In a ruling of major importance to the business community, the New York Court of Appeals issued its decision on May 3, 2016 in Finerty v. ABEX Corp.(Ford Motor Company) rejecting plaintiff’s argument that, even in the absence of any basis for corporate veil-piercing, a parent company can be held liable for torts committed by its foreign subsidiary on the theory that the parent is “in the best position to exert pressure to improved safety products.” The court firmly rejected the notion that a U.S. parent is the global “guardian” of its brand and that the broad imposition of liability for products sold by its subsidiaries in foreign countries is therefore appropriate. The decision goes a long way in reaffirming well-settled New York law on corporate separateness and basic principles of corporate law.

Plaintiff claims that he developed peritoneal mesothelioma as a result of exposure to asbestos during the 1970s and 1980s while replacing asbestos-containing brakes, clutches and engine parts on Ford tractors and passenger vehicles in Ireland. The plaintiff later immigrated to New York. It was not disputed that Ford USA’s wholly owned subsidiary, Ford UK, manufactured, produced, distributed and sold the parts in question. Both the trial court and the Appellate Division, First Department, determined that, while there was no basis on which to pierce the corporate veil, the plaintiff had nonetheless produced sufficient evidence showing that Ford USA “exercised significate control over Ford UK and Ford Ireland and had a direct role in placing the asbestos-containing products to which plaintiff was exposed into the stream of commerce.” Thus, both lower courts found that there was a question of fact concerning Ford USA’s “direct responsibility for plaintiff’s injuries…”

There was no factual question as to whether Ford USA was the manufacturer, retailer or distributor of the asbestos-containing parts. That was not at issue. Rather, the appellate division hinged Ford USA’s potential liability on the premise that there was evidence that Ford USA played a “substantial rule in the design, development and use of the auto parts distributed by Ford UK” such that Ford USA’s “role in facilitating the distribution of the asbestos-containing auto parties” could subject it to strict liability because it was in the best position to exert pressure on Ford UK into warn its users of the hazards presented by the auto parts. (emphasis in original opinion).

The court determined that the lower appellate court had committed two significant errors in its ruling. First, the court held that Ford USA, as the corporate parent of Ford UK, could not be held derivatively liable to plaintiff under the theory of strict products liability unless Ford USA disregarded the separate identity of Ford UK and involved itself directly in that entity’s affairs such that the corporate veil could be pierced.

Essentially, the court faulted the First Department for its seemingly basic misunderstanding of the role parents play with their subsidiaries across different markets throughout the world to ensure product standardization. As the US Chamber of Commerce observed in its amicus curiae brief, successfully selling a product locally requires a balance between standardizing products across markets in various countries and adapting them to the differences among markets in those countries. The US Chamber of Commerce cited a study of 128 products sold in foreign markets by 62 multinational corporations that showed that this balance was best achieved through direct contact between headquarters and subsidiary managers to positively influence product performance in international markets. Parent-subsidiary corporation is a fact of life for multinational corporations and hardly controversial. The Court of Appeals held:

“Moreover, absent any indication that Ford USA was in the distribution chain, it is of no moment that Ford USA exercised control over its trademark. …In any event, the record indicate that Ford USA’s “world-wide” trademark program described how the trademark was to be used on packaging of Ford products, and did not contain directives as to what warnings, if any, were required to be placed on the packaging itself.”

The second significant error made by the First Department was its conclusion that Ford USA could be subject to strict liability because it was in the “best position” to “exert pressure” on Ford UK for improved product safety. The court recognized that as Ford UK’s parent company, Ford USA could “exert pressure” on Ford UK, but clarified that:

“…we have never applied that concept to a parent company’s presumed authority over a wholly owned subsidiary. We have, however, routinely applied that concept to sellers of a manufacturer’s product because it is the sellers who, through their ongoing relationship with the manufacturers and through contribution and indemnification in litigation, combined with their role in placing the product in the consumer’s hands, are in the best position to pressure the manufacturers to create safer products.”

Accordingly, because Ford USA was not in the distribution supply chain as a manufacturer, retailer or distributor, it was a mistake for the appellate division to seek to subject Ford USA to strict liability.

If it had been left unchallenged, the poorly reasoned decision of the First Department would have potentially opened the litigation floodgates in New York, not just for asbestos defendants, but to all American product manufacturers, and potentially create confusion concerning the proper role of multinational corporations in today’s world. The Court of Appeals decision provides clear judicial guidance to New York trial courts concerning how they must address creative challenges to American corporate law principles in the future.