Episode 5 – How to protect your company from liabilities in the US with Manny Schoenhuber

Welcome to The US expansion series. The podcast where you can learn about successfully expanding to and scaling your business in The US markets. My name is Flor. My name is Flora. And in every episode,

we dive into a different aspect of successful market expansion.

Flora, we had the pleasure of talking to Manny Schoenhuber and pick his brain on liabilities. And thinking back on our conversation with Manny, it almost seems like with being successful in The US comes the risk of liability and being sued. Although, to be honest, it doesn't sound very appealing or encouraging.

Yeah. It's a great way to start our podcast. I know, but I see what you're saying, and the risk is, of course, always there. But I also think companies shouldn't get discouraged because with liabilities, it's very important to take the time to prepare and think about how you're doing business, what could be potential liabilities in your business model, where are possible risks, and then think about how you can protect yourself. But if you're doing it properly, you can definitely limit the risk of exposure.

Absolutely. And that's why I think this conversation with many is actually very helpful for companies that are about to do business in The US. And I mean, it's a very specific subject, but nonetheless very important and I think necessary when you're on your US expansion journey. So let's dive in. Annie, thank you for joining us today.

We're very excited to have you on the podcast. And today, we'll be scratching the surface of the seemingly intimidating world of liabilities. But before we dive in, please introduce yourself and tell us a little bit more about what you do.

Thanks Flor. Thanks Flor for having me. I'm super excited to be here. This will be I'm sure a great episode. Thanks for the invite.

A little bit about myself, Manny Schoenhuber. I'm, from originally from a small town near Munich. Came to The States about ten years ago now. And I'm a practicing attorney at Jackson Walker which is the largest law firm in the state of Texas doing pretty much everything that a European company coming to The US or expanding into The US market would need on the legal side. And I personally exclusively work with European, Central European companies and help them with their legal needs.

Thanks, Manny. And we're so excited to be able to talk about liabilities with you today. I'm pretty sure that there's no topic that gets mentioned more often than this topic that we're discussing today. Like, when we have calls with clients or when we are organizing webinars, the number one question from founders is: how can I protect myself or my company against liabilities and getting sued in The US? So I think we should just like start right away with the most pressing question.

Is The US really a more litigious society? And how afraid should a company be of getting sued in The US?

I guess there's two parts to the answer. The first is definitely true. The US is the country with the most lawsuits all over the world, globally, statistically speaking, at least. But then as we do it with other statistics, we look at it per capita. So the percentage there is actually that The US only comes in on number five.

And to everyone's surprise, probably Germany is the country with the most lawsuits, legal disputes per capita in the world. So two parts. Yes, there's a whole lot of lawsuits in The US, which is also why there's so many lawyers. But on the other hand, the fear of potential litigation should not make a European company shy away from a huge market. You also have to put it into perspective that The US is a country of 300 more than 350,000,000 people.

And you compare that to The Netherlands, to Germany, Austria or Europe as a whole, of course chances are that if you're successful and somebody sees that the company is making money, that you will get sued, yes. But there's and I'm sure we'll talk a little more about it, there's ways to prevent that. But it should not be an excuse or deterrent for Europeans to come to The US if they read in the media in Europe another $100,000,000, jury charge verdict, against an entity. I mean, the big example is you talk Bayer, Monsanto, Volkswagen. Yes.

Very unlikely that this will happen to a European company coming here doing it the right way.

So going off what Flora was saying, how can a European company limit the risks of getting sued in The US when doing business with a US subsidiary?

So I always describe it this way that there's really three main pillars to the so called limiting liability pyramid. The first one really is to set up the entity properly. And most importantly for The US business you should set up a US entity. I see a lot of European companies just using the European entity and then selling into The US market. That may make sense on a tax side, as a lawyer, a former litigator or still a litigator, to a certain extent at least.

I always cringe a little bit when I see that because you put the entire company in Europe, all its assets, all its riches hopefully on the line in The US and everything is collectible in a US court if you're doing business with the European entity in The US. So the first pillar really is set up your entity the right way. Whether that is just a simple corporation or a limited partnership, an LLC, do something that's local to The US. Don't please, please, please don't do business with your Dutch entity and sell into The US. The second pillar on the pyramid, so to speak, is your contracts.

You gotta have your contracts the right way. You can limit your potential exposure liability in writing, in your contracts, in your terms and conditions. Europeans have to understand that The US is a different legal system. It's more akin to the British common law. It is based on British common law.

And countries like The Netherlands or other Central European countries, they're based on the French Court Civil. So you have statutes for pretty much everything. We don't do that here. Yes, there's a statute, the Uniform Commercial Code, which governs the sale of goods in The US. But we as lawyers, as companies work with contracts.

We work with our terms and conditions. And what generally speaking, whatever you put in your terms and conditions, unless a judge says, no, you can't do that, this is what governs the transaction. So we can limit liability, we can work with disclaimers, We can work with a lot of things in writing to limit exposure and your liability. Legally, limit that liability. And the last topic, the last third pillar is insurance.

You will want to have insurance for your US entity. I know that a lot of European insurance carriers also offer to cover you and your company, your business, for The US market. Yes. I understand that. And yes, it's a whole lot cheaper to do it that way.

But if things go really bad and sometimes it will, sometimes it won't, you will only need it when you need it and then it may be too late. The European insurance carriers will find an exclusion on your policy. So once you have your US legal entity set up, your corporation, get a local US insurance to cover that. So in short Mhmm. The three pillars, the last one insurance, the second one, get your contracts right, your terms and conditions.

And to start it all off with is get your US entity.

Can you explain briefly what the main insurances are that you would recommend?

Absolutely. So every company should have commercial general liability insurance, which we abbreviate as CGL with certain limits. Usually it's around 1,000,000 per occurrence and 2,000,000 in the aggregate. That's pretty standard unless you're in a high exposure field or for example you're working on construction projects, something like that where there may be more exposure. But commercial general liability is where it all starts off.

Once you have employees, workers' comp, car insurance, obviously when you have company vehicles. And then very important is also excess liability insurance, which we describe as umbrella insurance. And it really works like an umbrella. If for example you have a $1,000,000 policy on your CGL, but a great lawyer sues your company and gets a judgment for $3,000,000, you don't wanna be on the hook for the remaining $2,000,000. That's where the umbrella insurance hopefully kicks in and covers anything in excess of what you already have.

And then there's when we're looking at the individual level, DNO directors and officers insurance which is not as important as it would be in Europe because piercing the corporate veil which means getting to the personal liability for a manager or an officer is a whole lot harder to do in The US than it is in Europe.

I also have a lot of questions. Maybe to start with the entity. So, of course, it's important that you set up the entity in the correct way. You don't want to do business with the European entity for too long in The US. You want to have that separate in The US entity.

Is it then sufficient to set up a US subsidiary, for example, as a daughter of The UK Ltd or the German entity? Or do you also want to add a blocker entity?

I like the term blocker entity that you use because this is good news for every lawyer when you work with them. Also with the CPAs. Mean, the the term blocker entity comes from the tech side actually. But we just adopted it because it blocks potential liability as well. So you have to envision it that way where you start off with just one entity for The US business.

Okay? You set up your LLC or your corporation depending on what works right, works the right way for you and your business. But then as hopefully your business grows and expands and The US business becomes more and more valuable with hopefully a lot of assets, which can be inventory or anything else. Yeah. Anything that may be collectible in a lawsuit against you.

Anything that a judge can take away to satisfy a judgment, you want to protect that. And if you only have one entity that is 100% owned by, for example, the Dutch parent company, then it's a whole lot easier to to get to those assets. But it certainly makes sense to have a second entity that, so to speak, actually blocks US courts, US judgment collectors from reaching whatever you may have. And that is usually a holding structure where the European entity owns the holding company, which is then a US entity 100%. And then that US entity has another subsidiary, which can also be an LLC or even numerous subsidiaries.

Right? The the more the then hopefully successful US entity has, the more it makes sense to have various different LLCs. Like one can hold all the intellectual property, another one can hold all the, real estate. And then one is the operating, entity. So I'm a big fan of blocker entities.

Yes. You have to set up two entities instead of one, which makes the whole thing a little more expensive. But look at it like an insurance policy, an additional insurance policy. And it makes my job trying to defend the company a whole lot easier.

But if I understand it correctly, it's something that makes more sense when there's also more substance in The US. When a company is just starting out, starting to do the first few sales, hire this first few employees, then one entity should be sufficient.

It's definitely better than nothing. But from a tax perspective, and I'm sure I'll talk to the tax experts about it, it can also make a whole lot of sense right from the beginning, to pay less taxes. But I'm not giving any tax advice here. From a legal perspective, it's just, the additional protection from potential liability in The US, which is why I love working with Blocker entities.

And you already mentioned the personal liability. So if I'm a founder in Europe and I'm setting up the US entity, how afraid should I be of any personal liabilities?

Unless you're a fraudster, you shouldn't be too concerned about it, because this is, the theme of piercing the corporate veil. I mean, we're setting up these entities for a reason. This is not like it's sometimes portrayed as your Cayman Island, PO boxes and no real substance behind it. Right? We're setting up the entities.

There are limited liability companies like an LLC, it's in the name. But then you can also get into partnerships where sometimes there's no limited liability. And there is personal liability which is also why most of the time partnerships don't make a whole lot of sense for Europeans. But to really answer your question, it's very, very difficult to get to personal liability in The US legal system. Yeah.

If we're talking about white collar crimes yeah. I have to go back to the term. You have to be a fraudster to really come to The US for all the wrong reasons, and, then you should be concerned about it. But you have to be concerned about that too in Europe. And in Europe, it's a whole lot easier to get to the personal liability than it is in The US.

Yeah. So how important is it to set up the directors and officers' insurance? Should every European company have that insurance when they are starting to do business in The US? Or are there certain criteria where you're saying like, oh, now you really need to have this?

I think the more you're in the services industries where the managers, directors, officers actually provide a service, it makes sense. Yeah. Where your customers rely on your input, your knowledge, yes. When you have a product that you're selling into the market, it's not absolutely necessary. In Europe, we all have a tendency to over insure as compared to The US market, right?

Which there's nothing wrong with that. But especially if we're talking about startup costs and The US being a more expensive market than Europe, then this may be something that you don't need right away depending on the kind of business you do. Just focus on your commercial general liability insurance, workers' comp, car and umbrella insurance.

And why is it more important when it surfaces? Because then it's easier to make mistakes or

Yeah. If I'm giving you bad legal advice you could potentially sue me, right? And that's why I as a lawyer have also professional liability insurance. Or my law firm does, right? Same goes with bankers, CPAs.

And for example, if you're a consultant, you're telling a company what they should do and then it doesn't work out and you want to protect yourself from it. Or again, going back to the fraudster theme, if you're here for the wrong reasons then, yes, it may actually make sense. But if you're a fraudster here, D and O insurance policy will find an exclusion and, you're still on the hook for it personally. So, again, if you're providing some type of opinion, some type of expert advice, I would consider it. If you have a product that you're selling and you want to limit your exposure when it comes to the liability.

And that's when the other insurance policies kick in more so.

And I'm also very curious because every few years we do a research project for TEPPs where we look into the do's and don'ts of doing business in The US. And I think we noticed, yeah, we always noticed that five or eight years ago, people were always very afraid of the product liability claims, as you mentioned all the newspaper articles with the worst case scenarios. But we are noticing a shift to more employment liability claims. And yeah, very curious what are your thoughts on this and what are some trends that you're seeing at the moment?

I would agree with that. I see the same trend where potential employers liability, whether it be through you firing an employee for the wrong reasons or not accommodating employees that may need accommodation. There are lawyers out there who are looking for these. Unfortunately, are lawyers out there who are looking for these types of mistakes, especially foreign owned entities make. Because I have to go back to the fact that there's a different legal system, right?

You look at resume that you receive from an applicant in Europe with the photo on it, date of birth, whether they're married or not, what gender they are. Those are all things you cannot disclose or you cannot even ask for as a US employer. So sometimes European companies make that mistake. And, overall, with a lot of policies that also, came into play over the past years, work from home, Also, the the workforce as a whole in The US being a whole lot more competitive than it used to be, and the labor market drying up more than it used to. These topics are are hot topics where my job and and other lawyers' jobs, and and I'm sure to a certain extent yours as well, is really to advocate for the Europeans, but also then to educate them on, what may be different in The US than it is in Europe and how to approach it the right way.

Liability on the product side is still probably number one and I'm sorry, number two, but employment is number one by now.

And then to educate companies, what are some of the most common employment liability claims?

Definitely wrongful termination, which you have to be careful that there are certain protected classes in The US. We're talking about age, anybody over 40. When you terminate that person, probably wanna have a a release agreement in place where they're signing off on, hey, I'm not gonna sue you based on termination because of age. And in turn, you provide a severance package, for example. National origin, gender, race, religion, all these things you don't want to terminate or you don't want to provide a reason to terminate.

Right? For example, one of the simplest things an employer can do when they are terminating somebody is that person, that individual down, but don't be alone in that room with him. It's pretty much the same setup that we have here now. If you two were to terminate me now, you'd be in a whole lot better position because you can vouch for each other and act as witnesses. Right?

I can't make anything up. Or sexual harassment, other work related instances that cause problems. Because again, I have to go back to the fact that in Europe, we're simply not used to these work related liability questions. So be careful when it comes to those things. Without disclosing any names and any individuals, it's just a prime example of what can go wrong.

And if it does, it gets very expensive very quickly in The US. So it was a subsidiary of a German owned business entity in Texas. They brought over a comparably young general manager from Germany at the time. And he was responsible for hiring employees. Went through several interviews and out of three candidates picked one who that individual thought would be the right fit for the company.

One of the candidates who didn't get the job then sent an email literally asking, hey, why didn't I get the job? And

Which is valid, right?

Which certainly you can ask that question. But, when you get an email like that, you probably want to pick up the phone instead of putting something in writing. And if you, pick up the phone, one other thing that I always tell clients is especially in in Texas and and some other, one party consent states, always assume that you're being recorded just like we are now. So be careful what you say. But the the big mistake that individual made, was responding to that email in writing, literally saying, and I kept a copy of that email.

Sorry but we were looking for somebody younger than you. And that is the prime example of an age discrimination lawsuits because that individual who didn't get the job was over the age of 40. And then, two weeks later, I got a nasty letter from a lawyer Right. Saying, unless you pay us a lot of money, we are going to sue you. And, we were still able to negotiate a very very fair, settlement.

But, yes, it just imagine you're a small company just starting up, looking for your first employee, not having a a big bankroll to rely on, this can break your US venture very quickly.

We also see that European companies with e commerce websites have been confronted with claims that they had violated the ADA and the California Prop 65. Can you tell us a bit more about that and how companies can protect themselves against these kind of claims?

Yeah. Definitely. I'm dealing with a Prop 65 claim California right now. Oh, shit. As we as as we speak, which frankly, is a headache, because there's simply law firms out there in the state of California taking advantage of it.

So if you're especially in the food industry selling a food product into California, you have to put a warning label on it or you're you could be subject to receiving a letter saying you we ran a lab test on your product and, here are the results. They exceed what California Prop 65, which I mean was an interesting idea, a good idea by the state of California to protect, consumers from high levels of mercury and and other chemicals that could be out there. But now law firms, unfortunately take advantage of it and seek to squeeze companies, and get a lot of money from them. So if you want to protect yourself against, for example, prop 65, you just put a warning label on it, on your product that you're selling into California. This is not something that you have to be considered read about when you're selling into Texas, for example, or Florida.

This is a California specific thing. You go to any McDonald's, Starbucks. There are other fast food providers. I'm not trying to advertise for anything. You walk in the door, there's a notice, a prop 65 notice at every fast food chain restaurant in the state of California just saying if you eat our product, you'll probably be exposed to all these chemicals.

So this is really the the best way to do it. I'm no marketer. Obviously, I understand that once you put a warning label on your product, it's a whole lot more difficult to sell it. But this from a legal perspective is what you have to do. If not, then, and there is a lab result that exceeds the limits which are obviously different for every Mhmm.

Chemical in California. Then you have to reformulate your product. You have to pay a fine, which, yes, indirectly goes to the law firm. Mhmm. And you get most of the time six to twelve months to reformulate your product.

Or if you don't want to do that, you put a warning label on it too. So sometimes it may just be a good idea to put it, on at the beginning at the outset so that you don't expose yourself to it.

Manny, you're German. And Germans are known for their directness. I hope it doesn't I'm not saying anything that's you know, not known.

I'm super offended now.

I was gonna say, did I offend you?

Very much.

Are cultural differences a thing that you discuss with companies or potential new clients that you assist?

All the time. All the time because that's also similar to to what you practice, right? Bridging that transatlantic approach to business because in Europe as you said, we do business a certain way. Whereas in The US, what makes you successful in Europe does not necessarily make you successful in The US. So it's my job not only to explain the laws and being a lawyer for the companies coming here, it's also really translating literally to the Germans and and society or culturally when it comes to doing business.

Because again, I go back to the point that as successful as you are in Europe and trying to bring that over to The US does not always work because, yes, most of European companies will have a fantastic product, which a lot of them have a better product than what is already available in The US market. But you also have to learn how to sell it. You can't sell it like you would in Europe where Germans are very much known for being technical about their sales and made in Germany, made in Europe, all these things matter. Whereas in The US pricing matters more as well as your network. Who do you know?

So sometimes having a US person, US sales manager be responsible and and running sales over here actually is one of the key components of successful European companies in in The US. And that's the beauty of my job is seeing very very many different European companies and seeing what the successfuls do right Mhmm. And what the not successful ones do wrong. And there is a certain theme, a recurring theme actually, to what these aspects are.

Do you care to share?

Yes. Of course. So, one of the big aspects of or big mistakes European companies make when they enter The US market is they want to do it on the cheap. The US is a very expensive market as a whole. I mean, you live in New York, I live in Houston.

Not just that but even services, your bank account, your insurance, everything is going to be more expensive than it is in Europe. And then European shy away from wanting to spend that money, whether it's on the service providers, but also their employees. Right? If you

salary of a sales employee in New York or California.

That's exactly right. When it comes to hiring a general manager and you pay that individual $80,000, you're gonna get a general manager with the skill of $80,000, general manager, which is way, way, way too low for what's going right in The US. European companies have to look at The US as one country with 50 different states. We're it's like selling into 50 different countries all at once. And then you include Canada and Mexico and you have an entire North American continent that you can sell into.

So naturally, everything will be more expensive. So don't spend $510,000 on your incorporation and then try to hire somebody for $60,000 running the show here. It's not gonna work. In The US, you have to spend money to make money. It's just as simple as that.

And it's going if if you have a very successful sales manager who is sure, enjoying a decent base salary Mhmm. But then a commission, if that person is selling $10,000,000, yes, that individual may earn more money than the general manager in Europe. Yeah. But that's a good thing

Yeah.

For for the European company in The US, because the potential upsides are just so great. And it goes back to the European products being sought after by Europe by US customers Yeah. As well as great quality product. But you just have to be able to sell them the right way and approach marketing the right way. Another aspect is, for example, you can't use a global marketing strategy and expect that this will also work in The US.

It doesn't because American consumers work differently. Whether you're selling b to c or b to b, it's just very different. And last but not least, which may not be a mistake but may be just how we do business in Europe in general is the risk adversity. You have to be willing and able to take risks. And if you do if you do it the right way, if you listen to your advisers, your bankers, your CPAs, your lawyers, your tops team, we have the experience and we've seen how it gets done successfully, then the sky is the limit.

And this is what makes The US as a market so prolific for European companies expanding here. The growth that you can accomplish within five years, ten years when you do it the right way in The US is by leaps and bounds, more bigger, more exhaustive and and amounts to a whole lot more than you will reach you will be able to reach in Europe. So this is really the goes back to the risk adversity. And the last point I'm going to make about the mistakes is that sometimes companies want to do it too soon when it's a startup that does not have a proven concept, where there's no proof of market, or they just have, for example, a software, have already have three rounds of financing in Europe and then come over here and look for a US investor. You're not gonna be attractive to venture capital, private equity funds, when not only your shares are already diluted, but you don't have a a proof of concept.

So sometimes it is valuable to be patient at the right time. But then when you go in, you will wanna do it the right way and go all in Yeah. Because the upside is, again, we've seen it, you've seen it, phenomenal.

Thanks so much, Manny. That was very valuable. A lot of great tips on what you shouldn't do and what you should do. So, thank you.

Thanks for having me. It was super exciting and hope to do this again soon.

I'm glad that we had this conversation with Manny. I think it was great that he mentioned the three pillars to how you can protect yourself against liabilities in The US. And both the setup of the entity structure, contracts,

and insurances are also important when doing business in The US. And towards the end, Manny talked about how to sell and pitch your products. And if you're curious and wanna learn more about pitching in The US, please go back and listen to our very first episode with pitch coach David Beckett on how to successfully create and prepare a pitch for US customers and investors.

That is still one of my favorite episodes. And this was already our fifth episode of The US expansion series. Our next and final episode of this season will be with Anouk Gottlieb, CEO of Belgian Boys. And that episode will be on how they grew their business to become successful and fast growing business that it is today.

And if there are any topics that you'd like us to cover for the second season of The US expansion series, you can send us a message on LinkedIn or reach out to us on bizdev@tabsinc.com, and we'll make sure to add all of this information in the show notes below.