Warning, Border Ahead? Expanding Israeli Courts’ Jurisdiction over Foreign Defendants
In early June 2021, the Tel Aviv-Yafo District Court handed down an important precedential ruling. The ruling expands the identity of an authorized agent, i.e., the entity to whom a statement of claim may be served and that thus subjects a foreign defendant to the jurisdiction of the Israeli court.
The issue of jurisdiction arises often when parties hail from different countries with different legal systems. For the most part, the decision of which court will adjudicate the dispute derives from the validity of the service of the statement of claim to the foreign defendant.
In Israel, there are several possibilities for service of statements of claim to foreign parties. The central method is to serve the statement of claim to an agent. The Civil Procedure Regulations and the case law on the issue state that when a corporation establishes ties to Israel via an agent, statements of claim may be served to such agent and thus the foreign defendant will be subject to the jurisdiction of the Israeli court.
Several years ago, Apple was revealed to have concealed from its consumers that updates to iPhone devices were causing the devices to slow down. Accordingly, several class action suits were filed in Israel against Apple Inc. and against several additional associated companies. These cased were joined into one class action suit.
The plaintiffs served the motion for approval of the class action suit to Apple, an American corporation, through three Israeli companies.
- The first was Apple Israel Ltd., an affiliated company that conducts R&D for the Apple Consortium.
- The second was Icon Group Ltd., an Israeli company that serves as the official importer and distributer of Apple’s products in Israel, as well as an authorized service provider of Apple in Israel.
- The third was iDigital Store Ltd., a subsidiary of Icon, which operates a chain of stores that sell Apple’s products.
The Tel Aviv-Yafo District Court upheld the validity of the service to all three companies and held that each of them constitutes an agent for purposes of receiving court documents on behalf of Apple US.
The court based its findings regarding Icon and iDigital on the fact that, despite the lack of any corporate link between these companies to Apple US, they maintain an intensive relationship with it. The court ruled that this relationship is also relevant to the dispute at the heart of the class action suit, as the companies were involved in the relevant software updates. The Israeli companies also executed agreements with Apple, implemented its policy in terms of repairs, received instructions from it in cases of malfunctions, and held ongoing communications with Apple US’s officers.
It follows from this ruling that any foreign corporation that does not have representation in Israel[1] but seeks to distribute its products in Israel and would like to guarantee the characteristics and branding of its products (such as the iPhone), in order to maintain a unified perception of the products around the world, could potentially be dragged into litigation in Israel against its will.
Implications of the Ruling
An important implication of the ruling is that a corporation that wishes to avoid litigation in Israel may reconsider its decision to commence distribution of its products. This could have a chilling effect, which may result in a loss to consumers, both in limiting the scope of products offered and in reducing competition. This may in turn lead to higher prices.
Note that when global companies are concerned, each legal ruling in a secondary market such as Israel may hold great significance in the central judicial forums where these companies operate. For instance, to the extent an Israeli court holds that Apple indeed misled investors in this particular case (inter alia, due to the softer requirement for a causal connection as applied in class action suits in Israel), this would certainly have serious implications across the board even in other suits litigated against the company in the United States.
On the other hand, Israeli consumers who purchased a luxury item from a global company cannot remain without a remedy for the harm they believe they suffered, without being forced to pay unreasonable expenses and litigate a legal procedure outside the borders of Israel. Should Israeli consumers consider themselves without recourse, they will hesitate and avoid purchasing the product in many cases. If so, distributing products in Israel may turn out to be economically disadvantageous for the foreign company.
We are at the intersection between the need to encourage foreign companies to operate in Israel without dragging them against their will into litigation in Israel, and the need to preserve Israeli consumers’ reasonable recourse for claims that may arise against the foreign company. In this sense, the ruling in the Apple case contributes to the ongoing trend of blurring the borders, and there is no satisfactory solution.
From a practical standpoint, we believe there are several possible concrete steps a foreign company may implement:
- Create a short disclaimer whereby the service provider may not receive court documents in Israel for the foreign company and clarify that it does not constitute the foreign company’s agent.
- Limit the relationship and status given to representative companies in Israel, for instance by utilizing several service providers instead of one service provider, offering services from a company that itself is a foreign company, and so on.
Please note that the above does not constitute legal advice and should not be relied upon in and of itself. Each case must be examined on its own merit, and a suitable, customized solution should be offered for each company after an individualized and meticulous review of its circumstances.
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[1] In this context, Apple Israel is a center for research and development and is irrelevant.
Source: barlaw.co.il