Senior Partner at HCM International and Lecturer at the University of St.Gallen, talks about the increasing need for Swiss and other European professionals to better understand the U.S. legal system.

Gabe Shawn Varges was interviewed by Bruno Mascello.

Impact of U.S. law on Swiss and European companies

Countries have long complained about the „long-arm“ of U.S. law. Why is this a particular challenge for Switzerland?
It is true that the extraterritorial reach of U.S. law has long been a sore point for many countries, not just Switzerland. The U.S. claim that it can apply its laws outside its borders finds various degrees of resistance–even resentment–around the world. For Switzerland it has been a particular challenge not only because it is a small country but because of our strong international and export orientation. Our exports represent some 65% of our GDP. For a country like Sweden this figure is only about 45% and for Spain 32%. With the U.S. being such a significant market, this means that many Swiss companies inevitably have direct or indirect contacts with the U.S. The catch is that even a small contact may suffice to establish a jurisdictional claim by U.S. authorities and litigants.

Are there other factors that make the issue more critical for Switzerland?
The stable nature of Switzerland and its financial know-how has made it an attractive place to invest and do banking, including for American companies and individuals. Where these inflows have had a tax motivation, they have created additional factors that contribute to the kind of issues and settlements we have seen in the headlines in recent times.

Do you see tax issues then as the main challenge?
No, in fact I see tax somewhat as a distractor. Of course, for the institutions involved it has been a most serious issue, leading to heavy fines and other penalties, and even contributing to the disappearance of some players. But it has been distracting to the extent that those Swiss companies not having any connection to U.S. tax disputes may get a false sense of comfort that they face less risk from the U.S. legal system.

Which areas require particular attention?
There are many. One example is anti-trust (competition law), where U.S. courts and enforcement authorities claim expansive reach, including in respect of actions that take place outside the U.S. but impact competition in the U.S. Another example are U.S. rules prohibiting doing business with certain countries. Historically these have been influenced by U.S. foreign policy and have included countries that otherwise may not be subject to international prohibition, such as Cuba. Further examples are stringent investor and consumer protection laws.

But are specific U.S. rules the main challenge, or is there more?
Yes, it’s far more. It is the entirety of the U.S. legal system. It is a complex, litigious, and high-stake system. The outcomes (in terms of fines, jail sentences, or jury awards) can sometimes seem incomprehensible to Swiss and other non-U.S parties. Further when thinking about U.S. legal risks, one must remember the risk of both U.S. authorities and private parties taking action. Private lawsuits, including class actions, can be as big a headache for foreign companies as actions by law enforcement agencies. One only has to recall that there are over one million lawyers in the U.S.! And some of these spend their days looking for lawsuits.

What about regulation?
This too can overwhelm an outside party, even at the start with the regulatory approval process. For example, to recover the huge costs of research and development for new drugs, most European pharma concerns count on being able to sell these drugs also in the large U.S. market. But the approval process (from the Federal Drug Administration) is characteristically laborious, as Basilea is currently experiencing with their efforts to have a new antibiotic approved. U.S. banking and insurance regulation also requires a large dosage of patience and careful management of the relationship with the regulator.

Any advice on when you should involve a U.S. law firm?
By the time a company or individual hires a U.S. law firm, it is often because a problem already has arisen. It should be earlier. Further, an American law firm is often hired to do a distinct task (i.e. obtain a business licence in the U.S.) but not often enough usually to bring general sensitivity to the company and its employees on the peculiarities of U.S. law and U.S. law enforcement.

What are some of these peculiarities?
There are some obvious ones like the fact that certain tax violations can have criminal not only civil law consequences. Or that in a dispute with a U.S. business partner a Swiss company may find itself in a courtroom where the decision about who is right is not made by a learned judge, but by a jury of average citizens.

Another peculiarity is the interplay of federal and state law, and particularly of federal and state enforcement authorities. It strikes many Europeans as strange that the Attorney General (Staatsanwalt) of the State of New York or another U.S. state may in some cases sue a company to enforce federal law. This brings foreign parties particular discomfort since in forty-three U.S. states the attorney general is not a civil servant. It is a person elected, like a politician, through voting by citizens. Some judges are also not appointed but elected.

Another peculiarity is the area of so-called „discovery“. Discovery is the phase of a U.S. lawsuit when evidence is gathered. But rather than being gathered by the judge, it is gathered by the two parties in litigation. During this process not only can it come to huge costs (e.g. „please provide us all emails since 2007 that mention the sales contract in dispute“) but to a party already having to give testimony. How should a non-U.S. person, for example, react when he or she gets a request to be „deposed“ (i.e. give testimony), even in a case having nothing to do with him or her?

In such case, wouldn’t it be smart to hire U.S. legal counsel?
Absolutely. And gaining better sensitivity to U.S. legal thinking can help you make better decisions about when to consult U.S. legal counsel and how to select such counsel. The more a business person is sensitive to U.S. legal issues and the thinking of U.S. legal and regulatory authorities the better equipped he or she is to know when to secure U.S. legal advice and how to choose the right lawyer. For example, for some matters it is OK to engage a generalist. But for others–such as specialized intellectual property issues or matters involving securities law–not having a deep specialist from the start could itself be a risk. It could also be a risk to try to save money by giving too much weight to the amount of proposed legal fees. Legal fees with U.S. firms are generally negotiable but should not be the primary criterion for selecting counsel.

Does part of the sensitivity you refer to also involve more general areas of U.S. law, like constitutional law?
Yes. In fact, constitutional law is one area where many non-Americans, who otherwise have a fair familiarity with U.S. laws, often have a gap. And yet having some foundation in the U.S. constitution is essential for understanding the U.S. legal system…even the U.S. political system. Further, it helps greatly in figuring out the federal versus state tension and the rights of individuals and companies in relation to law enforcement authorities. Constitutional law is not an esoteric subject…it is eminently practical.

This all seems like be a big challenge for a Swiss or other European. What should a business or legal professional do?
You are right. And this means too that non-American business people, government officials, and even lawyers are from the outset at a certain disadvantage when dealing with their U.S. counterparts. The latter have grown up in the U.S. legal system and can use their familiarity with U.S. legal practice and „lingo“ to get an upper hand, such as in contractual negotiations or in discussions about regulatory or judicial matters.

My experience is that sometimes the non-American may understand one specific area of U.S. law reasonably well if it is part of his or her work (e.g. asset management regulations), but such person may still lack the context of this area within the overall U.S. legal landscape. Or he or she may understand the mechanics of U.S. law but not necessarily the „why“ of U.S. legal thinking. The latter is not the same as the legal thinking in continental Europe, for example.

Since doing business with or having some contact with the U.S. is difficult to avoid, the best advice is to stay as informed as possible. With this need in mind, the University of St.Gallen is launching U.S. Law-School-in-One-Week. LSIW is designed to provide the context I refer to above and the sensitivity for how the U.S. legal mind ticks. It also will allow participants to improve their legal English and their familiarity with U.S. legal terminology. It is taught using a hands-on approach by U.S. lawyers and law instructors with practical experience in the above challenges, and other challenges such as relating to corporate law, regulation, intellectual property, and tax.

Gabe Shawn Varges is Senior Partner at the international consulting firm, HCM, based in Zurich and Geneva. He has extensive experience as an executive, regulator, and advisor. At the University of St.Gallen he leads, among other things, „U.S. Law-School-in-a- Week“, an innovative new program designed to help those who deal commercially or legally with America to better understand U.S. legal thinking. Gabe is a graduate of Harvard University and lawyer member of the New York Bar. He is the author of numerous publications, including „The Case for Board Budgets and Resources“ and „Governing Remuneration.“ Gabe was interviewed by Bruno Mascello.


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