The U.S. Supreme Court issued two opinions clarifying the criteria that must be satisfied before a court may constitutionally exercise personal jurisdiction over a defendant-J. McIntyre Machinery, Ltd. v. Nicastro and Goodyear Dunlop Tires Operations, S.A. v. Brown. While both decisions involved product liability suits asserted against non-U.S. manufacturers, both have relevance as well for domestic corporations defending lawsuits under any liability theory. This includes liability arising from use of independent distributors and appears to extend to Web based sales as well.
The decisions are important because they overturn previous Supreme Court decisions that broadly exposed companies to the long arm reach of state laws when those companies are operating out-of-state. Under a Supreme Court opinion issued almost 25 years ago, Asahi Metal Industry Co. v. Superior Court of California, 480 U.S. 102 (1987), the existence of personal jurisdiction was based on the concept of the “stream of commerce, “i.e., the placement of a product into the stream of commerce, without more, if it winds up in the state in which the plaintiff’s claim arises would be enough of an act to create personal jurisdiction. As stated by Justice Brennan “As long as [the defendant]…is aware that the final product is being marketed in the forum State, the possibility of a lawsuit there cannot come as a surprise.” Therefore, additional conduct by a defendant was not required, such as an act of the defendant purposefully directed toward the forum State.
The New Jersey Supreme Court’s decision that was being reviewed by the Supreme Court in the J. McIntyre case held that “courts can exercise jurisdiction over a foreign manufacturer…so long as the manufacturer knows or reasonably should know that its products are distributed through a nationwide distribution system that might lead to those products being sold in any of the fifty states.” The Supreme Court reversed with six of the justices rejecting the New Jersey Supreme Court’s sweeping jurisdictional rule – namely, that jurisdiction can be based on the defendant’s targeting of the U.S. market as a whole, even when the defendant took no actions directed toward the state in which the plaintiff sues. The Supreme Court also rejected the stream of commerce analysis insofar as that analysis made foreseeability (the defendant’s ability to anticipate being subject to a state’s jurisdiction because it was foreseeable that its product could end up there) the “touchstone of jurisdiction.”
According to the six justices, foreseeability is not enough to satisfy the due process principles that underlie the jurisdictional question. Instead, the defendant’s conduct, and more specifically, its conduct directed toward a particular state, are the constitutionally required relevant considerations. Consequently, actions targeting the U.S. market in general are not enough. Without proof that the defendant engaged in conduct specifically aimed at getting its product into a particular state, personal jurisdiction does not lie just because the product made its way there-no matter how foreseeable it might have been that the product would end up there.
The decision sets forth additional important principles. First, that “personal jurisdiction requires a forum-by-forum…analysis” holds equally true for foreign and domestic defendants. A domestic defendant that does not purposefully direct its activities toward a particular state cannot be sued in that state merely because, for example, it sells its products to a distributor who then distributes them nationwide. Second, the practical significance of this ruling was addressed by pointing to the “undesirable consequences” of a foreseeability-based approach, including the “significant expenses…incurred just on the preliminary issue of jurisdiction. Jurisdictional rules should avoid these costs whenever possible.”
In a concurring opinion in McIntyre, Justice Alito agreed that a defendant’s actions directed toward a particular state must be the focus of the personal jurisdiction inquiry. However, he expressed concern that the decision might too “broad” and may foreclose jurisdiction in cases involving electronic commerce, such as where “a company targets the world by selling products from its Web site” or “consigns the products through an intermediary distributors or retail outlets.
McIntyre’s companion case, Goodyear, dealt with the stream of commerce analogy within the larger framework of the personal jurisdiction inquiry. Goodyear explained that the flow of a one’s products into the forum through the stream of commerce was not relevant to the general jurisdiction inquiry. General or all-purpose jurisdiction arises when a corporation’s “affiliations with the State are so continuous and systematic” that it is “essentially at home in the forum State.” “[S]pecific or case-linked jurisdiction,” on the other hand, arises when there is a connection “between the forum and the underlying controversy.”
The Supreme Court ruled that the forum state, North Carolina, did not have either general or specific personal jurisdiction over a Turkish subsidiary of a U.S. corporation. There was no general jurisdiction because the subsidiary’s contacts with North Carolina-namely, sales of “a small percentage of [its] tires (tens of thousands out of tens of millions …)” within the state-did not render it “essentially at home” there. And there was no specific jurisdiction either, because the allegedly defective product (a bus tire) never went into North Carolina, but instead injured U.S. citizens who were traveling in France. Thus, Goodyear builds on McIntyre by explaining when the newly clarified stream of commerce analogy is relevant to the personal jurisdiction inquiry.
These two decisions on personal jurisdiction provide a new and clear basis on which a defendant can fight jurisdiction in any state where it has not “purposefully availed” itself of the privilege of conducting activities, even if its products make their way to that forum by way of distributors, Web pages, or otherwise. Under McIntyre, courts going forward will look at the defendant’s conduct in targeting the forum state, rather than the foreseeability that the defendant would be sued there. While the decisions add a level of clarity to the personal jurisdiction inquiry, other recent decisions by other courts add other layers of complexity. One decision in particular, Bauman v. DaimlerChrysler Corp, is analyzed in our firm’s Client Advisory, State Jurisdiction Over Foreign Corporations Expanded by 9thCircuit.
Prepaid calling card providers, distributors, and others concerned about exposure to being subject to personal or general jurisdiction in states in which they are not located should consider contacting Charles H. Helein of the Firm 703-714-1301, email@example.com,to discuss and explore any immediate and long term implications for their business models and whether they are tailored properly to avoid or minimize exposure to a state’s jurisdiction.