The Ninth Circuit issued a dreadful decision this week that uses an agency theory to impose general jurisdiction over a foreign corporation because of its control of its US subsidiary, thus subjecting it to an Alien Tort Statute and Torture Victim Prevention Act suit arising out of the actions of the company's Argentina subsidiary. See Bauman v. DaimlerChrysler Corp., No. 07-15386, Slip op. (9th Cir. May 18, 2011).
The plaintiffs in Bauman were 22 Argentine nationals who either were allegedly kidnapped, detained, or tortured by Argentine security forces or were related to those who were. They alleged that during Argentina's Dirty War in the mid-1970s, Mercedes Benz Argentina -- a wholly-owned subsidiary of DaimlerChrysler AG -- labeled workers who favored unions as "subversives" and "agitators," with the knowledge and intention that the state security forces would capture them (often, allegedly, at MBA's plant) and subsequently commit human rights abuses. The plaintiffs sought recovery from the corporate parent -- DaimlerChrysler AG ("DCAG"), a German company headquartered in Stuttgart.
DCAG also owned a holding company, DaimlerChrysler North America Holding Corporation, which was the sole owner of Mercedes-Benz USA, LLC ("MBUSA"). MBUSA has a regional office in Costa Mesa, California. The parties all agreed that MBUSA would be subject to general personal jurisdiction in California. The question -- for purposes of Bauman -- was whether the German parent company, DCAG, would be subject to such general personal jurisdiction.
The District Court concluded that it was not and granted the motion to dismiss for lack of personal jurisdiction. But a three-judge panel of the Ninth Circuit -- Judges Mary Schroeder, Dorothy Nelson, and Stephen Reinhardt -- disagreed, reversing the District Court's opinion. Notably, the panel did not consider the Kiobel question: whether a corporation can even be subject to suit under the Alien Tort Statute.
In stretching to find personal jurisdiction over DCAG, the Ninth Circuit did not engage in an analysis of whether the corporate veils between MBUSA and DCAG should be pierced as being effectively fraudulent. Rather, the court used an agency theory to conclude that DCAG exercised such control over MBUSA as its product distributor that the distributor should be considered DCAG's agent in the US, subjecting it to general personal jurisdiction. Foreign companies that have clauses in their distribution agreements allowing them to control their brands and intellectual property would do well to pay close attention to the Bauman court's analysis.
In conducting the standard "minimum contacts" analysis for general personal jurisdiction (i.e., jurisdiction over matters that arise outside the forum), the court framed the issue as "whether MBUSA's extensive contacts with California warrant the exercise of general jurisdiction over DCAG." Slip op at 6575. The court instructed that it had two tests available to it to determine whether due process would allow the exercise of jurisdiction over a parent by virtue of its relationship to a subsidiary. The first is the "alter ego" test, which requires the parent to exercise such control over the subsidiary that it is a mere instrumentality of the parent, such that honoring the corporate formalities will result in fraud or injustice. Slip op. at 6576. Clearly, the plaintiffs could not meet that standard.
And so the court focused on the second test, the "agency" test, which asks whether the "subsidiary functions as the parent corporation's representative in that it performs services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation's own officials would undertake to perform substantially similar services." Id. (citation omitted). The court acknowledged that this test also required a showing that the parent controlled the subsidiary, but held that the quantum of control required to meet the agency test was somehow less than the control required to meet the "alter ego" test.
It is this conclusion -- that plaintiffs need not show control of the day-to-day operations of the subsidiary -- that is fundamentally flawed. The Ninth Circuit found that MBUSA performs important services for DCAG. Of course it does -- it sells a HUGE number of DCAG's cars. And if MBUSA didn't do it, of course DCAG would have to get another company to do it. But that isn't what satisfies due process. Control -- extraordinary, daily, detailed, almost sham-like control -- is what due process requires to exercise general jurisdiction over the parent.
Admittedly, DCAG's distributorship agreement with MBUSA gives it the right to control a number of issues -- just as any company concerned about its luxury brand and trademarks would do to protect the value of such intellectual property. The goal of most of these controls is to ensure that the quality of the customer experience is maintained; they are not attempts to use MBUSA as a sham independent agency to protect the manufacturer. And they are not evidence of day-to-day control of all aspects of MBUSA's operations.
DCAG sets dealership standards, service standards, warranty terms, prices, customer satisfaction policies, dealership locations, and what customer information MBUSA may collect; approves modification of vehicles and all dealership signage; can review advertising and marketing plans; and establishes sales targets and electronic systems for accounting, order, inventory control, and warranty claim processing. But these controls do not amount to running MBUSA on a day-to-day basis.
After the Bauman court concluded that the "agency" test was met, it then embarked on a 7-prong analysis of whether the exercise of general jurisdiction over DCAG was "reasonable," First, it concluded that DCAG had purposefully interjected itself into California through MBUSA. It also focused on some lawsuits the company had filed in the state, and the work of a California-based research subsidiary there. It also noted that DCAG "has retained permanent counsel in California." Id. at 6585.
Next, it evaluated the burden of defending the suit in California. The court discounted such burdens on an international corporation, concluding that it weighed "slightly in DCAG's favor."
Third, the court discounted any conflict with the sovereignty of DCAG's home country of Germany, reasoning that because the company intended to benefit from the US market, it must tolerate the risk of litigation here. Id. at 6588.
Moreover, the court held that California has "a significant interest in adjudicating the suit" arising out of torts allegedly committed in Argentina, citing the Alien Tort Statute and the Torture Victim Prevention Act.
The court held that there was no "most efficient" forum for adjudicating the dispute. The US and Germany would be equally efficient, it reasoned, and Argentina was "not a truly available forum" because it imposes a two-year statute of limitations on human rights cases arising out of the Dirty War. The court also expressed concern about whether Germany would allow equitable tolling of the statute of limitations for human rights claims.
Ultimately, the court:
conclude[d] that it is reasonable to exercise jurisdiction over DCAG in California, a state that has itself become a major hub for world commerce and attracts business not only from all over Europe, but from all over Asia as well.
Id. at 6594. The court noted that sales in California alone counted for 2.4% of DCAG's worldwide sales, and nearly 50% of DCAG's revenue cam from the United States. The court continued: "Our test for personal jurisdiction must take these realities into account in determining whether it is reasonable to subject a parent company to the jurisdiction of the courts of this nation on the basis of the acts of its agent." Id. at 6596.
Beware, large multinational corporations with considerable US sales. Bauman suggests that general personal jurisdiction exists to hale you into court here based on your US subsidiaries' contacts, even where the causes of action pled against you arise out of a foreign subsidiary's alleged actions on foreign soil. Bauman is a dangerous precedent indeed.