Multinational Enterprises and the Reach of U.S. Courts

Global business puts pressure on geographically limited courts. U.S. courts, for instance, can reach only defendants with contacts with the forum territory, usually the specific U.S. state in which the court is located. But litigation may be brought against part of a multinational business that has separately organized entities in different countries. Often the local subsidiary has direct contacts, but the plaintiffs want to sue the absent parent as well. Can they? The somewhat unsatisfactory answer is that it depends. Often it depends on whether the local subsidiary’s contacts with the forum territory “count” as those of the parent company. What the law is—and where it should go—are the subject of this post, which looks at the aftermath of the Supreme Court’s opinion in Daimler AG v. Bauman.

When multinational enterprises (MNEs) are sued in U.S. courts, a threshold question is whether the court can reach the particular named defendant. U.S. courts generally agree that the mere fact of a subsidiary-parent relationship is not enough to bring an absent parent company to court. Beyond that, however, the law is much more muddled. Courts have sometimes borrowed corporate-law doctrines such as veil piercing and enterprise liability. Or, under the misleading label of “agency” jurisdiction, courts have considered whether the parent would have performed a particular in-state role itself if it had no local subsidiary.

The Supreme Court considered jurisdiction over components of an MNE in 2014 in Daimler AG v. Bauman. Plaintiffs sued Daimler AG in a California court, even though the German parent company had almost no direct contact with the state. According to plaintiffs, the court could reach the parent company based on the contacts of its U.S. importer and distributor, which had offices in California.

In its opinion, the Supreme Court cut away at the outer edges of jurisdiction over absent corporate parents. The court below had allowed the California court to reach the German parent. It had reasoned that the U.S. subsidiary’s services were so important to the foreign corporation that the corporation’s own officials would have performed them in the absence of a representative. The Supreme Court disagreed with the legal standard, essentially saying: “We don’t know much about what should count as contacts for the parent, but the Ninth Circuit has definitely gone too far (again).” The Supreme Court rebuked the Ninth Circuit for its expansive definition, which would reach most parents and subsidiaries. But it otherwise left courts to muddle through.

What should courts do with MNEs in the wake of Daimler AG v. Bauman? Judges and litigants often borrow from corporate law to determine when a corporate parent may be brought into court. During oral argument in Daimler AG v. Bauman, for instance, Justice Breyer signaled that he viewed the relevant contacts “through the lens of corporate law.” But corporate law does not provide a complete answer. And ruling it out is the first step towards a more coherent response.

One objection to importing corporate law is practical. “Veil piercing” addresses when separately organized business entities are so intertwined that they can be treated as a single entity. But courts should be reluctant to import a doctrine that has inspired only insults from commentators and judges. Veil piercing has also prompted thousand-page treatises devoted to its state-by-state and court-by-court variations, signaling that it is an unpromising source for a predictable rule.

A more fundamental objection is that it would be unreasonable for defendants to expect that the legal boundaries of corporate entities are always respected, absent some narrow exception developed in substantive corporate law. When determining the reach of courts, defendants’ expectations matter—concerns with “fair play and substantial justice” drive due process limits, and protecting reasonable expectations is an aspect of that fairness. But the relevant portion of the corporate group depends on the area of law at issue. The relevant unit for torts is different from that for antitrust or for tax, for instance. A reasonable expectation is accordingly that courts and legislatures identify different relevant subsets within the MNE depending on the legal problem. There is no compelling reason to prefer how corporate law defines the boundaries.

If corporate law does not determine the reach of courts into MNEs, what does? The first part of the answer is that courts should look to legal areas that address the driving question: how much control would make it fair to bring a particular corporate defendant to court? In the corporate group context, there is often no debate that the various entities respected formal boundaries by keeping separate accounts and formal separation. That certainly was the case with Daimler. The more difficult case is when the basic corporate formalities are respected, and this is something that corporate law does not address. Part of the response likely lies instead in agency law, as it deals with precisely the question of when one entity’s acts bind another.

The second part of the response is to define more explicitly the problem that imputing contacts within a corporate group is trying to solve. Particularly as MNEs and other corporate groups take on force, jurisdictional gaps may be the concern: some actors and actions may be beyond the reach of any court. Courts are left to balance the benefits of respecting corporate separateness—predictability and risk management—with accountability for corporate actions even when they are not directly undertaken and even when they are made in the context of a complicated network of related but separately organized entities.

The preceding post comes to us from Verity Winship, Professor at the University of Illinois College of Law. The post is based on her papers, Corporate Law and the Reach of Courts, 19 Lewis & Clark L. Rev. 693 (2015); and Personal Jurisdiction and Corporate Groups: DaimlerChrysler AG v. Bauman, 9 J. Priv. Int’l L. 431 (2013).