Does a federal court have jurisdiction over a foreign corporation not incorporated in the forum state solely because the corporation’s indirect corporate subsidiary performs services for the corporation in the forum state?
During the Argentine “Dirty War” of the 1970s, between 10,000 to 30,000 left-wing sympathizers disappeared. In 2004, Bauman and twenty-two Argentine citizens or residents sued DaimlerChrysler AG (“DCAG”) for violations under the Alien Tort Claims Act, claiming that DCAG’s subsidiary in Argentina ordered state security forces to rid its plant of left-wing sympathizers. DaimlerChrysler is a German company that does not manufacture or sell products in the US, but owns a subsidiary, Mercedes Benz, that sells DCAG products in the US. Bauman sued in the Northern District of California, claiming that the court had general personal jurisdiction over DCAG via Mercedes Benz USA’s contacts with California. The Ninth Circuit held that DCAG is subject to general personal jurisdiction in California because it has an indirect subsidiary that distributes DCAG-manufactured vehicles in California. Thus, the court concluded that DCAG could be sued in California for the company’s alleged human rights violations committed by an Argentine subsidiary against Argentine residents. DCAG claims that neither an alter ego theory nor agency theory establish the necessary minimum contacts to extend personal jurisdiction over DCAG. Bauman argues that the Ninth Circuit properly found general personal jurisdiction because agency theory establishes DCAG’s necessary minimum contacts with California. The Supreme Court’s decision will determine the boundaries of general personal jurisdiction—specifically, whether an indirect corporate subsidiary’s contacts with a forum state can be imputed to the parent company to confer personal jurisdiction over the parent company.
Questions as Framed for the Court by the Parties
Whether it violates due process for a court to exercise general personal jurisdiction over a foreign corporation based solely on the fact that an indirect corporate subsidiary performs services on behalf of the corporation in the forum state.
In March 1976, a right-wing military group organized a coup d’etat to overthrew Argentine President Isabel Peron. Soon after, this military dictatorship targeted suspected left-wing political opponents, leading to a seven-year period commonly known as the “Dirty War.” During this time an estimated 10,000 to 30,000 left-wing sympathizers disappeared after authorities seized them.
In 2004, Barbara Bauman and twenty-two Argentine citizens and residents filed a complaint under the Alien Tort Claims Act, 28 U.S.C. § 1350, in the District Court for the Northern District of California against DaimlerChrysler AG (“DCAG”). The complaint alleged that DCAG’s subsidiary in Argentina, Mercedes Benz Argentina (“MBA”), committed human rights violations under the military regime of the 1970s. The complaint states that MBA executives ordered Argentine state security forces to kidnap, detain, or torture the plaintiffs or their family members because MBA executives wanted to rid its plant of individuals they considered to be union agitators.
DCAG is a German multinational corporation with its principal place of business in Stuttgart, Germany. Mercedes Benz USA, LLC (“MBUSA”) is a Delaware limited liability company with its principal place of business in New Jersey. MBUSA also has two offices in California, where it is subject to general personal jurisdiction. Additionally, MBUSA is a wholly-owned subsidiary of the DaimlerChrysler North American Holding Company, which is a subsidiary of DCAG.
DCAG manufactures Mercedes Benz cars, and MBUSA markets, sells, and services these cars in California. Title passes in Germany, where MBUSA purchases the cars from DCAG. Under a General Distributor Agreement (“the Agreement”), both parties’ approval is required for common objectives and either party may terminate the Agreement for good cause. Furthermore, although DCAG does not control the destination of the vehicles it sells to MBUSA, DCAG’s consent is required for management changes and agreements with authorized resellers.
In April 2005, DCAG filed a motion to dismiss the Bauman lawsuit, arguing that the court lacked personal jurisdiction over DCAG in California. The district court tentatively granted the motion, finding that DCAG did not have “continuous and systematic” contacts with California via MBUSA. However, the court ordered limited-jurisdiction discovery as to (1) whether an agency relationship existed between DCAG and MBUSA, and (2) whether the plaintiffs could pursue their claims in Germany or Argentina. In February 2007, the court concluded that its ruling on personal jurisdiction was correct. It also found that MBUSA was not DCAG’s agent (for purposes of conferring general personal jurisdiction) and that both Germany and Argentina provided adequate alternative forums for the plaintiffs.
Bauman appealed and the United States Court of Appeals for the Ninth Circuit reversed. The court concluded that (1) without MBUSA, DCAG would have had to perform the services that MBUSA performed and (2) DCAG controlled nearly every aspect of MBUSA. Accordingly, the Court concluded that the lower court had general personal jurisdiction over DCAG because MBUSA was an agent of DCAG. The Supreme Court granted certiorari to determine whether it violates due process for a court to exercise general personal jurisdiction over a foreign corporation based on the fact that an indirect corporate subsidiary performs services on the corporation's behalf in the forum state.
The Court will decide whether a court can extend general personal jurisdiction over a foreign corporation because of that corporation’s indirect corporate subsidiaries in the forum state. DCAG argues that the district court cannot extend jurisdiction over DCAG because the company does not maintain sufficient contacts with California. Bauman counters that personal jurisdiction is appropriate because DCAG created and controls a “wholly owned subsidiary to conduct essential operations” in the forum state for the benefit of DCAG. The Supreme Court will determine how far U.S. courts can extend their jurisdiction; accordingly, this case addresses the reach of the Alien Tort Claims Act, and international corporations’ liabilities in the U.S. for human rights abuses abroad.
RETALIATORY LAWS AGAINST THE UNITED STATES
Supporters of DCAG argue that conferring personal jurisdiction over DCAG would lead to a boundless and unpredictable expansion of general personal jurisdiction. The Chamber of Commerce (“Chamber”) argues that such expansive jurisdiction would lead to retaliatory laws against the U.S. abroad. In the Chamber’s view, because the U.S. is not a party to any jurisdictional treaties, this expansion would further impede a harmonious global legal system.
Supporters of Bauman counter that several countries have more expansive jurisdictional rules than the U.S., but there has been no indication of retaliation against those countries; in fact, Earthrights International claims, certain countries grant jurisdiction simply by the existence of a subsidiary in that country. Additionally, these supporters posit that jurisdictional predictability is achieved through a system where a parent company can be sued in a forum state by the presence of its subsidiary there.
INCREASED RISK OF DOING BUSINESS IN THE UNITED STATES
Supporters of DCAG also argue that corporations need clear rules to forecast where they could be sued. The Chamber contends that the Ninth Circuit decision increases corporate risk by making corporations liable wherever they maintain distribution relationships. Moreover, the Chamber contends, it makes it impossible to predict what kind of commercial relationship confers one entity’s jurisdictional contacts onto another. Even more, the Chamber argues, expansive personal jurisdiction affects small business owners who can now be subject to a court’s jurisdiction through contacts with distributors or agents, thereby forcing owners to avoid entering potentially lucrative markets for fear of incurring liability. DCAG’s proponents also argue that expanding general personal jurisdiction would decrease foreign investment in the U.S. because a hostile litigation environment would impact a company’s willingness to invest there. With the current decision, any company with any relationship in the US is likely to be sued there for activities taking place elsewhere in the world, even if those activities have nothing to do with the US.
Bauman’s supporters counter that under DCAG’s interpretation of the law, any corporation would avoid being sued in the US simply by establishing a wholly-owned subsidiary to act on its behalf in the forum state. In Bauman’s view, this would bar manufacturers and designers of products from liability and completely expose the domestic distributor. Furthermore, Earthrights argues that courts have been using the same jurisdictional tests for years with no evidence that foreign investment has decreased.
ADEQUATE ALTERNATIVES TO COMBAT HUMAN RIGHTS VIOLATIONS
DCAG argues that there are alternative forums that are more appropriate and convenient to handle tort cases involving human rights violations. Thus, DCAG contends, even when personal jurisdiction exists, courts can abstain from exercising their power to let the better forum handle the case. DCAG also suggests that courts may abstain from exercising jurisdiction to respect the interests of another sovereign and to allow plaintiffs to exhaust local remedies in their domestic courts.
In support of Bauman, the German Institute counters that the alternative forums in this case are not adequate because both alternatives would bar Bauman’s claims. Additionally, the Institute claims, Germany has not expressed concern that litigating this case in the U.S. would violate German sovereignty, whereas the U.S. has shown great interest in providing a forum to adjudicate human-rights violations.
The Court will decide whether due process is violated where a court exercises general personal jurisdiction over a foreign corporation solely because an indirect corporate subsidiary performs services in the forum state on the corporation’s behalf. The case presents two sub-issues: (1) whether the in-state economic activity of MBUSA can be considered “at home” under “minimum contacts” analysis and (2) whether an exercise of general personal jurisdiction over foreign DCAG is unreasonable when its contacts with the forum are established through its relationship with an “uninvolved domestic entity.”
DCAG claims that there is no basis for attributing MBUSA’s California business activities to DCAG in order to determine whether DCAG can be forced into a California court, because (1) DCAG is a legally separate entity from MBUSA, and (2) DCAG is not legally responsible for the acts of MBUSA. DCAG also argues that exercising general personal jurisdiction over DCAG is (1) per se unreasonable and (2) unreasonable under an analysis of the factors in World-Wide Volkswagen Corp. v. Woodson (“Volkswagen”).
Bauman claims that there is a basis for attributing MBUSA’s jurisdictional contacts to DCAG under a minimum contacts analysis because state law does not define the limits on a state’s authority to disregard corporate formalities for purposes of exercising personal jurisdiction. Furthermore, Bauman contends that MBUSA’s jurisdictional contacts can be attributed to DCAG based on an agency theory. In Bauman’s view, DCAG’s objections are without merit because the Due Process Clause permits consideration of a subsidiary’s contacts when that subsidiary performs important services for a parent company while subject to the parent's significant control.
DCAG argues that attributing MBUSA’s jurisdictional contacts to DCAG is improper because the two companies are not “alter egos”—i.e., that MBUSA is not acting as a mere cover for DCAG for the purpose of serving as a legal shield. DCAG asserts that the Court has long respected “corporate separateness” between a parent company and its subsidiary in the context of personal jurisdiction. Accordingly, DCAG contends, two affiliated corporations can only be merged for jurisdictional purposes when the corporations fail to adhere to the requirements of “corporate separateness” and are thus the “alter ego” of the other. DCAG argues that it is not the “alter ego” of MBUSA because the two corporations have maintained separate identities by having separate boards of directors, officers, employees, books and records, and decision-making systems.
DCAG also argues that attribution of MBUSA’s jurisdictional contacts to DCAG may not rest on an agency theory. Citing previous cases, DCAG asserts that an agency relationship may be sufficient in some circumstances to give rise to specific jurisdiction, but it cannot support a finding of general jurisdiction. DCAG continues that, even if this Court were to recognize an agency theory for this case, an agency relationship between DCAG and MBUSA does not exist because several fundamental elements required to establish a principal-agent relationship—“assent” by both parties to the agency relationship, the existence of fiduciary duties between the parties, and the principal’s “control” over the agent’s actions—are not present in this case.
Bauman counters that the Court should follow the traditional practice of establishing a federal rule to enforce the limits against which state laws are ultimately judged. Following this line of reasoning, Bauman argues that the Due Process Clause does not categorically limit states from applying alter ego tests in determining whether to disregard formal corporate distinctions for jurisdictional purposes. Bauman contends that such reasoning ignores the justification for exercising jurisdiction, which is that DCAG has enjoyed the benefits of the forum state’s laws and economy. Bauman also reasons that DCAG’s alter ego standard has no support under modern due process precedents. Furthermore, Bauman argues that the alter ego test is neither adapted for the concerns of the Due Process Clause nor so deeply embedded in U.S. legal traditions as to have attained constitutional status.
Bauman also claims that MBUSA’s contacts can be attributed to DCAG based on an agency theory. Bauman argues that under a four-factor test, MBUSA’s contacts were sufficient to establish an “agency” relationship; specifically, whether the subsidiary (1) is wholly owned by the parent company, (2) undertakes an important part of the parent company’s business in the forum, (3) exclusively for the parent company, and (4) does so while subject to substantial control by the parent company. Bauman argues that the “agency” relationship is established because MBUSA meets each of the factors.
DCAG argues that subjecting it to general personal jurisdiction for purely foreign conduct based solely on its relationship with MBUSA is per se unreasonable. DCAG contends that a U.S. court extending jurisdiction to apply US law or a US interpretation of foreign law to alleged foreign conduct raises the “obvious” likelihood of incompatibility with another country’s laws. DCAG claims that in Kiobel v. Royal Dutch Petroleum Co. (“Kiobel”), the Court recently warned that such cases present a unique “danger of unwarranted judicial interference in the conduct of foreign policy.” Accordingly, DCAG concludes that it is per se unreasonable for it to be implicated by the US for actions that did not occur in the US. DCAG continues that even if the Court does not recognize the per se unreasonableness of this case, finding jurisdiction here would be unreasonable under the Volkswagen factors.DCAG asserts that all of the Volkswagen factors—burden on the defendant, sovereignty of foreign nations, interests of the forum state, and availability of alternative forums—weigh against the exercise of jurisdiction over DCAG.
Bauman responds that the Court unambiguously declined to adopt a per se rule that would never permit jurisdiction over a foreign party for foreign conduct based solely on its relationship with an uninvolved domestic entity. Bauman claims that the reasonableness factors cited by DCAG actually weigh in favor of exercising jurisdiction over DCAG. In particular, Bauman contends, DCAG is not burdened by litigating in California because there is no language barrier, and California is no more burdensome a location than Argentina, an undisputed alternative forum. In Bauman’s view, as a forum state, California has a legitimate interest in regulating DCAG, which substantially and directly participates in the State by owning MBUSA. Bauman also argues that a California forum would not intrude on Germany’s sovereignty because nearly half of DCAG’s sales come from the United States. Bauman’s view is that the availability of an alternative forum, such as Germany, is not determinative when DCAG has taken extensive economic advantage of foreign markets like California; thus, DCAG is reasonably subject to suit in California even if the parent company would be amenable to suit in its place of incorporation or principal place of business.
In this case, the Supreme Court will address a fundamental question about personal jurisdiction and the scope of the Due Process Clause. The Court will reinterpret several legal tests and decide whether general personal jurisdiction over a foreign corporation can be based solely on the services performed by an indirect corporate subsidiary in the forum state. DCAG argues that there is no basis for attributing a subsidiary’s contacts to its parent company because a minimum contacts analysis prohibits such attribution. DCAG also argues that such attribution is constitutionally unreasonable. Bauman asserts that an agency theory provides the legal basis for attributing a subsidiary’s jurisdictional contacts to its parent. Bauman also argues that DCAG’s unreasonableness challenge should be rejected because the relevant factors weigh in favor of California’s exercise of jurisdiction. The Court’s decision will significantly impact the operations and structures of foreign companies doing, or seeking to do, business in the U.S. Further, the decision will determine how far U.S. courts can reach to bring foreign defendants into U.S. courts.
- Kenneth Anderson, Opinio Juris: Supreme Court to Review Bauman v. DaimlerChrysler (July 17, 2013)
- John Bellinger, Lawfareblog.com: Justice Department Urges Supreme Court to Reverse Ninth Circuit in Bauman v. DaimlerChrysler (July 12, 2013)
- Michael Bobelian, Forbes: Supreme Court Could Redraw The Reach Of America's Courts (April 29, 2013)