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Going global? Four legal issues you need to consider

Colorado companies that want to do business abroad must do their due diligence

Mark Spitz //May 16, 2016//

Going global? Four legal issues you need to consider

Colorado companies that want to do business abroad must do their due diligence

Mark Spitz //May 16, 2016//

 Nearly 6,000 Colorado companies do business outside the United States. Most of them are small or medium-sized, not Fortune 1000 companies.

Companies expand globally for a variety of reasons: new markets, lower production costs, less competition and to exploit economies of scale, to name a few. Any company looking to go international needs to do its due diligence first, however, including defining objectives, conducting market research and assessing whether it has the necessary resources. Legal issues are an important part of this advance work.

So what do you need to consider before you “go global"?

Legal Structure

There are many ways to “stick your toe in the water” when starting to do business internationally. The simplest way is to export your products directly to customers. Many companies start off this way; it is relatively inexpensive, and avoids taxation and other legal issues in other countries. A good freight forwarder can help you get started with exporting.

Some companies engage a sales representative or distributor in another country.  These arrangements can be tricky, however; the laws of many other countries are very protective of distributors, and terminating one can be difficult and expensive.  It is critical to have a well-drafted distributor or sales representative agreement. Don’t base this relationship on a handshake or an email exchange.

A branch office or subsidiary creates an actual physical presence in another country, and gives the U.S. company more control over its in-country employees, distribution, and customer relations. This structure is more expensive, however, and will usually subject the U.S. company to local taxes and employment laws. 

Protecting your Intellectual Property

Intellectual property (IP) is a valuable asset for many companies. Laws and courts in the United States, the EU, and a number of other jurisdictions provide strong protection for patents, trademarks, copyrights and other IP rights. Some countries, however, such as China, India and Russia, have extremely spotty records when it comes to protecting the intellectual property of foreign companies against infringers.

Your U.S. patent or trademark rights are valid only in the United States. If you plan to do business in another country, you should first apply for a patent or for trademark registration, depending on your business. If you are working with a partner in your target market, include a provision in your contract with that partner that prohibits them from registering your IP.

Otherwise, they may do that in their own name, and you might not own your patent or trademark there. Also, be aware that some countries may require you to license your IP to a local partner in order to do business there, which can increase the risk of infringement or piracy.

Legal Climate of the Target Market

Know the legal climate in your target market. Most countries outside the US use European civil law, which is different from the common law system we use here. For example, you can expect contracts written in a civil law country to have much broader language than a typical U.S. contract, because statutes and not case law will determine how it is interpreted. 

Contracts in those countries may look very different from what you are used to here, with fewer provisions and less specificity around many issues such as indemnifications, limitations of liability, and dispute resolution. At a minimum, you want to address how and where disputes will be resolved, to avoid ending up in local courts.

If you plan to hire local employees in your target country, it is important to know the differences between U.S. employment law and the employment laws of the target country.  The U.S. legal concept of “at-will” employment is rarely found in other countries.  Local law may require a written employment contract for most employees, specific notice periods prior to terminating an employee, and substantial severance payments based upon length of service. 

Local law may require more frequent and longer holidays. Some countries, such as Germany, require employers to have workers’ councils made up of employee representatives and management, which by law must be included in and approve certain management decisions.

U.S. laws will still apply

Even after you go global, some U.S. laws still apply to your international business operations, whether you have established a branch or subsidiary, are using a distributor, or are merely exporting. The U.S. Department of Commerce regulates exports; for certain sensitive items that could be adapted to military uses you may need an export license.  U.S. companies are prohibited from exporting to certain countries such as North Korea, Syria, and Iran (with some limited exceptions), and must take precautions to ensure that their overseas customer does not intend to trans-ship products to a restricted country.

The Foreign Corrupt Practice Act (FCPA) prohibits U.S. companies and their employees, including overseas agents or employees, from paying bribes to foreign government officials or falsifying records to cover up such payments.  The U.S. Department of Justice has been getting more aggressive in recent years with enforcing the FCPA, and penalties can be steep. Any company seeking to do business abroad, in particular with foreign governments, must be familiar with the FCPA and how to comply.

While these legal considerations may sound intimidating, they are just part of the overall due diligence any company needs to work through in taking its business overseas.  The upfront investment may seem high, but there can be significant returns as you expand your business outside the U.S. market.