This week in Young v. Daimler AG, the California Court of Appeal held that there is no general personal jurisdiction over foreign companies in California whose only “connections” to the state are the activities of its legally separate but wholly owned subsidiaries. This is the first appellate case in California applying the U.S. Supreme Court’s January 2014 decision on this issue, Daimler AG v. Bauman (2014) 134 S.Ct. 746.
Young is particularly significant because it abrogates an entire theory of general jurisdiction law in California — the “representative services doctrine” — and gives out-of-state and foreign defendants welcome protection from lawsuits in California, even if they have in-state subsidiaries doing substantial business. It is important to note that this case did not involve any other theory of jurisdiction, such as an “alter ego”-type of theory holding a foreign parent subject to jurisdiction in California, where its corporate formality-ignoring subsidiary operates.
The representative services doctrine, set forth in Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, held that general personal jurisdiction could be asserted over a foreign defendant if its in-state subsidiary performed “a function that is compatible with, and assists the parent in pursuit of, the parent’s own business.” In other words: “[I]f a parent uses a subsidiary to do what it otherwise would have done itself, it has purposely availed itself of the privilege of doing business in the forum. Jurisdiction over the parent is therefore proper.” This may describe many foreign parent-domestic subsidiary relationships, but the U.S. Supreme Court held inBauman that it does not confer personal jurisdiction, and Young agrees.
This is not the only such case before the Court of Appeal on this very issue — Daimler AG v. Superior Court (Pierson) is scheduled for oral argument on August 18, 2014. Young and Pierson involve the same question, arising out of the same fact pattern: May a California state court exercise general personal jurisdiction over a foreign company, solely due to the in-state activities of its subsidiaries? Young, applying the U.S. Supreme Court’s Bauman decision, answered “no.” The California Supreme Court unanimously ordered in March 2014 that the Pierson plaintiffs show cause why service of summons on Daimler should not be quashed in light ofBauman. Pierson is before a different Court of Appeal district (the Third, in Sacramento) than was Young (the First, in San Francisco), but Pierson is likely to be decided the same way.
Young and Pierson are product liability cases involving Jeep vehicles manufactured by DaimlerChrysler before Chrysler’s split from Daimler AG and bankruptcy. Both plaintiffs pursued their claims against Daimler AG as the ultimate parent of DaimlerChrysler at the time the vehicles in question were manufactured.
In Young, the plaintiffsasked the court to apply the Ninth Circuit’s then-current decision in Bauman v. DaimlerChrysler Corp. (2011) 644 F.3d 909, which held that general jurisdiction over Daimler AG was appropriate in California because of the extensive activities of its indirect subsidiary Mercedes-Benz USA. This case cited the representative services doctrine as the source of its holding, that is, Mercedes-Benz USA’s activities in California were so important to Daimler AG that general jurisdiction over Daimler AG was appropriate.
In reversing the Ninth Circuit, the U.S. Supreme Court held in Bauman that the representative services doctrine “rested primarily on [the] observation that [American subsidiary] MBUSA’s services were ‘important’ to Daimler, as gauged by Daimler’s hypothetical readiness to perform those services itself if MBUSA did not exist. Formulated this way, the inquiry into importance stacks the deck, for it will always yield a pro-jurisdiction answer[.] . . . The Ninth Circuit’s agency theory thus appears to subject foreign corporations to general jurisdiction whenever they have an in-state subsidiary or affiliate, an outcome that would sweep beyond even the ‘sprawling view of general jurisdiction’ we rejected in” other cases.
Applying Bauman, Young affirmed the trial court’s grant of Daimler AG’s motion to quash service of summons and agreed that because Daimler AG itself did not do business in California, there was no general personal jurisdiction: “In our view, appellant’s argument impermissibly ‘elide[s] the essential difference between case-specific and all-purpose (general) jurisdiction. . . . Indeed, the test endorsed in Bauman . . . whether a foreign defendant is ‘essentially at home in the forum state’—focuses on the defendant’s significant corporate presence in the forum.”
Young recognized that this means the representative services doctrine is essentially dead: “While the Bauman II Court questioned the formulation and application of the Ninth Circuit’s agency test [the representative services doctrine], in the end it assumed agency and still concluded that MBUSA’s California contacts were insufficient to confer general jurisdiction in California.” This is hugely important to multistate and international businesses. Such defendants cannot be sued in California, even if their subsidiaries do substantial business in California.Young is a clear rejection of the representative services doctrine and the opinion did not limit the application of its decision to the particular facts of the case before it.
Out-of-state and foreign businesses participating in California’s economy through subsidiaries are common. Such businesses must remain careful to ensure that their subsidiaries observe corporate formalities and remain legally separate. Overall, however, Young brings California general jurisdiction law in line with U.S. Supreme Court precedent and will make establishing jurisdiction over out-of-state and foreign defendants significantly more difficult in the future.