Attorney Authored

Eroding Theory of General Personal Jurisdiction: Effect of 'Bauman'

February 03, 2014

BY DANIEL B. GOLDMAN & ADAM W. BRAVEMAN

On Jan. 14, 2014, the U.S. Supreme Court decided Daimler AG v. Bauman, 571 U.S. __ (2014) (slip op.), an extraordinarily important opinion with respect to general personal jurisdiction over corporations, particularly foreign corporations. In an eight-justice opinion (with Justice Sonia Soto mayor concurring separately in the result), the court held that general jurisdiction may only exist over a corporation when "that corporation's 'affiliations with the State are so 'continuous and systematic' as to render [it] essentially at ho me in the forum State.'"[1] This decision effectively invalidates 47 years of general jurisdiction law in the state of New York starting with the seminal New York Court of Appeals case, Frummer v. Hilton Hotels Int'l, 19 N.Y.2d 533, 227 N.E.2d 851, 281 N.Y.S.2d 41 (1967), and it severely restricts the ability of a plaintiff to hail a foreign corporation into New York court based on a theory of general jurisdiction.

General Personal Jurisdiction

The Fourteenth Amendment's Due Process Clause "protects an individual's liberty interest in not being subject to the binding judgments of a forum with which he has established no meaningful 'contacts, ties, or relations.'"[2] The Supreme Court's decision in International Shoe v. Washington, 326 U.S. 310 (1945), set s forth the due process requirements for personal jurisdiction over a corporation.[3] According to the court, "[due process] demands may be met by such contacts of the corporation with the state of the forum as make it reasonable…to require the corporation to defend the particular suit which is brought there."[4]

Supreme Court jurisprudence has distinguished between two types of personal jurisdiction; "specific" and "general." As the court has explained, "[w]hen a St at e exercises personal jurisdiction over a defendant in a suit arising out of or related to the defendant's contacts with the forum, the State is exercising 'specific jurisdiction' over the defendant."[5] Conversely, "when the cause of action does not arise out of or relate to the foreign corporation's activities in the forum State,"[6] a court "may assert general jurisdiction over foreign [ ] corporations to hear any and all claims against them when t heir affiliations with the State are so 'continuous and systematic' as to render them essentially at home in the forum State."[7]

Surprisingly, since International Shoe, the court has rarely addressed the issue of general jurisdiction, especially in the context of foreign corporations.[8] These decisions, moreover, have provided little guidance for foreign corporations that have no direct contacts with a forum state but have subsidiaries or independent contractors doing business in the forum.

Opinion in 'Bauman'

In Bauman, the Supreme Court held that exercising general jurisdiction over a German parent corporation, Daimler AG, based on the in-state activities of its subsidiary, Mercedes-Benz USA (MBUSA), violated due process.[9] There, plaintiffs alleged that Mercedes-Benz Argentina (MBA), which is a subsidiary of Daimler, collaborated with state security forces to commit human rights offenses against them and/or their relatives whom MBA viewed as union agitators.[10] Plaintiffs, who are all Argentinian residents, claimed that general jurisdiction existed over Daimler in California based on its relationship with and activities by another one of its subsidiaries, MBUSA.[11]

Daimler is a manufacturer of Mercedes-Benz motor vehicles and parts, primarily at factories in Germany.[12] MBUSA purchased Mercedes-Benz vehicles from Daimler in Germany for distribution in the United States, with a focus on the California market.[13] Indeed, MBUSA's California sales of Daimler's cars accounted for 2.4 percent of Daimler's total worldwide sales.[14] Based on these facts, the U.S. Court of Appeals for the Ninth Circuit found that under the agency theory of jurisdiction, general jurisdiction existed over Daimler because "the services provided by MBUSA [were] sufficiently import ant t o [Daimler] that, if MBUSA went out of business, [Daimler] would continue selling cars in this vast market either by selling them itself, or alternatively by selling them through a new representative."[15]

The Supreme Court reversed the Ninth Circuit's decision. While the court did not address directly whether agency could be a basis for general jurisdiction, the court rejected the "sufficiently important" test enunciated by the Ninth Circuit, as "it will always yield a pro jurisdictional answer."[16] As the court stated, "[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."[17] The court found that "even if we were to assume that MBUSA is at home in California, and further to assume MBUSA's contacts are imputable 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."[18] In making its decision, the Court unambiguously articulated the standard for general personal jurisdiction:

[T]he [general personal jurisdiction] inquiry under Goodyear is not whether a foreign corporation's in-forum contacts can be said to be in some sense 'continuous and systematic,' it is whet her that corporation's 'affiliations with the State are so 'continuous and systematic' as to render [it] essentially at home in the forum State.'"[19]

According to the court, "only a limited set of affiliations with a forum" will satisfy the general jurisdiction standard.[20] For a corporation, this consists of "the place of incorporation and principal place of business,"[21] as well as the "exceptional case [where] a corporation's operations in a forum other than its formal place of incorporation or principal place of business may be so substantial and of such a nature as to render the corporation at home in that State."[22] Accordingly, the court rejected plaintiffs' argument that general jurisdiction should be allowed in states where a corporation "engages in a substantial, continuous, and systematic course of business" as "unacceptably grasping."[23] The court instead held that general jurisdiction calls for "an appraisal of a corporation's activities in their entirety, nationwide and worldwide. A corporation that operates in many places can scarcely be deemed at home in all of them."[24]

Under this framework of general jurisdiction, the court relied on the fact that "neither Daimler nor MBUSA is incorporated in California, nor does either entity have its principal place of business there."[25] Consequently, although MBUSA's California sales of Daimler's product accounted for 2.4 percent of Daimler's worldwide sales, Daimler was not "at home" in the state.[26]

Effect on New York Law

The Bauman decision substantially changes the law of general personal jurisdiction in New York. The New York Court of Appeals decision in Frummer is a seminal case, which articulated a standard for obtaining general jurisdiction over a corporation based on agency theory. In Frummer, the court held that activities by a New York entity on behalf of a foreign corporation, including performing public relations work, generating business, and accepting and confirming rooms for the foreign corporation, established the foreign corporation's "presence" in New York, thereby subjecting it to general jurisdiction in the state.[27]

As the U.S. Court of Appeals for the Second Circuit has articulated, Frummer held that "[t]o establish that a subsidiary is an agent of the parent [for jurisdictional purposes], the plaintiff must only show that the subsidiary 'does all the business which [the parent corporation] could do were it here by its own officials.'"[28] "Courts have further interpreted this to mean that the agent's activities in New York must be sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation's own officials would undertake to perform substantially similar services."[29] This, of course, is the very test upon which the Ninth Circuit relied and which the Supreme Court rejected in Bauman.

New York courts have frequently applied the agency theory first enunciated in Frummer to find that general jurisdiction exists over foreign corporations that have no direct New York contacts. For example, in Wiwa v. Royal Dutch Petroleum, 226 F.3d 88 (2d Cir. 2000), the Second Circuit held that personal jurisdiction existed over two foreign holding companies when the holding companies 'New York investor relations office fielded inquiries from investors, mailed information about the foreign holding companies to "thousands of individuals throughout the United States," and organized meetings between the foreign holding companies and investors.[30] Additionally, the foreign holding companies approved decisions made by the office and funded the office, and the office only performed investor relations on the foreign holding companies' behalf.[31] Likewise, in Sonera Holding v. Cukurova Holding, 895 F.Supp.2d 513 (S.D.N.Y. 2012), the court exerted general jurisdiction over a foreign defendant when an affiliate company of the defendant described itself as the "gateway to the Americas for [the defendant]," distributed textiles produced by the defendant's sister company, and there was no indication that this affiliate"[was] engaged in business on behalf of interests other than those of [the defendant]."[32]

Similarly, in Liverpool v. Con-Way, No. 08-CV-4076, 2009 WL 1362965 (E.D.N.Y. May 15, 2009), the court concluded that the following facts "satisfied the less-than-stringent test for agency under Frummer": the foreign parent and its [New York] subsidiary shared the same website; the foreign parent stated on its website that the subsidiary was "one of its 'primary operating companies'"; the website "set forth [the foreign parent's] extensive operations through [its subsidiary] for [] shipping services to all points served in the United States"; and the website proclaimed that the foreign parent had "an integrated, single-source[d] business model."[33]

In addition to agency jurisdiction, New York courts have used other theories to find general jurisdiction over foreign corporations that have limited New York contacts. For example, there is a line of New York case law standing for the proposition that a foreign corporation that merely "holds itself out" as having an office in New York can be subject to general jurisdiction even if the corporation does not actually do business in the state.[34] Interestingly, these decisions were authored by Justice Soto mayor, the one justice who disagreed sharply with the reasoning of the majority opinion in Bauman, concurring only in the result. Similarly, some New York courts have held that a mere registration or authorization to do business in New York is sufficient to establish general jurisdiction, even if the foreign corporation never actually conducts business in the state.[35]

These are but a few examples of New York conferring general jurisdiction over foreign corporations that have, at best, minimal contacts with the state. In light of the court's decision in Bauman, these jurisdictional theories likely no longer pass constitutional muster. In short, Bauman significantly changes the lands cape of personal jurisdiction in New York. Moving forward, it will be extremely difficult for plaintiffs to establish general jurisdiction over foreign corporations that are neither incorporated nor have their principal place of business in the state. General jurisdiction over such corporations will be appropriate, as the Supreme Court held, only in an "exceptional case."[36]

Daniel B. Goldman is a partner in the New York litigation department of Paul Hastings. Adam W. Braveman is an associate in the New York litigation department of the firm.

[1] Daimler AG v. Bauman, 571 U.S. __ (2014) (slip op., at 20) (citation omitted).

[2] Burger King v. Rudzewicz, 471 U.S. 462, 471-72 (1985) (quoting Int'l Shoe v. Washington, 326 U.S. 310, 319 (1945)).

[3] Daimler AG v. Bauman, 571 U.S. __ (2014) (slip op. at 16).

[4] Int'l Shoe, 326 U.S. at 317.

[5] Helicopteros Nacionales de Columbia, v. Hall, 466 U.S. 408, 414 n.8 (1984) (citation omitted) (emphasis added).

[6] Id. at 414 (citing Int'l Shoe, 326 U.S. at 317).

[7] Goodyear Dunlop Tires Operations v. Brown, 131 S. Ct. 2846, 2851 (2011) (emphasis added) (citation omitted).

[8] See Perkins v. Benguet Consol. Mining, 342 U.S. 437, 448 (1952); Helicopteros, 466 U.S. at 416; Goodyear, 131 S. Ct. at 2856-57.

[9] Daimler AG v. Bauman, 571 U.S. __ (2014) (slip op., at 18).

[10] Id. at 1-2.

[11]

[12] Id. at 1, 3.

[13] Id. at 4.

[14] Id.

[15] DaimlerChrysler AG v. Bauman, 644 F.3d 909, 920 (9th Cir. 2011).

[16] Daimler AG v. Bauman, 571 U.S. __ (2014) (slip op., at 17).

[17] Id. (citation omitted).

[18] Id. at 18.

[19] Id. at 20 (emphasis added) (citing Goodyear, 564 U.S. at __ (slip op. at 2)).

[20] Id. at 18 (emphasis added).

[21] Id. at 18-9.

[22] Id. at 20 n.19 (emphasis added) (citing Perkins, 342 U.S. at 448, where general jurisdiction was established in Ohio when the president of a Filipino corporation moved the entire corporation's operations to Ohio during the occupation of the Philippines).

[23] Id. at 19.

[24] Id. at 21 n.20.

[25] Id. at 20-21.

[26] Id. at 18.

[27] 19 N.Y.2d at 536-37.

[28] See Jazini v. Nissan Motor, 148 F.3d 181, 184 (2d Cir. 1998) (citing Frummer, 19 N.Y.2d at 537).

[29] Angela Tese-Milner v. Diamond Trading, No. 04 Civ. 05203, 2010 U.S. Dist. LEXIS 143934, at *20 (S.D.N.Y. May 14, 2010) (citing Jazini,148 F.3d at 184), vacated in part on other grounds by W.B. David & Co. v. De Beers Centenary, No. 11-4609-cv, 2013 U.S. App. LEXIS 591 (2d Cir. Jan. 10, 2013).

[30] 226 F.3d at 93.

[31] Id. at 93, 94-97.

[32] 895 F.Supp.2d at 518-21.

[33] 2009 WL 1362965, at *7 (emphasis added).

[34] See, e.g., Revlon v. United Overseas, No. 93 Civ. 0863, 1994 WL 9657, at *2 (S.D.N.Y. Jan. 12, 1994) (finding that "even if a foreign corporation does not actually maintain an office in New York, if it holds itself out to the public as having one, such corporation will be deemed 'doing business' in New York for jurisdictional purposes") (citing N.Y. Marine Managers v. M.V. "Topor-1, 716 F.Supp. 783, 785 (S.D.N.Y. 1989)); see also Mayatextil, S.A. v. Liztex, U.S.A., No. 92 Civ. 4528, 1995 WL 131774, at *3 (S.D.N.Y. March 23, 1995) (same).

[35] See, e.g., Rockefeller Univ. v. Ligand Pharm., 581 F.Supp.2d 461, 464-66 (S.D.N.Y. 2008) (observing that the majority of federal district and New York courts hold that a filing for authorization to do business in the state is sufficient to subject a foreign corporation to general personal jurisdiction); see also Kropschot Fin. Servs. v. Balboa Capital, No. 11 Civ. 8609, 2012 WL 1870697, at *4 (S.D.N.Y. May 21, 2012) (same).

[36] Daimler AG v. Bauman, 571 U.S. __ (2014) (slip op., at 20 n.19).