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March 11, 2014

Recent Supreme Court Decisions Further Restrict Jurisdiction of U.S. Courts Over Foreign Defendants

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Two recent decisions by the U.S. Supreme Court are good news for corporations facing product liability claims. The decisions make it more difficult for plaintiffs to subject foreign and out-of-state corporations to personal jurisdiction in U.S. courts.

Walden v. Fiore

On February 25, 2014, the Court issued its decision in Walden v. Fiore, No. 12-574, an appeal from the Ninth Circuit's ruling.  The Court held that "[a] forum State's exercise of jurisdiction over an out-of-state intentional tortfeasor must be based on intentional conduct by the defendant that creates the necessary contacts with the forum."

The holding in Walden clarified 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: the decisive inquiry is whether a defendant's own actions connect him to the jurisdiction, and not whether the defendant merely caused the plaintiff to sustain an injury in that jurisdiction.

Daimler AG v. Bauman

Walden is the second of two personal jurisdiction opinions issued by the Court this term. On January 14, 2014, the Court decided Daimler AG v. Bauman, No. 11-965—a major ruling that significantly limits extraterritorial jurisdiction over foreign corporations with U.S. subsidiaries.

The Court's decision in Bauman further limited the exercise of general jurisdiction over foreign parent companies by closing the door on the use of the "agency" theory as a way to impute to a foreign entity the minimum contacts of its in-state subsidiary. The Bauman decision clarified that a foreign company was not subject to general personal jurisdiction in a forum on the sole basis of its subsidiary's in-forum contacts. Thus, imputing a subsidiary's in-state contacts to its foreign parent is not enough, on its own, to support general jurisdiction over the parent corporation.

Earlier cases defining personal jurisdiction

These two decisions follow closely on the heels of the Supreme Court’s rulings in June 2011 in Goodyear Dunlop Tires Operations and J. McIntyre Machinery—where the Court further defined and delineated the sufficient minimum contacts constitutional analysis, thus limiting the ability of state courts to assert personal jurisdiction over foreign corporations. Goodyear Dunlop Tires Operations and J. McIntyre Machinery reiterated, especially in a products liability setting, that the mere placement of a product into the stream of commerce, without more, is not enough for a state court to exercise jurisdiction over a non-resident manufacturer or supplier. This emphasis was welcome given that the law in this area had been in flux since the Supreme Court's confusing, multi-opinion decision in Asahi Metal Industry, Ltd. v. Superior Court of California, 480 U.S. 102 (1987), where Justice Brennan, in his concurring opinion, argued that if it was foreseeable that a product might end up in the forum state, then sufficient minimum contacts (and thus personal jurisdiction) were established. Goodyear established that there is general jurisdiction when a corporation is "at home" in the forum state—that a corporation's contacts with the forum state are so extensive as to render it essentially at home in the forum state.

Walden: personal jurisdiction exists when defendants contacts are with the forum itself, not merely residents of the forum

With Walden, the Court resolves an issue of vital concern to foreign companies, particularly in the product liability setting.  By arguing the so-called "effects test" of personal jurisdiction, plaintiffs have been able to circumvent due process considerations and obtain personal jurisdiction over out-of-state domestic, as well as foreign companies. The Walden decision has cut short that practice.

The plaintiffs in Walden—two professional gamblers—were traveling from Puerto Rico to their home in Nevada, by way of Atlanta, Georgia. The plaintiffs were detained at the Atlanta airport and were searched by the defendant, a Georgia police officer working as an agent of the U.S. Drug Enforcement Administration (DEA), who seized almost $97,000 from the plaintiffs on suspicion that the money was involved in the drug trade. The defendant advised the plaintiffs that their money would be returned if they later demonstrated that it had been legitimately gained. The plaintiffs returned to Nevada and over the next few months, provided documentation that the money was gained lawfully but were unsuccessful in retrieving the funds. Subsequently, the defendant helped draft a probable cause affidavit in support of forfeiture, but the United States Attorney's office did not find probable cause for the forfeiture and the funds were returned to the plaintiffs.

The plaintiffs filed suit against the DEA agent in federal district court in Nevada, alleging violations of their Fourth Amendment rights. The defendant argued that he did not have any contacts with the state of Nevada and sought to dismiss plaintiffs' claims due to lack of personal jurisdiction. The district court granted the defendant's motion to dismiss the complaint, holding that his search of the plaintiffs and seizure of their cash in Georgia, accompanied by his drafting of the affidavit in Georgia, did not establish a basis for personal jurisdiction. The Ninth Circuit reversed, reasoning that the defendant's act—drafting and submitting the affidavit with the knowledge that it would affect persons in Nevada—was aimed at the forum State.

In a unanimous opinion, the Court reversed the Ninth Circuit's decision, holding that exercise of personal jurisdiction did not satisfy the requirements of due process.  The Court explained that the Ninth Circuit erred by failing to recognize that, for a state to exercise jurisdiction consistent with due process, a defendant's minimum contacts must be with the forum and not with persons residing there. Therefore, because the plaintiffs in Bauman were the only link between the defendant and the forum, the defendant lacked the minimum contacts with Nevada. The mere fact that the injury occurred in Nevada was not sufficient to overcome the limits imposed by the Due Process Clause.

Impact of these decisions

Foreign companies routinely challenge American courts’ exercise of personal jurisdiction over them because of unfamiliarity and uneasiness with jury trials, open-ended damages for non-economic loss, punitive damages, and the expense associated with broad pre-trial discovery afforded litigants.

These two decisions continue the Court's recent trend of restricting jurisdiction of U.S. courts over foreign defendants and demonstrate a respect for the corporate form and international comity. Bauman and Walden now make it more difficult for resident plaintiffs to subject foreign and out-of-state corporations to personal jurisdiction in U.S. courts.

Unresolved issues

Significant questions still remain, however, following Bauman and Walden. In Walden, the Court did not comment on how its "minimum contacts" analysis may differ in cases involving "virtual contacts" with the forum, where the alleged conduct occurred over the internet. Moreover, Bauman did not expand its analysis to situations where allegations of personal jurisdiction are grounded in an "alter ego" relationship—where the foreign parent exercises such control over the day-to-day activities of its domestic subsidiary that the corporate form should be disregarded and the two should be treated as alter egos.

Therefore, to avoid the pitfalls of litigation in American courts, companies should continue to be cautious about their active control over the day-to-day operation of their subsidiaries and remain vigilant of the terms of written agreements with distributors and affiliates. A cavalier approach to subsidiaries and contractual relations could be just the hook that causes the foreign defendant to be “haled into court . . .,” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980).

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