Grant J. Esposito Brian R. Matsui Jessica E. Palmer March 4 2014 Supreme Court curtails general personal jurisdiction Morrison & Foerster LLP | Litigation - USA Grant J. Esposito, Brian R. Matsui, Jessica E. Palmer Litigation IntroductionBackgroundSupreme Court decisionCommentIntroductionOn January 14 2014 the Supreme Court decided Daimler AG v Bauman, 11-965 – a closely watched personal jurisdiction case (for further details see "More than an alien tort statute case: Supreme Court may limit personal jurisdiction"). In an opinion authored by Justice Ginsburg for eight justices, the court reversed the Ninth Circuit's holding that a German company was subject to general personal jurisdiction in California, based on the California contacts of the company's Delaware subsidiary. Justice Sotomayor concurred in the judgment.Until recently, the Supreme Court engaged infrequently with issues of personal jurisdiction. Before the October 2010 term, the Supreme Court had not significantly addressed personal jurisdiction since 1987, when it issued a splintered decision in Asahi Metal Industry Co v Superior Court of California.(1) During the 2010 term, the Supreme Court decided two cases that effectively limited the ability of state courts to assert personal jurisdiction over foreign defendants: Goodyear Dunlop Tires Operations v Brown and J McIntyre Machinery v Nicastro. In Goodyear the Supreme Court explained that there is general jurisdiction when a business is "at home" in the forum state.(2) Bauman further closes the door on efforts to extend personal jurisdiction against foreign corporations.Bauman addresses a question left unresolved by Goodyear: whether the in-state contacts of a corporate subsidiary can be imputed to a foreign parent corporation for purposes of exercising general jurisdiction over the parent, even though the parent itself conducts no business in the forum state. The Supreme Court held that the subsidiary's in-state contacts could not support general jurisdiction over the parent corporation. The court reiterated that personal jurisdiction is generally limited to where a foreign corporation's affiliations with the forum state are so extensive as to render it essentially at home in the forum state.Background The question presented in Bauman was:"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 defendant in the forum State."The plaintiffs are residents of Argentina who alleged human rights violations against them and their relatives at the hands of Argentina's military dictatorship during the 1970s and early 1980s. The plaintiffs and their relatives were employed by Daimler's subsidiary in Argentina. Daimler is a German company that manufactures Mercedes-Benz automobiles inGermany. It does not manufacture, market or sell any products in the United States.The plaintiffs filed suit in California, maintaining that Daimler was subject to general personal jurisdiction in California based on an agency theory. The plaintiffs argued that Daimler was subject to general jurisdiction in California based on the contacts that Daimler's wholly owned subsidiary, which was incorporated in Delaware, had in California. The plaintiffs argued that the German parent could thus be forced to defend itself in California against the human rights violations allegedly committed by its Argentine subsidiary. The district court dismissed the case for lack of jurisdiction.The Ninth Circuit reversed, holding that Daimler was subject to general jurisdiction. The Ninth Circuit considered two separate tests for determining whether a subsidiary's in-state contacts can be imputed to a parent corporation for purposes of general jurisdiction. Although other circuits have applied similar tests, the Supreme Court has not endorsed either test. The first– the alter-ego test – did not apply because the plaintiffs acknowledged that the subsidiary was not an alter ego of the parent corporation. The second – the agency test –requires two showings:The subsidiary was established for, or is engaged in, activities of sufficient importance that the parent would have to undertake similar activities itself, but for the existence of the subsidiary.The parent has actual control over, or the right to control, the subsidiary's internal affairs or day-to-day operations.The Ninth Circuit concluded that the agency test was satisfied.Supreme Court decisionThe Supreme Court reversed the Ninth Circuit's decision, rejecting its invocation of the agency test for general jurisdiction. The Supreme Court explained that it had "not yet addressed whether a foreign corporation may be subjected to a court's general jurisdiction based on the contacts of its in-state subsidiary".(3) While the court did not foreclose use of the agency test to impute a subsidiary's in-state contacts to a foreign parent, it made clear the Ninth Circuit's analysis could not be sustained. The Ninth Circuit had relied on the fact that the subsidiary's "services were 'important' to Daimler, as gauged by Daimler's hypothetical readiness to perform those services itself if [the subsidiary] did not exist".(4) The court held that 'importance' cannot be the test, as "[a]nything a corporation does through an independent contractor, subsidiary, or distributor is presumably something that the corporation would do by other means if the independent contractor, subsidiary, or distributor did not exist".(5) Such a result "would sweep beyond even the 'sprawling view of general jurisdiction' we rejected in Goodyear".(6)The Supreme Court also reiterated that even if the subsidiary's contacts could be imputed to Daimler, "there would still be no basis to subject Daimler to general jurisdiction in California, for Daimler's slim contacts with the State hardly render it at home there".(7)The court stressed that for a corporation, "the place of incorporation and principal place of business are paradigm bases for general jurisdiction".(8)The court also rejected the plaintiffs' argument that general jurisdiction exists whenever "a corporation engages in a substantial, continuous, and systematic course of business" as "unacceptably grasping".(9) The court explained that "continuous and systematic" is the standard for specific jurisdiction, not general jurisdiction. For general jurisdiction to exist, the foreign corporation's in-state affiliations must "render it essentially at home in the forum State".(10) Finally, the court concluded that concerns about predictability and international comity supported its determination that foreign corporations are not subject to general jurisdiction in all states where their subsidiaries have sizeable sales.Justice Sotomayor concurred. She agreed that there was no jurisdiction over the parent company, but in her view, the majority placed too much weight on the size and extent of Daimler's worldwide contacts. She would instead have focused the general jurisdiction test "solely on the magnitude of the defendant's in-state contacts, not the relative magnitude of those contacts in comparison to the defendant's contacts with other States".(11)CommentBauman further closes the door on recent lower court efforts to expand general personal jurisdiction. Had the Supreme Court approved the Ninth Circuit's permissive approach to personal jurisdiction, it could have significantly expanded the scope of corporate and shareholder liability. Instead, the Supreme Court reaffirmed the more restrictive test, articulating that foreign corporations are not subject to general personal jurisdiction in a state unless they are "essentially at home" in that state.Bauman further clarified that where the alter-ego test is not satisfied, a corporate subsidiary's sizeable sales in the forum state or the importance of its services to its parent are not sufficient to support general jurisdiction over a foreign parent corporation. This holding will make it more difficult to subject non-state defendants, including foreign corporations, to general personal jurisdiction.Moreover, although Bauman did not expressly hold that the in-state contacts of an alleged agent could never supply general jurisdiction, the court signalled an end to that argument by placing the focus squarely on the defendant's – rather than the agent's – activities in the forum. Thus, even if the agency test survives, the circumstances in which it might confer general jurisdiction appear extremely limited. Nonetheless, companies should review written agreements with subsidiaries and affiliates to clarify the grounds, if any, on which an in-state affiliate might be considered an agent, and continue to observe standard formalities of corporate separateness to avoid litigation expense outside their home jurisdiction.Bauman is the first of two personal jurisdiction opinions expected from the Supreme Court this term. On November 4 2013 the Supreme Court heard argument in Walden v Fiore, 12-574, which addressed what it means for a defendant to 'expressly aim' its conduct at a forum state, such that the forum state has specific personal jurisdiction over the defendant. In Walden, the Ninth Circuit held that there was personal jurisdiction over a non-resident Drug Enforcement Agency (DEA) agent who lacked contacts with the forum state, because the DEA agent committed an intentional act (the filing of an allegedly false probable cause affidavit) expressly aimed at the forum state where the plaintiffs resided.For further information on this topic please contact Grant J Esposito or Jessica E. Palmer at Morrison & Foerster LLP's New York office by telephone (+1 212 468 8000), fax (+1 212 468 7900) or email ([email protected] or [email protected]). Alternatively, contact Brian R Matsui at Morrison & Foerster LLP's Washington DC office by telephone (+1 202 887 1500), fax (+1 202 887 0763) or email ([email protected]). The Morrison & Foerster website can be accessed at www.mofo.com.Endnotes(1) Solano City, 480 US 102 (1987).(2) 131 S Ct 2846, 2887 (2011).(3) Slip op 16.(4) Slip op 17.(5) Slip op 17 (quoting 676 F3d 774, 777 (9th Cir 2011) (O' Scanlainn, dissenting from denial of rehearing en banc)).(6) Slip op 17.(7) Slip op 18.(8) Slip op 19 (internal quotations and alterations omitted).(9) Slip op 19.(10) Slip op 20.(11) Slip op 8.