United States: The World In US Courts - Summer 2015 - When Can Personal Jurisdiction Over A Non-US Company Be Based On Actions Taken By Its US Subsidiary?

Plaintiffs routinely try to impute the activities of US subsidiary companies to their non-US parents in an effort to obtain jurisdiction over the parents in American courts. While there is broad agreement as to the general principles of law to be applied in addressing the question of parental responsibility, judicial rulings are very fact-specific, and not at all consistent with one another. Notably, some decisions turn on a review of the facts giving rise to the claim, while in others the courts focus on the general operation of the parent-subsidiary relationship at issue. In both cases, a familiarity with the rules that courts are likely to apply can allow for advance planning, and help minimize the chances that a court will find that jurisdiction exists.

This special issue of The World in US Courts is devoted exclusively to the parent-subsidiary relationship, and discusses the circumstances under which US courts will and will not impute a subsidiary's actions to its parent for purposes of determining whether the parent must remain in a case.1 An Executive Summary appears below, describing the principal points that we draw from the cases. A more detailed summary with discussions of specific cases follows for those readers wishing to study the issue in further detail and to consider its application in the context of their situations.

Executive Summary

Personal jurisdiction describes the power of a US court (state or federal) to require a party to participate in a judicial proceeding, and to issue enforceable orders applicable to that party. Even if a court has jurisdiction to hear a particular dispute, it may only act against parties over which it has personal jurisdiction. The result is that some parties may win dismissal of a claim on personal jurisdiction grounds even if the case proceeds against other defendants.

The Due Process Clause of the US Constitution imposes requirements as to the minimum contacts that a defendant must have with a forum before personal jurisdiction may be asserted. Many plaintiffs seek to evade these requirements in the case of suits against a non-US company by arguing that the conduct of the company's US subsidiaries should be imputed to the parent for purposes of determining whether the parent had adequate contacts with the state where the litigation has been filed to support the assertion of personal jurisdiction.

US courts consider two types of personal jurisdiction, and the role of the parent-subsidiary relationship is different in each. First, "general personal jurisdiction" allows a court to hear any claim against a particular defendant no matter whether the claim relates to the defendant's contacts with the forum State where the court sits. "Specific personal jurisdiction," meanwhile, is narrower, only allowing a court to hear claims arising out of the defendant's contacts with the forum. The difference can have dramatic practical consequences: Subject to the assertion of additional defenses that would have to be litigated, a defendant that is sued in a State where it is subject to general personal jurisdiction may be required to answer for its conduct anywhere in the US or even the world.

General personal jurisdiction is broad in scope but difficult to obtain. The 2014 decision of the US Supreme Court in Daimler AG v. Bauman held that general personal jurisdiction could only be asserted over a corporation in a State where the corporation could be said to be "at home." The Supreme Court described a corporation as being "at home" in a State where is incorporated or has its principal place of business. For non-US corporations, there may be no US State where that is true. The Daimler case speculated that there may be an "exceptional" case where an alternative basis for general jurisdiction might be found, but courts have been reluctant to apply this exception broadly, choosing instead to conclude in the vast majority of cases that the State of incorporation/principal place of business test is dispositive.

Plaintiffs used two theories to try to assert general personal jurisdiction against a non-US company based on the activities of its US subsidiaries. First, they have argued that, under the facts of specific cases, the subsidiary's corporate form should be disregarded and the parent and the subsidiary should be deemed to be one entity—"alter egos" of one another. The Daimler case reduced the significance of this argument by noting that, even if the subsidiary were found to be part of the parent, general personal jurisdiction would still attach only if the combined company were incorporated, or had its principal place of business in, the US State where litigation was brought. Regardless, efforts to "pierce the corporate veil" are often attempted but are rarely successful. Corporations largely exist in order to shield their owners from the corporation's own actions, and courts will generally respect the corporate form if the subsidiary appears not to be a sham. Factors often cited by courts in refusing to pierce the corporate veil are whether the subsidiary is adequately capitalized, appears to make certain decisions on its own (even though there may be overlap in the management and boards between a subsidiary and its parent), and corporate formalities are observed. Notably, this risk can be minimized by careful advance planning.

Plaintiffs also try to impute the conduct of a subsidiary to its parent on a theory that the subsidiary is merely an "agent" of the parent. The Daimler opinion rejected two specific agency arguments and cast doubt on the viability of this theory as a general matter, and it appears unlikely that, at least as to general personal jurisdiction, agency claims will be successful in the future.

The parent-subsidiary relationship plays a different role in analyzing whether specific personal jurisdiction exists, because the focus is on specific conduct. Under the Due Process Clause, specific jurisdiction exists where (i) a defendant has itself "purposefully availed" itself of the privilege of doing business in a forum State, of a magnitude and type that it could reasonably anticipate being required to defend itself in the State's courts, (ii) the claims at issue arose out of those contacts, and not actions unrelated to the forum, and (iii) the assertion of jurisdiction would be consistent with "fundamental fairness and substantial justice."

Defendants often litigate whether the Due Process requirements for the assertion of specific personal jurisdiction have been satisfied. For present purposes, the question is whether a plaintiff may refer to actions taken by a non-US parent's US subsidiary in seeking to satisfy the test. The same two theories—that the parent and the subsidiary are alter egos of one another, and that the subsidiary has acted as the parent's agent—are used by plaintiffs in the context of specific personal jurisdiction, but the relevance of the parent-subsidiary relationship is different.

The showing necessary to pierce the corporate veil in the context of special jurisdiction is the same as it is with respect to general jurisdiction—meaning, that it is just as difficult. If successful, however, a plaintiff could utilize the US company's contacts with the forum State in order to argue that the non-US parent had "purposefully availed" itself of the privilege of doing business in a State, that the claim arose from the subsidiary's conduct, and that asserting jurisdiction was fair. Under the facts of a given case, this showing might not be difficult to satisfy. Again, the basis for such an argument is one that largely depends on the manner in which a parent has conducted and maintained its relationship with its subsidiaries, and thoughtful advance planning can reduce risks considerably.

Arguments that a subsidiary is merely the agent of its parent are also more dangerous in the context of specific jurisdiction than in that of general jurisdiction. While the standards for showing that an agency relationship exists are the same, the focus of special jurisdiction on the specific acts that give rise to a claim makes those acts—and the role the parent may have played in them—more relevant. The skepticism expressed in Daimler about the viability of agency theories in the context of general jurisdiction simply does not exist with respect to special jurisdiction, and so agency remains a potentially dangerous theory for non-US defendants. Even so, thoughtful advance planning can minimize the risk that an agency relationship may be found in connection with any transaction.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.