The Lede: Ninth Circuit Judge Reinhardt rules in the face of a pending Supreme Court case on an identical issue that a foreign company with no “contacts” in California can be haled into court there based on activities of a subsidiary.

The Constitution imposes limits on the authority of U.S. courts to exercise jurisdiction over defendants who lack significant contacts with the judicial forum.  A decision this week by Judge Stephen Reinhardt of the U.S. Court of Appeals for the Ninth Circuit threatens to deprive large foreign corporations of all such protection.  Ironically, the decision comes at a time when the U.S. Supreme Court appears poised to issue a ruling imposing strict limits on the personal jurisdiction of U.S. courts over foreign corporations.  Judge Reinhardt’s decision seems designed to create an easy way around those limitations.

The decision in Bauman v. DaimlerChrysler involves DaimlerChrysler AG (“DCAG”), renamed DaimlerBenz AG following the 2007 sale of its Chrysler subsidiary.  DCAG is a German corporation that does not directly conduct business in the U.S.  Rather, its German-manufactured Mercedes-Benz cars are marketed in the U.S. through its American subsidiary, Mercedes-Benz USA (“MBUSA”).  Because a significant number of such cars are sold in the U.S., American courts unquestionably have specific jurisdiction over DCAG whenever a dispute arises with respect to the sale or operation of a Mercedes-Benz car in this country.

But the Ninth Circuit case does not involve events that took place in the U.S.  Rather, it involves claims by Argentinian plaintiffs that DCAG’s Argentina subsidiary aided and abetted human rights violations by government officials during Argentina’s “Dirty War” in the 1970s and 1980s.  The question before the court was whether DCAG’s contacts with California were sufficient for courts in that State to exercise “general” jurisdiction over DCAG, i.e., jurisdiction over any claims against DCAG, regardless where they arise.  In an unprecedented ruling, Judge Reinhardt held that DCAG was, indeed, subject to general jurisdiction – on the basis of the California activities of its subsidiary, MBUSA.  Even though there was no evidence that DCAG controlled MBUSA’s day-to-day operations to such an extent that MBUSA could be deemed little more than DCAG’s alter ego (the traditional ground for “piercing the corporate veil”), the court ruled that DCAG could be subjected to general jurisdiction in California because MBUSA acted as DCAG’s “agent” in selling cars within the State.

The Ninth Circuit case raises issues quite similar to issues raised in a pending U.S. Supreme Court, Goodyear Luxembourg Tires, S.A. v. Brown.  That case was filed in a North Carolina court by the survivors of an American killed in the crash of a bus in France; the plaintiffs contend that the crash was caused by faulty tires manufactured by a European company. The plaintiffs contend that the company should be subject to the general jurisdiction of the North Carolina courts because a small number of its tires are sold in this country through its American affiliate.  Based on the Justices’ questions during oral arguments, the Supreme Court appears poised to rule that the Constitution prohibits the assertion of general jurisdiction over the European tire manufacturer when the underlying events did not occur in the U.S.

Judge Reinhardt apparently views his “agent” theory as a way around the Supreme Court’s anticipated decision.  Under that theory, U.S.-based activities of one company (in this case, MBUSA) can be attributed to a separate, foreign company (in this case, DCAG) if the U.S.-based company has been tasked by the foreign company to assist with sales in this country.  The result will be that any foreign company that intends its products to be sold in this country will be subject to the general jurisdiction of U.S. courts, even in lawsuits (as here) having no connection to the U.S.

Such a rule raises serious trade policy concerns.  As the U.S. Justice Department argued in its brief opposing assertion of general jurisdiction in Goodyear Luxembourg, “Decisions like the one at issue here may dissuade foreign companies from doing business in the United States, thereby depriving United States consumers of the full benefits of foreign trade.”  The Ninth Circuit ought to agree to rehear Judge Reinhardt’s ill-advised decision.