Latham & Watkins Environment, Land & Resources Department

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1 Number 1212 July 7, 2011 Client Alert Latham & Watkins Environment, Land & Resources Department US Supreme Court Declines to Expand Jurisdiction Over Foreign Products Manufacturers [F]oreign manufacturers will be better able to predict the likelihood of facing product liability claims in US state courts. In a pair of recent decisions, the US Supreme Court declined to expand the scope of state court jurisdiction over foreign products manufacturers. In Goodyear Dunlop Tires Operations, S. A. v. Brown, the Court unanimously found that an American corporation s foreign subsidiaries were not amenable to suit in a state on claims unrelated to the subsidiaries activities in that state. In J. McIntyre Machinery, Ltd. v. Nicastro, the court declined to find jurisdiction where the foreign corporation s actions did not reveal an intent to invoke or benefit from the protection of the state s laws. Reversing both state court rulings, the Supreme Court refused to expand the scope of the stream of commerce test as a mechanism for personal jurisdiction. An affirmance of personal jurisdiction in either case could have significantly expanded a foreign product manufacturer s risk of facing state product liability claims even where there is little or no contact with the forum. As a result of the Supreme Court s reversals, foreign manufacturers will be better able to predict the likelihood of facing product liability claims in US state courts. However, the McIntyre decision commanded only a plurality of justices, with the two justices in concurrence unwilling to establish or disavow any bright line test in a case that did not present more modern commercial practices such as e-commerce. Thus, there remain open questions regarding personal jurisdiction for foreign products manufacturers targeting sales in the United States, particularly in the Internet context. Corporate Personal Jurisdiction To maintain an action against a defendant in state court, the court must first have personal jurisdiction over the defendant. Due process requires that personal jurisdiction exists only if the defendant has a sufficient relationship with the forum in which the defendant is called into court. Over time, courts have cast a wider net of jurisdiction to account for modern commercial practices. The Goodyear and McIntyre decisions declined, however, to further expand corporate personal jurisdiction. Under traditional notions of personal jurisdiction, a corporation was subject to jurisdiction only in the state where it was incorporated. 1 Courts expanded this narrow basis for jurisdiction as corporate activity began to take place on a nationwide scale and courts developed additional theories of jurisdiction. These theories included allowing suits when a corporation consented to suit for acts arising out of its transactions in Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and an affiliated partnership conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Mohammed A. Al-Sheikh. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY , Phone: Copyright 2011 Latham & Watkins. All Rights Reserved.

2 a state or if the corporation was doing business in the state such that it could be considered present in the state for jurisdictional purposes. The Supreme Court s 1945 decision in International Shoe Co. v. Washington redefined the constitutional limits of jurisdiction over nonresident corporate defendants. Under International Shoe, a corporation is subject to suit in a state if it engages in continuous and systematic activities in the state that are sufficient to render the corporation liable to suit. 2 In other words, a corporation must have minimum contacts with the forum so that jurisdiction would not offend traditional notions of fair play and substantial justice. 3 Where a corporation purposefully avails itself of the privileges and protections of the laws of a forum state, courts have held that the corporation has sufficient minimum contacts to be hailed into court. 4 Foreseeability is an additional component, and the Supreme Court has held that a nonresident corporation s activities in the forum should be such that the corporation has a reasonable anticipation of being haled into court there. 5 Before the decisions last week, the Supreme Court last addressed personal jurisdiction in Ashai Metal Industry Company v. Superior Court of California. 6 In that case, a pair of plurality opinions found that nonresident corporate defendants may also be subject to jurisdiction under a stream of commerce theory. Justice O Connor said jurisdiction required that a corporation place its product into the stream of commerce, plus make some additional conduct aimed at the forum such as advertising or distribution in the state. Justice Brennan, on the other hand, argued a state may assert jurisdiction over a corporation that places its goods in commerce and is merely aware that the the regular and anticipated flow of products could lead the product to be sold in the forum state. Personal jurisdiction is divided into two bases general and specific and the recent Supreme Court cases addressed each. Specific jurisdiction applies where the suit arises out of the corporation s activities inside the forum. In contrast, where the action is not related specifically to the corporation s contacts in the forum, only general jurisdiction is available. For general jurisdiction to be proper, a corporation must have sufficiently continuous and systematic contacts with the state to justify maintaining an action the defendant in the forum on any charge, even one not related to the corporation s in-state activities. General Jurisdiction Revisited: Goodyear Lux. Tires v. Brown Background The plaintiffs in Goodyear are the parents of two North Carolina teenagers who died in France when a tire blew out on the bus the children were riding. 7 The tire was designed and manufactured by foreign subsidiaries of Goodyear Tire & Rubber, an Ohio corporation. The subsidiaries primarily manufacture tires for overseas markets, but thousands of their tires were distributed in North Carolina, and a version of the tire used on the bus was imported into the US. The North Carolina Court of Appeals found the subsidiaries had continuous and systematic ties with North Carolina, reasoning that the US-based corporate operation controlled the distribution scheme that brought the tires into North Carolina. The foreign subsidiary thus had continuous and systematic contacts in North Carolina, and could anticipate being haled into court there. 8 The Goodyear subsidiary argued its activities in North Carolina were limited to distribution of products, which does not meet the historical presence test for general jurisdiction. 9 It also argued that under International Shoe, its sale of tires in North Carolina does not meet the test of continuous and systematic contacts. Goodyear claimed a corporation cannot reasonably anticipate being haled into court in a state simply because its products were distributed 2 Number 1212 July 7, 2011

3 in the state, when it has never had a physical presence in the state and the relevant claim did not arise in the state. It said the consequence of adopting such a rule would be to allow virtually universal jurisdiction in every state s courts over any manufacturer for claims arising anywhere in the world. Plaintiffs argued that sufficient contacts exist between the Goodyear Luxembourg and North Carolina due to the subsidiaries participation in Goodyear s integrated distribution operation in North Carolina. 10 In other words, jurisdiction was appropriate because the subsidiaries lacked an independent distribution operation and relied entirely on the distribution operation of the US parent. The argument relied heavily on the proposition that where multinational corporations operate a closed, highlyintegrated business enterprise, the actions of one corporate actor should not be distinguished from those of another for purposes of jurisdiction. The Supreme Court s Decision in Goodyear The Supreme Court unanimously reversed the decision of the North Carolina Court of Appeals, holding that the Goodyear foreign subsidiaries were not amenable to suit in North Carolina on claims unrelated to their activities in that state. 11 The Court held that the fact that some of the tires manufactured and sold by the foreign subsidiaries found their way to North Carolina [fell] far short of the continuous and systematic general business contacts necessary to subject the subsidiaries to general jurisdiction. 12 With such attenuated contacts, the subsidiaries were in no sense at home in North Carolina. Importantly, the Supreme Court ruled that the North Carolina court s reliance on the stream of commerce theory was misplaced. 13 The mere fact that a corporation s products reach a state through the stream of commerce is insufficient to support general jurisdiction. Such a connection does not establish the continuous and systematic relationship needed to empower North Carolina to hale the corporation into court on claims unrelated to its contacts with the State. Rather, general jurisdiction is only available in instances in which the continuous corporate operations within a state [are] so substantial and of such a nature as to justify suit against it on causes of action arising from dealings entirely distinct from those activities. 14 The distinction between general and specific jurisdiction is now especially relevant in assessing the importance of the subsidiaries placement of their tires in the stream of commerce. While [f]low of a manufacturer s products into the forum... may bolster an affiliation germane to specific jurisdiction, such ties do not warrant a determination that, based on those ties, the forum has general jurisdiction over a defendant. 15 Goodyear provides foreign corporations with more predictability about the likelihood of facing product liability claims in US state courts. The Court s ruling that mere stream of commerce is not sufficient to establish general jurisdiction should ease some liability concerns. Courts will focus on whether a company has continuous and systematic contacts with a state, such that it is essentially at home there. Here, courts are likely to conduct an inquiry into the volume of the company s business in the state, as the Goodyear decision fails to provide a bright line rule that will allow corporations to be certain when they are or are not subject to general jurisdiction. However, the mere insertion of products into the stream of commerce that end up in a particular state, without more, will not likely be sufficient to subject a company to general jurisdiction. Specific Jurisdiction Revisited: McIntyre Machinery, Ltd. v. Nicastro Background J. McIntyre is a British manufacturer of heavy-duty scrap metal machinery. 16 McIntyre used an exclusive US distributor based in Ohio, which 3 Number 1212 July 7, 2011

4 targeted the entire US market for sales of McIntyre s machines. 17 One such machine allegedly injured the respondent Robert Nicastro in New Jersey. McIntyre admitted various contacts with the US nationwide market, including that McIntyre s president exhibited products at the Las Vegas trade show where Nicastro s employer first learned about the machine. Nicastro sued J. McIntyre and its Ohio distributor in New Jersey. The state appellate court found that McIntyre could have reasonably expected its products to be sold in New Jersey. 18 In what would mark an expansion of personal jurisdiction over foreign corporate defendants, the New Jersey Supreme Court affirmed on grounds that even though McIntyre lacked minimum contacts with New Jersey, it targeted the entire United States and therefore could be haled into court in New Jersey. 19 J. McIntyre argued it lacked sufficient contacts with New Jersey, saying its only contacts were the result of the unilateral acts of the independent distributor. 20 It argued there is no fair warning of being haled into court unless the corporation itself targets the forum. McIntyre also argued there was no jurisdiction under a stream of commerce theory, saying Justice O Connor s Asahi opinion is the proper formulation of the stream of commerce test. Thus, its mere act of placing the machine into the marketplace coupled with awareness that the machine may be sold in New Jersey was insufficient for specific jurisdiction absent some additional act. Plaintiffs argued minimum contacts did exist because the defendant purposefully marketed its products to the entire US. 21 Thus, it was foreseeable that its products could cause injury in New Jersey. Nicastro also argued the facts satisfy either stream of commerce test. First, under Justice Brennan s test, McIntyre placed its machinery into commerce and was aware that the regular and anticipated flow of products could lead to a sale in New Jersey. Likewise, Nicastro argued that McIntyre purposefully selected an exclusive distributor to target sales throughout the US, thus satisfying Justice O Connor s test. The Supreme Court s Decision in McIntyre The Supreme Court reversed the Supreme Court of New Jersey, holding that McIntyre was not subject to specific jurisdiction in New Jersey because its actions did not reveal an intent to invoke or benefit from the protection of [New Jersey s] laws. 22 In an opinion commanding only a plurality of four Justices, the Court stated a defendant is generally not subject to specific jurisdiction unless it purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its law. 23 As in Goodyear, the plurality opinion in McIntyre also limited the importance of the stream of commerce test. Going forward, a defendant s placement of goods into the stream of commerce permits the exercise of jurisdiction only where the defendant can be said to have targeted the forum; as a general rule, it is not enough that the defendant might have predicted that its goods will reach the forum State. 24 In underscoring the significance of whether a defendant has targeted the forum, the plurality indicated its agreement with Justice O Connor s opinion in Asahi. Noting that Justice Brennan s approach could subject companies to jurisdiction wherever a company can anticipate that its product will end up in the forum state, the McIntyre plurality required something more, such as an action of the defendant purposefully directed toward the forum. It is the defendant s actions, not his expectations, that empower a State s courts to subject him to judgment. 25 The plurality articulated two principles to help clarify the specific jurisdiction inquiry. 26 First, personal jurisdiction requires a forum-by-forum, or sovereignby-sovereign, analysis. Courts must ask whether a defendant has directed its actions at that particular forum, so 4 Number 1212 July 7, 2011

5 that the forum has the power to subject the defendant to judgment concerning that conduct. Second, the Court noted that [b]ecause the United States is a distinct sovereign, a defendant may in principle be subject to the jurisdiction of the courts of the United States but not of any particular State. Thus, though McIntyre had targeted its business at the United States generally, it had not targeted New Jersey and the New Jersey courts did not have authority to exercise jurisdiction over it. 27 Two Justices concurred only in the judgment, indicating a concern with laying down a rule of broad applicability without full consideration of the modern-day consequences. 28 Justice Breyer, joined by Justice Alito, expressed particular concern that the purposeful availment rule was unclear in many situations. For example, what do those standards mean when a company targets the world by selling products from its website? 29 Because the lead opinion gained only a plurality of justices, the McIntyre opinion falls short of providing complete clarity to foreign corporations. In many cases, state courts will follow the plurality and disclaim the broad stream of commerce test. However, a full majority of the Court has yet to explain how the various personal jurisdiction tests apply in the internet sales and online advertising contexts. Thus, it seems foreign corporations especially those targeting US sales online will have to wait for a future case to clarify how their e-commerce practices impact their likelihood of being sued in US state courts. Conclusion Through its recent rulings, the Supreme Court halted a trend toward broader grants of jurisdiction, thereby allowing corporations to better understand the potential legal consequences of transacting business in the US. The Court reaffirmed some of its prior holdings while further defining the scope of the stream of commerce approach. Following Goodyear, general jurisdiction is available only where companies have continuous and systematic business contacts with a forum, such that they may fairly be regarded as at home there. A company s mere placement of goods into the stream of commerce is insufficient to subject it to general jurisdiction, unless the company also does such a substantial amount of business there that it has continuous and systematic business contacts. Similarly, the McIntyre decision indicates the Court s hesitation to expand specific jurisdiction. Although McIntyre is probably not the Court s last pronouncement on specific jurisdiction, courts now are likely to find specific jurisdiction only where companies target a particular state seeking to invoke or benefit from the protection of its laws. Endnotes 1 Louisville Cincinnati & Charleston R.R. Co. v. Letson, 43 US 497 (1844) US 310, 318 (1945). 3 Int l Shoe, 326 US at Burger King Corp. v. Rudzewicz, 471 US 462 (1985). 5 World-Wide Volkswagen Corp. v. Woodson, 444 US at Asahi Metal Indus. Co., Ltd. v. Superior Court of California, 480 US 102 (1987). 7 Goodyear Dunlop Tires Operations, S. A. v. Brown, 564 US (No ) (June 27, 2011), slip op. at 3. 8 See Brown v. Meter, 681 S.E.2d 382 (N.C.App. 2009). 9 Brief for Petitioners, Goodyear Lux. Tires, S.A. v. Brown, 564 US (2011) (No ), at Brief for Respondents, Goodyear Lux. Tires, S.A. v. Brown, 564 US (2011) (No ), at Goodyear Dunlop Tires Operations, S. A. v. Brown, 564 US (No ) (June 27, 2011). 12 Id. at Id. at Id. at 7 (quoting Int l Shoe, 326 US at 318) (alteration in original). 15 Id. at (emphasis in original). 16 J. McIntyre Machinery Ltd. v. Nicastro, 564 US (2011) (No ), slip op. at Number 1212 July 7, 2011

6 17 The US distributor was separately owned and controlled from a legal perspective, but the U.K. manufacturer coordinated marketing and distribution efforts with the distributor. 18 Nicastro v. McIntyre Machinery Am., Ltd., 399 N.J. Super. 539 (App. Div. 2008) (reversing the lower court s dismissal for lack of personal jurisdiction). 19 Nicastro v. McIntyre Machinery Am., Ltd., 201 N.J. 48 (2010). 20 Brief for Petitioner, J. McIntyre Machinery, Ltd. v. Nicastro, No , 564 US (June 27, 2011), at See J. McIntyre, No , slip op. at Id. at Id. at 2 (quoting Hanson v. Denckla, 357 US 235, 253 (1958)). 24 Id. at Id. at 8 (emphasis added). 26 Id. at Id. at J. McIntyre, No , slip op. at 1 (Brennan, J., concurring). 29 Id. at 4 (Brennan, J., concurring). If you have any questions about this Client Alert, please contact one of the authors listed below or the Latham attorney with whom you normally consult: Christine G. Rolph christine.rolph@lw.com Washington, D.C. Arthur F. Foerster arthur.foerster@lw.com Chicago Tyler J. Hagenbuch tyler.hagenbuch@lw.com Chicago Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorney with whom you normally consult. A complete list of our Client Alerts can be found on our website at If you wish to update your contact details or customize the information you receive from Latham & Watkins, please visit to subscribe to our global client mailings program. Abu Dhabi Barcelona Beijing Boston Brussels Chicago Doha Dubai Frankfurt Hamburg Hong Kong Houston London Los Angeles Madrid Milan Moscow Munich New Jersey New York Orange County Paris Riyadh* Rome San Diego San Francisco Shanghai Silicon Valley Singapore Tokyo Washington, D.C. * In association with the Law Office of Mohammed A. Al-Sheikh 6 Number 1212 July 7, 2011