United States: "Not Made in America" - U.S. Supreme Court To Determine Scope Of Jurisdiction Over Foreign Manufacturers

"Today, all the world is a market. In our contemporary international economy, trade knows few boundaries, and it is now commonplace that dangerous products will find their way, through purposeful marketing, to our nation's shores and into our State."

Nicastro v. McIntyre Machinery America, Ltd., 201 N.J. 48, 52 (2010).

The loose term "globalization" can be used to refer not only to wide open communication networks connecting the world, but also to expansive trading networks. These networks allow the smallest manufacturer in one remote corner of the world to market their products on the other side of the globe. They also allow multi-national firms to take advantage of widely-dispersed supply chains and distribution channels to maximize their potential market, regardless of the company's original hometown.

However, while it has become infinitely easier to buy and sell goods across borders and seas, American courts have by and large been hesitant to allow U.S. citizens to drag foreign manufacturers into the country to face product liability lawsuits. While the 1987 Asahi1 decision arguably allowed for a generous interpretation of where a manufacturer might possibly find itself as a defendant, it was not until this past year that they true ramifications of the globalized marketplace on jurisdiction came to light.

It was in the context of one case from New Jersey and another from North Carolina2 that the Supreme Court decided the time had come to clear the air on Asahi after a quarter century of globalization. Or at least, the Court decided the time had come to make the attempt. The Court heard arguments in these two cases in January, and should rule within the next few months. First we will look at the cases themselves. Then we will discuss the ramifications of potentially expanded liability. Because nearly regardless of what the Supreme Court decides as the proper test, foreign manufacturers and the businesses they work with need to be aware of what can be done to protect themselves.

THE UNDERLYING CASES

The Nicastro3 case, decided by the New Jersey Supreme Court in 2010 and argued before the United States Supreme Court on January 11, 2011, involved a product manufacturer from the United Kingdom, its American distributor by an almost identical name ("McIntyre Machinery America, Ltd. as opposed to McIntyre Machinery, Ltd.)4, and an injured New Jersey plaintiff. The manufacturer sold a recycling machine to its American distributor, which is in Ohio. The American distributor then sold the machine to Curcio Scrap Metal, located in New Jersey. Plaintiff Nicastro was operating the machine in October of 2001 when his hand got caught in the blades, resulting in four severed fingers. Nicastro brought suit in 2003.

When McIntyre brought its motion based on lack of personal jurisdiction, the New Jersey court recognized that there were none of the traditional contacts with New Jersey that would give the court jurisdiction. The New Jersey Supreme Court carefully stated it did not find that the manufacturer "had a presence or minimum contacts in the State – in any jurisprudential sense – that would justify a New Jersey court to exercise jurisdiction in this case."5 Jurisdiction, it reasoned, would have to come with the stream-of-commerce theory.

Go back to Asahi for a moment, the U.S. Supreme Court's statement on the stream-of-commerce theory. Unfortunately, Asahi was not a unanimous opinion. Far from it. It was a plurality, meaning there are two somewhat contradictory tests: Justice William Brennan's "stream-of-commerce" and Justice Sandra Day O'Connor's "stream-of-commerce-plus." Brennan's test would allow that as long as a manufacturer "is aware that the final product is being marketed in the forum State, the possibility of a lawsuit there cannot come as a surprise."6 Thus, if the manufacturer knows it sells to a distributor that theoretically markets to the fifty states, it could be stuck litigating in any of the fifty states. O'Connor, on the other hand, called for something more: "purposeful direction." This test does not allow for jurisdiction when a product ends up in any state. Rather some sort of effort needs to be focused at the state: a particular design, advertising, a marketing agent in-state, etc.7 Without this extra bit of effort, no jurisdiction.

The New Jersey Supreme Court left no doubt, in words and actions, that it backed Brennan's more expansive idea. "[T]he increasingly fast-paced globalization of the world economy has removed national borders as barriers to trade."8 If a manufacturer works with a distributor that targets a fifty-state market, that manufacturer knows its product might end up with a New Jersey consumer. Awareness of the flow of stream of commerce thus satisfied, New Jersey could have jurisdiction over McIntyre and any other similarly-situated foreign manufacturer.

Where Nicastro looked at the idea of specific jurisdiction – how the defendant may have availed itself of the forum based upon the defendant's contacts arising from a specific controversy – Brown9 out of North Carolina argued general jurisdiction - "continuous and systematic contacts" with the forum unrelated to the specific controversy at issue.10 The underlying case involved two North Carolina teenagers who died in a bus accident in France. The accident allegedly occurred when one of the bus's tires failed. The tires were manufactured in Turkey by a Goodyear subsidiary. Their estates sued Goodyear and a number of its foreign subsidiaries. The foreign subsidiaries sought dismissal, but the court found general jurisdiction despite no apparent connection to North Carolina. The court though found enough minimal contacts based on the fact that (1) the tires had U.S. Dept. of Transportation markings permitting their sale in the U.S., (2) from 2004 through 2006 over 40,000 tires made by the foreign manufacturers were shipped to North Carolina as a part of Goodyear's "continuous and highly-organized distribution process"; and (3) the sale of the tires in North Carolina generated "substantial revenue" for the foreign manufacturers.11

With this, the North Carolina court found the foreign manufacturers had continuous and systemic contacts with North Carolina; the foreign manufacturers' activities in North Carolina were substantial; and that considering the quantity and nature of those contacts and activities, and the interest of North Carolina in the action and the convenience of the parties, the evidence weighed in favor of general jurisdiction. It could even be argued that it used the stream-of-commerce test to find general jurisdiction, even though stream-of-commerce had only been used for specific jurisdiction. The Court held the foreign manufacturers "purposefully injected [the] product into the stream of commerce without any indication that [they] desired to limit the area of distribution of [the] product so as to exclude North Carolina..."12 In this manner, the North Carolina court held as New Jersey did in Nicastro, that because of the essentially borderless global marketplace, a commercial enterprise aimed at the U.S. was an enterprise aimed at any individual State.

With these two cases before it, this January the United States Supreme Court thus found itself at one of the litigious crossroads of globalization.

THE SUPREME COURT

The arguments before the Court13 showed that all the justices were carefully considering the ramifications not only to the cases before them, but for the international marketplace. Among other topics, there were two key areas of interest: First, how a foreign manufacturer can protect itself in the American marketplace should the justices expand jurisdiction or at the least expressly adopt Justice Brennan's straight stream of commerce test and a similarly broad rule of jurisdiction; and second, whether an expanded view of jurisdiction would open up liability to any foreign entity whose products eventually make it to an American consumer, no matter how small the foreign company may be. Interestingly, the Court even identified the ramifications on small regional sellers whose products reach the other side of the country.

In Nicastro, the difficult issue for the manufacturer was that its distributor targeted all 50 states. It did not have a viable fall-back argument that it only focused on the Midwest, or excluded certain regions. Justice Sotamayor questioned the company's counsel on the coordination between the manufacturer and the American distributor, and needled counsel about how the British manufacturer's president attended the very Las Vegas tradeshow where the New Jersey company first saw the machine.14 Much of the argument around this topic focused on that problem: obviously the foreign manufacturer is going to support, and in some cases actively assist, their distributor in selling their products. And even regardless of the coordination between foreign manufacturer American distributor, Justice Kagan at the outset focused properly on the desire – not even really the intent, but the desire – of the foreign manufacturer to target the United States market. The manufacturer didn't care about which states precisely, it only cared about getting its products into the American market. Kagan thus posited why a foreign manufacturer couldn't be sued in any state, if its product was sold there. The argument circled in that way, with McIntyre's counsel trying to focus the argument on what the foreign manufacturer's "purpose" was and how, without giving the distributor express direction to go and sell in New Jersey, New Jersey could not have jurisdiction.

Justice Breyer went into the second issue: are even small companies open to liability anywhere in the country if they were to fall into McIntyre's trap? Justice Breyer set up a hypothetical:

Now, a person walks into a shop in either West Virginia or the country of India where they make pots. They're very nice pots made, actually, in West Virginia. And the potter makes several thousand a year, and this individual says: Mr. Potter, I want to sell your pots; send me a thousand each year. Where are you going to sell them? Everywhere. Great.

Okay? That's it. Now, suppose that the law were, as it could be perhaps, that it is sufficient for jurisdiction throughout the United States that the distributor or independent buyer said good, I'm selling them everywhere I can. And two or three end up in New Mexico, but it doesn't matter where they end up. Suppose that was sufficient to find jurisdiction.15

Counsel for McIntyre attempted to argue that jurisdiction would be inappropriate, based on Asahi, and further that the plaintiff should be forced to go where the manufacturer is found. Justice Ginsburg expressed concern about forcing plaintiffs to search the world and dive into various legal systems to seek justice. There is no doubt that this point will steer the decision, whether or not it drives it all the way home for plaintiffs.

Though the crux of the issues in Brown are the general jurisdiction implications of globalization, and the issues are in a sense quite similar to Nicastro, the arguments before the court focused quite a bit on how to deal with the parent and subsidiaries. To the point of the case, and showing the similar real-world implications of this and Nicastro, was this question from Justice Ginsburg put to Brown's counsel, Collyn Peddie:

Justice Ginsburg: Do you have any case law that supports your position, which, I take it – and correct me if I've got it wrong – that a subsidiary is subject to jurisdiction wherever the parent is, so long as some products made by the subsidiary are shipped by the parent to the – to buyers in the forum State?

Ms. Peddie: No, Your Honor, because that's not our position here. Our position is that if you participate in this kind – not a general one, but in this kind of very tightly controlled system, distribution and supply system, then there is general jurisdiction in the forum over the foreign subsidiary that participates in this.16

The arguments then went briefly into the effect on outsourcing. Brown's counsel argued that shielding subsidiaries in this type of "tightly controlled system" will encourage firms to start foreign subsidiaries rather than keeping plants at home, in order to shield themselves from liability.17 However, this argument did not get much traction.

NOW WHAT DO WE DO?

The Supreme Court is on the brink of potentially expressly expanding specific and/or general jurisdiction, arguably due to the ease with which many products now flow around the globe and, more precisely, the ease with which products are marketed and distributed to all fifty states simultaneously. Where does this then leave the international firm, regardless of whether they have subsidiaries around the globe or one small manufacturing plant in Manchester or Shanghai? And how as a domestic distributor can you protect yourself from liability that is best placed with the foreign manufacturer?

Even if the Court does not rule expressly, foreign manufacturers should presume they could be hailed into any of the fifty states where their distributor finds a seller. The key then is to make sure that defense of potential litigation is prepared for and practical. The same goes for distributors, seeking to protect themselves from allegations of latent defects in the products. As always, protection can begin and end with the contract or agreement between manufacturer and distributor. A few clauses that are important to consider for this contract are: (1) waiver of the Hague Convention for service of process on the foreign manufacturer, (2) indemnification language, and (3) additional insured language.

The Hague Convention establishes specific rules for service of process on a foreign entity. As a distributor, ensuring waiver of these cumbersome rules is important. After a costly suit has been filed – with onerous discovery looming -- is not the time to be on the phone with the American consulate in the Czech Republic trying to figure out how to serve a third-party complaint. Even the manufacturer itself may not want to have to worry about the Hague Convention's pitfalls, if it relies on American customers and if American jurisdictional rules are expanded by the Court. Therefore, contract language that waives Hague Convention requirements and allows for substitute service for the manufacturer on the distributor or on an American law firm can be beneficial to both defensive parties.

Next: strong indemnification language, a solid hold harmless clause. This clause can go both ways. Not only can it save the distributor from litigating a serious product liability matter on its own, even though the manufacturer was clearly the one who allowed the given design flaw, for example; it can also save the manufacturer from footing the bill if the issue actually arose from the distributor. Indemnification language thus needs to be carefully crafted.

It is important to also mention the forum selection clause here. In an indemnity agreement, it would also be beneficial to add in this language. From a distributor point of view, even if there is trouble holding jurisdiction over the manufacturer in the product liability suit if there is a domestic forum selected for any litigation of the indemnity agreement, the distributor may at least be able to seek relief from the manufacturer in that forum. Of course, it would make matters even easier if the distributor included a forum selection clause into any sales agreement with the end consumer of the product. But whether or not this use of the forum selection clause – given vagaries with levels of sophistication of the consumer, etc. – is not a topic for today. Both distributors and manufacturers should however give thought to including a forum selection clause in any of its vendor, distribution, or sales agreements to make any litigation smoother.

The insurance coverage issue is perhaps the most important of all, because this is what can control counsel and who foots the bill. Logical in most situations is to have the agreement indicate, within or in conjunction with the indemnification language, that for those indemnification situations the insurance of the distributor/manufacturer will cover the to-be-indemnified party as a named additional insured.

What about the arguments before the Supreme Court in the Nicastro case regarding specific instructions to the distributor? Is it feasible for a manufacturer to expressly tell a distributor NOT to sell any products in the State of New Jersey? The ability to instruct a distributor not to sell in a specific jurisdiction certainly exists. The issue really goes to feasibility of exclusion. A distributor can follow instructions not to actively market in a given state. But, continuing down this road, the distributor might then be forced to not allow any sales to go forward to businesses operating in New Jersey, or even order business customers to not allow the purchased products to ever make their way to New Jersey. This says nothing of liability that stays with products as they find their way to the secondary market. If the customer sells the product to someone else on the secondary market two years after the initial sale, and the subsequent purchaser in New Jersey is injured and brings suit in New Jersey, is the manufacturer safe from jurisdiction because of the original order to the distributor not to market in New Jersey? Is the distributor left holding the bag?

It may not be worth worrying about whether the Supreme Court will allow a foreign manufacturer to use such exclusionary language until they rule. That ruling should come very soon. Unfortunately, if it is anything like Asahi, companies wondering whether they could find themselves subject to the jurisdiction of some far-flung court may be left reading tea leaves.

Footnotes

1 Asahi Metal Industry Co. v. Superior Court of California, 480 U.S. 102 (1987)

2 Nicastro v. McIntyre Machinery America, Ltd., 201 N.J. 48, 52 (2010); Brown v. Meter, 681 S.E.2d 382 (N.C. Ct. App. 2009)

3 Nicastro v. McIntyre Machinery America, Ltd., 201 N.J. 48, 52 (2010)

4 The two companies were however distinct and independently owned, operated and controlled. Id. At 55.

5 Id. at 61. (emphasis added)

6 Asahi at 1034-1035.

7 Id. at 1032.

8 Nicastro at 52.

9 Brown v. Meter, 681 S.E.2d 382, 384 (N.C. Ct. App. 2009).

10 Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 416 (1984).

11 Id. at 386.

12 Id. at 390.

13 The arguments are available at: Nicastro transcript: http://www.supremecourt.gov/oral_arguments/argument_transcripts/09-1343.pdf; Brown transcript: http://www.supremecourt.gov/oral_arguments/argument_transcripts/10-76.pdf.

14 Nicastro transcript at 19, et seq.

15 Nicastro transcript at 22-23

16 Brown transcript at 39.

17 Brown transcript at 41.

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