US Supreme Court rejects jurisdiction over foreign corporation based on its subsidiary’s contacts with the forum

For the first time ever, the United States Supreme Court has addressed whether a foreign corporation may be subjected to a court’s general jurisdiction based on its subsidiary’s contacts with the forum state: Daimler AG v. Bauman, No. 11-965, 2014 WL 113486 (U.S. Jan. 14, 2014). Rejecting the exercise of jurisdiction, the Court held that a foreign company was not subject to general jurisdiction in California, based on its domestic subsidiary’s activities in the state, on a claim arising out of events that all took place outside the United States. 

Moreover, the Court went out of its way to delineate substantial limits on courts’ ability to exercise general jurisdiction over corporate defendants. General jurisdiction subjects a defendant to a lawsuit in the forum based on activities conducted anywhere, even outside the forum. The Court’s decision in Daimler makes clear that the assertion of general jurisdiction over a foreign corporate defendant, for conduct not directed at the forum, presents a difficult challenge for plaintiffs. David Wallace and Garrett Kamen of our New York office consider the decision further below.

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Background

In Daimler, a group of Argentinian residents filed suit in federal court in California against DaimlerChrysler Aktiengesellschaft (“Daimler”), a German public stock company headquartered in Stuttgart.  The plaintiffs alleged that a subsidiary of Daimler in Argentina, Mercedes-Benz Argentina, directed and collaborated with state security forces to kidnap, detain, torture, and kill plaintiffs and their families in Argentina as part of that country’s 1975-1977 “Dirty War.”  

They sought to impose vicarious liability on Daimler for the conduct of Mercedes-Benz Argentina, and to invoke jurisdiction in California based on the activities of a different subsidiary, Mercedes-Benz USA (“MBUSA”).  MBUSA, a Delaware corporation with its principal place of business in New Jersey, distributed Daimler-manufactured vehicles to independent dealerships around the United Sates, including in California.  Since their claims arose entirely outside California, the plaintiffs argued that Daimler could be sued in California “on any and all claims against it, wherever in the world the claims may arise” because MBUSA was Daimler’s agent for jurisdictional purposes.  Thus, the plaintiffs claimed that the California contacts of Daimler’s US subsidiary could be imputed to Daimler under an agency theory.  

The Ninth Circuit Court of Appeals upheld the exercise of jurisdiction, on the grounds that MBUSA conducted extensive business in California and that its activities could be imputed to Daimler. Daimler appealed to the Supreme Court. 

Decision 

The Supreme Court reversed the Ninth Circuit's ruling. In an opinion by Justice Ginsburg in which seven other Justices joined, the Court held that due process prevented the exercise of general jurisdiction over Daimler based on MBUSA’s California contacts.  The Court reasoned that adoption of the agency theory would “subject foreign corporations to general jurisdiction whenever they have an in-state subsidiary or affiliate, an outcome that would sweep beyond even the sprawling view of general jurisdiction.” 

That could have been the end of the ruling, but the Court did not stop there.  Instead, the Court went on to issue a broad opinion, explaining that even if MBUSA’s contacts with California could be imputed to Daimler, “there would still be no basis to subject Daimler to general jurisdiction in California . . . .”  The Court stressed that “only a limited set of affiliations with a forum will render a defendant amenable to all-purpose jurisdiction.”  

In the case of a corporation, the Court said, the principal place of business and place of incorporation are the “paradigm” bases for jurisdiction.  Although the Court acknowledged the “possibility” that in an “exceptional” case a corporation’s operations might subject it to general jurisdiction in a forum other than its place of incorporation or principal place of business, it found no such circumstances in the Daimler case.  

The Court rejected the plaintiffs’ argument that general jurisdiction could be asserted over a corporation wherever it is engaged in a “substantial, continuous, and systematic course of business.”  The Court directed that all-purpose jurisdiction could be exercised over a corporation not when its contacts with the forum “can be said to be in some sense ‘continuous and systematic,’” but only when the contacts are “so ‘continuous and systematic’ as to render it essentially at home in the forum State” (emphasis added).  

Expanding on this rationale, the Court wrote that if Daimler’s “California activities sufficed to allow adjudication of this Argentina-rooted case in California, the same global reach would presumably be available in every other State in which MBUSA’s sales are sizable.”  This “exorbitant” exercise of all-purpose jurisdiction, the Court said, would prevent out-of-state defendants from structuring their conduct “with some minimum assurance” as to where they will be amenable to suit.  Thus, the exercise of general jurisdiction over a corporation, the Court said, requires appraisal of its activities “in their entirety,” not just in the forum, and a determination where its corporate “home” is located.  

Noting the “transnational” context of the lawsuit, moreover, the Court recognized the need to pay heed to the “risks to international comity” that would arise from an expansive assertion of general jurisdiction, and noted that its ruling was consistent with the jurisdictional approach taken in the European Union.  

Justice Sotomayor concurred in judgment, but wrote that the Court should have ruled on “far simpler ground that, no matter how extensive Daimler’s contacts with California, that State’s exercise of jurisdiction would be unreasonable given that the case involves foreign plaintiffs suing a foreign defendant based on foreign conduct, and given that a more appropriate forum is available.” 

Conclusion

The Supreme Court’s decision in Daimler imposes a high burden on plaintiffs seeking to invoke jurisdiction over a corporate defendant on claims unrelated to conduct in the forum.  The Court ruled that a subsidiary’s activities in the forum could not be imputed to a foreign parent on an agency theory for purposes of asserting jurisdiction – in addition, even if the subsidiary’s contacts were attributed to the parent, jurisdiction was still absent because the parent was not “at home” in the forum state.  Increasingly, in order to subject a foreign corporation to personal jurisdiction, plaintiffs will need to establish a connection between the forum and the defendant’s conduct that gives rise to the claim.  

For more information, please contact David Wallace or Garrett Kamen or your usual Herbert Smith Freehills contact.