Report: 'Legal firewall' shields Chinese companies from jurisdiction of US courts

Chinese companies are shielding themselves from lawsuits in America, denying U.S. businesses and investors their day in court, a report from a federal watchdog says.

The report published Tuesday by the U.S.-China Economic Security Commission says that Chinese companies operating in the U.S. have built a legal firewall that keeps them largely immune from the jurisdiction of U.S. courts and regulatory agencies.

They use complicated corporate structures that protect their China-based parent companies from U.S. lawsuits. And they often claim that Chinese secrecy and banking laws exempt them from turning over evidence and responding to U.S. court documents.

The report calls on Congress to establish that Chinese companies fall under the jurisdiction of U.S. courts and require that Chinese firms assign agents to accept subpoenas and other U.S. court documents.

For now, anyone suing a Chinese company can find it "almost impossible" to deliver court papers to the defendants in the United States, according to the report.

That forces plaintiffs into a cumbersome international process for delivering legal documents and pursuing evidence in China. The paperwork must be translated into Chinese, then presented to China's government, which often rejects the cases for alleged errors.

The report, written by commission researcher Kevin Rosier, studied several cases involving state-owned Chinese banks and other financial firms.

In a 2011 suit against Chinese companies that allegedly sold counterfeit handbags, for instance, Gucci America tried unsuccessfully to force the state-owned Bank of China to turn over financial records related to the sales of the disputed goods. Bank of China argued that Chinese law barred it from delivering the information. The case has been bogged down in U.S. courts for more than four years.

Beijing-based Harvest Fund Management has so far managed to fend off a lawsuit filed last year by U.S.-based Krane Distribution. Krane alleges that Harvest reneged on an agreement to jointly market mutual funds in the U.S. But Harvest argues that only its shell company, Harvest USA, falls under the jurisdiction of U.S. courts and that Krane cannot collect evidence from Harvest operations in China, the report says.

The problems reflect the complications that arise as China seeks to expand internationally, bringing to the U.S. companies that are often owned at least partially by the Chinese government.

"It really puts American companies at an economic disadvantage," says Frederick Longer, a lawyer with the Philadelphia law firm Levin, Fishbein, Sedran & Berman, who has pursued cases against Chinese companies. "They are subject to American laws and American standards and American judicial jurisdiction. Chinese companies contend they have these high standards, but they basically hide behind Chinese walls."

The Chinese government requires the Chinese enterprises investing in the U.S. to abide by U.S. laws and regulations, a spokesman for the Chinese embassy in Washington said.

"At the same time, we hope that the U.S. government will provide equal treatment for the Chinese enterprises under related U.S. legal framework," the spokesman, Zhu Haiquan, said.

Chinese direct investment in the United States has risen from virtually nothing before 2010 to more than $10 billion in each of the last two years, according to the Rhodium Group consultancy.

As investment increases, "U.S. businesses will be increasingly vulnerable without the protection of the U.S. judicial system" when they do business with Chinese firms operating in America, the report warns.

The commission, created by Congress in 2000 to monitor the national security implications of the U.S.-China economic relationship, is publishing the report "to promote greater public understanding" but does not necessarily endorse its findings.