In a recent decision, the U.S. Court of Appeals for the Ninth Circuit confirmed that Federal district courts have jurisdiction over foreign corporations based on their subsidiary’s contacts in the United States.
In Bauman v. DaimlerChrysler Corp. (No. 07-15386 (9thCir. May 18, 2011)), the Ninth Circuit expanded the use of “agency theory” to impose personal jurisdiction over a foreign corporation doing business in the U.S. through its U.S. subsidiary. The court found jurisdiction based on the subsidiary’s contacts within California. The lawsuit was initiated by non-U.S. residents regarding acts allegedly committed in a foreign country that had nothing to do with the subsidiary’s contacts.
If this decision stands, it has the potential to affect any foreign company doing business in the U.S. through subsidiaries, even if those subsidiaries have nothing to do with the company’s alleged actions giving rise to the lawsuit.
The Ninth Circuit held that personal jurisdiction existed over DaimlerChrysler AG (DCAG), a German company, based in part on its right to maintain control over Mercedes-Benz USA LLC (MBUSA), its wholly owned U.S. subsidiary due to MBUSA’s contacts within California.
The plaintiffs, Argentine nationals, brought suit under the Alien Tort Statute and the Torture Victims Prosecution Act of 1991, against DCAG in the Northern District of California alleging that DCAG’s Argentine subsidiary, Mercedes-Benz Argentina (MBA), collaborated to brake up the union at an MBA plant. DCAG owns an American holding company, DaimlerChrysler North America Holding Corp., which in turn owns MBUSA. MBUSA is a Delaware company with its principal place of business in New Jersey, but it has a regional office in California, as well as other centers of operation located in California.
The relationship between DCAG and MBUSA is governed by a General Distributor Agreement which establishes requirements for MBUSA as the general distributor of Mercedes-Benz cars in the U.S. MBUSA’s sales in California alone account for 2.4 percent of DCAG’s total world wide sales. DCAG did not dispute that MBUSA was subject to general personal jurisdiction in California.
General personal jurisdiction (i.e. jurisdiction over any claims against DCAG, regardless where they arise) over DCAG was conceded because of the contacts of MBUSA with California.
The central issue was whether DCAG had “the requisite contacts with the forum state to render it subject to the forum’s jurisdiction” by considering either “substantial” or “continuous and systematic” contact with the forum state. The corollary question was whether the court could impute MBUSA’s contacts in California to DCAG. To decide such issues courts use the “alter ego” test or the “agency” test. Because the facts showed there was no “alter ego” issue, the court turned to the agency test.
The agency test is predicated upon showing the “special importance of the services performed by the subsidiary.” Specifically, the agency test is satisfied by a showing that the subsidiary functions as the parent corporation’s representative by performing services that are sufficiently important to the foreign corporation that without its representative performance of them, the corporation’s own officials would undertake to do so.
In addition, the parent company must also exert, or have the right to exert, sufficient control over the subsidiary, though “not as much control as is required to meet the ‘alter ego’ test.” The court held that MBUSA’s services were sufficiently important to justify personal jurisdiction over DCAG via the agency test.DCAG simply could not afford to be without a U.S. distribution system, given the amount of cars sold in the U.S. and in California. (Sales of luxury cars in California were in the low seven figures and amounted to over 2% of global sales. Also, DCAG had the right to control MBUSA’s activities under the distributor agreement.
The court focused on DCAG’s purposeful interjection into the California market. The court looked at the importance of the California market to DCAG’s car sales and the fact that DCAG had initiated lawsuits in California to challenge clean air laws and to protect its patents. The court also found that DCAG was a large sophisticated company, therefore the burden to litigate the dispute in California was not enough to preclude jurisdiction.
The importance of Bauman is that the Ninth Circuit’s use of the “agency” test makes it easier for foreign corporations to be sued in the U.S. based on the unrelated activities of an American subsidiary. Foreign corporations exercising control, or which have clauses in distribution or other agreements with their U.S. subsidiaries which allow them to control their subsidiary’s activities, should pay close attention to the court’s analysis in Bauman.
The reach of Bauman’s importance may be affected by the Supreme Court’s decision in Goodyear Dunlop Tires, S.A. v. Brown (No. 10-76), which raises similar issues regarding personal jurisdiction over a foreign company when the lawsuit does not arise from events in the U.S. Our firm prepared a detailed analysis of these cases in the July 9, 2011 Client Advisory, State Jurisdiction Over Companies Using Distributors or Other Entities in Their Sales Channels Sharply Limited By U.S. Supreme Court.
Clients that are or may be directly affected due to their ownership of or dealings with a U.S. subsidiary of a foreign Corporation and others concerned about exposure to being subject to personal or general jurisdiction in the U.S. may contact Charles H. Helein of the Firm 703-714-1301, firstname.lastname@example.org,to discuss and explore any immediate and long term implications for their business models or dealings.