsmann’s existence as such. Bertelsmann unsuccessfully objected against the decision of the OLG Duesseldorf as the competent authority to order the Amtsgericht (Local Court) Guetersloh to serve the lawsuit and therefore Bertelsmann had no other option but to address the BVerfG - the German Federal Constitutional Court - with a constitutional complaint12.
Indeed, the BVerfG followed Bertelsmann’s arguments andset aside the service for an initial period of six months.13 However, the violation of Bertelsmann’s constitutional rights was not grounded on the nature of the US lawsuit as a class action. It was, rather, assumed that the US action was used to threaten Bertelsmann and to force it to enter into a settlement agreement it would normally refuse. If there was such “abuse” of legal opportunities, the German constitution prohibits any cooperation. Furthermore, the BVerfG pointed out that the mere service of the lawsuit as such could already trigger disadvantages to Bertelsmann simply by being involved in the US litigation. Even if a recognition of the US judgment would be denied later on in Germany, such ruling would only protect Bertelsmann’s property located in Germany but of course not its property located in the US.
It is obvious that such ruling was clearly dissenting to BVerfG’s earlier decision in 1994.14 For German litigation scenarios the Bertelsmann/Napster case was certainly something spectacular - and something strange. However, it marked the point that German courts and German law are not so much concerned about the unique principles of US litigation as set out above but rather whether these concepts - and the individual US litigation as such - are indeed used “in good faith.” It is therefore no surprise that the BVerfG’s ruling in the Bertelsmann/Napster case had its followers15 but was also heavily criticized.16
In 2005, the OLG Koblenz stopped service of another US class action against - among others - the German defendant Boehringer Ingelheim and referred the case to the BGH for further clarification according to § 29 para. 2 of the German Einführungsgesetz zum Gerichtsverfassungsgesetz (EGGVG - Introductory Code to the Law on the Judiciary Structure).17 The case was again quite unusual. Boehringer Ingelheim is a big pharma enterprise in Germany and of course also distributes its products in the US. In the US, there is no price regulation for pharmaceutical products on the one hand while on the other hand, the US prohibits a re-import of pharmaceutical products. One of the plaintiffs in the US class action was a company which organized bus tours from the US to Canada to enable its customers to purchase pharmaceutical products in Canada at much lower prices than in the US. The plaintiff’s argument was that the defendants - the pharmaceutical enterprises - exercised an influence on the US government to stop such local frontier traffic and were planning to limit their exports to Canada to the extent the pharmaceutical products were necessary to satisfy the needs of the Canadian market only. Therefore, the plaintiffs assumed a “conspiracy” and based their class action on a violation of the Sherman Antitrust Act18 in connection with the Clayton Act19 and were seeking treble damages.
The OLG Koblenz examined several previous decisions by German courts granting service abroad of US actions in Germany and came to the conclusion that it would not accept service in this case. In its well-grounded and rather voluminous merits, the OLG Koblenz explained its first concern that it was highly questionable whether a violation of antitrust law triggering class action claims of an indefinite number of claimants should be considered as a “civil or commercial matter” within the meaning of Art. 1 para. 1 HC. The court’s second concern was the well-known aspect of ordre public according to Art. 13 para. 1 HC if the US action appears as an abuse of the law to force the German defendant to agree to a settlement simply by avoiding the time and costs of US litigation and thus getting rid of the threat of an outrageous damage compensation.20
It is not much of a miracle that the discussion of how to handle service of US actions in Germany started again. Unfortunately neither the BVerfG had to render a final decision in the Bertelsmann/Napster case nor did the BGH decide on the Boehringer Ingelheim case.
The Bertelsmann/Napster case, to begin with, ended because the US action was served on a board member of Bertelsmann during his stay in New York - which was sufficient according to US rules.21 As a consequence, the US litigation went on irrespective of any service procedure abroad in Germany and this is why Bertelsmann - after some extensions of the BVerfG’s injunctive relief for six months each - finally withdraw its constitutional complaint.22
The case which was prepared so ambitiously by the OLG Koblenz had the same fortune. The US action was served otherwise in accordance with US rules and the US litigation went on. Therefore, the parties in the German litigation declared the case as finished and no court decision was required.23
However, the way both cases ended demonstrated that service of US actions on foreign defendants does not exclusively depend on the Hague Convention. Indeed, US rules allow service to be effected “by other means not prohibited by international agreement as may be directed by the court.”24 As a consequence, German defendants had to learn that they could not stop any US litigation against them even if they were able to argue that service abroad in Germany falls under the ordre public according to Art. 13 para. 1 HC.25
Although the injunction of the BVerfG in 200326 and the merits of the decision of the OLG Koblenz in 200527 left open issues, other courts did not change their practice to grant service abroad in Germany of US actions under the Hague Convention. Even if the US action aimed at punitive damages, treble damages or had the shape and nature of a class action, it was qualified as a “civil or commercial matter” and the Hague Convention applied.28 All court decisions were aware especially of the decision of the OLG Koblenz but denied that their cases had to be referred to the BGH for final clearance - either because the respective court (unlike OLG Koblenz) did not intend to differ from the previous rulings of other courts29 or the respective court did not see an obvious abuse of rights or blackmail-scenario30 or it assumed that the case decided by the OLG Koblenz was much different to the case at hand.31
Such case law was confirmed with respect to its accordance with the German constitution after the BVerfG decided not to accept several constitutional complaints against service of US lawsuits since it assumed that there was obviously no violation of constitutional rights. In its first decision of 2007, an individual brought a lawsuit against the subsidiary of a German company in a Puerto Rico-court alleging that he was ignored for a higher management position due to discrimination of age; the claim was aiming at punitive damages in the amount of $ 11,114,500.00. The plaintiff did not only sue the Puerto Rico-entity which was the plaintiff’s employer but also the German parent company and its subsidiaries in the US and in Mexico. After service was effected by the German authorities and an objection to the OLG Frankfurt am Main failed, the German defendant filed a constitutional complaint which was also unsuccessful. The BVerfG did not see an impact on the defendant’s constitutional rights. Although the concepts of pre-trial discovery, American rule of costs and punitive damages are not known in German law, the disadvantages resulting thereof do not infringe basic and constitutional principles in German law.32 In two further decisions of 2007 and 2008, such ruling was extended to US class actions in antitrust cases.33 The risk resulting thereof including the risk of denial of any cost compensation for legal counsel which can be significant in the US should be acceptable for any individual or entity doing cross-border business in the US34
In the end, German defendants, German authorities, German courts - and the German public - had to learn that US actions aiming at punitive or even treble damages and especially US class actions are subject to service abroad in Germany under the Hague Convention. However, this does not mean that a German defendant should simply accept service and beyond that remain silent in Germany independent from organizing its defense in the US lawsuit.
After all, the most problematic and “political” cases remain if (i) the US action must be understood as a blackmail-initiative to force defendant to a settlement which indeed could be qualified as an abuse of rights35 and (ii) from the first assessment of the case it is indeed questionable why such case was brought to an US court since the case shows little or no relation to the US at all.36 Apparently, both scenarios can apply cumulatively. While the first scenario is rather a question of the merits of the case, the second touches upon the sensitive question of US jurisdiction. In both cases, the general recommendation is to challenge service abroad in Germany, thus opening another legal battlefield. This makes sense for two reasons: Firstly, it is a clear signal to the plaintiff(s) that the defendant will use any defense and any remedy at hand.37 When doing so, the plaintiff often has to hire outside - German - counsel and has to face the fact that things will not go forward as quickly as expected and will be more costly than expected.38 Especially in certain class action-cases such strategy can be sensible.
The second reason is to collect a German court’s opinion on the case even if it will finally grant service abroad. When deciding on service, the German court quite often has to examine the same issues - yet, at a very preliminary level - which will also play a role in the original US litigation. It is not that unusual that the merits of the German court’s decision are considered by the US court when examining US jurisdiction. Clearly, the assumption of US jurisdiction is a matter of US law. But in many fields the individual US judge has a large discretion39 and there are also legal concepts such as the forum non conveniens-doctrine which give room to challenge jurisdiction in a way that plaintiff(s) might not have foreseen.40 Here, the merits of the ruling of a foreign court being involved at an early state of the US litigation might be helpful.41