Proskauer Rose International Practice Guide Proskauer Rose LLP |
      Proskauer on International Litigation and Arbitration:
       Managing, Resolving, and Avoiding Cross-Border Business or Regulatory Disputes
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  1. Contract
    1. Choice of law provisions in a contract are given effect, with some caveats.
      1. Under most choice of law analyses, the negotiated choice of law provision will be given effect.
      2. However, the law of a chosen state will not be applied if (a) the parties choose the law of a state to which they have no substantial connection, or (b) the application of the chosen law would be contrary to a fundamental policy of the state which has a materially greater interest than the chosen state in the determination of the particular issue and which -- under Section 188 of the Second Restatement of Conflicts of Law -- would be the state with the applicable law absent an effective choice of law between the parties. Second Restatement § 187; Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 466 (1992); Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20 Cal. App. 3d 668, 672 (1st Dist. 1971) (New York law that enforces forfeiture clauses by which employee forfeits profit-sharing rights was against California public policy, so New York choice of law provision was not given effect).
      3. The proper approach is for the court to determine whether the chosen state has a substantial relationship to the parties or transaction, or whether there is any other reasonable basis for their choice of law. If neither test is met, the court need not enforce their choice. If one of those tests is met, the court must then determine whether the chosen state’s law is contrary to a fundamental policy of the forum state. If not, the court should enforce the parties’ chosen law. If so, the court must then determine whether the forum has a materially greater interest in determining the particular issue than the state whose law the parties chose to govern. If so, the forum law applies and the choice of law is not enforced. Nedlloyd, 3 Cal. 4th at 466.
      4. A court can decline to enforce the parties’ selected law only if the interests of the forum state are “materially greater” than those of the chosen state and the forum state’s interests would be more seriously impaired by enforcing the chosen law than would the interests of the chosen state by application of the forum state’s law. Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App. 4th 881, 898-899 (1998). Effectively, parties cannot contract away from the law of a state that would have applied under the governmental interest analysis test if that state has a materially greater interest in the application of its laws.
      5. The mere fact that one of the parties to the contract is incorporated in the chosen state is sufficient to support a finding of a substantial relationship, and the mere fact that one party resides in the chosen state provides a reasonable basis for the parties’ choice of law. Nedlloyd, 3 Cal. 4th at 467-468.
      6. The scope of a choice of law provision is determined pursuant to the law of the jurisdiction specified in that provision. Whether the choice of law clause is broad enough to encompass non-contractual claims is a matter itself to be decided under the law identified by the clause. The specific wording of the clause is generally determinative of the scope of the clause.
      7. In New York, clauses providing an agreement to be “governed by” and “construed in accordance with” a particular law have been construed as applying to only disputes concerning the agreement itself, and not to all disputes arising out of the relationship, whereas choice of law clauses applying to controversies “arising out of” or “connected to” the contract are construed to include tort or fraud claims. Williams v. Deutsche Bank Securities, Inc., 2005 WL 1414435, at *4 (S.D.N.Y. 2005); E*Trade Fin. Corp. v. Deutsche Bank AG, 420 F. Supp. 2d 273, 290 (S.D.N.Y. 2006), clarification denied, 2006 WL 2927613 (S.D.N.Y. Oct. 12, 2006); Hughes v. LaSalle Bank, N.A., 419 F. Supp. 2d 605, 616 (S.D.N.Y. 2006), reconsideration denied, 2006 WL 1982983 (S.D.N.Y. July 14, 2006).
      8. In California, “governed by” is construed as encompassing all causes of action arising out of or related to the agreement, including tortious breaches of duties arising out of the agreement. Nedlloyd, 3 Cal. 4th at 470. See, e.g., Olinick v. BMG Entertainment, 42 Cal. Rptr. 3d 268, 278 (2d Dist. 2006) (wrongful discharge and age discrimination); VFD Consulting, Inc. v. 21st Servs., 425 F. Supp. 2d 1037, 1047 (N.D. Cal. 2006) (fraud and misappropriation of trade secrets).
    2. Absence a choice of law by the parties in the contract, the choice of law analysis will consider the spectrum of all of the relevant contacts, including the place of contracting, negotiation, performance, subject matter of the contract, as well as the domicile or place of business of the contracting parties, to determine which state has the more substantial relationship to the contract. ABF Capital Corp. v. Berglass, 130 Cal. App. 4th 825, 838 (2d Dist. 2005); Eagle Ins. Co. v. Singletary, 279 A.D.2d 56, 58-59 (N.Y. App. Div. 2000).
  2. Tort
    1. Under the government interest analysis, a state’s recognition of a given tort is viewed as the state’s determination of the point at which it will attach liability to conduct occurring within its borders. States that do not recognize a given tort typically express the state’s interest of (i) avoiding extended financial hardship to negligent citizens or to foreign defendants who might otherwise avoid doing business in the state, and (ii) promoting freedom of investment and enterprise within its borders. Thus, the situs of the injury is critical to the analysis. Offshore Rental, 583 P.2d at 728; Abogados v. AT&T, Inc., 223 .F.3d 932, 936 (9th Cir. 2000).
    2. Laws permitting recovery for losses caused by negligent injuries to key employees express the state’s interest in protecting citizen businesses or individuals from harm due to negligent conduct and the policy extends beyond injury inflicted in the state since economic and tax revenues are affected regardless of where the injury occurs. Offshore Rental, 583 P.2d at 725. What is determinative in these cases is whether the law is (a) anachronistic, (b) of minimal importance to the state and not strongly applied, or (c) easily covered by insurance, and will not be found significantly impaired if not applied. Id. at 729.
    3. Under New York’s choice of law analysis seeking to apply the law of the jurisdiction with the most significant relationship to the dispute, the courts treat conduct-regulating laws (i.e. laws aimed at the primary conduct) and loss-allocating laws (i.e. post-tort remedial rules) differently. The former are generally governed by the law where the tort occurred because that jurisdiction has the greatest interest in regulating behavior within its borders. The latter are subject to a three-part test. Cooney v. Osgoode Machinery, Inc., 81 N.Y.2d 66, 72 (1993).
    4. The place of the wrong is the place where the last event necessary to make the actor liable occurred.
  3. Tortious interference with contracts
    1. Under the government interest analysis, a state that does not recognize tortious interference with contract expresses its state interest in determining the point at which it will attach tort liability to conduct occurring within its borders. The law in such cases is designed to protect potential defendants, including foreign defendants who might otherwise avoid doing business in the state, and so the state will have a significant interest in applying its laws to conduct within its borders. Abogados v. AT&T, Inc., 223 F.3d 932, 935-936 (9th Cir. 2000).
    2. Under the New York choice of law analysis, this tort is conduct-regulating and therefore the law of the locus of the tort -- the place of the wrong -- will apply. Tortious interference with contract requires that the plaintiff suffer damages, and thus the place of damage is the place where the last event necessary to make the actor liable occurred. Hidden Brook Air, Inc. v. Thabet Aviation Int’l, Inc., 241 F. Supp. 2d 246, 277 (S.D.N.Y. 2002).
  4. Fraud
    1. The government interest analysis leans towards applying the law of the state in which the misrepresentations took place, on the presumption that such state has the predominant interest in regulating conduct within its borders. McGhee, 871 F.2d at 1426. However, a state may have a strong public policy interest in preventing fraud by resident corporations against foreign residents. Clothesrigger, Inc. v. GTE Corp., 191 Cal. App. 3d 605, 616 (4th Dist. 1987) (it is simply wrong that “California has no interest in providing nonresident plaintiffs greater protection” in fraud case than they would be afforded in their home state).
    2. Under New York law, the law applicable to torts, including fraud, is the law of the jurisdiction with the greatest interest in the litigation. Generally, the location of the injury resulting from the fraudulent conduct is the determinative consideration. For corporate entities, the place of injury is the principal place of business or location of the business, not the place of incorporation/organization. Pinnacle Oil Co. v. Triumph Oklahoma Ltd. Partnership, 1997 WL 362224, *1 (S.D.N.Y. 1997). However, the test in each instance is which state has the greatest interest, and if the grouping of all contacts indicates a state other than the state where the injury was sustained has the greater interest, then that state’s laws may apply. See, for e.g., LaSala v. UBS, 510 F. Supp. 2d 213 (S.D.N.Y. 2007) (notwithstanding that injury resulting from fraudulent conduct occurred in the U.S., foreign country had greater interest in regulating fraudulent conduct of banks within its borders); Sussman v. Bank of Israel, 801 F. Supp. 1068, 1075 (S.D.N.Y. 1992) “[T]his Court has regarded the place where the victim of fraud or negligence suffered economic loss as less significant for choice of law purposes than the law of the place by which the defendant’s conduct is evaluated”).
  5. Products liability
    1. Under the government interest analysis, strict liability in tort is not concerned with regulating conduct within a state’s borders but with compensating injured consumers on the theory that the enterprise is better able to sustain the burdens of the costs of the injuries. It is an expression of policy that once an entity is instrumental in placing a defective product into the stream of commerce, then liability attaches without regard to conduct or fault. Kasel v. Remington Arms Co., Inc. , 24 Cal. App. 3d 711, 733 (2d Dist. 1972).
    2. Thus, the place of the wrong is not as important in the analysis as the place where the injured party being compensated is domiciled. See id. at 735 (California’s interest in compensating its residents injured by defective products outweighs any interest Mexico has in regulating its own manufacturers where no Mexican citizen was a party to the action and Mexican law does not recognize the doctrine of strict liability).
    3. New York’s choice of law analysis views product liability as loss-allocating, and subject to the loss-allocating 3-part test for determining the applicable law. See Cooney v. Osgood Machinery, Inc., 81 N.Y.2d 66, 72 (N.Y. 1993); Monroe v. NuMed, Inc., 173 Misc. 2d 817, 820 (N.Y. Sup. Ct. 1997).
  6. Unfair Trade Practice Acts
    1. Even where the contract contains a choice of law provision, unfair trade practice claims under a different state’s laws may proceed to the extent those claims are not made under or pursuant to the contract. Klussman v. Cross Country Bank, 36 Cal. Rptr. 3d 728, 731 (Cal. App. 2005) (Delaware choice-of-law clause, Delaware unfair trade practices and California unfair competition law both alleged, neither dismissed); Am. Online, Inc. v. Superior Court, 108 Cal. Rptr. 2d 699, 701-02 (Cal. App. 2001) (Virginia choice of law clause, California Unfair Business Practice claim not dismissed).
      1. Practice Tip: One difficulty -- under either the significant relationship or governmental interest analysis -- arises when a party advocates one state’s laws for the majority of torts, but a different state’s unfair trade practice laws. The purpose of unfair trade practice acts is to maintain ethical standards in dealings between persons engaged in business, to promote good faith at all levels of commerce, and to ensure that local business interests do not proceed with impunity in their commercial activities. United Roasters, Inc. v. Colgate-Palmolive Co., 485 F. Supp. 1041, 1046 (E.D.N.C. 1979); Marshall v. Miller, 302 N.C. 539, 549, 276 S.E.2d 397, 403 (1981). A party is in a sensitive position when it seeks to establish that the conduct at issue implicates one state’s interest in maintaining ethical standards of conduct but that another state has the more significant relationship or government interest regarding the other claims relating to that same conduct.
  7. Measure of damages
    1. Under the government interest analysis, damage-limiting laws, generally speaking, express the state’s interest in protecting its own resident defendants from exaggerated claims and excessive financial burdens. Thus, non-U.S. states are generally presumed not to have an interest in applying their damage-limiting laws against non-resident tortfeasors. Marsh v. Burrell, 805 F. Supp. 1493, 1498 (N.D. Cal. 1992).
    2. However, a damage-limiting law may advance the state’s interest even when applied against non-resident defendants where the injury takes place in the state’s borders. For example, where a major industry in a state is tourism, applying damage-limiting laws to protect visiting non-resident defendants from excessive financial burdens may advance the state’s interest even though the defendant is not a resident of the state. Hernandez v. Burger, 102 Cal. App. 3d 795, 802-03 (1980).
    3. Under New York’s choice of law analysis, loss-allocating laws (post-tort remedial rules) are subject to a three part test established in Neumeier v. Kuehner, 31 N.Y.2d 121, 127-28 (1972).
      1. First, if the parties are domiciliaries of the same state, the law of that state applies.
      2. Second, if the parties are domiciled in different states, and if the tort occurred in the domicile of one of the parties, the law of that state applies.
      3. Third, if the tort did not occur in the domicile of either party, the law of the situs of the tort will normally apply unless displacing it “will advance the relevant substantive law purposes without impairing the smooth working of the multi-state system or producing great uncertainty for litigants.” By way of example, the state in which the tort occurred but in which no party is domiciled does not have an interest in applying its limitation on the recovery of non-economic damages, whereas the forum in which the plaintiff is domiciled has an important interest in protecting its own residents injured in foreign jurisdictions by ensuring that they receive full compensation. Marillo v. Benjamin Moore & Co., 32 A.D.3d 1313, 1314 (4th Dep’t 2006).
      4. Loss-allocating rules are those that prohibit, assign or limit liability after the tort occurs.
    4. Joint/several liability: Under a separate analysis than that applying to the underlying claim, courts view the residency of the plaintiff as of determinative importance to the question of joint/several liability. In California, for example, the law is that each of the joint tortfeasors may be liable in full, and even if not all the tortfeasors are joined, California courts will not allow the concurrent fault of absent tortfeasors to reduce the damages owed by the present tortfeasor. This rule operates to put the plaintiff’s recovery above equitable apportionment of damages, and, thus, is not implicated where the plaintiff is not a resident of California. Browne v. McDonnell Douglas Corp., 504 F. Supp. 514, 518 (C.D. Cal. 1980).
    5. Wrongful death: The interest of a state in a tort rule limiting damages for wrongful death is to protect defendants from excessive financial burdens or exaggerated claims. So where the defendant is not a citizen of the state that limits damages, that state does not have a real interest in applying its laws. Hurtado, 522 P.2d at 670.
  8. Punitive damages
    1. As discussed above, the issue of punitive damages is distinct from the issue of compensatory damages and the application of different laws to each may be appropriate. In re Air Crash at Belle Harbor, No. 2006 WL 1288298, at *23 (S.D.N.Y. May 9, 2006).
    2. The purposes underlying the award of punitive damages are punishment of the defendant and deterrence of future wrongdoing. In re Air Crash Near Chicago, 644 F.2d 594, 613 (7th Cir. 1980) (applying California choice of law rules). The purpose underlying the disallowance of punitive damages is protection of defendants from excessive financial liability. Id.
    3. So, under the government interest analysis, states in which the conduct occurred or in which the parties’ principal places of business are located have an interest in applying their laws to permit/prohibit punitive damages that prevent future misconduct and protect businesses within their borders. Id. at 613, 622 (under both “significant relationship” test and “governmental interest” test).
    4. Generally, the state of the place of injury alone (assuming different than the state in which the conduct occurred or in which the plaintiff’s principal place of business is located) does not have a significant interest in applying its punitive damage laws to control behavior by deterrence or punishment or to protect defendants from liability given that the misconduct and the defendants are in other states. However, the place of injury may have a special interest in applying its punitive damage laws to injuries that constitute major disasters, or relate to common carriers, given its interest in promoting safety and not suffering disasters to businesses within its border. Id. at 613, 623 (under both “significant relationship” test and “governmental interest” test).
    5. The domicile of the plaintiff does not play a significant role in punitive damages choice of law determinations. The place of the relevant conduct and the defendant’s place of business are important factors. In re Air Crash at Belle Harbor, 2006 U.S. Dist. LEXIS 27387, at *80 (S.D.N.Y. May 9, 2006) (place of the design and manufacture of the product was the more appropriate law for punitive damages).
    6. States that recognize punitive damages will be found to have a greater interest in enforcing their laws against resident defendants than states that do not recognize punitive damages against non-resident defendants. Damage-limiting laws express a policy of protecting resident defendants from unlimited liability, and not of limiting the damages available to resident plaintiffs. See Hurtado v. Superior Court, 11 Cal. 3d 574, 584 (Cal. 1974) (jurisdiction which would limit damages has no interest in applying its damage-limiting law when the defendant does not reside in that jurisdiction). A non-U.S. state does not have a strong interest in denying its plaintiffs the fullest recovery possible under non-U.S. law permitting punitive damages. Bank Saderat Iran v. Telegen Corp., WL 188935, at *2 (9th Cir. Feb. 6, 2002).
    7. Under New York’s choice of law analysis, punitive damages are conduct-regulating because they are meant to deter egregious conduct rather than to compensate plaintiffs. Hence the dominant factors in the analysis will be those that touch on the defendant’s actions; the law of the place of the tort has the strongest interest in deterring future tortious conduct within its borders. Townes v. Cove Haven, Inc., 2004 WL 2403467, at *2 (S.D.N.Y. Oct. 27, 2004).
  9. Comparative negligence/contributory negligence.
    1. Where the question is whether the law of contributory negligence in one state or that of comparative negligence in another should apply, the courts will consider the interest at stake in contributory negligence -- regulating conduct within the state’s borders and holding parties liable for conduct within the borders -- to find that it is not in the state’s interest to regulate or impose its contributory negligence regime on a non-U.S. plaintiff.
    2. The governmental interest analysis factors in whether the policies underlying the law are still strongly held, or whether the law is attenuated and anachronistic. States that apply the more archaic, isolated law of comparative negligence may be found less impaired if their laws are not applied. Offshore Rental, 583 P.2d at 726 (“If one of the competing laws is archaic and isolated in the context of the laws of the federal union, it may not unreasonably have to yield to the more prevalent and progressive law, other factors of choice being roughly equal.”) Contributory negligence has been described as a “discredited doctrine.” Pope & Talbot, Inc. v. Hawn, 346 U.S. 406, 409 (1953). See also Li v. Yellow Cab Co., 13 Cal.3d 804, 811 (1975) (stating California’s basic objection to “the [contributory negligence] doctrine – grounded in the primal concept that in a system in which liability is based on fault, the extent of fault should govern the extent of liability – remains irresistible to reason and all intelligent notions of fairness.”)
    3. Under New York choice of law, comparative/contributory negligence laws are loss-allocating, and the inquiry is governed by the Neumeier 3-part test. Generally speaking, the third rule that the locus of the tort governs is displaced in comparative negligence cases to acknowledge New York’s comparative negligence regime because (1) the state where the accident occurred has no substantive interest where non-domiciliaries are concerned, (2) New York has an interest in protecting its domiciliaries injured in foreign jurisdictions, and (3) New York has an interest in enforcing its determination that its own domiciliary whose negligence is only partially responsible for his/her injuries should not go uncompensated. O’Brien v. Marriot Int’l, 2006 WL 1806567, at *4 (E.D.N.Y. June 29, 2006) (and cases cited therein).

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