Supreme Court to Consider General Jurisdiction Over Foreign Parent Based on U.S. Subsidiary

25 April 2013 Dashboard Insights Blog

On Monday, April 22, the United States Supreme Court agreed to hear DaimlerChrysler AG v. Bauman, which asks whether a foreign parent corporation can be subject to suit in the United States for wrongs allegedly committed by a foreign subsidiary, based on the foreign parent’s relationship with a separate, non-party U.S. subsidiary. The question presented to the Court involves general personal jurisdiction over the foreign parent in California federal court — in other words, whether the parent must answer lawsuits filed in California federal court, even if the conduct alleged in the lawsuit took place elsewhere. If the Supreme Court affirms the Ninth Circuit’s ruling, global businesses may have to reconsider the contractual and ownership bonds between their networks of parents and subsidiaries, bearing in mind the risks arising in each subsidiary and the potential for those risks to spill over to the parent.  

Case Background

DaimlerChrysler AG (now just Daimler AG), like many global manufacturers, established wholly-owned subsidiaries in a number of different countries. In Argentina, DaimlerChrysler AG’s predecessor company established a wholly owned subsidiary, Mercedes-Benz Argentina, or MBA. In a complaint filed in 2004 in the Northern District of California, about two dozen former workers at an Argentine manufacturing plant operated by MBA alleged that MBA had assisted the Argentine government in committing human rights abuses against them in the 1970s and 1980s, giving rise to claims under the Alien Tort Claims Act and the Torture Victims Protection Act. The complaint named DaimlerChrysler AG — a German corporation — as a defendant. The District Court dismissed the complaint for lack of personal jurisdiction.

The Ninth Circuit’s Decision

The Ninth Circuit reversed, relying on the activities of Mercedes-Benz USA, LLC (“MBUSA”), a wholly-owned U.S. subsidiary of DaimlerChrysler AG. MBUSA was unquestionably subject to general jurisdiction in California — the only question was whether jurisdiction over MBUSA, which was not a defendant, could be extended to jurisdiction over DaimlerChrysler AG. 

MBUSA was, by contract, DaimlerChrysler AG’s exclusive distributor of Mercedes-Benz vehicles in the United States. The distribution agreement between MBUSA and DaimlerChrysler AG gave DaimlerChrysler AG final say over many aspects of MBUSA, including the terms of: warranty service; dealership management; vehicle modifications; required personnel for MBUSA; and the pricing of merchandise.  MBUSA sales in the U.S. accounted for 19% of DaimlerChrysler AG’s worldwide sales, with California alone accounting for 2.4% of DaimlerChrysler AG’s total worldwide sales. 

The Ninth Circuit held that these facts established that MBUSA was (1) so critically important to DaimlerChrysler AG that DaimlerChrysler AG would take on MBUSA’s activities itself if MBUSA could not; and (2) that DaimlerChrysler AG had the right to exercise control over “nearly all aspects of MBUSA’s operations.”  The Ninth Circuit further found that exercise of jurisdiction over DaimlerChrysler AG was reasonable, due to “DCAG’s pervasive contacts with the forum state through MBUSA, including the extensive business operations of that subsidiary, the interest of California in adjudicating important questions of human rights, our substantial doubt as to the adequacy of Argentina as an alternative forum,” and the court’s concern that German courts might not hear the case. The Ninth Circuit held that MBUSA was thus DaimlerChrysler AG’s “agent” for purposes of establishing general personal jurisdiction, and MBUSA’s extensive California presence could be imputed to DaimlerChrysler AG for the purpose of answering the suit (which itself arose from the conduct of MBA in Argentina).

The Ninth Circuit denied rehearing en banc (that is, a rehearing with the whole court participating). Eight judges dissented from the denial of rehearing, stating that the ruling “represents a breathtaking expansion of general personal jurisdiction, which is unwarranted in light of Supreme Court precedent, the precedent of our sister circuits, and our own precedents,” and “presents a gratuitous threat to our nation’s economy, foreign relations, and international comity.” The Supreme Court granted DaimlerChrysler AG’s petition for certiorari.

Potential Impact

Corporations with global operations establish and operate subsidiaries with an eye toward compartmentalizing risks presented by their operations. If plaintiffs can impose liability on a parent corporation based on the conduct of its subsidiaries — and can do so by establishing jurisdiction over the parent through a separate subsidiary that did not even participate in the alleged wrongdoing — corporations with a global presence will need to carefully evaluate the risks to their business based on the lowered bar to having their parent companies haled into court for their subsidiaries’ past conduct.  

That said, affirmance is far from assured. In addition to the Ninth Circuit dissent, recent Supreme Court decisions appear unfavorable to the theories relied upon by the plaintiffs—for example, in Goodyear Dunlop Tire Operations, S.A. v. Brown, 131 S. Ct. 2846 (2011), decided shortly after the Ninth Circuit’s ruling in DaimlerChrysler AG, the Court unanimously declined to permit North Carolina courts to assert general personal jurisdiction over foreign subsidiaries of a domestic parent corporation, even though jurisdiction was proper over the parent. And other recent decisions (including Kiobel v. Royal Dutch Petroleum, decided the week before the Court agreed to hear DaimlerChrysler AG) have limited the reach of the statutes relied upon by the plaintiffs, giving the Court another potential basis for a ruling. Even so, DaimlerChrysler AG merits close attention, given the consequences of any Supreme Court decision either expanding or limiting the ability of U.S. courts to assert jurisdiction over foreign parent corporations.

DaimlerChrysler AG, docket number 11-965, is currently scheduled to be heard by the Supreme Court during the October 2013 Term.

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