One-Two, The Court Backs International Shoe

Clore Law · June 28 2011 The U.S. Supreme Court, in a pair of decisions issued today, bolstered the defenses of companies against being haled into a state court against their will. The decisions–unanimous in one case, fractured in the other–involved Industrial Age products but could foreshadow similar battles as the Internet thrusts threatens to drag companies under the jurisdiction of courts everywhere. They also continued a line of decisions where the court has honored the legal walls separating corporate divisions instead of allowing plaintiffs to "pierce the veil" and get at a parent company's cash. Both decisions supported the idea established under the seminal 1945 case known as International Shoe vs. Washington, that companies can't be dragged into court in states where they have minimal or no business contacts. The reasoning is simple: If companies don't avail themselves of the services provided by a government, and don't do anything directly in that state, they shouldn't be subject to the jurisdiction of its courts. In a unanimous decision penned by Justice Ruth Bader Ginsburg, the court rejected a lawsuit by parents of two North Carolina boys killed in a Paris bus accident involving tires manufactured by the Turkish subsidiary of Goodyear Tire & Rubber. The parents tried to sue Goodyear in North Carolina on a product-liability claim, but they failed to make the case that Goodyear's foreign subsidiaries had sufficient contacts with the state to subject it to the jurisdiction of its courts. Goodyear may sell tires in North Carolina, the court ruled in Goodyear vs. Brown, but its foreign subsidiary doesn't, and the accident occurred on foreign soil. Under International Shoe vs. Washington, the court established a test for state-court jurisdiction that requires "continuous and systematic" contact with that state, either by setting up offices and employing personnel or by actively selling products there. The idea is to protect companies from being ambushed by lawsuits in states they don't have any connection with, which would "offend `traditional notions of fair play and justice.'" International Shoe has been sorely tested by the rise of multinational corporations that spread their products across the globe. The Internet, moreover, could potentially subject a company to jurisdiction everywhere. But in Goodyear vs. Brown Ginsburg reaffirmed basic limits on the ability of state courts to hand down penalties against foreign companies, saying the mere fact that Goodyear, parent, does business in North Carolina doesn't mean its foreign subsidiaries can be haled into court to answer for an accident that occurred overseas. The court wasn't nearly so harmonious in the second case, involving a worker who was injured using a metal-shearing machine made in England and imported used into New Jersey from another state. New Jersey courts allowed the manufacturer to be sued under the doctrine in a case called Asahi that held companies can be sued in a state if they had a reasonable expectation that their products would enter the "stream of commerce" there. A narrow majority led by Justice Anthony Kennedy reversed, but in the process also overturned Asahi, saying the "stream of commerce" idea came in a concurrence by Justice William Brennan that only commanded four votes and thus was suspect from the beginning. The concept placed too much emphasis on fairness to consumers and not enough on the fundamental question of whether a state court has jurisdiction, Kennedy said. Assuming any company could face a lawsuit in a state simply because it was "foreseeable" its products might wind up there could violate due process:

The owner of a small Florida farm might sell crops to a large nearby distributor, for example, who might then distribute them to grocers across the country. If foreseeability were the controlling criterion, the farmer could be sued in Alaska or any number of other States' courts without ever leaving town. And the issue of foreseeability may itself be contested so that significant expenses are incurred just on the preliminary issue of jurisdiction. Jurisdictional rules should avoid these costs whenever possible.

Justice Stephen Breyer, joined by Justice Samuel Alito, agreed the case should be reversed but said Kennedy went too far in overturning the "stream of commerce" concept in Asahi. Perhaps mindful of the implications for Internet commerce, he said:

Because the incident at issue in this case does not implicate modern concerns, and because the factual record leaves many open questions, this is an unsuitable vehicle for making broad pronouncements that refashion basic jurisdictional rules.

Ginsburg, joined by Justices Sotomayor and Kagan, split with the majority and held there were sufficient contacts between the machinery company and New Jersey to let the suit proceed. The British company had a U.S. subsidiary and attended trade meetings in the U.S., Ginsburg said. Under state "long-arm" statutes giving states the power to hear cases over acts that may have occurred outside their borders she said, the company met the test of being subject to a lawsuit in New Jersey. Yet:

…six Justices of this Court, in divergent opinions, tell us that the manufacturer has avoided the jurisdiction of our state courts, except perhaps in States where its products are sold in sizeable quantities. Inconceivable as it may have seemed yesterday, the splintered majority today "turn[s] the clock back to the days before modern long-arm statutes when a manufacturer, to avoid being haled into court where a user is injured, need only Pilate-like wash its hands of a product by having independent distributors market it."

Taken together, the decisions strengthen protections against U.S. lawsuits against purely foreign entities. The American Association for Justice, nee American Trial Lawyers Association, warned that these decisions mean consumers will be exposed to dangerous products without necessarily being able to sue over them. In a statement, AAJ President Gibson Vance advocated passage of a bill pending in Congress that would require foreign manufacturers to designate a U.S. agent to accept service should they be sued here.

Simply put, foreign companies that market and sell their products in our country should not be able to evade accountability. In our global marketplace, this decision will allow foreign manufacturers to sell their products without adhering to our safety standards.

The AAJ now has a list of Supreme Court decisions it wants Congress to reverse. Last year, the court ruled out so-called "foreign cubed" lawsuits by overseas plaintiffs complaining of securities fraud by overseas companies. And earlier this year, it upheld the corporate firewall between Janus Capital Group and a mutual fund it advised. Definitely a good time to be a corporate lawyer drawing up litigation-proof structures to hold foreign assets. Article from [url=https://blogs.forbes.com/danielfisher/]https://blogs.forbes.com/danielfisher/[/url]

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