In a tragic 1978 accident on a Solano County highway in California, Ruth Ann Moreno was killed and her husband, Gary Zurcher, was severely injured when the rear tire of their motorcycle suddenly deflated and they fell in the path of an oncoming tractor-trailer. Litigation resulting from that crash is now set for review by the U.S. Supreme Court, and is causing worries in capitals around the world.
What is at stake is the extent of the power of state courts to haul before them as defendants overseas businesses that never have even made a sale in the United States.
Manufacturers already know that if the products they turn out are destined for the United States, they can be made to answer for their defects in U.S. courts, even though sales were made through intermediaries. But the California Supreme Court decision that the justices will review went further. It said that a supplier to an overseas manufacturer who is turning out products for a worldwide market is also subject to the jurisdiction of courts where the final product -- the product of the defendant's customer -- is sold. That holding is "absolutely outrageous," a trade official at one European embassy here fumed. "It has the most serious implications for any company outside the United States."
The Confederation of British Industry, allied with the American Chamber of Commerce in Britain, told the high court in a brief filed in mid-April that the ruling "threatens important and legitimate interests" of its members. The groups warned that upholding the California decision "would substantially increase the cost and uncertainties of international trade for British manufacturers" and "may well lead to conflicts between the governments and laws of the United Kingdom (and other countries) and the United States, to the detriment of trade between those nations."
Ironically, it was not Zurcher, but a foreign corporation -- Cheng Shin Rubber Industrial Co. Ltd. of Taiwan -- that argued for the broad reach of California law that so terrifies the foreigners. Cheng Shin has settled with Zurcher, but now wants to recover from Asahi Metal Industry Co. Ltd., one of its Japanese component suppliers, claiming that a defective Asahi valve was the real cause of the problem. "All the witnesses to the accident, all the people involved, are here in California," explained Ronald R. Haven, Cheng Shin's lawyer. So that is where the company wants to present its case against its supplier.
But it is also likely that given the pro-plaintiff stance of U.S. tort law -- particularly in California -- it will be easier for Cheng Shin to win its case there than it would be in any overseas court. And the size of an award a plaintiff can win here dwarfs the damages that are possible in overseas litigation.
Haven argued that his Taiwanese client, as part of doing business in the United States, accepted the power of U.S. courts, but should be able to use that same judicial power in conflicts with other overseas companies. The California justices agreed, in a 5-to-1 vote. The Japanese company should have known that its customer was shipping a significant part of its production run to the United States, the majority said.
California manufacturers lobbied for that decision. "It's not fair to have somebody who does business in California be the only one who is liable," insisted Michael Brening, counsel of the California Manufacturers Association, which sided with Cheng Shin at the state high court and plans to file a supporting brief soon with the U.S. Supreme Court.
The California rule, however, "could be very onerous, when that parts-manufacturer has no real control over where that part is going to be sold," said Northwestern University law Prof. Anthony A. D'Amato, chairman of the international law section of the Association of American Law Schools. Douglas E. Rosenthal, a U.S. expert on extraterritoriality and a chief author of the British industry brief, asked rhetorically: "Do our companies have to know the law in Venezuela when we sell to a French company?"