U.S. courts long have been attractive to foreign plaintiffs because of the perceived advantages offered by litigation in the United States, including trial by jury, broad discovery, and the prospect of higher damages awards, including punitive damages. Until recently, the inconvenience of litigating claims far from their home countries has discouraged excessive litigation by foreign plaintiffs in U.S. courts. In the past several years, however, U.S. courts have seen a troubling increase in claims by foreign plaintiffs — particularly claims against U.S. companies with overseas investments.

The current wave of foreign claims in U.S. courts has been prompted in part by U.S. trial lawyers, who have become more active in soliciting lawsuits in developing countries, which they see as a huge and untapped reservoir of potential plaintiffs. Often making use of the class-action device — which is widespread in the United States but not recognized in most of the rest of the world — U.S. plaintiffs’ lawyers are crowding U.S. court dockets with product liability, environmental tort, unfair wage, and human rights claims on behalf of hundreds of thousands of foreign plaintiffs. Because class-action lawyers in the United States have the incentive of collecting huge contingency fees — which are also unavailable in most parts of the world — they are often willing to bring questionable lawsuits that would never be filed in the countries in which the claims arose, in the hopes of forcing a large settlement from of U.S. defendants.

In addition, special-interest groups and foreign political parties have turned to U.S. courts as a forum to litigate social or political grievances against repressive regimes in developing countries. In most instances the foreign regimes are shielded from suit by principles of sovereign immunity. Accordingly, plaintiffs increasingly target U.S. companies that do business in countries with unpopular governments — advancing novel legal theories of vicarious liability in an attempt to punish the companies and their shareholders for the acts of foreign regimes. The lawsuits are designed to discourage foreign investment by U.S. companies — even where Congress has specifically allowed or encouraged such investment. If successful, such lawsuits can result in a form of judicially imposed economic sanctions on unpopular foreign governments.

These trends have converged in recent years in a flood of lawsuits under an obscure federal law, the Alien Tort Statute. Enacted in 1789, the Alien Tort Statute gives U.S. federal courts jurisdiction to hear claims by aliens for torts committed in violation of the law of nations. Although nobody knows exactly what function the statute was originally intended to have, scholars believe that it was meant to allow certain tort claims against privateers under 18th-century treaties. The statute laid virtually dormant for two centuries, but it has been seized upon in the past decade by class-action lawyers as a vehicle to sue U.S. companies for a variety of modern-day claims arising in foreign countries.

For example, plaintiffs and their lawyers have sued U.S. companies under the Alien Tort Statute for environmental pollution, unfair labor practices, and a variety of human rights abuses by governments in Iraq, Myanmar, Indonesia, Ecuador, Nigeria, China and other developing nations. Despite the fact that the Alien Tort Statute was never intended to create a cause of action for these claims, some courts have allowed such suits to proceed, potentially exposing U.S. companies and their shareholder to enormous damages claims. Until the U.S. Supreme Court addresses the appropriate scope of the statute, the number of lawsuits brought against U.S. companies under the Alien Tort Statute is likely to keep expanding. [IMGCAP(1)]

When they have been unsuccessful pursuing claims in federal court, plaintiffs’ lawyers have turned to state courts and state legislatures for assistance. For example, several years ago the California Legislature — aided by class-action lawyers — passed laws designed to allow foreign plaintiffs to sue private companies for World War II-era reparations claims in California courts, even though those claims were decades old and were explicitly barred by various international treaties. The California legislation spawned dozens of class-action lawsuits against U.S. and other companies. In another example, plaintiffs from Myanmar have filed lawsuits in California state court seeking to hold Unocal Corp. vicariously liable under California law for actions by the military regime in Myanmar.

Aside from their questionable legal foundations, such lawsuits often raise serious foreign policy concerns. Given that these lawsuits are often thinly veiled attempts to discourage foreign investment, manipulate social policy in other countries, or undermine treaties or other international agreements, it is hardly surprising that numerous foreign governments have protested the litigation of such claims in U.S. courts. In some cases, the U.S. government has intervened on behalf of the defendants, urging dismissal on foreign policy grounds. Some courts have been sensitive to these concerns. Last term the Supreme Court stuck down part of California’s legislative scheme designed to facilitate World War II-era claims. Other courts, however, have been less sensitive to foreign policy concerns and have allowed such claims to continue.

Lawsuits seeking to hold U.S. companies liable for their investments abroad have a negative impact on U.S. competitiveness in the global economy. Foreign companies that are not subject to the jurisdiction of U.S. courts are free to invest abroad without fear of the unique legal liabilities faced by their U.S. competitors. Judges and policymakers can take reasonable steps to prevent U.S. courts from being used unfairly to disadvantage U.S. companies investing abroad. To begin with, judges should be particularly sensitive to foreign policy concerns when foreign plaintiffs attempt to sue U.S. companies as a way of challenging the actions of foreign governments. Courts should not allow themselves to be used to impose de facto economic sanctions on foreign governments.

Courts should also observe constitutional limitations that restrict the extraterritorial application of U.S. laws to disputes having little or no connection to the United States. If U.S. companies conduct business abroad through properly created foreign subsidiaries, courts should respect corporate formalities, and require plaintiffs to pursue their claims against those subsidiaries in their own countries, rather than suing U.S. parent corporations in the United States. Finally, foreign plaintiffs should be discouraged from bringing lawsuits in U.S. courts in the first instance, if the courts in their own country provide an adequate forum.

By respecting fundamental legal principles such as these, U.S. courts can avoid becoming the clearinghouse for claims from around the world that have little or no legitimate connection to this country, but that are often fraught with foreign policy concerns.

John Niblock is counsel at O’Melveny & Myers LLP.