What Brands to Need to Know to Enter and Establish in the Americas, Part 1
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In an earlier article, we discussed the substantiality of the U.S. market in the context of realizable potential for international brands. As large as it is, however, the U.S. market presents uniquely complex challenges, especially with regards to legal and regulatory issues. In many ways, the U.S. market is not just one market, but rather comprised of 50 separate markets, each with its own set of laws, compliance standards, and enforcement measures.
While the U.S. is regarded as one of the most litigious countries in the world, new entrants to the U.S. market can navigate legal pitfalls through a better understanding of the various federal, state, and local regulations. Below, we break down a few key considerations that we have seen brands encounter.
1. Entity Choice
International brands must decide on the form of entity they will use to conduct business in the U.S. Some options include forming corporations or limited liability companies (LLCs), creating a branch office, and/or establishing a partnership with a U.S. company. There are pros and cons for each. For example, setting up a branch office may seem like the path of least resistance at first blush as it pertains to paperwork and fees. However, a branch office can subject the entire foreign company to taxation on all income earned and the foreign company may not be insulated from the branch office’s liability. The choice of form is case-specific, depending largely on the international brand’s U.S. strategy and business factors.
U.S. tax laws are very complex and best handled by tax attorneys and CPAs. Federal, state, and local governments each have the authority to tax, legislate, and regulate business activities. Consequently, international brands operating in the U.S. are subject to tax imposed by all three mutually exclusive jurisdictions. Just to name a few at the federal level, brands must comply with and be mindful of registration requirements of the IRS (obtaining FEIN or EIN), annual tax returns, tax payment timing, branch taxes, capital gain tax rates, transfer pricing regulations, and foreign tax credits (to also mitigate double taxation on worldwide income).
State and local jurisdictions also levy a sales tax as opposed to a VAT. Note that there is no federally imposed sales tax and not all states impose a sales tax. International brands engaging in B2B sales must keep valid exemption certificates on file in compliance with audit and bookkeeping requirements of each applicable jurisdiction.
3. Importing, Customs, and Product Safety Regulations
A great product alone may not be enough to break into the U.S. marketplace. For example, a product may not be sold in the U.S. if it fails to meet all the legal requirements of U.S. customs and import laws, lacks the required licenses and permits, and does not have compliant export and import documentation. There are extensive regulatory requirements by category of products but familiarization with CPSIA (children’s products), CPSC (substances in all products) at the federal level and California Proposition 65 (optional) at the state level, FCC (electronics), UL (electronics), and Country of Origin Labeling is a good place to start to better understand what may be required in order to successfully import products into the U.S.
Since a standardized compliance check process does not exist, the real risk is not about passing customs checks, but rather related to product liability—i.e., what might happen in the hands of the end consumer, user, or bystander.
4. Product Liability
Home to arguably the most diverse and developed product liability laws in the world, the U.S. litigates product liability claims more frequently than any other country. A product liability claim arises when a defective product causes personal injury or property damage. The three main types of product defects are design defects, manufacturing defects, and warning defects. All parties in the supply chain—manufacturer, distributor, wholesaler, and retailer—may be subject to liability. Many brands commonly obtain and maintain extensive product liability insurance in order to mitigate U.S. product liability exposure.
There is no federal product liability law in the U.S.; liability is determined strictly by the laws of each state. While there are many similarities across jurisdictions, state laws vary and as such, international brands entering the U.S. market should be well-versed in the state-by-state intricacies of product liability law as relevant.
5. Intellectual Property
Intellectual property (IP) is one of the most valuable assets for brands. Foreign patents and trademarks are generally not enforceable in the U.S. For truly unique products that are new, novel, and non-obvious, the best way to secure the highest protection afforded in the U.S. would be through a patent granted by the U.S. Patent and Trademark Office (USPTO). However, obtaining a patent can be a lengthy and costly process.
Federal trademark registration (via USPTO) is not the only way to secure trademark protection in the U.S. State registrations are also available (although this may have more limited protection), and logos and brand names may acquire certain trademark rights when used in specific territories in the U.S. through “secondary meaning” or “acquired distinctiveness.” Ultimately, federal registration provides the strongest level of protection, and international brands should consider registering the company and product names with the USPTO.
The topics introduced above just barely scratch the surface of all the U.S. legal considerations for international brands. The right partner(s) will not only mind the gap but also bridge the gap, ensuring the brand’s swift, painless, and above-board entry and assimilation into the U.S. market.