German Federal Constitutional Court: Risk of Punitive Damages No Reason to Prevent Service of U.S. Action

IJA Brigade member Peter Bert reviews a new case from the German Constitutional Court on service of process under the Hague Service Convention when the underlying US litigation involves a claim for punitive damages.

In a ruling in January 2013, the Federal Constitutional Court (Bundesverfassungsgericht) confirmed its approach to service of US actions in Germany under the Hague Service Convention. The court refused to hear a constitutional complaint (Verfassungsbeschwerde) filed by a German company sued in the United States. The German defendant had sought to stop service in Germany of process in a US action, and it had applied for a preliminary injunction to that effect.

The defendant had been involved in a legal dispute with “B” Inc., a US corporation, since 2006. These disputes were about trademarks and internet domains owned by the defendant, all of them included variations of the word “B”. “B” Inc. tried to enforce rights over the trademarks and domains in dispute. To that effect, “B” Inc. filed an action in the United State District Court for the Northern District of California in May 2012, based on federal trademark infringement, unfair competition, and false designation of origin.

The German party first applied to the Central Authority for the State of Berlin, (Senatsverwaltung für Justiz) to abstain from executing the US service request. When the Central Authority denied that application, the German party applied for legal review to the Berlin Court of Appeals (Kammergericht), but it was unsuccessful. The Berlin Court of Appeals held that Article 13 of the Hague Service Convention, which covers infringement of sovereignty or security, did not apply.

The German party then took the matter to the Federal Constitutional Court (Bundesverfassungsgericht). It argued that service of the US action violated its constitutional rights, as it had not sufficient funds to defend the US action and its existence was at risk if the service of the action was allowed. On that basis, the German party alleged that by permitting service under the Hague Service Convention, the German authorities would violate its fundamental rights. The constitutional complaint relied in particular on Article 2, Personal Freedoms, and Article 14, Occupational Freedom, of the Basic Law (Grundgesetz), the German constitution.

A Chamber of the Second Senate of the Federal Constitutional Court, comprising three of its eight judges, including the court’s president, Andreas Voßkuhle, reviewed the matter. It refused to entertain the constitutional complaint. Each of the arguments made by the German party is discussed and dismissed:

The US plaintiff had sought punitive damages, and the defendant argued that this concept was contrary to German public policy. The court did not concur; punitive damages do not per se violate fundamental principles of the Rule of Law (unverzichtbare Grundsätze des freiheitlichen Rechtsstaats). In addition, the German authorities are not in a position to assess, at the time of service, whether the amount of damages claimed was disproportionate; The same was true for the US rule on costs, which does not provide for the loosing party to reimburse the opponent. In this context, the court noted that the financial risks stemming from US litigation were business risks resulting from doing cross-border business (Folge der unternehmerischen Entscheidung für eine grenzüberschreitende Teilnahme am Wirtschaftsleben).

That proceedings in the United States can be brought both in State and in Federal Court was a deviation from the German concept but still did not amount to violation of fundamental principles of the Rule of Law, since the US legal system on the other hand provides for safe guards that prevent from contradicting judgments in the same matter being issued. Finally, the fact that a media campaign was allegedly triggered by the US action did also not persuade the court to find otherwise.

The ruling in this matter is in line with the recent case law, which we reviewed in an earlier post. It appears that the preliminary injunction that the Federal Constitutional Court issued in the Bertelsmann/Napster matter in 2003 is very likely to remain a one-off decision. In that case, Bertelsmann withdrew its application in 2005, and the Federal Constitutional Court never got to rule in the main action, or on the merits. For all practical purposes, in the absence of extreme factual circumstances, the German courts will not stop service of US actions under the Hague Service Convention. Any “excesses” of the US legal system would be dealt with post judgment on the recognition and enforcement level.

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