Rimon Helps Chinese Companies Beat Jurisdiction Claims and End Litigation

We congratulate our client on their recent victory in litigation involving a disgruntled former employee and complex cross border issues.

Congratulations to our team, Zheng Liu, Scott Raber, Bob Cocchia and Kendra Orr who represented the Chinese companies.

A summary of the case, along with some practical suggestions for foreign companies on what to do when hiring U.S. Personnel is included below.  

A Chinese company provides clinical trial services. In the summer of 2021, the company attempted to hire a senior scientist to lead its development effort. This scientist was living in California at that time. The scientist received a generous package with salary and stock incentive, however it came with a requirement to relocate to China. Due to travel restrictions surrounding the COVID pandemic, he was not able to move back to China, and instead ended up working for the company’s US subsidiary. In the fall of 2022, he was terminated as part of the group-wide work force reduction. The scientist sued the US company and two Chinese companies for multiple claims in California state court, including the value of stock options, unpaid salary under the original agreement to work in China, and wrongful termination for retaliation over alleged “whistle blowing” on potential employment violations. The companies defended themselves vigorously and strongly believed that they did nothing wrong.

Rimon helped the defendants filed four motions:

Motion to Strike for lack of personal jurisdiction as to one Chinese company

Motion to Strike for lack of personal jurisdiction as to another Chinese company

Demurrer (motion to dismiss) all non-employment claims as to the US company

Motion to Compel Arbitration of employment claims as to the US company

These are fact-intensive motions that are difficult to win at the onset of litigation. Rimon worked with the companies and prepared multiple factual declarations supporting the motions. Rimon focused on the logical fallacy of plaintiff’s arguments. For example, the plaintiff denied that the later employment agreement with the US company necessarily terminated the earlier employment agreement with the Chinese entity under an integration clause, because they are not the same entity. At the same time, however, the plaintiff argued that the three companies should be considered as the same entity for purposes of jurisdiction as they all acted in concert. Another example was that plaintiff claimed that the original employment agreement was never terminated so he should be paid for all three years of the term, although he was already paid by other entities under the newer agreements during the same time period.

The Court granted both motions on personal jurisdiction and the motion to compel arbitration for the employment claims. The demurrer was considered moot. In its decision, it was clear that the Court grasped the logical inconsistency. The judge even stated, “Had the [original] Agreement not been superseded by the [later] Agreement, as Plaintiff argues, Plaintiff’s compensation would have doubled.”

With the two Chinese entities out of the lawsuit, only the employment law claims were to be arbitrated. The parties resolved this matter shortly afterwards.

One of the major challenges in the case was the plaintiff’s attempt to include two Chinese entities as parties to the litigation. Cross-border litigation is extremely costly, particularly when U.S. discovery procedures are extended to Chinese entities. Internationally based parent (or grandparent) entities inevitably are involved in U.S. subsidiaries’ operations at the early stages. While that is normal and inevitable, which this Court acknowledged in its decisions, it is important that foreign companies with U.S. entities establish U.S. subsidiaries’ independent operations as early as possible. An important reason the Chinese entities were able to win was because the judge recognized that involvement in the U.S. company’s operation was mainly at the initial set-up stage and the U.S. company established its own operational team and processes as quickly as possible. This is something very few foreign companies do well.

We recommend that foreign companies consider the following when hiring U.S. personnel:

• Establish a U.S. subsidiary and have employment agreements signed with that entity;
• Terminate all agreements formally, not only relying on integration clauses;
• Consider granting stock options or other incentive plans to employees or consultants through the U.S. subsidiary, if possible;
• Maintain clear separation between the U.S. and foreign entities to avoid potential piercing of the corporate veil—for example, ensure sufficient capital infusion into the U.S. subsidiary, keep separate bank and accounting records, and properly document business activities and maintain business records;
• Ensure that the parent company and U.S. subsidiary conduct transactions at arm’s length, such as through service agreements.

When foreign companies establish U.S. subsidiaries, they often seek to minimize costs and may overlook these structural safeguards. However, once litigation arises, the expenses can be exponentially higher compared to the relatively modest investment required to set up the structure properly from the outset.

Please reach out to us should you have questions or need assistance.

The views expressed are solely the opinion of the author and do not represent the official positions of the Rimon P.C.  This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.

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