Hearing of the Subcommittee on Administrative Oversight and the Courts of the Senate Judiciary Committee - "Leveling the Playing Field and Protecting Americans: Holding Foreign Manufacturers Accountable"

Statement

Hearing of the Subcommittee on Administrative Oversight and the Courts of the Senate Judiciary Committee - "Leveling the Playing Field and Protecting Americans: Holding Foreign Manufacturers Accountable"

Chaired By: Senator Sheldon Whitehouse (D-RI)

Witnesses: Louise Ellen Teitz, Professor Of Law, Roger Williams University School Of Law; Thomas L. Gowen, Partner, Locks Law Firm; Chuck Stefan, Vice President, The Mitchell Company; Victor E. Schwartz, Chair, Shook, Hardy & Bacon LLP Public Policy Group, on Behalf of the Institute of Legal Reform, U.S. Chamber of Commerce

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SEN. WHITEHOUSE: The hearing will come to order with my apologies for a delayed start. I had very much hoped that the votes that are about to get underway on the Senate floor would be done by now, but the usual last minute wrinkles emerged, so it looks like it would be prudent to get started. We may have to interrupt in 20 minutes or so, once the votes get close, and I'll go over and try to be the last senator to vote on the first vote and the first senator to vote on the second one and come back without too much interruption, but I very much appreciate everyone being here.

Every day Americans in all walks of life are injured by defective products that are manufactured outside the United States. These products hurt consumers. They lead to serious injuries and even death and they hurt the American businesses that sell these products and that must deal with angry customers, product recalls and unusable inventory. The list of recent examples of Americans injured by products made in China and other countries is shocking. Last year a contaminated blood thinner caused severe medical reactions and contributed to numerous deaths. In 2006, a lead-tainted charm, and by tainted I mean 99 percent lead, claimed the life of a four-year-old. Food products from seafood to honey have been contaminated with unthinkable chemicals, including veterinary drugs banned in domestic production, potentially harmful antibiotics and unapproved food additives. Sixty million packages of pet food contaminated with tainted wheat gluten have been recalled in the last two years. Substandard tires have failed, leading to fatalities. It's a long litany.

Most recently defective imported drywall, imported from China, has been found to contain excessively high levels of sulfur, causing houses to smell like rotten eggs, corroding copper wiring and making expensive appliances fail. Thousands of homes may be affected. A subcommittee of the Commerce Committee is holding a hearing on Thursday to consider the consequences of those defective products, and I commend that committee for their leadership on what rapidly is emerging as a major problem for homeowners and businesses. We all know that American manufacturers must comply with regulations that ensure the safety of American consumers. When they fail to do so, they must answer to regulators and they're held accountable through the American system of justice.

Unfortunately, however, foreign manufacturers are not held to the same standards. This puts at risk American consumers and businesses and puts American manufacturers at competitive disadvantage. A major cause of this disparity is that Americans injured by foreign products face unnecessary and inappropriate procedural hurdles if they seek to hold foreign manufacturers accountable.

First, they must identify the manufacturer of the product that injured them, often not as easy as it would sound since many foreign products do no more than indicate their country of origin. Second, an injured American must serve process on the foreign manufacturer. This means the injured American has to deliver legal papers to the company directly or through a registered agent explaining that he or she is bringing a legal action against it, but this simple step often requires enormous time and expense. Lawsuits, even can fail over it as the injured American attempts to comply with various complicated international treaties. Third, an injured American must overcome the technical defense that even though a foreign manufacturer's product was used by an American consumer, sold to that consumer, nevertheless the courts of that consumer's home state do not have jurisdiction over that company. Finally, even after an injured American has overcome these hurdles and prevailed in court, a foreign manufacturer can avoid collection on the judgment, often simply cutting off communications or shutting up the business and reopening under a different name.

Americans harmed by defective foreign products need justice and they do not get it when foreign manufacturers use technical legal defenses to avoid paying damages to the people they have injured. Today's hearing will help us learn more about these failures of justice and what we can do to fix them. If we do nothing, Americans will continue to be injured by foreign products and denied a meaningful remedy. American businesses will continue to be left on the hook for foreign defective products they import, use or resell, and foreign manufacturers will maintain a competitive advantage over American manufacturers who must follow the rules and are subject to the American tort system.

This hearing will consider the range of legal impediments standing between an injured American and an enforceable, collectible judgment against the foreign manufacturer. It also will demonstrate that these impediments result in enormous harm to American consumers as well as damage to American businesses that transact business with the foreign entity. The assembled panel of experts will explain legal hurdles facing Americans injured by foreign products and also put those injuries into real world context by describing the harm they can cause to families and businesses.

I am very grateful to all the witnesses for taking the time to come before the committee today. I am especially delighted to have my fellow Rhode Islander, Louise Ellen Teitz, here to testify. She is a distinguished professor at Roger Williams University Law School in Rhode Island. Her brother is a dear friend of mine of many, many, many years' duration. Her expertise will make a great contribution to this hearing, as it has to that wonderful law school of which she is one of the very first professors.

I look forward to continuing to work with Professor Teitz and the other witnesses, as I will soon introduce legislation that addresses the difficulty in serving process on foreign manufacturers. My legislation will require that a manufacturer who imports goods into the United States must designate an agent for service of process who will accept the legal papers required to initiate a lawsuit. It will require the development of a register of these agents so that an injured American can inform the manufacturer defendant of a lawsuit quickly and cheaply.

I look forward to working with Ranking Member Sessions and other senators on this legislation. Similarly, I look forward to hearing the witnesses' perspectives on the approach I've proposed. Protecting Americans and holding foreign manufacturers accountable for the injuries they cause is not a partisan issue. Everyone agrees that we should do what we can to keep Americans safe from defective products wherever they may come from. So, too, I think we all agree that American companies should not be at a competitive disadvantage to their foreign counterparts, particularly not for a wrong reason. With these fundamental agreements, I look forward to finding legislative solutions that will level the competitive field and protect Americans.

I will ask for our first witness, Professor Louise Ellen Teitz, as I said a professor of law at Roger Williams University School of Law in Bristol, Rhode Island. Ellen has been teaching and writing about transnational litigation, civil procedure, conflicts of law, private international law, and comparative procedure for over 20 years, both here and abroad. She is the author of a treatise on transnational litigation and has participated as a member of the U.S. State Department delegation to The Hague conference in connection with the jurisdiction and judgments convention, the choice of court convention, and the conventions on service of process, evidence and apostille. Professor Teitz is a member of numerous professional associations, including the American Law Institute and the International Association of Procedural Law. She has practiced law in Washington, D.C. and Dallas, Texas, in the fields of anti-trust competition and trade regulation practice and federal and state litigation. She received her B.A. from Yale University and her J.D. from Southern Methodist University School of Law. Professor Teitz.

MS. TEITZ: Thank you, Chairman Whitehouse, Ranking Member Sessions, and members of the subcommittee. I am honored to be here today to address the committee on the difficulties of suing foreign parties, specifically foreign manufacturers, in U.S. courts. I'll speak briefly to three major procedural hurdles: obtaining personal jurisdiction, serving process or notice to the defendant and enforcing U.S. judgments abroad, the first two of these being more easily remedied by some form of legislation.

A party suing in the U.S. must first be able to find a court that has constitutional authority over the defendant or what is called personal jurisdiction. Then, after filing, the party must inform the defendant of the lawsuit and its contents or, that is, serve process of the summons and complaint. At the end of the lawsuit, the party must be able to collect any money awarded, especially when the defendant's assets are outside of the U.S.; that is, be able to enforce the judgment abroad. As a result of different approaches in other legal systems, U.S. consumers face difficulties recovering in U.S. courts or enforcing U.S. judgments abroad, in fact more difficulty than many foreign consumers face in the reverse situation. In addition, there is a competitive impact, obviously, on U.S. manufacturers who are sued more easily and cheaply here in the U.S. and against whom judgments can be enforced throughout the U.S. under the Full Faith and Credit Clause.

First, personal jurisdiction: It's important not only for the initial litigation but for subsequent enforcement of the judgment here or abroad. When the defendant is an alien, there is the additional concern with potential enforcement in foreign locations where the defendant has assets. Personal jurisdiction in the U.S., as you're all well aware, is governed by the due process clause, generally under the 14th Amendment, both in state and federal court, which requires that the defendant have certain minimum contact, such as not to offend traditional notions of fair play and substantial justice. Even when the defendant is a foreign individual or entity, state boundaries are generally, unfortunately, the measuring unit.

The Supreme Court's most recent case concerning a foreign defendant and a product in the stream of commerce is the Asahi case from 1987. It broke the requirements into two parts: the defendant's purposeful minimum contacts with a forum and the fairness to the defendant in having to be subject to jurisdiction in the forum. The finding of no jurisdiction over the alien inadvertently encouraged foreign manufacturers to challenge the assertion of personal jurisdiction in many cases by providing a basis for them to argue that there was unfairness to the alien defendants. While lower courts, both state and federal, have, in fact, upheld jurisdiction over foreign manufacturers since Asahi, the determination is ultimately very fact-specific, both as to whether the contacts were purposely directed at the forum and whether it is fair. This fact-specific nature encourages litigation, litigation that's very expensive and time-consuming for a plaintiff and costly in terms of judicial resources. A federal statute that required consent to jurisdiction as well as designation of a domestic agent for service for foreign manufacturers importing certain types of products into the U.S. could reduce the uncertainty that plaintiffs face about if and where they can sue and maintain jurisdiction in the U.S.

Service of process, the second procedural problem that a U.S. party faces once a party has filed is notifying the defendant of the lawsuit, as constitutionally mandated. Suing foreign defendants raises several additional issues that add delay and expense for the consumer. First, if the defendant is located in a country with which the U.S. has a relevant treaty or agreement, that treaty controls both in federal and state courts. The Hague convention on service of process, which currently 59 countries are party to, includes many of our major trading partners: Japan, Canada, and China, and is the exclusive means of serving a defendant in a member country.

If no treaty controls, there are several options but, nonetheless, these are time-consuming and in fact in some cases take six months to a year to execute, if at all. Since The Hague convention is generally applicable to service of defendants from our major trading partners, I want to highlight briefly the implications of service under the treaty. There is a process with a central authority which is set up. It is time-consuming. All documents must be translated. At a special commission a meeting in The Hague in February many countries have been trying to do this in three months, but countries such as China indicated they would have trouble making a six-month deadline.

What is crucial for triggering The Hague service convention in federal or state court is that service is affected abroad; that is, that the document is served abroad. However, that determination of whether service is made abroad is made by reference to national law and in the U.S. that's mostly state law. Thus, if service is complete under the law of the specific state without transmittal abroad, then the convention of expense and delay is not triggered. Thus, this is one area that in fact legislation that required a foreign manufacturer to appoint a domestic agent for service might reduce the cost of service abroad, especially if the agent would be appointed for all lawsuits throughout the U.S. and it would be even more effective, obviously, if, in addition, the legislation were expanded to require explicit consent to jurisdiction in the U.S. Consent is a traditional basis for personal jurisdiction and one that thereby could avoid the need for lengthy litigation over the nature and extent of minimum contacts necessary for the court to have authority over the defendant.

I see my time is up and I will just close by saying that it is difficult to enforce U.S. judgments abroad. It is a trade imbalance. We enforce incoming judgments quite readily, but we are faced with difficulty in enforcing our judgments abroad and so many of the manufacturers have no assets in the U.S. They structure their business to avoid personal jurisdiction and, unfortunately, in the end, a U.S. plaintiff who is choosing among potential defendants is obviously well advised to choose a domestic defendant.

I look forward to your questions and having the opportunity to work with the committee as it develops its legislation. Thank you.

SEN. WHITEHOUSE: Thank you very much, Professor Teitz. Once again, American manufacturers on the losing end of American trade policy. The next witness we will hear from, and then we'll go general questions, is Thomas Gowen. He's a partner at the Locks law Firm in Philadelphia, Pennsylvania. He has practiced law for 30 years with his primary concentration in the areas of complex personal injury and civil litigation. He has represented numerous clients in products liability, head injury, construction litigation, medical malpractice, and automobile litigation. Mr. Gowen is a member of the faculty of the National College of Advocacy and a past chairman of the Montgomery Bar Association Continuing Legal Education Committee. He has published legal articles in Am. Jur. Trials, a Guide for Legal Assistance by the Practicing Law Institute, The Barrister, the Pennsylvania Law Journal Reporter, and other journals. Mr. Gowen is a graduate of Hariford College and Villanova University School of Law. We are delighted to have him with us. Please proceed, Mr. Gowen.

MR. GOWEN: Thank you, Senator. The problem has grown -- (off mike) -- seven and largely recognized the problems and recommended numerous solutions. We now import $2 trillion worth of imported goods, over $200 billion of which come from China, and that number is expected to triple by 2015, according to the commission. The commission recommended a structured response by the United States of prevention, intervention and response, recognizing that it would not be able to inspect nearly all of the products coming into the country. The response portion of the American reaction to the product liability issues raised by imports is a critical part that has roles to play for the Consumer Product Safety Commission and others, but the civil justice system has long been a potent and effective method for bringing about safety.

The interagency working group recommended using the principles of hazard and risk recognition or simply the practice of safety engineering which are used to prove a product's liability case in the United States.

The problem today with bringing these cases against foreign manufacturers, as Professor Teitz has indicated, is that you have numerous civil procedural hurdles which subsume much of the litigation in this case and the issues are identification, service of process, jurisdiction of the courts and collectability.

Professor Teitz addressed the issue of service of process. It is no joke that identification is a major problem because many, many of the products that come into this country bear nothing more than a label saying made in a particular country with no link to the particular manufacturer, and we have seen in some cases that I've handled that the importer hasn't even been able to identify the manufacturer.

I think it is important to recognize that the Supreme Court in the Asahi decision in a footnote in Justice O'Connor's opinion, did recognize that it was not addressing the issue of whether Congress could legislate to allow the system of justice to be based upon an aggregate of national contacts. That would be bringing our system of justice into sync with the system of commerce. These companies sell into the market of the United States and then claim that they don't sell into a particular state, but you can't sell to the American market without the product going to one of the 50 states. It simply is an impossibility, so we need to bring our system of commerce into sync with the system of justice or the other way around.

I recommend that the Congress consider legislating an import license which would require that there first be identification of a product with the manufacturer and its address that is posted on a United States government website that's searchable and available to the public. Second, that we require the designation of an agent for the service of process, as your bill is recommending, and service of process anywhere in the United States. Third, that the license require consent to jurisdiction in the states where the product is sold or causes injury and, fourth, that there be product liability insurance in the United States.

The collectability issue I think raises another somewhat more subtle issue. It's obvious when the company can't collect a judgment but it also greatly impairs the process of settlement when the foreign defendant is not concerned that its assets may be at risk and, therefore, it fails to negotiate reasonable and sensible settlements as occur in most of our domestic litigation. I think that the use of a import license and the interagency task force recommended a system of verification and, essentially, licensing could be done and could go a long way toward leveling the playing field so that foreign manufacturers had to come to the courts in the United States and be amenable to process and justice in the same way that American companies are.

Thank you, Senator.

SEN. WHITEHOUSE: Thank you very much, Mr. Gowen. I understand that the ranking member, Senator Sessions, is on his way and I know that he will be very keen to hear from Mr. Stefan, who hails from his home state. So what I think I'll do is step out of order, if Professor Schwartz wouldn't mind, and go directly to Victor Schwartz and then we'll go to Mr. Stefan afterwards so that Senator Sessions can be here.

Victor Schwartz chairs the public policy group at Shook, Hardy & Bacon. For over two decades he has co-authored the nation's leading torts case book, Prosser, Wade and Schwartz's Torts and also authors Comparative Negligence, the principal text on the subject. Mr. Schwartz serves as general counsel to the American Tort Reform Association and co-chairs the American Legislative Exchange Counsel's Civil Justice Task Force. Mr. Schwartz is former dean of the University of Cincinnati College of Law and currently serves on its board of visitors. During his academic career, he litigated cases on behalf of plaintiffs and secured the first punitive damages award of the Midwest against the manufacturer of a defective product. Mr. Schwartz has been inducted as a life member of the American Law Institute and served on the advisory committee to the Restatement (Third) of Torts, products liability and apportionment of liability projects. Mr. Schwartz holds -- (off mike) -- J.D. from Columbia University and a B.A. from Boston University. He is extremely distinguished as a witness, and we are delighted to have him here. Will it be Dean Schwartz, Professor Schwartz, Counselor Schwartz --

MR. SCHWARTZ: Just Victor. (laughs) But thank you, Mr. Chairman, and I appreciate the invitation. One thing you didn't include in my biography is that I taught at UVA in 1971. And my whole life has been this way. I know that you graduated after, and every place I've been something good has happened after I left, so I --

SEN. WHITEHOUSE: Maybe something good will happen in the Senate today.

MR. SCHWARTZ: It may, because I'm testifying today on behalf of the Institute of Legal Reform, the United States Chamber. I'm privileged to do that. The views are really my own. I've thought about this problem for a long time and see it as very serious to American manufacturers and large manufacturers of foreign goods that have jurisdiction in this country. Every manufacturer on its products pays what I call a tort tax. With something like a step ladder, many of which are imported, it's as much as 16 percent, so having American manufacturers and foreign manufacturers who are sued here pay the tort tax and having foreign manufacturers not pay, as you hinted in your opening remarks, Senator, that is simply unfair competition and it's wrong.

And this is an area where you can get agreement between a distinguished member of the plaintiff's bar and some of us on the other side to do something. As I said to Mr. Gowen earlier, the main problem is getting this issue highlighted enough so that it really can be addressed. The House looked at the issue last year. They had some legislation that overreached a bit, but I think consensus can be reached.

One of the things that I've noted is that many people have viewed this Asahi case, which Professor Teitz referred to, as a barrier. If you read the case, it's not a product liability case. It was two foreign manufacturers, one of whom was trying to seek jurisdiction in the United States, and Justice O'Connor, who wrote the plurality opinion, was clear that she might have had a different point of view if it were a personal injury case. The jurisdiction might have been fit in that case if it had been somebody who was injured by a product, a Californian, where the state would have a greater interest than in refereeing a dispute between two foreign manufacturers who were not present there. And I mentioned this in my House testimony and, behold, two courts and I'll submit the opinions to you have held that Asahi's rules do not apply when there is a personal injury case and that there's broader jurisdiction when there is a personal injury case and someone is hurt here in the United States by a foreign product. In other words, this body has more latitude to develop legislation on jurisdiction than some might think.

Senator Sessions, good to see you, sir. I note that your focus has been on service of process and we would work with you on that, but I would urge you to also consider legislation that addresses the jurisdictional issue. I mean, it's very rare in a Supreme Court opinion that a justice provides a road map to Congress as to what to do, but that's exactly what Justice O'Connor did in the Asahi case. In a very pregnant footnote, she outlined how legislation could be formed and that is to have jurisdiction in federal courts only, assembling contacts throughout the United States. A company can sell a few products in California.

Under the rules you can't get jurisdiction over them, but they're selling products throughout the United States, so if you assemble those contacts, you can have jurisdiction in federal court, and I think the legislation, as my testimony indicates, has to be very carefully drawn not to go overboard and beyond the specific problem. And that was the problem with some of the House legislation; it got into issues such as choice of law and other irrelevant things. It also affected domestic distributors. You don't want to do that, but I think, apart from service of process, addressing the jurisdictional issue is very important and only this body can do it.

And I have a final suggestion in any legislation that might be of interest to you. I've dealt and talked with many foreign manufacturers who are sophisticated, but a lot of them don't really fully understand what our tort system does. And I think if this body passes legislation, that information should be provided that reaches these foreign companies about our tort system. Tell them that you're subject to punitive damages with no limit. Tell them that you can be subject to strict liability. Let them know about the power of folks like Mr. Gowen, who can see that they never will exist on the face of the earth again if they sell defective products in this country.

And I think that will be a deterrent as well as any legislation you may pass.

Thank you both.

SEN. WHITEHOUSE: I very much appreciate your testimony, Dean Schwartz, Professor Schwartz, whatever it will be, and I would like to recognize the ranking member, the distinguished senator from Alabama, Jeff Sessions, who has appeared. I don't know if the senator would care to make an opening statement at this point. We are through the testimony of Professor Teitz, Mr. Gowen and Professor Schwartz, awaiting only the testimony of your fellow Alabaman, Mr. Chuck Stefan.

SEN. JEFF SESSIONS (R-AL): It's great to have Chuck here, Mr. Stefan, and we're delighted to have you here and look forward to your testimony. I know because of the votes we've gotten behind. I won't issue any long statement. I was on the way up here and the Armed Services staff, which is meeting down the hall, grabbed me. They needed one more for a quorum, so we got 2,400 military promotions done just a few minutes ago because I was another five minutes late.

Let me just say this, Mr. Chairman, this is a good hearing on an important subject. I think we ought to do the right thing. For a good public policy, it should be a bipartisan effort and maybe, some disagreements, but I don't know what they will be. But, I believe that this is not working adequately. I believe clarity and rationality can be improved in this system and so I'm glad you're having a hearing. I think it's the kind of the thing we ought to do more of -- get into the nitty gritty of a problem that makes life miserable both judges, lawyers, and parties when we can probably fix it.

SEN. WHITEHOUSE: Well, I sure --

SEN. SESSIONS: And I look forward to hearing Chuck's testimony.

SEN. WHITEHOUSE: Well, I'm delighted to have you here and I would like to thank you and compliment you for you and your staff's cooperation in putting this hearing together -- a thoroughly cordial and highly bipartisan basis and it's really almost a joint hearing at this point. These are joint witnesses and I couldn't be more delighted by the way this is going.

And now we get to hear from Chuck Stefan, who currently serves as the Senior Executive Vice President for Apartment Development at The Mitchell Company -- a homebuilder in Alabama, Florida, and Mississippi, that has been ranked among the top 100 single family builders in the country. Mr. Stefan has been associated with The Mitchell Company, Incorporated and it's predecessors in interest since 1973, following his tenure with the multi-family finance section of the U.S. Department of Housing and Urban Development.

Since joining the company, Mr. Stefan has been responsible for the site selection, acquisition, and long-term financing of the divisions' various department programs. Mr. Stefan was appointed to the office of Senior Vice President in 1988 and is also a Principal in the firm. Mr. Stefan received a B.A. from DePaul University in 1967 and an M.B.A. from Florida State University in 1971 and we welcome him to the hearing. We believe he has the award for farthest traveled.

MR. STEFAN: Good morning, Chairman Whitehouse, Senator Sessions. Thank you for allowing me the opportunity to share my experience with you this morning. And, Senator Sessions, thank you for stopping at the Armed Services Committee, because my middle son is up for Lieutenant Colonel in the Air Force and we really needed that vote. (Laughter.)

The Mitchell Company builds homes in Alabama, Florida, and Mississippi. Prior to the current housing crisis, we were one of the top 100 builders in the country. But, my story today does not originate in Alabama, Florida, or Mississippi. It originates in China and Germany. You see, we currently have 45 houses, including in homes located in Alabama and Florida, that have been positively identified as containing Chinese sheetrock -- the same Chinese sheetrock that has been so much in the news lately. This drywall emits corrosive gases that smell like rotten eggs and quickly damages copper both in the piping and wiring systems.

We received our first complaints on this problem in late 2008, when our homeowners complained of a rotten egg smell in their Mitchell homes. We also discovered that we were replacing the air conditioning coils in the air conditioning units in these houses as often as once every year. Further investigation, and a Wall Street Journal report, confirmed that the smell and corrosion stem from the Chinese drywall.

This calamity greatly impacted our business and the homes of our customers. Little did we realize the unnecessary and unfair procedural battles we faced simply because the defective product had been manufactured abroad. First, it was difficult to figure out where the sheetrock came from. Some pieces from our Alabama homes had the word "Knauf" stamped on the back of the product or simply stamped "Made in China", without any further identification.

In order to identify the manufacturer of the sheetrock from our Florida homes, we had to pay $2300 simply to access shipping data from the Customs Department. We had to navigate through many different search terms and descriptions of the possible product, ranging from sheetrock to drywall to plasterboard to gypsum board. These searches, along with other information we are obtaining, will allow us to identify the manufacturer, but only after substantial time and expense. If the product had been properly marked to begin with, identification would have been as easy as reading the manufacturer's name on the product itself.

We have had a great deal of difficulty holding Knauf accountable through the U.S. Court system because the Hague Convention requires us to serve this company as an overseas defendant, even though Knauf has extensive operations in the U.S., is familiar with the U.S. language and customs, and sends and receives Federal Express packages daily from its' Chicago headquarters. The rules vary by country, but under the Hague Convention, we had to translate all of the complaints into both Mandarin Chinese and German. The translators then had to send the complaints to the country involved and get an official there to serve them.

We estimate that it will cost $2300 for the German service, and delay our case for an additional 12 to 16 weeks. Serving the two Chinese manufacturers will cost us $3000 and could add as long as 6 to 8 months. Unfortunately, all of these delays and expenses are especially harmful to our clients.

One home had such a severe drywall problem that we had to replace the refrigerator, the washer, and the dryer because the wiring had corroded and ruined these appliances. We have also relocated one homeowner over her concerns about living in a defective house. We have offered to move another homeowner to a different house in the same subdivision, but are still awaiting her answer.

As you can see, the lack of registration and identification of these imported products, and the difficulties involved in serving a foreign manufacturer, have made a challenging task even more daunting. Foreign manufacturers should not be left off the hook for harming U.S. consumers and businesses like ours, especially if they are conducting substantial operations here in the U.S. If American businesses can't hold foreign manufacturers accountable, it hurts our bottom line, in addition to harming U.S. consumers and homeowners. I look forward to answering any questions you may have about my experience and thank you again for allowing me the opportunity to testify today.

SEN. WHITEHOUSE: Thank you, Mr. Stefan. Your testimony, I think, is particularly important because it provides such a concrete example of the situation and the consequences of the situation that I think Mr. Gowen in his testimony described so well. Mr. Gowen said, "Foreign manufacturers enthusiastically seek access to the American market, but assiduously seek to avoid responsibility and accountability in American courts for injuries caused by their products".

And that seems to be the case. They have no hesitation marketing the sheetrock, had no hesitation shipping it to you. They had no hesitation taking the check. But, when it came to cleaning up the damage that they caused, suddenly you have to translate things into Mandarin and German and chase people to foreign countries.

An interesting element of your story that I'd like you to expand on a little bit, is that there seems to be a double whammy here for American business in the sense that, from the very get-go, an American gyp board manufacturer lost the sale of sheetrock to whoever manufactured the defective sheetrock, so there's a harm to the manufacturer that lost the sale and then, here you are, the innocent intermediary, and now you evidently have to -- they're your customers and they're upset and they can't find the sheetrock manufacturer and so, it sounds like, that's all on you right now to try to keep your customers happy and you're getting no support from the foreign sheetrock manufacturer. Is that correct?

MR. STEFAN: That's correct, Senator. And I'd also like to point out that the American manufacturer of the air conditioning equipment -- Goodman -- sent their representatives to the site, replaced their product, and continue to replace their product, even after they know that it's not a defect in their manufacturing and even though Knauf sent it's attorney and a Ph.D. in toxicology and a lab assistant to the site, they've offered no assistance in finding a solution, or paying any bills, or even calling us back now that we've tested them a little.

SEN. WHITEHOUSE: And the harm to the air conditioner's because the release of sulfur from the sheetrock causes an environment which copper corrodes very rapidly?

MR. STEFAN: Yes. We're not exactly sure that it's the sulfur or some compound that's in the sheetrock, but about once a year, you have to change the coils. It's a very thin copper and it eats right through and the coils just have to be thrown away. They're not of any use, but --

SEN. WHITEHOUSE: Ordinarily, how often would you have to change the coils in a regular home?

MR. STEFAN: We have plenty of apartments after 20 years with the same coils still operating in the air handler.

SEN. WHITEHOUSE: And these ones don't last a year?

MR. STEFAN: That's correct. That problem's not solved, but it's been obviated by every time we replace a copper coil today, we change out the entire unit and use an aluminum coil from a different manufacturer.

SEN. WHITEHOUSE: Professor Teitz, would requiring foreign manufacturing who sell defective products in this country, to abide by a Service of Process Requirement and appoint a Registered Agent and perhaps even consent to jurisdiction -- is that a trade issue that would interfere with our treaty obligations with respect to the WTO. Is it addressed in NAFTA or CAFTA or any of the trade treaties we're under?

MS. TEITZ: I don't think those two parts do because of the service part -- at least, under the Hague Convention, the question is whether the service was actually effected and made in the U.S. and it's left to the national interpretation which is, as I mentioned, in this country, is State Law, and the argument is that service is complete in the U.S.. Therefore, it's sufficient and the Hague Convention isn't triggered. Similarly, consent is generally viewed as an acceptable basis for jurisdiction and I think in terms of --

SEN. WHITEHOUSE: That wouldn't be seen as a trade barrier?

MS. TEITZ: I don't think either one would be a trade barrier because consent is also available as a basis for jurisdiction against domestic manufacturers and more specifically, certainly with a service issue, most U.S. corporations to be incorporated, they have to designate an agent for service, or under most state law if you do business, and you haven't designated an agent, you are deemed to have designated the Secretary of State. So, it seems to me -- I'm not an expert in trade law -- but, I don't see anything that would suggest a favoring of nationals, of one's own nationals.

SEN. WHITEHOUSE: And you mentioned in your testimony that U.S. consumers face difficulties recovering in U.S. courts or enforcing U.S. judgments abroad -- in fact, more difficulty than many foreign consumers face in the reverse situation. So, in light of that lack of reciprocality, if you will, what would the effect be if foreign countries retaliated and opposed similar rules as the Service of Process Legislation? Would that be significant or are American manufacturers already held accountable abroad?

MS. TEITZ: Well, U.S. manufacturers already held accountable abroad. Many of these consumers come to the U.S. and sue our manufacturers here because they prefer our legal system, they prefer the jury, they prefer large pain and suffering, they prefer the opportunity to be part of a class action. So, I think it's more likely that they come here and if they do get a judgment overseas, the enforcement of foreign judgments incoming is a matter or State law, but as a practical matter, the Uniform Foreign Money Recognition Act and it's amended version, tend to enforce judgments as long as they're with personal jurisdiction and usually our notions of personal jurisdiction are sufficient to accept what was used there.

SEN. WHITEHOUSE: So, this really would be a matter of balancing, rather than creating what one might call a race to the bottom?

MS. TEITZ: I would think that is the case. Certainly, one of the things to keep in mind, for instance, in terms of jurisdiction, in the European countries, at the moment, normally a person injured can sue at the place of injury and that isn't always true here. I mean, a perfect example is a recent case out of the Third Circuit that had to do with an airplane crash, but nonetheless, you couldn't sue at the site of injury. Conceivably, you may be able to sue a Swiss company that imports lots and lots of its planes to the U.S. in Colorado, but that's not clear even at this point.

So, I think that our notions that personal jurisdiction in certain areas are narrower because they are activity based and have a constitutional component and therefore, they look at what the defendant does rather than where the injury occurs.

SEN. WHITEHOUSE: The distinguished ranking member.

SEN. SESSIONS: Thank you, Mr. Chairman. Mr. Stefan, first let me say how much I appreciate The Mitchell Company and its good work is one of Alabama and Mobile's finest companies and we wish you every success. So, you've contracted with an attorney. Have you yet gotten service of process and how long has it been?

MR. STEFAN: I'll let my attorney address that.

SEN. SESSIONS: All right.

STEVEN L. NICHOLAS (attorney for Mr. Stefan): Good morning, Senator Sessions.

SEN. SESSIONS: You are --

MR. NICHOLAS: Steve Nicholas.

SEN. SESSIONS: With --

MR. NICHOLAS: With Cunningham Bounds and --

SEN. SESSIONS: Well, Cunningham Bounds knows how to get service if anybody does, so we're listening to --

SEN. WHITEHOUSE: They know how to get a judgment, too. (Laughter.)

SEN. SESSIONS: They're one of the best plaintiff law firms in America and quite an honorable and effective group.

MR. NICHOLAS: Thank you, sir. It's my understanding, the complaints have been translated and they have been sent over to Germany and China, respective. But, exactly where they are in the process I can't tell you. We started that process probably eight weeks ago, so while we sue local defendants, if you will, distributors, and of course, we have service over them, but everybody's just sort of sitting there waiting for the foreign defendants to appear.

SEN. SESSIONS: Well, it's just a big problem.

I guess you've had to spend considerable hours in research and there's no one easy source to go find exactly how to get this done. Is that fair to say?

MR. NICHOLAS: Well, the service issues --. There are companies out there that will do it for you, of course for a fee. And, so, to get service over the two foreign defendants costs The Mitchell Company ultimately, a little over $5000, but then it's the delay involved. And, we hope it will all work out and we'll be able to get that service.

SEN. SESSIONS: All right. Now, I just --. I think I like what Mr. Schwartz said because I do know that major foreign companies -- really good companies that invest in Alabama and other places -- want to know about the legal system. They want to know what they're subjected to and if they think they're going to a haven for abusive torts that makes them nervous, they're not willing to invest in that area. And, so these are matters that are very important.

It's also unthinkable that we would allow a system to occur in which our American manufacturers are more liable and more subject to lawsuits than a foreign manufacturer. If they sell in the United States, seek access to our market, they should be subject to the same rules. And, Mr. Schwartz, I like your statement a lot, which is that we should be able to tell them precisely what they're subjected to and what kind of liability insurance they may need to have or what kind of behavior they need to demonstrate to avoid getting sued in U.S. federal court.

Mr. Gowen, you've filed these lawsuits, I believe. Do you think that's something that makes sense to you? The professor said, who by the way is (headed to cross her own torts?) and one of the great legal minds in the country.

MR. THOMAS L. GOWEN: Absolutely, Senator, and I must say that although I was flattered, I was not quite sure that I or my colleagues have quite the draconian level of power that Mr. Schwartz described to us in his testimony.

SEN. SESSIONS: You have been known to get companies' attention.

MR. GOWEN: Well, we have and we think that's a good thing because we think that that gives them some considerable incentive to increase the safety of their products. And, when we apply the principle of safety engineering to prove a product liability case, the term strict liability is strictly a misnomer. You do have to prove that the product was defectively designed, defectively manufactured, defectively sold, which is essentially the same as proving that it was done negligently.

And it's a considerable burden, it's a considerable litigation, but that's where the litigation should take place, not on the issue of civil procedure and, in response to Senator Whitehouse's question on the issue of jurisdiction and the comments that Mr. Schwartz made, Mr. Stefan doesn't have any idea of what's going to happen next in his litigation once they come and answer, because he's going to get a brief saying that the court in Alabama does not have jurisdiction.

SEN. SESSIONS: That's what the defendant will say.

MR. GOWEN: And that's what the defendant will say and when I testified in the same hearing that Mr. Schwartz did in November of 2007, the Asahi case had been cited 2600 times. I checked just yesterday and it's now been cited 5778 times, which tells you how often that this defense is being raised in the federal courts, and then involves substantial briefing. As Professor Teitz said, there was just a decision in the Third Circuit this week involving an airplane crash. So, it is a considerable problem and I think it is one that Congress should consider addressing through the Consent to Jurisdiction mechanism and as Professor Schwartz said, Justice O'Connor did set forth an invitation to Congress to act in this manner.

SEN. SESSIONS: Briefly, how comfortable are you with Justice O'Connor's suggestion?

MR. GOWEN: I'm very comfortable with her suggestion. I'm not so comfortable with the factors that she set forth in her opinion. I think Justice Brennan set forth in the stream of commerce approach to the jurisdictional issue, a much more realistic thing, because I think our system of commerce has grown where these companies in the trillion dollar range are sending products to what they call the American market and then they come and say, "But we're not selling it to the state of New Jersey or the State of Alabama or the State of Pennsylvania" and it's simply impossible to sell to the American market without the product going to one of the states.

SEN. SESSIONS: Professor Teitz, what about the -- Are there any dangers to the American companies that if we do the wrong thing that our companies could be subjected to similar type circumstances where perhaps the courts are less objective in foreign countries. Do you see any concern there?

MS. TEITZ: I think there is certainly always the danger that countries adopt reciprocal legislation, but at this point, I think, in general, our companies are at a competitive disadvantage because of their being subject to suit here and overseas for that matter and they're getting judgments -- parties getting judgments in Germany and bringing them over here to be enforced where they're assets. Once upon a time, it wasn't quite as bad because foreign companies generally had assets in the U.S. so you could enforce a judgment you got here against one of them here. But, that of course, has changed. With a click of the mouse, one can move assets offshore and then, you're stuck.

SEN. SESSIONS: I remember one that I was involved with at least for a while involving an antique automobile and bothering with a great ally of ours -- Germany. But, the person aggrieved, at least I thought, ended up spending more money, and I'm not sure he ever got the car. It was expensive. Litigating abroad can be significant and can wipe out any game you get from an ultimate victory, so --

MR. GOWEN: Senator, if I might in response to your question. The common practice if one of our companies is sued in this country by a group or individual foreign plaintiffs is to file a foreign non- convenience petition and ask the court to send it back to the country of origin. And that has occurred in pharmaceutical litigation, it's occurred in oil company litigation, it's occurred in numerous areas so that the American companies are actually saying to the United States courts that they would rather be sued in England or Germany or wherever their product has caused harm.

MR. SCHWARTZ: I think you can meet Asahi case head on without having to go to descents because as I mentioned just before you came in, Senator. The Asahi case was a strange case. It was a case of two foreign companies seeking to use a California court for their dispute which arose abroad and I would throw it out and probably both of you would. It wasn't where a person was injured in California by a product sold in California and Justice O'Connor in her opinion, made that distinction clear.

So, if your jurisdiction is over cases where somebody has been injured or there's been property damage, and you assemble the contacts nationwide as she suggested, and place the jurisdiction in federal courts, first you gain a little bit more in terrorem effect, meaning to make those folks who were going to tell them about the tort system worry a little bit that they can be sued here. Second, you (help?) address the 5700 cases interpreting this decision of a plurality of 21 years ago. So, you cut down on litigation. You have clarity. You provide at least some in terrorem effect to foreign manufacturers and I do think it's good for them to know about this system.

The tort tax situation, which I very briefly said, is intriguing. You have -- One company I represent makes the best, I think, respirators in the world. But, they pay a tort tax on each product. A Chinese company comes in with a cheaper version, they can sell it for much less, because they don't pay any liability and it's blatant unfair competition that needs to be addressed.

SEN. WHITEHOUSE: Professor, just to follow up a little bit on Asahi, if I can be amateur lawyer for two seconds, the principle that we're talking about that comes out of the Asahi decision, is the sort of purposefulness test that's required for there to be jurisdiction in any particular state. And as I read it, the five judges who joined in the concurring opinions all, in one way or another, disassociated themselves from that part of the opinion. So, you actually have a majority of the Supreme Court that refused to sign on to that principle and yet, it seems to have gained considerable currency. It's an interesting phenomenon that a minority of the court, in that sense, through its plurality opinion has set the law when a majority of the court said, "You know, we're not comfortable with that".

Do you agree with that reasoning?

MR. SCHWARTZ: Absolutely. You read the case exactly right and you make a map with these plurality opinions which, for anybody, are difficult to read. You did exactly the right thing and that's map out where each judge --Justice, excuse me -- made his or her statement. So, you have a majority of the court there. I agree with your analysis of the case. Yes, sir.

SEN. WHITEHOUSE: And it creates a very bizarre anomaly, as I read it, which is that you can be a company that wants to sell a product in the United States that definitely, assuredly, purposefully, wants to sell its product in the United States, but because tort law tends to be a state law, state court matter, you can intend to sell it in the United States, and then not to intend to sell it in any particular state, with the result that your product is everywhere physically and yet nowhere legally for purposes of jurisdiction.

MR. SCHWARTZ: That's absolutely correct.

SEN. WHITEHOUSE: It's a puzzle, isn't it?

MR. SCHWARTZ: Well, I think you can solve the cases cause, with 5,700 sides, the cases more -- cause more confusion than it's worth. It's unlikely that the court is going to be addressing the issue again soon. You have been given invitation to come into this area. It's not as if the court is saying 'we're the only body that can tell you what to do.' They provided a road map. Your reading of the case is exactly right, and I would encourage you to address the jurisdictional issue, as well as the service and process issue. And Mr. Gowen makes a good point about identification and also enforcement.

SEN. WHITEHOUSE: Should we require consent to jurisdiction as part of the service of process legislation? Would you join the other two legal witnesses in agreeing with that and making the panel unanimous?

MR. SCHWARTZ: Yes, if it meets the basic Constitutional requirements.

SEN. WHITEHOUSE: Yeah.

MR. SCHWARTZ: Because probably you have the same Constitutional requirements for consent that you would have for obtaining jurisdiction. So I would concur as long as the basic Constitutional requirements, yeah.

SEN. WHITEHOUSE: You'd still have to have minimum contacts, but you wouldn't necessarily have to have purposefulness?

MR. SCHWARTZ: Yes, Senator.

SEN. WHITEHOUSE: Okay, I understand. One interesting point that was raised by the discussion between the ranking member and Mr. Stefan and his attorney is that there are other parties, domestic parties, American distributors and so forth, involved in your litigation. As I understand it and this is a question for the lawyers, as a general proposition, if you assume that the damages that Mr. Stefan's clients have experienced are worth a million dollars. That's just what it is. It's a million dollar case, and we all know it. That's a given. And you have an array of different defendants, the distributors, perhaps Mitchell itself, scores have sold it, who knows, there could be an array of them. It doesn't make the damages any less simply because the foreign defendants can't be found.

Under principles of joint and several liability, the million dollars doesn't get carved up and go away. And so in effect, by dodging responsibility under the American law, not only did they cause the American manufacturer to lose out, not only did they cause Mr. Stefan's company to have to take on a project of coping with irate consumers, who frankly aren't truly your problem, you're they're problem, but you also have the other constellation of defendants, who if they're not found, will end up bearing their share of the costs in litigation out of the eventual judgment. So they're sort of triply loading up other American businesses in an uncompetitive way. Is that a fair explanation? Let me start with Mr. Gowen and Professor Teitz, and Professor Schwartz.

MR. GOWEN: Yes, I think it's very fairly stated, Senator, and I think all of us want to see American companies succeed, and this is an area where there is definite unfairness because the American companies can be left holding the bag and because they can't get them there. As you say, the damages don't go down or don't go away. These folks just are able to avoid their responsibility or, you know, sufficiently add complexity to the case before you can ever get them to the court that it becomes extremely owneress (sic) to get them there.

SEN. WHITEHOUSE: And of course, we focused a certain amount in this discussion on the commercial defendants and the business effect of this, but behind all of that is some, in this case, Alabaman who is out of their house.

MR. GOWEN: That's right.

SEN. WHITEHOUSE: Or who can't get the air conditioner up and rolling because the coils have corroded out and I gather the weather can be pretty warm down there sometimes.

MR. : You need them there.

SEN. WHITEHOUSE: You need an air conditioner. So there's a real human cost in addition to the business cost. Professor Teitz.

MS. TEITZ: I think that as a practical matter as well what happens is if you're a lawyer who's consulted about this, you would advise the client to go after the domestic defendants because there's so many procedural hurdles, and if you have a Chinese defendant who you ultimately get jurisdiction over, the question is are you going to be able to enforce a judgment. Are there any assets in the U.S. or debtors to the Chinese company in the U.S.? So they may be, for all purposes, not really a viable defendant anyway. So if you already have a viable defendant who has joint and several liability why necessarily --

SEN. WHITEHOUSE: Why -- (inaudible) -- yeah.

MS. TEITZ: -- continue on that.

SEN. WHITEHOUSE: Yeah, I understand. So some people might not even take the effort that Mr. Stefan's company did to chase down the true miscreants that they're satisfied that they can collect their judgments from the American companies, and the injustice compounds itself. Professor Schwartz did you want to comment on that, or?

MR. SCHWARTZ: I think that you stated this very, very well because it's in terms that everybody can understand. Everybody can --

SEN. SESSIONS: (Inaudible) -- had complemented you twice. That's a vague --

(Cross talk.)

MR. SCHWARTZ: I taught at his school ten years before he was there, and as I said in my beginning, that's probably why he did well, I had left. If this issue is broken down into terms that everybody can understand, I think it'll get solved. When I hear it discussed, it's discussed in too complex a manner, but you put it well.

Number one, the rules let a foreign manufacturer take away business from American companies, and right now, that is something that rings true. We're worried about jobs in this country. We're worried about business in this country. Second, they can sell it cheaper because they don't pay the torte tax, and the American company does. And then third, the irony is under our joint and several liability rules, some American manufacturer who didn't do anything wrong or marginally was involved pays the whole liability.

And if you break it down into those three things and just talk about it over and over again, the media will pick it up, and you'll get some wind behind the sails of some legislation that can address the problem. I think it would be addressed when you have consensus, other than other issues that seem more important to people, take the front seat. But this is something that's affecting this gentleman, businesses all over America, and people who are left with nobody to sue in some situations.

SEN. WHITEHOUSE: Well, let me ask the distinguished ranking member to conclude the questioning of this panel unless another Senator should turn up with another question that they're burning to ask. And we'll then close the hearing after that.

SEN. SESSIONS: Thank you, your Honor. Well, I do think it's something we can fix and we should fix. It's not impossible, and as a practical matter, Mr. Schwartz, what about a requirement, I don't know where it would be in the system but, that the products themselves, where practical, should have on it the original manufacturer or at least some requirement that if a distributor sells it in the United States that they have on record information dealing with who actually manufactured the product.

MR. SCHWARTZ: You're absolutely right, Senator. You have to address the identification issue. And that may be a very practical way to do it. If we don't know whose product it is, as I recall when I did plaintiffs work, and certainly Mr. McGowan, you don't know where to begin. So I think a requirement of that type, carefully worked out, carefully crafted, is essential to having the portal open so these companies can be held responsible.

SEN. SESSIONS: You're suggested there's some danger if we get to far abroad in what we write as a legislative fix that could create political controversies, but what about the question of federal state jurisdictions or to what extent should it be federal, if a product is sold in all 50 states, and what about venue forum shopping where if a product is sold in all 50 states that the plaintiff could then choose the one county that has one judge that they like and file the lawsuit there.

MR. SCHWARTZ: Well, you're so kind to ask that question. You know, I trademarked a term called "judicial hell holes," and I won't address any of the states of this committee, but yes. They become places where people go, and I think your solutions to this issue should be in federal courts, which are neutral in their application and not create pending jurisdiction problems and other problems where state courts result in situations that adversely affect domestic manufacturers.

Some of the House legislation unintentionally did that, and I'm for getting a solution done if we stick to the core problem. It is a national problem. Sandra Day O'Connor, Justice O'Connor, said it was national in scope. She provided a road map, and I don't think it would be good to have litigation tourism going on in solving a problem and creating another one. That we do not want.

SEN. SESSIONS: Well, thank you. I believe we've made some progress, going to look forward to working with you.

SEN. WHITEHOUSE: I thank the distinguished ranking member. I thank the witnesses. I would note, just in response to the very interesting colloquy between the ranking member and Professor Schwartz that if there is such a thing as a 'judicial hell hole,' they're probably ones on both sides of the aisle, and what you would also not want is to allow the foreign defector product manufacturer to be able to choose venues in which their defense was favored. So that's an issue very much worth working on, but I think particularly the questions of service of process and of consent to jurisdiction have emerged from this hearings as one where there appears to be both room for progress, unanimity, and some real practical benefit from going forward.

So I'm grateful to the witness for having framed it this well. I'm grateful to the ranking member for his cooperation and his staff's cooperation in pulling this hearing together in so collegial a fashion. The record will remain open for another week if anybody wishes to supplement the record. Without objection, with the ranking member's consent, I will add into the record a statement of Chairman Leahy, the Chairman of the Judiciary Committee, on this question. And if there is no further business, the hearing will stand adjourned.

END.

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