June 23, 2011

Ninth Circuit Expands Use of "Agency Theory" to Impose General Jurisdiction Over Foreign Corporations with Subsidiaries in the U.S.

Holland & Knight Alert
Robert E. Tonn

The U.S. Court of Appeals for the Ninth Circuit recently issued its decision in Bauman v. DaimlerChrysler Corp., __ F.3d __, 2011 WL 1879210 (C.A.9(Cal.)), which expands the use of “agency theory” to impose general jurisdiction over foreign corporations solely based on the domestic business activities of their U.S. subsidiaries.

In Bauman, the Ninth Circuit held that personal jurisdiction existed over DaimlerChrysler Aktiengesellschaft (DCAG), a German company, through DCAG’s wholly-owned American subsidiary, Mercedes-Benz USA LLC (MBUSA). The court held that MBUSA functioned as DCAG’s agent, conferring jurisdiction on DCAG, because MBUSA’s services to DCAG were “sufficiently important to the foreign entity that the corporation itself would perform equivalent services if no agent were available.”

Case Background

In Bauman, the plaintiffs sued DCAG, alleging that one of its subsidiaries, Mercedes-Benz Argentina (MBA), collaborated with state security forces to kidnap, detain, torture and kill the plaintiffs and their relatives during Argentina’s “Dirty War” in an effort to break union control over its Argentine manufacturing facility. The plaintiffs brought suit against DCAG in the Northern District of California under the Alien Tort Statute and the Torture Victims Prosecution Act of 1991 (28 U.S.C. § 1350 and 106 Stat. 73, note following 28 U.S.C. § 1350, respectively).

DCAG’s corporate structure is familiar to most in the industry: DCAG owned DaimlerChrysler North America Holding Corporation, which in turn owned MBUSA, a Delaware company with its principal place of business in New Jersey. MBUSA is the single largest supplier of luxury vehicles in the California market and maintains several offices in California. MBUSA did not dispute that it was subject to general jurisdiction in California because of its activities in the state. However, DCAG argued that it was not subject to California jurisdiction because it had little or no contact with the state.

General Jurisdiction Exists Because MBUSA Was DCAG’s Agent

The primary issue in Bauman was whether MBUSA’s many contacts in California should be attributed to DCAG, allowing the court to exercise general jurisdiction over DCAG. In deciding this, the Ninth Circuit held that if MBUSA was either the “alter ego” or “agent” of DCAG, then DCAG would have the necessary contacts to support the exercise of personal jurisdiction over it.

The Ninth Circuit determined that the facts did not meet the high standard to pass the “alter ego” test. This test requires a showing of actual control by the parent company over the subsidiary, a unity of interest and ownership such that the separate personalities of the two entities no longer exist, and that the failure to disregard the separate identities would result in fraud or injustice.

The “agent” test, on the other hand, has a much lower standard because it is satisfied by a showing that “the subsidiary functions as the parent corporation’s representative in that it performs services that are sufficiently important to the foreign corporation” such that the parent would itself perform the same services if the subsidiary could not. While this test requires the plaintiffs to show that the parent exercises some level of control over the subsidiary, it does not require nearly the level of control mandated by the “alter ego” test. In fact, the Bauman court held that the mere right to control is sufficient to meet this standard.

Given MBUSA’s extensive sales of luxury vehicles in California (2.4 percent of DCAG’s total sales worldwide), and the fact that DCAG had the right to control MBUSA through a general distributor agreement, the court’s holding was almost a foregone conclusion. In determining that exercising personal jurisdiction was also reasonable, the court focused on the fact that DCAG was a large, sophisticated company that could easily defend itself in California and that DCAG had a great interest in maintaining its connections in America’s vast markets.

Implications for Foreign Companies and Their American Subsidiaries

The Bauman decision is significant because it increases the likelihood that U.S. courts will exercise personal jurisdiction over foreign companies based completely on the activities of their U.S. subsidiaries. And nothing in this decision limits the court’s ruling only to human rights claims. Indeed, Bauman leaves foreign companies with U.S. subsidiaries more vulnerable to all types of lawsuits in the United States, even for issues that have little or nothing to do with the U.S. business.

It is possible that Bauman’s effect may soon be limited by the U.S. Supreme Court’s ruling in Goodyear Dunlop Tires SA v. Brown, which may be decided before the end of the current Court’s term. In Goodyear, the Court is expected to rule on whether the Constitution prohibits the exercise of general jurisdiction over a foreign company when the lawsuit does not arise from events in the United States. However, until the Supreme Court issues its decision, foreign corporations with U.S. subsidiaries should be wary that they may be more easily subjected to U.S. courts’ jurisdiction through their relationship with those subsidiaries.

Related Insights