Hypothetical 1: You are an engineer living in Louisiana. Seeing the economic opportunities presented by the boom in Texas fracking, you start a business to produce fracking sand in Minnesota. You visit Texas for business, some visits of which are to secure financing for the project and to meet with joint venturers on the project. You are also involved in some Texas entities that were created to facilitate the venture. Can you be sued in Texas and be forced to retain counsel for your defense when things go south?
Hypothetical 2: You are a Mexican businessperson living in Mexico. A competitor has its headquarters in Dallas, Texas. You hire a publicist based in Washington D.C. to issue nationwide negative press releases about your competitor. Some of these releases are directed to Texas markets. If your competitor sues you in Texas for defamation, do you have to hire counsel and make sure your visa is up to date in case you get called to trial?
In cases involving similar facts, the Dallas Court of Appeals has reached two different outcomes in the not-so-hypothetical cases referenced above, holding that Texas courts had jurisdiction over the Mexican national but lacked jurisdiction over the Louisiana engineer. These divergent outcomes may seem arbitrary to those of us who are not scholars of civil procedure or who do not otherwise deal with these issues on a day-to-day basis. However, understanding the reasoning behind these opinions is essential in today’s integrated economy because a court’s exercise of personal jurisdiction can have very practical effects on clients who become subjected to inconvenient or burdensome litigation in a state where they do not reside. Conversely, parties bringing lawsuits may be restricted if they cannot sue a defendant in the most convenient forum where the alleged harm occurred, or, in the case of class-action plaintiffs, if they cannot conveniently aggregate their claims in a single forum.
Despite globalization and technological changes that have blurred state and national borders, the United States Supreme Court has tightened the reins of personal jurisdiction in recent landmark cases and seemingly made it more difficult for states to assert jurisdiction against non-resident parties. This trend has begun to trickle down into recent opinions by Texas courts. These developments, and how to navigate, is the subject of this month’s KRCL litigation update.
A Review of (or Introduction to) Personal Jurisdiction
In a nutshell, personal jurisdiction is the ability of individual states to exercise power over an individual or company. The doctrine arises out of the Due Process Clause of the Fourteenth Amendment, which traditionally provided that a state’s power reaches no farther than its borders. In practical terms, this means that a state cannot compel a party to appear in the courts of that state or maintain judgment against the party unless baseline constitutional requirements are met.
A party may be subjected to one of two types of jurisdiction: general or specific. If a party is subject to general jurisdiction in a particular forum, it may be sued for any claim, even those claims that are unrelated to its activities in that forum (e.g., a Delaware Corporation sued in Delaware even though none of its day-to-day business operations occur in Delaware). For corporations, this “home base” forum would either be in its state of incorporation or principal place of business. An individual’s “home base” would be the state of domicile. If a party attempts to sue a defendant outside of the defendant’s “home base,” general jurisdiction should be invoked in the limited circumstance in which a company’s activities in a state are so substantial that it should reasonably anticipate being subject to suit in that state. This is an extremely limited exception that has been further constrained by Daimler, a 2014 Supreme Court case discussed below.
If general jurisdiction is not met, a claimant must rely on specific jurisdiction, which requires that the specific claims asserted in the lawsuit be sufficiently related to the connections that the defendant does have to a given forum. For example, if Company sells Widget A only in Texas and Widget B only in New York (and otherwise has a minimal presence in both states), a plaintiff somehow injured by Widget B in Texas would hypothetically not be able to maintain suit against Company in Texas for products liability.
Bristol-Myers Squibb follows Supreme Court Trend of Limiting Personal Jurisdiction
This term, the U.S. Supreme Court decided Bristol-Myers Squibb Co. v. Superior Court of California, a case that will undoubtedly have far-reaching effects on multiparty litigation.
In Bristol-Myers Squibb, a group of plaintiffs, most of whom were not California residents, sued Bristol-Myers Squibb (BMS) in California state court, alleging that they were injured by BMS’s blood-thinning drug Plavix. The California Superior Court held that California courts lacked general jurisdiction over BMS (a Delaware Corporation headquartered in New York) but could assert specific jurisdiction over all claims, even those claims brought by non-resident Plaintiffs who did not purchase Plavix in California and were not injured in California.
On appeal, the United States Supreme Court reversed, holding that California courts lacked specific jurisdiction over claims brought by the non-resident class members. In other words, the Court held that the non-resident claims were not sufficiently related to the following of BMS’s connections to California: (1) BMS’s five research and laboratory facilities employing a total of 160 employees in California; (2) its state-government advocacy office in Sacramento; and (3) its employment of 250 sales representatives in California. The Court explained that these activities were not specifically related to the non-resident plaintiffs’ Plavix claims because BMS did not develop Plavix in California, did not create a marketing strategy for Plavix in California, and did not manufacture, label, package, or work on the regulatory approval of the product in California. All of these activities took place in New York or New Jersey. The Court also found it insufficient that BMS took $900 million from Plavix sales in the state, as none of the non-resident plaintiffs alleged that they purchased Plavix in California.
It may seem surprising to many that BMS could not be forced to appear in court on certain claims when it had offices in California and derived such a significant economic benefit from this state. Additionally, one of the primary policy considerations underlying personal jurisdiction is the burden placed on non-resident defendants. As Justice Sotomayor observed in her dissenting opinion, BMS would arguably suffer minimal additional burden because it was already required to litigate several other class claims in the same lawsuit.
Regardless of the criticism of Bristol-Myers Squibb and its anticipated far-reaching impact, this was an 8-1 decision that follows the trend begun by Daimler, a 2014 case that significantly limited general jurisdiction. As a recap, the Court in Daimler held that a company cannot be subjected to jurisdiction because an affiliated (but distinct) company would be subjected to jurisdiction, rejecting an argument that corporations may be agents of their affiliates, subsidiaries, parent companies, etc. for jurisdiction purposes.
This same term, the United States Supreme Court similarly limited personal jurisdiction in two other cases: BNSF Ry. Co. v. Tyrrell, 137 S.Ct. 1549 (2017) (holding that BNSF was not subject to jurisdiction in Montana when it was not incorporated in Montana, did not maintain a principal place of business there, and the wrongful-death facts occurred out of state); and TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S. Ct. 1514, 1520 (2017) (holding that venue provision under patent law provided that defendant’s “residence” is only the state of incorporation).
All of these cases were decided almost unanimously, suggesting that personal jurisdiction’s narrowing scope is here to stay, and there are several lessons to be learned from this trend. As shown in Daimler, courts should honor the legal distinctions between corporate entities, even those that are affiliated. With Bristol-Myers Squibb, the message is that when general jurisdiction is lacking, specific jurisdiction must be established for each claim brought by each plaintiff. At least for now, interstate businesses may rest assured that they can structure their enterprises to avoid litigation in unfavorable forums and/or nationwide litigation when they have taken the appropriate legal steps to avoid a nationwide presence.
Bringing Personal Jurisdiction Home: Northern Frac Proppants and Celanese
In the wake of the Supreme Court opinions discussed above, the Dallas Court of Appeals has issued two recent opinions that provide helpful guidance for Texas practitioners navigating the evolving area of personal jurisdiction.
The first case is Northern Frac Proppants, II, LLC v. 2011 NF Holdings, LLC et al., No. 05-16-00319-CV, 2017 WL 3275896 (Tex. App.—Dallas Jul. 27, 2017). The case arose out a venture to mine and produce fracking sands from Wisconsin and Minnesota. Various individuals were involved in the venture, including Jeffries Alston, a Louisiana engineer, and these individuals set up different entities to further this venture. One such entity was 2011 NF Holdings, LLC, a Delaware Limited Liability Company with its principal place of business in Richardson, Texas. NF Holdings held the group’s assets, including trade secrets and confidentiality agreements. The lawsuit alleged that Alston engaged in a scheme to steal these assets and transfer them into NFP II, a Delaware Limited Liability Company formed by Alston. The plaintiffs further alleged that Alston secretly used the trade secrets and confidentiality agreements to benefit NFP II and that NFP II began secret negotiations to sell the fracking sands enterprise to Badger Mining Corporation, a Wisconsin corporation and named defendant in the lawsuit.
Following the strict general jurisdiction standard established in Daimler, the Dallas Court of Appeals found that this was not met as to Alston despite his various activities within the state: (1) his state-of-the-art pickup truck that allowed him to conduct business wherever he was, including Texas; (2) his involvement in other companies that either had offices in Texas or held Texas sales tax ID numbers; and (3) his various meetings in Texas in connection with the fracking venture, including meetings to execute sales contracts, secure financing, and meet with Texas attorneys.
In finding no general jurisdiction as to Alston, a key factor the Dallas Court considered was the plaintiffs’ failure to allege how much time Alston spent in Texas transacting business. Following the U.S. Supreme Court’s holding in Daimler, the Court concluded that even substantial and continuous business dealings in a forum are insufficient to establish that a party is essentially “at home” in that forum.
To support specific jurisdiction, the plaintiffs introduced evidence that can be summarized as evidence that Alston stole Texas assets and that his conduct harmed Texas individuals and businesses. The Court first rejected the plaintiffs’ argument that Alston “directed” his activities towards Texas because the plaintiffs experienced injury there. Following a previous Supreme Court case, the Court noted that the question is “not where the plaintiff experienced a particular injury or effect but whether the defendant’s conduct connects him to the forum in a meaningful way.”
The Court also rejected the argument that Alston had stolen Texas assets, finding that the tangible assets in this case were the sand assets in Wisconsin. The Court distinguished the case from other cases in which the subject matter was Texas real estate. With regard to the alleged theft of intangible assets, the Court held that none of the parties to the non-competition agreements were Texas residents. As for the trade secrets, there was no evidence that the trade secrets came from Texas or were derived here, in contrast to a previous case in which trade secrets were obtained at a meeting that took place in Texas. Finding neither general nor specific jurisdiction as to Alston, the Court dismissed the claims against this defendant.
In contrast, the Dallas Court of Appeals recently found that personal jurisdiction was present as to non-resident Mexican nationals in Celanese Corp. et al. v. Javier Salcedo Sahagun et al., No. DC-15-09284 (Tex. App.—Dallas Aug. 9 2017).
Celanese operated a manufacturing plant in Mexico, and Defendant Javier Sahagun owned fifty acres of undeveloped property adjacent to the plant. The plaintiffs alleged that Salcedo and his attorneys had engaged in repeated tactics to interrupt the plaintiffs’ manufacturing business in an effort to force the plaintiffs to buy Salcedo’s property at an inflated price. One such tactic was the defendants’ hiring of a publicist to circulate allegedly defamatory statements that the Mexican government had shut down Celanese’s facility for environmental contamination, which Celanese claimed was false. The publications were circulated nationally but were significantly targeted to Texas markets, being published or re-published by the Dallas Business Journal and the Fort Worth Star Telegram.
Celanese sued the defendants for defamatory publications issued by a Washington D.C. publicist the defendants hired. The primary issue in this case was not whether the defendants were subject to personal jurisdiction in Texas themselves, but whether the publicist’s Texas contacts should be imputed to the defendants under an agency theory. The court first held that the publicist was an agent of Salcedo and his attorney, defendant Ramos, because they were heavily involved in formulating the publications and directed various aspects of the publicist’s work.
Turning to whether the publicist was subject to specific jurisdiction, there was evidence that the publicist specifically circulated the statements to Texas media outlets like Dallas Business Journal and the Fort Worth Star Telegram, that her initial business proposal targeted these publications, and that she directly followed up with employees from these publications by phone and e-mail regarding her press releases. There was also e-mail evidence that the defendants intended for the effects of the publications to be felt in Dallas, Celanese’s headquarters, to cause a “shake up” with Celanese’s corporate leadership.
In analyzing the “relatedness” component of special jurisdiction, i.e. whether the plaintiffs’ claims are sufficiently related to the defendants’ contacts, the Court looked not to the underlying real property (the Mexican plant) but to the defamatory publications. The Court considered the alleged causes of action for defamation, business disparagement, and conspiracy, finding the “operative facts” of these claims all related to the publications. In other words, the claims arose “out of the very activity” conducted in Texas, i.e. the publications.
A comparison of Celanese to Northern Frac illustrates the key distinctions that courts may make in evaluating specific jurisdiction. In Northern Frac, for instance, the Court found it highly relevant that the tangible fracking assets were in Wisconsin, not in Texas. In Celanese, there was also real property at issue: a manufacturing plant operated by Celanese in Mexico and fifty acres of adjacent real property owned by Salcedo. However, the analysis must begin with the specific claims being made in the lawsuit. In Northern Frac, the underlying suit arose out of alleged theft of assets based outside the state. In Celanese, the damages arose from the defamatory statements, not directly from the assets in Mexico.
Another factor present in both cases was that the alleged wrongful conduct was directed towards Texas citizens or businesses, which Northern Frac held was not sufficient in itself. In Celanese, though the harmful effects were similarly felt in Texas, this was not the key factor briefed by the plaintiffs or considered by the Court.
Finally, Celanese considered an often overlooked factor that balances the burdens on the defendants with the interest of the state and plaintiffs in adjudicating the dispute. Importantly, despite the defendants residing out of the country, the Court noted that they “had demonstrated a willingness to travel to Texas in the past.” This suggests that mere inconvenience or expense will likely not defeat a court’s exercise of personal jurisdiction. Though this is particularly unfortunate for foreign defendants, parties should always exercise caution and possibly hire counsel to avoid stepping over a state’s “line” and into litigation. This line may not always be clear, but the Supreme Court’s recent cases appear to provide some predictability and uniformity to the analysis, and Texas courts appear to be following suit.
- For plaintiffs in multiparty litigation, you must specifically plead and prove personal jurisdiction as to each claim and each party. After Bristol-Myers Squibb, parties will no longer be able to “tack on” additional parties or claims that would not independently be subject to personal jurisdiction.
- Focus on the subject matter of the litigation. If this case involves real estate, where is it located? If it involves defamatory publications, where were they published? In a products-liability case, where was the product marketed or sold?
- Argue for the right kind of jurisdiction. As shown in cases like Daimler and Northern Frac, establishing general jurisdiction on a non-resident will be a long shot. Argue for specific jurisdiction instead. Northern Frac is a comprehensive opinion that outlines various factors that will and will not suffice for specific jurisdiction.
Most Importantly: Though not an issue in any case cited above, if you are challenging jurisdiction in Texas courts, you must file a special appearance challenging jurisdiction before you file any other plea such as an answer or motion to transfer venue. Tex. R. Civ. P. 120a. Failure to follow this order may result in a waiver of jurisdictional challenges.