United States: Daimler AG v. Bauman: In Latest ATS Decision, The Supreme Court Limits Jurisdiction Of U.S. Courts Over Multinational Corporations

Last Updated: January 22 2014
Article by Vivek Krishnamurthy

A sweeping decision by the Supreme Court on January 14 has further restricted the circumstances under which plaintiffs may sue multinational corporations in U.S. courts for harms occurring outside the United States.

In Daimler AG v. Bauman, the Supreme Court unanimously rejected an attempt by twenty-two Argentinian plaintiffs to sue the German automaker in California for the alleged role of its Argentinian subsidiary in the deaths, kidnappings, torture, and wrongful detention of certain of its employees during that country's notorious "Dirty War."

The outcome of this case is not surprising given the Court's ruling last year in Kiobel v. Royal Dutch Petroleum, 133 S. Ct. 1659 (2013), that there must be "some relevant conduct" in the United States for a corporation to be answerable under the Alien Tort Statute ("ATS"), 28 U.S.C. §1350, for its alleged role in human rights abuses perpetrated abroad. What is a surprise, however, is that in deciding this case, the Court substantially tightened the law of jurisdiction in both U.S. federal and state courts as it applies to large corporations.

Decisions of the Lower Courts

The central issue in the Supreme Court's ruling was whether a federal District Court in California had jurisdiction to hear its claims against Daimler AG (Daimler) – the German parent corporation of Mercedes-Benz Argentina, which is alleged to have committed the human rights abuses – based on the activities in that state of Daimler's American subsidiary, Mercedes-Benz USA (MBUSA). Even before the Supreme Court released its decision in Kiobel, the District Court dismissed the plaintiffs' lawsuit, ruling that the relationship between Daimler and MBUSA did not support the Court's exercise of jurisdiction over Daimler in this case.

Despite the intervening release of the Kiobel judgment, a divided Ninth Circuit ruled on appeal that the activities of MBUSA could be attributed to Daimler for jurisdictional purposes. The Ninth Circuit so ruled because in its view, MBUSA acts as Daimler's all-purpose agent in California by performing "services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation's own officials would undertake to perform substantially similar services."

The Supreme Court's Decision

All nine Supreme Court justices agreed that this lawsuit, which "involves foreign plaintiffs suing a foreign defendant based on foreign conduct," did not belong in the U.S. based on the presumption announced in Kiobel against the extraterritorial application of the ATS. The Argentinian plaintiffs did not allege that MBUSA played any role in the abuses committed by Mercedes-Benz Argentina, nor did they allege that Daimler itself engaged in any "relevant conduct" in the United States that contributed to the human rights abuses suffered by the plaintiffs. Hence there was no "relevant conduct" in the United States that could serve to overcome the Kiobel presumption, regardless of whether the courts in California possessed jurisdiction over Daimler.

While Justice Sotomayor would have disposed of the case on these limited grounds, Justice Ginsburg, in an opinion joined by the seven other members of the Court, went further in holding that Daimler did not have sufficient "affiliations" with California to subject it to the general jurisdiction of the courts of that state.

The Law of Jurisdiction

Since the mid 20th century, the law of jurisdiction in the United States has recognized a distinction between general jurisdiction based on a corporation's physical presence in a state, and specific jurisdiction based on its "purposeful availment" of the privilege of doing business in a state.

The difference between the two forms of jurisdiction is best illustrated through some examples. The courts in California possess general jurisdiction over all corporations "at home" in that state, meaning that they may entertain all claims against such corporations arising from their activities anywhere in the world. Hence the courts in California may hear a discrimination claim brought by an employee of a Silicon Valley software company's office in Bangalore. By contrast, if a Dutch corporation's only connection to California is that third-party retailers in that state sell its bicycles in some volume, the California courts will possess only specific jurisdiction over the Dutch corporation to entertain specific claims arising from that activity, such as a products liability suit alleging that the bicycles are defectively designed.

In the Daimler case, since the plaintiffs' lawsuit was not based on any activity by Daimler or its subsidiaries in California, the courts in that state could only hear the case if they possessed general jurisdiction over the parent corporation. Even assuming that the Ninth Circuit was correct to attribute MBUSA's activities in California to Daimler in deciding the jurisdictional question, Justice Ginsburg found that "there would still be no basis to subject Daimler to general jurisdiction in California." Justice Ginsburg so held based on the Supreme Court's decision in Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. __ (2011), a case dealing with the reverse question of when the jurisdictional contacts of a parent company can be attributed to a subsidiary.

In Goodyear, the Supreme Court held unanimously that "[a] court may assert general jurisdiction over foreign (sister-state or foreign-country) corporations to hear any and all claims against them when their affiliations with the State are so 'continuous and systematic' as to render them essentially at home in the forum State." The paradigmatic examples of "continuous and systematic" affiliations are for a corporation to either be incorporated or to maintain its principal place of business in a state. There may, of course, be other "continuous and systematic" affiliations that could form the basis for general jurisdiction, but given that MBUSA is neither incorporated in California nor maintains its principal place of business there, Justice Ginsburg ruled that it would be "exorbitant" for courts in that state to exercise general jurisdiction over Daimler in such circumstances.

Justice Sotomayor concurred in the majority's judgment dismissing the case, but she disagreed vehemently with the logic of Justice Ginsburg's ruling. In her view, the majority deems Daimler "too big for general jurisdiction" by asking the wrong question. Instead of examining the absolute magnitude of Daimler's contacts with California, the majority considers the "relative magnitude of those contacts in comparison to the defendant's contacts with other states" in determining where it is "at home."

In Justice Sotomayor's view, the fact that California accounts for 2.4% of Daimler's global sales (some $4.6 billion per year), combined with the many facilities that MBUSA maintains in that state, might well be sufficient to render Daimler "at home" in the Golden State. By contrast, requiring a corporation to have contacts with a state akin to incorporation or a head office to establish general jurisdiction "shift[s] the risk of loss from multinational corporations to the individuals harmed by their actions" by preventing consumers from filing suit where they are at home. Justice Sotomayor cites the example of a person maimed by the negligence of a global hotel chain while vacationing abroad being unable to file suit in the state where they live, despite the fact that the corporation does billions of dollars of business there, because the corporation is neither incorporated nor headquartered there. According to Justice Sotomayor, not only is this result inconsistent with the law as it has been for decades, but it is also fundamentally unfair.

The Effect of the Supreme Court's Decision

What was widely expected to be an important decision regarding the scope of the ATS has instead turned out to be a landmark ruling on the much more general question of when large, complex corporations may be sued in U.S. courts. The Supreme Court's ruling does not change the fact that multinationals can be sued in any U.S. state in connection to claims arising from business they have conducted in a particular state, but lawsuits arising from all other situations can now only be brought in the limited number of states where the multinational can be considered to be "at home."

The true impact of the decision ruling will ultimately depend on how the lower federal courts decide that a corporation is "at home" in a state when it is neither incorporated nor headquartered there. If it turns out that large corporations, like wealthy individuals, can have many homes across the United States, the impact of Daimler may turn out to be more muted than it first appears.

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