On February 25, the Supreme Court unanimously decided Walden v. Fiore, a case with significant implications for Delaware’s officer and director consent statute, § 3114. I recently argued that § 3114 is unconstitutional, especially in light of the Court’s 2011 opinions in Nicastro. Walden makes even more clear that § 3114 violates the Due Process Clause.
In Walden, a DEA agent seized almost $100,000 in cash from two Nevada residents who were changing planes in Atlanta en route from Puerto Rico to Nevada. The agent then allegedly drafted an affidavit that could be used to institute forfeiture proceedings. The government declined to institute forfeiture proceedings and returned the money to the Nevadans. They filed a Bivens action in Nevada against the DEA agent and the agent contested personal jurisdiction. The Court, in an opinion by Justice Thomas, held that Nevada could not exercise personal jurisdiction over the agent.
The Court’s personal jurisdiction jurisprudence is plastic enough to support two quite different approaches. The more traditional approach focuses on the defendant’s voluntary contacts with the forum state. The other, more holistic, approach looks at the fairness of forcing the defendant to litigate in the forum state in light of the connections between the defendant, the plaintiff, the dispute, and the forum state.
Walden is decidedly in the traditionalist camp. It is a little surprising that no Justice wrote separately to emphasize the holistic approach and that Justice Thomas did not feel the need to acknowledge that holistic approach. It may be that this case signals a decisive victory for the traditional approach.
The Court emphasized that the contacts that matter for personal jurisdiction purposes must be (a) by the defendant and not indirectly by the plaintiff or any other party and (b) directed to the state itself, not others that happen to have a connection with the state.
Applying the language and logic of Walden to § 3114 shows that the statute is clearly unconstitutional. Both prongs in the Court’s approach cut against § 3114, as does the Court’s application of that analysis to the intentional tort setting. Finally, the particular facts of Walden are highly analogous to a non-resident corporate fiduciary who is sued in Delaware. Pertinent language from the Court’s opinion follows (page numbers refer to the Court’s slip opinion).
As to the first aspect of the Court’s focus,
“[T]he defendant’s suit-related conduct must create a substantial connection with the forum State…. First, the relationship must arise out of contacts that the ‘defendant himself’ creates with the forum State….” (p.6 emphasis original).
So, the fact that the corporation has chosen Delaware or has connections with Delaware is irrelevant to whether the director has done so. Further, I would argue that any self-created connection a director has with Delaware is not “a substantial connection.”
As to the second aspect,
“[O]ur ‘minimum contacts’ analysis looks to the defendant’s contacts with the forum State itself, not the defendant’s contacts with persons who reside there.” (p.7)
“To be sure, a defendant’s contacts with the forum State may be intertwined with his transactions or interactions with … other parties. But a defendant’s relationship with a … third party, standing alone, is an insufficient basis for jurisdiction” (p.8)
Thus, a director’s voluntary service as a director of a Delaware corporation is not a connection with Delaware that is either sufficient, or the primary inquiry, for a minimum contacts analysis.
The Court also focuses on intentional torts.
“These same principles apply when intentional torts are involved…. [J]urisdiction over an out-of-state intentional tortfeasor must be based on intentional conduct by the defendant that creates the necessary contacts with the forum.” (p.9).
Justice Thomas distinguished Calder v. Jones, a libel action in which personal jurisdiction was upheld in California against a Florida corporation, by noting that the harm in libel was to plaintiff’s reputation, which was centered in California.
“[T]he ‘effects’ caused by the defendants’ article – i.e., the injury to the plaintiff’s reputation in the estimation of the California public – connected the defendants’ conduct to California, not just to a plaintiff who lived there. That connection, combined with the various facts that gave the article a California focus, sufficed to authorize the California court’s exercise of jurisdiction.” (p.10 emphasis in original).
To the extent that fiduciary duty claims against officers and directors are essentially intentional torts, this emphasis suggests that the injury needs to be directed to particular victims in particular states. A corporate fiduciary of a Delaware corporation who breaches his or her fiduciary duty has not, by so doing, created sufficient contacts with Delaware. Surely, a Delaware pseudo-domestic corporation is not harmed in Delaware, but in its headquarters state.
Finally, the Court emphasized the following facts about the Georgia DEA officer’s conduct and concluded that they were insufficient to establish personal jurisdiction in Nevada. A moment’s reflection will show that these facts, in the Delaware corporate fiduciary context, would result in a finding of no personal jurisdiction under § 3114.
“[N]o part of [his or her] conduct occurred in [the forum State]” (p.11);
The officer “never traveled to, conducted activities within, contacted anyone in, or sent anything or anyone to [the forum State]” (p.11)
At most, a Delaware fiduciary might authorize the corporation to make a filing in Delaware, but that would rarely be connected with the specific jurisdiction claim for relief in a fiduciary duty action.
The officer’s “actions [elsewhere] did not create sufficient contacts with [the forum State] simply because [he or she] allegedly directed [his or her] conduct at [others] whom [he or she] knew had [forum State] connections.” (p.12);
“[M]ere injury to a forum resident is not a sufficient connection to the forum.” (p.12);
The officer’s “relevant conduct occurred entirely [elsewhere], and the mere fact that [his or her] conduct affected [others] with connections to the forum State does not suffice to authorize jurisdiction.” (p.14).