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Why The Latest Chapter In the Napster Saga Raises Issues About U.S./European Judicial Cooperation

Monday, Nov. 17, 2003

Recently, music publishers brought a U.S. class action suit against the German media giant Bertelsmann -- one of the largest music publishers in the world. The basis for the suit is Bertelsmann's past provision of loans to Napster, which the plaintiffs argue aided the site's copyright infringement.

But on July 25 of this year, Germany's highest court -- the Constitutional Court -- issued a temporary restraining order ("TRO") halting the service of process against Bertelsmann's German office in that suit. ("Service of process" occurs when an individual, hired as a process server, delivers the complaint in a lawsuit to the defendant or his -- or its -- authorized representative.)

In six months, after the TRO expires, the Court will have a chance to reconsider. It should do so.

In this column, I will explain why I believe the TRO is both extraordinary, and potentially dangerous -- and why the German court should ultimately allow Bertelsmann to be served. I will also explain why I fear this TRO may be a canary in a coalmine -- a harbinger of a new and difficult period for American lawyers overseas.

The Class Action Lawsuit Against Bertelsmann

In October 2000, Bertelsmann offered Napster $50-$90 million in loans in exchange for the option to buy a controlling interest in Napster. But that turned out to be a mistake, and Bertelsmann never exercised the option.

U.S. District Court Judge Marilyn Patel issued an injunction against Napster, which led to the company's downfall. Eventually, in 2002, Napster had to declare bankruptcy.

Recently, a class action was brought against Bertelsmann, in a federal district court in New York City by various music publishers and songwriters. The plaintiffs' theory is apparently that Bertelsmann, with its loans to Napster, aided and abetted -- and thus should be held responsible for -- Napster and its users' copyright infringement.

The plaintiffs are suing for $17 billion -- a sum that they say represents the statutory damages for an estimated 113,000 instances of copyright infringement that occurred after Napster received money from Bertelsmann.

At first, the suit seemed to be going smoothly. Bertelsmann accepted service of process in New York. (By law, corporations that do business in New York must register an agent there, to accept service of process on their behalf.) But then, things changed.

The German Court's Holding

Even though it had already accepted service of process in New York, Bertelsmann asked a local court in Düsseldorf to issue an injunction prohibiting the plaintiffs from serving the complaint upon Bertelsmann's German corporate headquarters, too.

The applicable law is the Hague Convention on jurisdiction and enforcement of judgments. Under the Convention, both German and American courts regularly ensure that their citizens comply with the demands of foreign legal systems in civil suits properly filed in foreign courts. (The country's courts can decide later whether to enforce the foreign judgment that may result.)

But in Germany, there's an exception: The German courts have held that the Convention does not require German courts to enforce foreign judicial commands in regard to service of process, when those demands violate German sovereignty or security.

Amazingly, the German Constitutional Court held -- at least as an initial matter -- that the service of process on Bertelsmann was just such a demand. Indeed, the court held that the plaintiffs had employed "obviously abusive means" in bringing the suit.

The result is that the suit in New York will proceed -- but recovery against Bertelsmann's German assets will be more difficult, and perhaps, unless the German Court reverses itself, impossible.

Why the German Court Deemed the American Class Action "Abusive"

What in the world was the German court talking about?

The decision is so wrongheaded, it is difficult to say. But here's what Bertelsmann argued: It contended that the purpose of the suit was to intimidate a major German company, and therefore to detrimentally affect the German economy. In accepting this argument, the court cited the negative publicity and the risk of large damages that accompanies a class action in America. It thus suggested that class actions for billions of dollars are somehow inherently an abuse of the American legal system.

But that claim is bizarre. It is true that Germany does not have class actions--but so what? The Hague Convention was designed to insure that countries with different legal systems nonetheless could work together. Its very intent was that citizens of these countries could be assured that if they did business with each other, procedural differences would not make it impossible to cheaply and easily resolve their disputes.

In 1994, the German Constitutional Court seemed to understand this very well. Then, it refused a German defendant's request that it prevent the service of process by an American plaintiff who was suing in an American court. The defendant complained that the suit was abusive because the American plaintiff sought punitive damages -- which German private law does not provide, as I discussed in a prior column.

Then, the Court did not see the contrast between the two systems as a reason to enjoin service of process. So why has it reached an exactly opposite decision now -- and allowed the fact that America has class actions, and Germany does now, to affect service of process?

Perhaps it was not the fact that a class action was involved, but the substance of the suit itself, that motivated the Court to issue the TRO. But that, too, seems bizarre. Multibillion-dollar suits against foreign corporations are not unusual in America. And while the plaintiffs' "aiding and abetting" theory is unusual, it is -- as I noted in a prior column -- hardly unique.

And in any event, how does any of this threaten German "sovereignty or security" -- as opposed to threatening, at most, the financial livelihood of a prominent German company? According to the German Court's own prior decision, only a threat to "sovereignty or security" will suffice.

Is the German Court's TRO A Harbinger of a Larger Trend?

Only one conclusion seems possible: The decision was motivated by politics, not law. The German Constitutional Court issued a frankly nativist ruling to protect a German company.

But why did it feel comfortable doing so, when it had ruled in favor of the American plaintiff in a similar suit as recently as 1994? I will consider two possible explanations -- and explain why I favor the latter.

First, it may be that the Republicans and other critics of the tort system are correct, and that the excesses of the American tort system are finally starting to create a backlash overseas. Under this theory, the German Constitutional Court accepted the most hysterical descriptions of class action litigation at face value. They actually believed that when the plaintiffs said they wanted $17 billion, they meant it. And they actually believed that the risk of punitive damages could result in the sort of company-busting verdicts that have been rendered against big corporations like the tobacco industry.

I am a little skeptical of this theory, however. German lawyers are very sophisticated about the reality of litigation in the United States, and they know that plaintiffs rarely receive what they demand, and that most huge damage awards are reversed on appeal.

Moreover, this explanation does not answer the question: Why now, and not earlier? After all, the horror stories about American tort litigation are not new. And multibillion dollar litigation in America against German corporations is not new either. After all, it was the threat of multibillion-dollar judgments against German corporations that led to the $6 billion slave labor settlement (about which I have written in an earlier column).

Because this first theory does not seem convincing, I want to suggest a second theory for why the German Constitutional Court felt comfortable issuing an opinion that seems so blatantly political: It is possible that, as in other areas of elite opinion, America has squandered so much goodwill that judges feel freer than ever before to act in ways hostile to American interests.

Under the first theory, the German Constitutional Court is looking at American class action lawyers from the point of view held by the Bush administration -- and seeing a tort system out of control. Under this second theory -- the one I favor -- the German Court is viewing American class action lawyers much in the way it views the Bush Administration itself: as powerful, reckless, and unprincipled.

After all, the Bush Administration went ahead with a war about which Germany had severe doubts -- whether Germany liked it not. Now perhaps, in Germany's view, American lawyers are trying to go ahead with a lawsuit based on unproven allegations that could bankrupt a German company -- whether Germany likes it or not.

In 1994, German judges might have viewed American-style of civil litigation with friendly skepticism. But as views of America change, views of American litigation may change, too. After all, everything about our system--from the contingency fee, to the adversarial system of factfinding, to the use of damages to punish--seemed rooted in our individualistic, 'frontier justice' national personality.

German elites now view America with a worried, almost hostile skepticism. They may well be taking the same view of American law. And this new attitude may be expressed in some very unusual ways--as the TRO on behalf of Bertelsmann, I think, illustrates.

Anthony J. Sebok, a FindLaw columnist, is a Professor of Law at Brooklyn Law School, where he teaches Torts, among other subjects. His other columns on tort law -- and class actions, in particular -- may be found in the archive of his columns on this site.

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