International trade is a mainstay of the current global economy, and businesses must navigate complex regulations and legal restrictions in order to engage in worldwide commerce. International companies looking to take advantage of the lucrative US marketplace face the threat of expensive litigation arising out of inevitable disputes. But when can a US state or federal court exercise power over a foreign company to adjudicate those disputes?
This article aims to provide a general framework for personal jurisdiction jurisprudence in the United States and an overview of the issues foreign companies may run into when defending against legal actions in the United States.
I. Step one: effectuating service of process on the foreign company
Before a foreign company can be hailed into US state or federal court, it must first be notified of the lawsuit. Lawsuits in the United States begin with the service of a complaint upon a prospective defendant. Service is generally a straightforward process governed by local state and federal court rules. Most often the primary method for obtaining in personam jurisdiction over a defendant is to have that defendant personally served with the summons and complaint in the state where suit is initiated.
Often foreign business entities maintain an authorized “registered agent” in those states where they routinely engage in business activities in order to expedite the service process. However, when a foreign entity maintains no physical presence or authorized agent in the United States, service must occur in accordance with any international treaties or conventions. Typically the “governing international treaty or convention” regarding service of process on foreign entities is the Hague Service Convention. Adopted on November 15, 1965, the Hague Service Convention is an international treaty that currently has 79 contracting parties including, but not limited to, Canada, China, Japan, the Republic of Korea, the United States, and all member countries of the European Union.[1]
Specific service requirements will vary from country to country, however the process for effectuating proper service under the Hague Convention is often both time consuming and expensive, sometimes taking two or more years to complete. As such, US litigants look to service via the Hague only as a last resort. Instead, these litigants with claims against large foreign companies will often look to locate and serve a domestic subsidiary in order to bypass the requirements of the Hague, which will be further discussed below.
II. Personal jurisdiction jurisprudence in the United States
Assuming for the moment that service has been properly effectuated on a foreign company, this does not mean that a US court necessarily has the power to maintain legal proceedings against the foreign entity. Specifically, the Due Process Clause of the Fourteenth Amendment to the US Constitution “limits a state court’s power to exercise jurisdiction over a defendant.” Ford Motor Co. v. Montana Eight Judicial Dist. Court, 141 S. Ct. 1017, 1024 (2021). As such, when a foreign entity claims a lack of personal jurisdiction as a defense, the court will need to examine the nature of that entity’s connections with the forum state to determine whether or not personal jurisdiction exists. Furthermore, the defense may be considered waived if it is not raised at the outset of litigation.
Defeating corporate separateness with the Alter Ego Theory and piercing the corporate veil
US litigants seeking to sue foreign business entities will often look to the existence of domestic subsidiaries in order to bypass the requirements of the Hague or to show that personal jurisdiction otherwise exists. Traditionally, Supreme Court rulings have limited the circumstances in which US courts may exercise personal jurisdiction over foreign companies for claims arising from their conduct overseas.
Foreign parent corporations, seeking to insulate themselves from liability arising out of a domestic organization’s activities, or avoid being dragged into a US court, can wall themselves off from its subsidiaries if they operate separately from their subsidiary or related company. This is known as the doctrine of corporate separateness. For example, parent organizations may have marketing or sales subsidiaries located in the US and elsewhere around the world that fall under a large corporate umbrella, but have a separate corporate structure and organization. Typically, the parent organization can insulate itself from liability claims brought against a related but separate organization or subsidiary.
Corporations structured in this matter must be wary of the possibility that US litigants may seek to draw the foreign corporation into a lawsuit through its domestic subsidiaries.
If a plaintiff can establish that the US based subsidiary is an agent of the parent with respect to the matter before the court, the closeness of the relationship between the parent and subsidiary could allow the court, under an “alter ego” theory, to look beyond the legal wall of corporate separateness. Previously some state and federal courts would apply a relaxed agency standard, however the Supreme Court of the United States rejected that theory of personal jurisdiction in 2014. See Daimler AG v. Bauman, 571 U.S. 117, 135-36 (2014). The Daimler case involved allegations that Mercedes-Benz of Argentina, a subsidiary of Daimler AG, were involved in the disappearance, torture, and murder of several labor leaders. Plaintiffs brought suit against Daimler AG, the German parent company of various Mercedes-Benz subsidiaries, and personal jurisdiction was argued under an agency theory as to subsidiaries located in the Unites States. The United State Supreme Court ultimately rejected this agency theory of personal jurisdiction. Now litigants will ask the court to “pierce the corporate veil” and treat parent and subsidiary organizations as one and the same. This exposes the parent corporations assets to litigation.
Despite this risk, establishing jurisdiction over a parent through an “alter ego” theory is difficult. Courts will conduct a fact intensive inquiry, and scrutinize the relationship between the parent and subsidiary organizations to determine, in essence, how much control the parent exerts over the subsidiary or related entity. For example, court will look at a parent’s involvement in the day-to-day activities of its subsidiary, how well and independently capitalized the subsidiary is, and whether the subsidiary maintains its own corporate formalities, amongst other factors.
In the example above, a court would closely examine the relationship between the foreign parent organization and its marketing subsidiary located in the US. If the court were to then find that the two entities shared employees, were governed by the same board of directors, that the parent capitalized the marketing subsidiary, that the parent ran the day-to-day operations of the subsidiary, etc., then the court could potentially exercise personal jurisdiction over the parent company despite the fact that the parent maintains no physical presence in the US.
III. Tips for litigating a personal jurisdiction defense and conclusion
A successful personal jurisdiction defense can ultimately mean avoiding the costs associated with years of drawn out litigation. With that being said, a personal jurisdiction defense is not a panacea to litigating in the US, as a US court will likely need to probe into a businesses’ contacts with the state where the lawsuit is initiated. In addition, litigants may attempt to defeat a personal jurisdiction defense by pointing to the activities of domestic subsidiaries, which will necessitate even further investigation by the parties.
While plaintiffs bear the burden of proof in demonstrating that a court has personal jurisdiction over a foreign entity, courts recognize that this burden is difficult, if not impossible, to meet without further information from the foreign entity itself. For this reason, US courts will routinely permit a period of “jurisdictional discovery,” wherein litigants will seek to uncover evidence concerning the entity’s contacts with the forum state and the underlying claims. As a result, jurisdictional discovery can itself be a lengthy and costly process, as the parties battle over the scope of discovery to be allowed. Because trial courts also have a great deal of discretion in guiding the discovery process and rendering a final decision regarding personal jurisdiction, these issues can also be further drawn out through subsequent appeals.
It is therefore imperative that foreign companies retain US defense counsel as soon as they are aware of the potential for litigation in the United States.
These companies should work closely with counsel to provide information concerning their corporate structure and business activities in order to determine whether a lack of personal jurisdiction is a viable defense.
[1] https://www.hcch.net/en/instruments/conventions/status-table/?cid=17
