When a U.S. firm and a foreign firm are both sued for the same reason in U.S. federal court, an American firm is more likely to win. Mays Assistant Professor of Finance Neal Galpin and co-authors found after studying 3,076 international corporate cases that whether they were antitrust, contract, employee, patent or product liability issues, the U.S. was consistently the favored team.
“There really is this problem. We needed to find out what was going on in the case and what a normal day was for these corporations,” Galpin says.
It turns out a normal day for an American corporation in an American courtroom finds the U.S. losing less often. Galpin and his team initially wondered if U.S. corporations tend to settle or get cases dismissed more, but after researching cases from 1995 to 2000, they found that American settlement and dismissal rates aren’t that different from foreign firms. However, when cases aren’t settled or dismissed, U.S. firms are still more likely to win: In 2000, a foreign corporate defendant had a 63 percent chance of winning a product liability lawsuit, while the U.S. had a 78 percent chance.
Galpin’s co-authored study, “The Home Court Advantage in International Corporate Litigation,” made headlines this winter in The Financial Times.
The research team entered the project with several questions. Researchers wondered if the type of country the foreign firm represents would make a difference in the likelihood of winning a case against an American firm. Perhaps if the foreign country shares similarity with the U.S.— say, English is the primary language or the religion is predominantly Christian— then would it have an advantage? But none of these specifics seemed to make a difference. “It’s more of a “you’re not from here’ mentality,” Galpin says of U.S. judges presiding over such cases.
U.S. corporations seem the most likely to win when they have trial by judge, as opposed to a trial by jury. U.S. judges may be more likely to sway to the side of the U.S. corporation, regardless of the specifics of the case, Galpin’s research finds.
A federal corporate lawsuit also tends to have a more negative affect on the foreign defendant: foreign stock prices are more likely to drop.
So what does this mean for business?
As countries outside the U.S. become more aware of the possibility of a home court advantage for U.S. firms in legal battles, those countries’ businessmen may be hesitant to trade and work with American corporations. “I think even the U.S. legal system realizes that this is a potential problem,” Galpin says.
“The Home Court Advantage in International Corporate Litigation” is forthcoming in the Journal of Law and Economics. Readers can find the paper here.
— Lindsay Newcomer
Categories: Research Notes