US Supreme Court decision makes it more difficult to establish jurisdiction over a foreign corporation based on the contacts of its in-state subsidiary

Daimler AG v Bauman 571 U.S. ___ (2014) (14 January 2014)

Summary

The United States Supreme Court has handed down a major decision that will significantly limit the ability of plaintiffs to bring claims against multinational corporations in the US for losses suffered outside of the US.

Facts

The plaintiffs were 22 residents of Argentina who commenced proceedings against DaimlerChrysler Aktiengesellschaft (Daimler), a German public company. The plaintiffs alleged that a Daimler subsidiary, Mercedes-Benz Argentina (MB Argentina), collaborated with state security forces during Argentina's "Dirty War" in 1976–1983 to kidnap, detain, torture and kill MB Argentina workers, including the plaintiffs and individuals closely related to the plaintiffs.

The plaintiffs sought to hold Daimler vicariously liable for MB Argentina's acts, and filed suit in California in 2004. They made claims under the Alien Tort Statute 28 U.S.C. § 1350 and the Torture Victim Protection Act of 1991 106 Stat. 73, as well as under Californian and Argentinian law.

The plaintiffs claimed jurisdiction in California on the basis that Daimler had a presence there. Alternatively, the plaintiffs argued that jurisdiction over Daimler could be established because Mercedes-Benz USA LLC (MBUSA), another Daimler subsidiary, should be treated as Daimler's agent for jurisdictional purposes. MBUSA had significant dealings in California due to its widespread distribution of Daimler-manufactured vehicles to dealerships throughout the country.

The District Court granted Daimler's motion to dismiss for want of jurisdiction, on the basis that the plaintiffs had failed to demonstrate that Daimler's own affiliations with California were sufficient to support the exercise of general jurisdiction. The District Court declined to attribute MBUSA's California contacts to Daimler through agency.

The Ninth Circuit Court initially affirmed the District Court's decision, holding that the plaintiffs had not established the existence of an agency relationship of the type required to attribute MBUSA's contacts to Daimler. However, upon rehearing, that Court reversed the District Court's decision, holding that since MBUSA fell within the all-purpose jurisdiction of the California courts, Daimler should also be generally answerable to suit in the state.

The Supreme Court granted certiorari to determine whether "Daimler was amenable to suit in California courts for claims involving only foreign plaintiffs and conduct occurring entirely abroad".

Decision

The Supreme Court ruled unanimously, holding that Daimler was not amenable to suit in California for injuries allegedly caused by MB Argentina's conduct that took place entirely outside the US. The majority opinion was delivered by Justice Ginsburg, with Chief Justice Roberts and Justices Scalia, Kennedy, Thomas, Breyer, Alito and Kagan agreeing. Justice Sotomayor delivered a separate judgment, dissenting in reasoning but concurring in the judgment.

The majority outlined the relevant law, noting that most decisions address due process limitations in specific rather than general jurisdiction cases. The plaintiffs' case focused solely on general jurisdiction.

Specific jurisdiction exists where the defendant's activities in the state are "continuous and systematic, but also give rise to the liabilities sued on", with the central concern being "the relationship among the defendant, the forum and the litigation".

On the other hand, courts may assert general jurisdiction over foreign corporations to hear any and all claims against them where the defendant's "continuous corporate operations within a State [are] so substantial and of such a nature as to justify suit against it on causes of action arising from dealings entirely distinct from those activities".

The majority acknowledged that the Supreme Court had not yet addressed whether a foreign corporation could be subject to a court's general jurisdiction based on the contacts of its in-state subsidiary. Generally, a subsidiary's jurisdictional contacts can be imputed to its parent "only when the former is so dominated by the latter as to be its alter ego".

The Ninth Circuit had found that MBUSA's services in California were sufficiently "important" to Daimler to justify a finding of agency, measured by Daimler's hypothetical readiness to perform those services itself if MBUSA did not exist. The Supreme Court rejected this, since presumably a corporation would do any task itself if its subsidiaries did not exist, and the test would always yield a "pro-jurisdiction" result.

The majority held that even if the Court assumed that MBUSA was at home in California, and that MBUSA's contacts were imputable to Daimler, there would be no basis to subject Daimler to California's general jurisdiction, because Daimler's "slim contacts with the State hardly render it at home there".

A defendant's place of incorporation and its principal place of business are the "paradigm bases" for general jurisdiction. However, the majority confirmed that other significant corporate activity within a state could also point to a finding of jurisdiction. Neither Daimler nor MBUSA were incorporated in California, nor did either corporation have its principal place of business there. The majority noted:

If Daimler's California activities sufficed to allow adjudication of this Argentina-rooted case in California, the same global reach would presumably be available in every other State in which MBUSA's sales are sizable. Such exorbitant exercises of all-purpose jurisdiction would scarcely permit out-of-state defendants to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit.

The majority held that the Ninth Circuit had erred in deciding that Daimler was subject to suit in California, even if MBUSA's contacts were attributed to it through agency. Further, it noted that considerations of international rapport and the risks associated with taking an expansive view of general jurisdiction reinforced the finding that subjecting Daimler to the general jurisdiction of California courts would not accord with the "fair play and substantial justice" due process requirements.

Justice Sotomayor delivered a separate judgment in which her Honour concurred with the majority's result but disagreed emphatically with its reasoning. Justice Sotomayor stated that the majority's basis for denying jurisdiction was "not that Daimler's contacts with California are too few, but that its contacts with other forums are too many". Her Honour criticised the majority for introducing a proportionality requirement to the "continuous and systematic contacts" test for general jurisdiction, which requires that the court consider the relative magnitude of those contacts in that state with the defendant's contacts in other states. According to Justice Sotomayor, this approach has several unwanted consequences, including that a court may be denied jurisdiction over a corporation because that corporation has a substantial presence in other states. The decision also shifts the risk of loss from multinational corporations to the individuals harmed by their actions, preventing consumers from filing suit where they are "at home". Justice Sotomayor argued that the majority should have based its decision on the fact that the exercise of jurisdiction in this case would be unreasonable in the circumstances, given that the case involved foreign plaintiffs suing a foreign defendant based on foreign conduct, and that a more appropriate forum, Germany, was available.

Commentary

Recent Supreme Court decisions including Kiobel v Royal Dutch Petroleum Co have curtailed the scope of the Alien Tort Claims Act and the Torture Victim Protection Act, with lower courts in the United States now applying more restrictive jurisdiction tests. The Supreme Court in Daimler has imposed an even higher burden on plaintiffs seeking to claim against corporate defendants where the conduct is unrelated to the corporation's activities in the forum. Daimler may also provide opportunities for multinational corporations to diminish litigation risks through their corporate structures.

This decision is available online here: http://www.supremecourt.gov/opinions/13pdf/11-965_1qm2.pdf

Emily Johnstone is a lawyer at Allens.