Civil Procedure - Ninth Circuit focuses on importance of subsidiary rather than control to impose general jurisdiction over foreign corporation - Bauman v. DaimlerChrysler Corp.

Author:Stark, Andrew T.

Civil Procedure--Ninth Circuit Focuses on Importance of Subsidiary Rather Than Control to Impose General Jurisdiction over Foreign Corporation--Bauman v. DaimlerChrysler Corp., 644 F.3d 909 (9th Cir. 2011)

The Supreme Court of the United States has established that general personal jurisdiction allows a forum to exercise authority over a defendant to adjudicate claims that do not arise from the defendant's contacts within the forum state. (1) Since the advent of the modern corporation, plaintiffs have attempted to establish jurisdiction over a foreign corporation because of its subsidiary's contacts with a forum state. (2) In Bauman v. DaimlerChrysler Corp., (3) the Court of Appeals for the Ninth Circuit considered whether a state may exercise general jurisdiction over a foreign corporation because it has a subsidiary with extensive contacts in the United States. (4) The Ninth Circuit held that a subsidiary is a foreign corporation's agent for jurisdictional purposes if the subsidiary's services are sufficiently important to the parent corporation and the parent has the right to substantially control the subsidiary's activities. (5)

In 2004, twenty-three persons (Plaintiffs) filed a lawsuit against DaimlerChrysler Aktiengesellschaft (DCAG) in the United States District Court for the Northern District of California. (6) Plaintiffs alleged that DCAG's wholly owned subsidiary, Mercedes-Benz Argentina, collaborated with the Argentinean government to kidnap, torture, or kill the Plaintiffs or their relatives during Argentina's "Dirty War." (7) In response to the Plaintiffs' complaint, DCAG moved to dismiss for insufficient service of process and lack of personal jurisdiction. (8)

Plaintiffs argued that DCAG had sufficient contacts with California to warrant general jurisdiction by virtue of its wholly owned subsidiary, Mercedes-Benz United States, LLC (MBUSA). (9) To support this claim, Plaintiffs contended that MBUSA acted as DCAG's agent for the purpose of asserting jurisdiction over DCAG. (10) The district court tentatively granted DCAG's motion to dismiss for lack of personal jurisdiction but permitted limited jurisdictional discovery before issuing a final decision. (11) The district court reasoned that, because DCAG could create another subsidiary or use an independent distributor to distribute and sell its vehicles in the United States, MBUSA was not an agent of DCAG for jurisdictional purposes. (12)

After the jurisdictional discovery was complete, the district court confirmed its tentative ruling that the court lacked general jurisdiction over DCAG and granted DCAG's motion to dismiss. (13) The court based its reasoning on DCAG's past use of independent distributors before it created MBUSA and Toyota Motor Corporation's current use of independent distributors within the United States. (14) The court explained that, because the use of a subsidiary to distribute and sell vehicles in the United States is not necessary, MBUSA's purpose is not a task that "but for the existence of the subsidiary, [DCAG] would have to undertake itself." (15) On appeal, the Court of Appeals for the Ninth Circuit affirmed the district court's dismissal of the lawsuit for lack of personal jurisdiction. (16) Nine months later, the three-judge panel for the Ninth Circuit unanimously vacated its prior decision and reversed the finding of the district court, holding that MBUSA's business was sufficiently important to DCAG and that without MBUSA or another representative, it would have to distribute and sell its vehicles itself. (17) Additionally, because DCAG had the right to substantially control MBUSA's operations, the Ninth Circuit held that it meant MBUSA was DCAG's agent for the purpose of attributing general jurisdiction. (18) Five months after the Ninth Circuit filed its opinion, a majority of the circuit's active judges voted to deny DCAG's petition for rehearing en banc. (19)

Before International Shoe introduced the modern constitutional standards of personal jurisdiction, the concept of asserting jurisdiction over an out-of-state corporation had been uniformly based on the traditional "entity" approach to corporate law. (20) In the 1925 case of Cannon Manufacturing Co. v. Cudahy Packing Co., the Supreme Court concluded that despite a corporation's complete ownership and control of its subsidiary, the subsidiary was a separate and distinct corporate entity; therefore, the activities of the subsidiary were not attributable to the parent corporation where it would be considered "present" in the forum state. (21) Twenty years after Cannon, the federal courts began to deemphasize the strict jurisdictional standard of presence and instead looked to minimum contacts, thereby focusing on the corporate defendant's relationship to the forum rather than the mechanics of its corporate structure. (22) In a string of decisions issued in the decades following International Shoe, the Supreme Court established the constitutional limits of exercising personal jurisdiction over an out-of-state corporation. (23)

Since the modern standards of personal jurisdiction have developed, the Supreme Court has not had the opportunity to apply such standards to a case involving the amenability of jurisdiction to a parent corporation based on the contacts of its in-state subsidiary. (24) As there is no definitive precedent set forth by the Court, this widespread practice of jurisdictional attribution is unsettlingly divided across the American legal system. (25) In Gelfand v. Tanner Motor Tours, Ltd., (26) the Second Circuit laid the foundation for the use of the "agency theory" doctrine in New York law. (27) Applying a decision from the Court of Appeals of New York, the Gelfand court determined that the decisive agency test is whether a foreign corporation's in-state representative "provides services beyond 'mere solicitation' and [whether] these services 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." (28) Rather than require the common-law element of control over an agent, the Second Circuit has continued to evaluate the "sufficient importance," economic integration, and functional relationship of the parent corporation and its representative. (29)

The Ninth Circuit adopted the agency theory of personal jurisdiction in Wells Fargo & Co. v. Wells Fargo Express Co (30) and relied extensively on the Second Circuit's sufficient-importance test. (31) The court emphasized the irrelevance of whether the putative agent was a subsidiary of the parent or independently owned, therefore adhering to the Second Circuit's focus on the functional relationship between the parent corporation and its representative. (32) In three subsequent cases, the Ninth Circuit also relied on the decision of a Pennsylvania federal district court, which found that courts may attribute a representative's contacts to a parent corporation where the representative was "either established for, or is in engaged in, activities that, but for the existence of the subsidiary, the parent would have to undertake itself." (33) When it adopted the sufficient-importance and but-for tests, the Ninth Circuit did not emphasize a parent corporation's control over its representative, which is an essential element of common-law agency. (34) Nevertheless, whether the element of control is actually required is not clear because the Ninth Circuit has either remanded or decided such cases for lack of sufficient importance. (35)

In Bauman v. DaimlerChrysler Corp., the Ninth Circuit considered whether a distribution subsidiary of a foreign corporation qualified as an agent under the agency test employed by the Second and Ninth Circuits. (36) Guided by previous decisions of both circuits, the Bauman court outlined what it regarded as the two elements of the agency test: the subsidiary must provide sufficiently important services that the parent corporation would delegate or perform itself if the subsidiary did not perform them, and the parent must reserve the right to exercise control over the representative. (37) The court first examined the sufficient-importance element in detail, emphasizing that the essence of the agency test requires a determination of whether the parent--in this case, DCAG--would distribute and sell its vehicles in the United States itself "if it had no representative at all to perform [these services]." (38) Recognizing the lack of clarity in the Ninth Circuit's articulation of the adopted but-for test, the court explicitly noted that the purpose of this test is to identify the importance of the delegated functions of a subsidiary, not to determine whether a particular subsidiary is the only entity that could perform such services. (39) Because of the large amount of revenue DCAG earns in the United States through MBUSA, the Ninth Circuit held that MBUSA's services satisfied the sufficient-importance test--that is, even if DCAG replaced MBUSA with a contractor, that contractor would still be considered a representative for purposes of the test. (40)

The court then examined the element of control by analyzing the issue under the principles of traditional common-law agency. (41) Reiterating the distinction between the agency and alter-ego tests, the court emphasized that in an agency-test analysis, control is weighed with less significance than the sufficient-importance element. (42) The Ninth Circuit held that a parent corporation need only exercise the right to control the subsidiary, rather than exercise day-to-day control over its operations. (43) Highlighting the General Distributor's Agreement between DCAG and MBUSA, the court held that it was evident that DCAG reserved the right to exercise control over nearly every aspect of MBUSA's operations. (44) The Ninth Circuit then evaluated the reasonableness of exercising...

To continue reading

FREE SIGN UP