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October Term, 2013

January 14, 2014

Today the Supreme Court issued two decisions, described below, of interest to the business community.

Personal Jurisdiction—General Personal Jurisdiction Based on Subsidiary’s or Affiliate’s Activities in Forum State

Daimler AG v. Bauman, No. 11-965 (previously discussed in the April 23, 2013 Docket Report).

Constitutional principles of due process permit a defendant to be sued in the courts of a state (or, generally, in the federal courts within that state) only if the forum can exercise personal jurisdiction over the defendant. Today, in Daimler AG v. Bauman, No. 11-965, the U.S. Supreme Court held that a defendant will be subject to “general” personal jurisdiction in a state—meaning that the defendant can be sued in the state for any claim, even if the claim has nothing to do with the defendant’s conduct in that state—only if its affiliations with the state are so continuous and systematic as to render the defendant essentially “at home” in the forum state.

In particular, the Court held that a state does not have general personal jurisdiction over a foreign corporation based solely on the fact that the defendant’s indirect corporate subsidiary performs services in the forum state that are unrelated to the lawsuit.

The defendant, Daimler AG, is a German public stock company that does not have any U.S. operations and does not own property, manufacture or sell products, or employ workers in the United States. The plaintiffs are residents of Argentina who sued Daimler in a federal court in California, alleging that an Argentine subsidiary of Daimler’s predecessor committed human-rights abuses in Argentina. The district court dismissed the suit for lack of personal jurisdiction over Daimler, but the Ninth Circuit reversed, holding that courts in California have general personal jurisdiction over Daimler because a different indirect subsidiary, Mercedes-Benz USA LLC, distributes Daimler-manufactured vehicles to dealerships in California and is therefore Daimler’s “agent” in the state.

Writing for an eight-Justice majority, Justice Ginsburg held that the Ninth Circuit erred for three reasons. First, the Supreme Court ruled that the Ninth Circuit’s “agency” test was far too expansive, as it would result in general personal jurisdiction wherever a subsidiary’s relationships with the forum state were “important,” which could encompass all states in which a foreign parent corporation has a domestic subsidiary. Second, the Court explained that general personal jurisdiction over a corporate defendant will exist only when a corporation is incorporated in a state, has its principal place of business in the state, or the corporation’s contacts with the state are so continuous and systematic as to render the corporation essentially “at home” in the state; Daimler satisfied none of those tests. Finally, the Court ruled that the Ninth Circuit had given insufficient attention to the transnational context of the case and did not sufficiently consider the risks to international comity that its expansive view of general personal jurisdiction would pose. Justice Sotomayor issued a separate opinion concurring in the judgment of the Court but disagreeing with its standard.

The Supreme Court’s decision in this case will be of great interest to the business community, and especially to foreign businesses that have—or are contemplating having—affiliated or subsidiary entities with operations in the United States. The Supreme Court’s decision also follows recent decisions addressing related personal-jurisdiction issues. In Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S. Ct. 2846 (2011), the Supreme Court held that a state may not exercise general personal jurisdiction over foreign manufacturers whose products enter into a state through the “stream of commerce.” 131 S. Ct. at 2856-57. In J. McIntyre Machinery Ltd. v. Nicastro, 131 S. Ct. 2780 (2011), a plurality of the Court concluded that New Jersey courts could not exercise specific personal jurisdiction over a British manufacturer of scrap-metal machines that the plaintiff had bought from an independent dealer because the defendant had never advertised in, sent goods to, or in any relevant sense targeted New Jersey. The Court’s decision in Daimler demonstrates its continuing interest in clarifying and rationalizing the due-process standards governing judicial power to exercise authority over litigants based in other states or countries.

Any questions about this case should be directed to Andrew Pincus (+1 202 263 3220) or Alex Lakatos (+1 202 263 3312) in our Washington office.

Class Action Fairness Act—Court Rejects Removal of Parens Patriae Suits As “Mass Actions” Under CAFA

Mississippi ex rel. Hood v. AU Optronics Corp., No. 12-1036 (previously described in the May 28, 2013, Docket Report)

When state attorneys general file suits to seek monetary recoveries based on claimed injuries to private citizens, those lawsuits look like, walk like, and quack like class actions. In fact, in most of these so-called “parens patriae” cases, the same private plaintiffs’ lawyers that bring private class actions are retained to represent states in exchange for the potential to garner substantial attorneys’ fees. While most class actions and mass actions of significance can be removed to federal court under the Class Action Fairness Act of 2005 (“CAFA”), the Supreme Court held today in Mississippi ex rel. Hood v. AU Optronics Corp., that lawsuits in which the state is the sole named plaintiff do not as a technical matter fall within CAFA’s coverage of “mass actions,” and therefore that such lawsuits may proceed in state courts. The likely impact of the decision is that businesses will face more class-action-style cases in state-court forums.

CAFA allows defendants to remove, among other things, “mass actions” from state to federal court. Under the statute, a mass action is “any civil action … in which monetary relief claims of 100 or more persons are proposed to be tried jointly.” 28 U.S.C. § 1332(d)(11)(B)(i). The question facing the Court in Hood was whether a parens patriae suit filed by a State as the sole plaintiff constitutes a mass action when the suit includes claims for restitution based on injuries suffered by the State’s citizens.

The case arose out of a lawsuit filed in state court by the State of Mississippi alleging that manufacturers of liquid crystal displays (“LCDs”) had formed a cartel to restrict competition and raise prices. The State sought, among other forms of relief, restitution for its own purchases of LCD products and for the purchases of its citizens. The manufacturers removed the case to federal court, arguing that it qualified as a mass action. The district court found that the case was a mass action, but remanded under CAFA’s “general public exception.” On appeal, the Fifth Circuit reversed, agreeing with the district court that the case qualified as a mass action but finding that no exception to federal jurisdiction under CAFA existed. The Fifth Circuit’s decision conflicted with rulings in the Fourth, Seventh and Ninth Circuits, which had all held that similar lawsuits were not “mass actions” under CAFA.

The Supreme Court granted review to resolve the circuit split. Today, in a unanimous opinion by Justice Sotomayor, the Court reversed the Fifth Circuit’s decision, holding that such parens patriae actions do not qualify as mass actions under CAFA. The Court held that the “100 or more persons” language in CAFA’s mass action provision refers to named plaintiffs only, and does not encompass unnamed persons who are real parties in interest. Slip op. 5-10. Citing CAFA’s numerosity requirement (28 U.S.C. § 1332(d)(5)(B)), the Court noted that Congress knew how to include unnamed persons in a definition, but chose not to do so with respect to mass actions. Id. at 6. Further, the Court determined that the “100 or more persons” were later specified as the “plaintiffs” in the same provision and that the term “plaintiffs” could not include unnamed parties. Id. at 6-8. The Court concluded that construing “plaintiffs” to include unnamed real parties in interest would stretch the meaning of “plaintiff” beyond its common understanding as a party who brings a civil suit. Id. at 8-9.

In addition, the Court noted CAFA’s requirement that a removed case shall not be transferred to another court “unless a majority of the plaintiffs in the action request transfer.” Id. at 10. If “plaintiffs” included unnamed parties, the Court found, it would be difficult for a court to poll all of the real parties in interest to decide whether the case could be transferred. Id. In addition, the Court found that the mass action provision functions largely as a “backstop” to ensure that plaintiffs cannot evade federal jurisdiction under CAFA by naming a host of plaintiffs rather than using the class device. Id. at 11. According to the Court, if Congress wanted CAFA to authorize removal of representative actions brought by a state, it would have provided for the removal under the class action mechanism, not the mass action provision. Id.   

Finally, the Court found that it was not proper in the mass action context to apply a background principle requiring courts to look behind the pleadings to ensure that parties are not improperly creating or destroying diversity jurisdiction. Id. at 11-13. According to the Court, this background principle had not previously been applied to count up unnamed parties but was typically applied to determine which parties’ citizenship should be considered in determining diversity. Id. at 12. In addition, by prohibiting defendants from joining unnamed individuals to turn a case into a mass action, see 28 U.S.C. 1332(d)(11)(B)(ii)(II), Congress indicated that it did not want courts to look behind the pleadings to attempt to find the real parties in interest. Id. at 13.

Today’s decision is highly significant for businesses. State attorneys general already have been filing enforcement actions in increasing numbers. And, as we have discussed on our Class Defense blog, some members of the plaintiffs’ bar have been lobbying states to deputize them as acting attorneys general so that they may file lawsuits as parens patriae actions in order to avoid federal jurisdiction and instead proceed in state court, which they perceive as a more hospitable forum. The Court’s decision today will likely encourage the private plaintiffs’ bar to redouble those efforts.

Any questions about the decision should be directed to Archis Parasharami (+1 202 263 3328) or Kevin Ranlett (+1 202 263 3217) in our Washington office.

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