On May 18, 2011, the Ninth Circuit Court of Appeals held that a California district court had general jurisdiction over DaimlerChrysler AG, an entity headquartered in Germany and with limited contacts with California, based on its subsidiary's contacts in the State. Bauman v. DaimlerChrysler Corp., __ F.3d __, No. 07-15386, 2011 WL 1879210 (9th Cir. 2011). In short, Bauman found that a U.S. district court had general jurisdiction over a foreign company, based on its subsidiary's contacts in the State, in a suit instituted by non-U.S. residents regarding acts allegedly committed in a foreign country that injured the foreign-resident plaintiffs.

In holding that jurisdiction over Daimler was appropriate, the court engaged in a two-part inquiry. First, it considered whether Daimler "ha[d] the requisite contacts with the forum state to render it subject to the forum's jurisdiction" via an agency test that focused on the special importance of the subsidiary's services, Mercedes-Benz USA. For purposes of jurisdiction, these services establish an agency relationship if they are "sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation's own officials would . . . perform substantially similar services." The parent must also exert sufficient control over the subsidiary, though "not as much . . . as is required to satisfy the 'alter ego' test."

The court held that the subsidiary's services were sufficiently important to justify personal jurisdiction. The court also found that Daimler exerted sufficient control over its subsidiary, stating that actual control over the subsidiary is unnecessary. Instead, the court held that an agency relationship exists where the principal and agent agree that the principal has the right to control the agent's activities -- a fact established by an agreement between Daimler and its subsidiary.

In the second phase of its inquiry, the court considered whether the exercise of jurisdiction was reasonable under the circumstances based on the following factors: 1) the extent of defendant's purposeful interjection into the state; 2) the burden on the defendant; 3) the extent of any conflict with the sovereignty of the defendant's state; 4) the forum state's interest in adjudicating the suit; 5) the most efficient judicial resolution of the dispute; 6) the convenience and effectiveness of relief for the plaintiff; and 7) the existence of an alternative forum. Jurisdiction does not depend on a majority of these factors being met, and none is dispositive.

The court found that jurisdiction was appropriate and consistent with "fair play and substantial justice." While the court found that many of the "jurisdictional factors" noted above were met, it appeared to find Daimler's purposeful interjection into the California market as the most important factor. For example, Daimler designed cars specifically for the California market, and the company established a Research and Technology Center in Palo Alto. Daimler also retained permanent counsel in California and initiated lawsuits in the state to challenge clean air laws and protect the company's patents. Furthermore, Daimler's auto sales in California were "not an isolated occurrence," as Mercedes-Benz USA's California sales accounted for 2.4% of Daimler's total sales.

The importance of Bauman is that foreign companies may be headed into U.S. courts, based at least in part on the conduct of their U.S. subsidiary, for acts of the company that occurred outside the U.S. The greater the parent's ability to control the subsidiary, and the greater the importance of the subsidiary's activities in the U.S., then the more likely that jurisdiction over the parent will exist.