The Global law firm Orrick, Herrington & Sutcliffe LLP takes great pride in announcing the latest edition of The World in U.S. Courts: Orrick’s Quarterly Review of Decisions Applying U.S. Law To Global Business and Cross-Border Activities. This issue contains our summaries of new U.S. federal court decisions, in areas of the law including the Foreign Sovereign Immunities Act, Arbitration, Securities Law, White Collar Criminal Law, and Personal Jurisdiction.
Please take a moment to review the members of our Editorial Board, who are drawn from Orrick’s 25+ offices in North America, Europe, and Asia. From this page, you may also go directly to the list of decisions discussed in this issue and the summaries of the cases and authorities. We have also provided a very brief summary description of the statutes that plaintiffs have sought to apply to conduct outside the U.S. To do any of these things, please click the appropriate link below.
Personal Jurisdiction Based on Knowledge of Texas Port of Call and Lack of Objection Even Where Ship Operator Had No Other Texas Contacts or Control Over Destination
Carmona v. LEO Ship Management, Inc., US Court of Appeals for the Fifth Circuit, May 10, 2019
The plaintiff, Jose Carmona, worked on a ship docked at a port in Texas. The defendant, Leo Ship Management (LSM), operated the ship. Carmona was injured while unloading cargo and sued LSM for negligence. LSM operated the ship but did not own it. LSM could not control the ship’s destination but had advance notice that it was going to Texas. LSM’s rights were limited to freely terminating the contract with the ship’s owner, with notice, if it objected to the Texas destination. LSM had no other contacts with Texas.
The Court considered whether it could assert “specific” personal jurisdiction over LSM as a result of the ship’s connection with the Texas, noting that such a finding required (i) that the defendant have “minimum contacts” with Texas as a result of “purposefully directing” activities at the State, or purposefully benefiting from the State; 2) the lawsuit is based on those contacts; and 3) jurisdiction would be fair so as to satisfy the requirements of the Due Process Cause of the US Constitution. The key dispute centered on whether LSM’s contact with Texas was “purposeful” and whether some parts of the lawsuit were based on that contact.
The Court first observed that committing a tort while present in Texas does not automatically grant personal jurisdiction; contacts there must still be purposeful. The Court found such a purpose in its connection with the ship and the ship’s activities. Even though LSM did not control the ship’s destination, it knew the ship was going to Texas and chose to complete its contract. LSM’s knowledge of the destination, combined with its right to terminate the contract, made entering Texas purposeful and, in the Court’s view, established minimum contacts with the forum to satisfy the first test for specific personal jurisdiction.
The Court concluded, however, that only some of Carmona’s claims were based on that contact, as required by the second specific personal jurisdiction test. One claim alleged that the cargo which injured Carmona was improperly stowed, but a third party committed this negligent act while outside the US. The Court thus found the claim was not based on LSM’s contact with Texas and dismissed it. Two other disputed claims dealt with the ship’s safety precautions and its obligation to minimize cargo hazards. The Court noted that LSM employees allegedly inspected the cargo’s condition in Texas but failed to make sure it was safe. The Court said those claims were based on LSM’s contact with Texas and thus were allowed to proceed. The relatedness of several other claims was not in dispute.
This case was an appeal, and the district court never considered the last element of specific personal jurisdiction, fairness. As a result, the Court sent the case back to the district court to consider that requirement.
No Specific Personal Jurisdiction over Japanese Car Manufacturer where Plaintiff Presented Virtually No Evidence of Forum-Specific Contacts
Kellogg-Borchardt v. Mazda Motor Corporation, US District Court for the District of New Mexico, May 21, 2019
The plaintiff, Alicia Kellogg-Borchardt, was severely injured in a car accident while she was driving a Madza sedan in New Mexico. She sued Mazda Motor Corporation, a Japanese company, for torts and breach of warranty. Mazda asked the Court to dismiss the case for lack of personal jurisdiction.
Only “specific” personal jurisdiction was at issue. The Court stated that Kellogg-Borchardt was required to show that Mazda had “minimum contacts” in New Mexico by establishing that Mazda “purposefully directed” activities there, and Kellogg-Borchardt’s injuries arose out of those activities. Kellogg-Borchardt’s evidence of contacts between Mazda and New Mexico included that the accident took place in New Mexico, Kellogg-Borchardt purchased the car from a New Mexico used car dealership; the car was titled in New Mexico, Mazda corporate documents indicated the US was a major market, and Mazda’s website can direct users to New Mexico dealerships.
The Court found that the evidence only showed contacts with the US as a whole and failed to show that Kellogg-Borchardt’s injuries arose out of any of Mazda’s contacts with New Mexico specifically. The corporate documents showed no New Mexico-specific information, Mazda’s car dealerships in New Mexico were associated with Mazda’s US subsidiary, not Mazda itself, and Mazda’s mere awareness that its cars would enter the stream of commerce in New Mexico did not establish “purposeful direction.” The Court listed examples that might qualify as purposeful direction, including designing a product specifically for New Mexico, advertising there, providing support services for New Mexico customers, or marketing through a sales agent there. But, no evidence in the case at bar supported those examples.
The Court observed that the requirement that a claim arise out of contacts also appeared not to be satisfied. Even if there had been purposeful direction by Mazda, no evidence linked conduct by Mazda in New Mexico to the accident or connected Mazda to how the car came to be in New Mexico at all. As a result, the Court found that Kellogg-Borchardt failed to establish minimum contacts and dismissed the case for lack of personal jurisdiction.
Personal Jurisdiction Exists Over Japanese Baseball Company That Allegedly Directed Contract Negotiations and Payments Toward Player Living in Pennsylvania But Jurisdiction Not Imputed to Parent Company
Lutz v. Rakuten, Inc., US District Court for the Eastern District of Pennsylvania, April 22, 2019
Plaintiff Lutz, a former professional baseball player, brought a fraud and misrepresentation action against Rakuten, Inc. (“Rakuten”) and its wholly-owned subsidiary, Rakuten Baseball, Inc. (“Rakuten Baseball”), both Japanese corporations. Lutz maintained a continuous residence in Pennsylvania while playing for the Tohoku Rakuten Golden Eagles in Japan, which is owned by Rakuten Baseball.
Lutz suffered a fractured thumb while playing for the Golden Eagles during the 2014 season and returned home to Pennsylvania for treatment and to recover. While in Pennsylvania, Lutz and his agents engaged in negotiations with the Golden Eagles regarding a contract for the 2015 season. Lutz signed a proposed contract with the Golden Eagles guaranteeing a base salary of $700,000. However, in December of 2014, Lutz and his agents began dealing with a new contact at the baseball team, who allegedly informed them that the team would not sign the contract signed by Lutz, that the team intended to renegotiate the terms of the contract, and finally, that the team had decided to cease negotiations. Lutz was then released on January 5, 2015, and ultimately signed a contract with a Korean baseball team for a salary of $550,000 which also did not include incentive bonuses or expenses contained in the Golden Eagles’ contract.
Lutz filed a complaint alleging fraud and misrepresentation, among other causes of action. Defendants moved to dismiss for lack of personal jurisdiction and failure to state a plausible claim for relief. The court granted the motion in part, holding that it had personal jurisdiction over Rakuten Baseball, but not over Rakuten.
With respect to Rakuten Baseball, the court found that the company had purposefully directed its activities at Pennsylvania by directly communicating with Lutz via texts, emails, and phone calls while he was in Pennsylvania. Rakuten Baseball was allegedly aware that Lutz was a Pennsylvania resident and had knowingly reached into Pennsylvania to recruit and employ him to play baseball. The company had also wire-transferred Lutz’s salary for the 2014 season to his bank account in Pennsylvania and had paid a US company for medical insurance for Lutz’s physical therapy and rehabilitation, most of which took place in Pennsylvania. Based on these alleged facts, the Court also found that the litigation arose from Defendant’s contacts with the forum and that the exercise of jurisdiction would not offend fair play and substantial justice. In particular, the court stated that the “relative finances” of the parties “is an overwhelming factor” supporting the exercise of jurisdiction.
With respect to Rakuten, however, the court held that even if Rakuten had directed any activities towards Pennsylvania (which it only assumed for its analysis), none of Lutz’s allegations arose out of any contacts with the forum by Rakuten, as opposed to Rakuten Baseball. The Court also analyzed whether Rakuten could be subjected to personal jurisdiction through its websites or by imputation through Rakuten Baseball and rejected both arguments, holding that the websites did not specifically target Pennsylvania citizens and that Rakuten did not control the day-to-day activities of Rakuten Baseball.
The Court then went on to hold that personal jurisdiction also could not be exercised over Rakuten under the Calder effects test, which allows a court to find personal jurisdiction where (1) a defendant has committed an intentional tort, (2) that was expressly aimed at the forum, and (3) the Lutz felt the brunt of the harm in the forum. The court found nothing in the record to suggest that Rakuten had expressly aimed its tortious conduct, or any conduct connected to the litigation, at the forum. All of Lutz’s allegations were directed at Rakuten Baseball, not Rakuten. Finally, the Court held that Rakuten did not have continuous or systematic affiliations with Pennsylvania sufficient to support “general” personal jurisdiction.
Specific Personal Jurisdiction Satisfied by Overseas Defendant’s Control over Wholly-Owned US Subsidiaries
Manlove v. Volkswagen Aktiengesellschaft, US District Court for the Eastern District of Tennessee, May 3, 2019
The Defendant, Volkswagen Aktiengesellschaft (VWAG), is a German corporation. It operates in the Tennessee forum through two wholly-owned subsidiary corporations, Volkswagen America and Volkswagen Chattanooga. The Plaintiff, Jonathan Manlove, works for Volkswagen Chattanooga. Manlove alleged that VWAG instituted a global workforce initiative that systemically discriminated against older workers, and that VWAG’s US subsidiaries instituted that initiative at VWAG’s direction. He claimed Volkswagen Chattanooga did not promote him, and demoted him, because of VWAG’s initiative, and sued VWAG and the subsidiaries for age discrimination. As relevant here, VWAG claimed that the Court could not assert personal jurisdiction over it.
The Court only considered whether the requirements of specific personal jurisdiction over VWAG had been met. In Tennessee, courts may assert specific jurisdiction over a defendant where 1) the defendant purposefully benefits from actions in the State or causes consequences there; 2) the lawsuit arises from or is related to the defendant’s activities in the State; and 3) doing so would be reasonable in conformity with the Due Process Clause of the US Constitution. In this case, Manlove alleged that VWAG controlled its US subsidiaries, including their workers’ activities and promotions. VWAG did not provide a factual response to this allegation and the Court concluded that this alleged control was sufficient to show that VWAG purposefully benefited from actions in the State or caused consequences there. The Court also said that the workforce initiative and VWAG’s alleged requirement that US Subsidiaries to implement it was both the basis of the lawsuit and VWAG’s connection to Tennessee. Therefore, Manlove’s claims arose from WAG’s alleged activities in Tennessee. Lastly, the Court observed that VWAG did not attempt to dispute the reasonableness prong of the specific personal jurisdiction test. With all three elements met, the Court found that it had specific personal jurisdiction over VWAG.
Personal Jurisdiction Over Canadian Corporation and Alter Ego-Based Jurisdiction Over its Sole Shareholder and Sole Creditor
Micro Fines Recycling Owego, LLC v. Ferrex Engineering, Ltd., US District Court for the Northern District of New York, April 22, 2019
Plaintiff Micro Fines Recycling Owego, LLC (“Micro Fines”) sued Defendants Ferrex Engineering, Ltd. (“Ferrex”), 1199541 Ontario, Inc. (“1199541”), and Tom Clarkson for rescission and breach of express and implied warranties relating to the sale of an industrial dryer. Micro Fines, a New York metal recycling company with its principal place of business in New York, paid Ferrex, a Canadian corporation with its principal place of business in Ontario, $435,000 for a rotary dryer and associated equipment. When the dryer malfunctioned, the parties initially attempted to resolve the issue. When that failed, Micro Fines formally rejected the dryer, demanded a full refund, and later filed suit. Micro subsequently amended its complaint to assert that Ferrex was merely a shell controlled by 1199541, a Canadian corporation with its principal place of business in Ontario, and Clarkson, who is the sole shareholder of 1199541 and the President and sole shareholder of Ferrex.
Clarkson and 1199541 moved to dismiss the action for lack of personal jurisdiction and for failure to state a claim. Micro Fines argued that the Court had direct personal jurisdiction over Ferrex and that it had personal jurisdiction over Clarkson and 1199541 on an “alter ego” theory, under which the three defendants would be considered the same for purposes of jurisdiction and liability. The Court readily found personal jurisdiction over Ferrex–which no party expressly challenged–because it engaged in consulting work and conducted sales in Owego, New York, and also sent maintenance representatives and repair workers into the forum. More specifically, the dispute at issue arose directly from Ferrex’s decision to contract with the New York-based Micro Fines, deliver the dryer to Micro Fines in New York, engage in numerous communications with Micro Fines in New York, and send both employees and a subcontractor to New York to work on the dryer. The Court therefore found that Ferrex had sufficient contacts with the forum to support personal jurisdiction and that exercising jurisdiction would not offend traditional notions of fair play and justice.
With respect to Clarkson and 1199541, the Court noted that the alter ego theory (also referred to as “piercing the corporate veil”) required satisfaction of a two-part test in New York: “(i) that the owner exercised complete domination over the corporation with respect to the transaction at issue; and (ii) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil.” The Court also observed that there was disagreement over whether a plaintiff seeking to pierce the corporate veil had to satisfy both prongs of the test, or just one. In the jurisdictional context in particular, the Court stated that earlier decisions had required only a showing that the controlled entity was a shell, without necessitating a showing of fraud.
Applying the 10 factors identified in relevant case law, the Court found that both “alter ego” defendants were properly subject to jurisdiction. Clarkson was the President of Ferrex and the sole shareholder of both Ferrex and 1199541. Meanwhile, 1199541 was the sole creditor of Ferrex and held a perfected security interest in the assets of Ferrex. Further, Micro Fines alleged that Ferrex’s counsel had stated to Micro Fines that Ferrex would be judgment proof because 1199541 could call its loan to Ferrex, leaving Ferrex with no assets, and that “Clarkson could re-open under another corporate name immediately.” The Court found that this “suggest[ed] complete domination,” because it indicated that the entities did not deal at arms-length and that Ferrex lacked business discretion. As a result, the court held that the corporate veil was pierced as to Clarkson. The Court then found the same as to 1199541, rejecting the defendant’s argument that if Clarkson “completely dominated” Ferrex, it was impossible for 1199541 also to do so. To the contrary, the Court held that the “interconnected nature of the alleged scheme” allowed for the possibility that both alter ego defendants dominated Ferrex.
Finally, though the Court acknowledged uncertainty as to whether a showing of a fraud or wrong was necessary to establish alter ego liability, it went on to hold that Micro Fines had sufficiently alleged that the defendants committed a wrong resulting in injury. Specifically, the court held that Micro Fines’ allegation that the defendants threatened to render Ferrex judgment proof constituted a wrong, despite the fact that no actual asset transfer had taken place, because the defendants had taken steps to set up a corporate structure that could elude liability.
Personal Jurisdiction Based on Canadian Corporation’s Seven Year Distribution Agreement with California Company
Quest Nutrition, LLC v. Nutrition Excellence, Inc., US District Court for the Central District of California, April 23, 2019
Plaintiff Quest Nutrition, LLC (“Quest”) is a Delaware company headquartered in California. Defendant, Nutrition Excellence, Inc. (“NEI”) is a Canadian corporation headquartered in Ontario. NEI was the exclusive Canadian distributor of Quest products for seven years pursuant to an oral distribution agreement between the parties. Quest terminated that agreement in early 2018, and the parties filed competing suits–NEI in Ontario and Quest in Los Angeles. As relevant here, NEI moved to have Quest’s suit dismissed for lack of personal jurisdiction and forum non conveniens.
The Court addressed whether NEI was subject to specific personal jurisdiction in California, looking first to whether NEI had “purposefully directed” its activities toward the State. It found this requirement satisfied by the company’s extensive contacts with the State, including numerous physical entries and millions of dollars in transacted business. For instance, from January 2014 to November 2017,Quest sold $35 million in products to NEI, whose employees and agents entered California at least 150 times to pick up the goods. The Court was not swayed by NEI’s arguments that Quest had solicited the relationship, that the agreement lacked a California choice of law clause, or that most of the disputed orders had been picked up in Tennessee, not California. Notwithstanding those facts, the Court found that NEI had “manifestly availed itself” of the privilege of conducting business in the forum through a distribution agreement that “envisioned continuing and wide-reaching contacts” within the State.
The Court further found that the litigation was related to NEI’s California contacts and that the exercise of jurisdiction would not be unreasonable or unduly burdensome. So far as the reasonableness inquiry was concerned the Court found that modern advances in communication and travel have reduced the burden of litigating in another country and that the Canadian suit concerned different issues than the California suit—namely the termination of the agreement, and the alleged default on specific orders, respectively—such that resolution of the Canadian action would not resolve Quest’s claims. Further, the Court held that California has a “manifest interest in providing its residents with a convenient forum for redressing injuries inflicted by out of state actors.”
The court rejected NEI’s forum non conveniens argument, noting that a forum is presumptively convenient where “a domestic plaintiff initiates litigation in its home forum.” Though Ontario, Canada provided an adequate alternative forum, the Court found that each of the private and public interest factors it was required to consider either weighed against dismissal or was neutral. The Court held that a domestic company’s choice to sue in its home jurisdiction is entitled to great deference, that there were strong local interest factors supporting the suit being heard in California, and that there were no efficiencies to be gained in travel, cost, or access to evidence in the Canadian forum.
No Personal Jurisdiction Over Australian Bank and Company when Only US Contacts were CTFC Registration and Globally Accessible Website
Waraich v. National Australia Bank LTD, US District Court for the Southern District of Texas, May 30, 2019
The Plaintiff, Sean Waraich, is a US resident. The relevant defendants, International Capital Markets (ICM) and the National Australia Bank (NAB), are Australian. Waraich alleged that he lost $120,000 in foreign-exchange market investments via ICM’s website. He sued, claiming that ICM and NAB violated the Commodities Exchange Act (CEA) through their failure to comply with US Commodities Futures Trading Commission (CFTC) regulations. Among other issues, the Court evaluated whether there was personal jurisdiction over the defendants.
Waraich asked the Court to review a CFTC Judgement Officer’s prior ruling that there was no personal jurisdiction over NAB. His only new argument was that NAB’s registration with the CFTC provided the Court with “general” jurisdiction—i.e., jurisdiction for all claims whether or not related to NAB’s contacts with Texas. The Court concluded that NAB’s registration with the CFTC did not render it “essentially at home” in the US, which is the test for general personal jurisdiction. The Court also noted that NAB had no contacts in the US so as to support “specific” personal jurisdiction, and so did not set aside the CFTC ruling.
The Court also considered whether it had personal jurisdiction over ICM. Waraich said it did because of ICM’s commercial website, which he accessed in the US and thus, in his view, established the requisite minimum contact. The Court responded that personal jurisdiction could potentially arise from a website if it could be deemed to be purposefully targeting US residents or purposefully benefiting from the privileges of doing business in the US. But sales generated by US residents also had to be significant to support jurisdiction. Here, the Court noted that ICM had no US offices or sales agents, did not solicit business targeting US customers, and Waraich identified no US customers beyond himself who had accessed the website. The fact that Waraich used ICM’s globally accessible website from within the US did not mean that ICM purposefully targeted US residents or benefited from doing business there.
In addition, the Court stated that the CEA could only have extraterritorial effect when the connection to, or effect on, US commerce was significant, or when activities violated rules or regulations designed to prevent circumventing the act. The Court concluded, however, that Waraich alleged no plausible violation of the CEA, let alone a significant impact on US commerce or circumvention of the act.
With no personal jurisdiction, and no plausible CEA claim, the Court denied all Waraich’s motions.
[Editor’s note: The Waraich case is also addressed in the Securities Fraud/Commodities Exchange Act section of this report.]
No Personal Jurisdiction in New York Discrimination Case over Tiawanese Company that Allegedly Attempted to Recruit a Candidate in New York for Overseas Employment
Yih v. Tiawan Semiconductor Manufacturing, US District Court for the Southern District of New York, June 24, 2019
The plaintiff, Jinshyr Yih, is a US citizen living in New York. The defendant, Tiawan Semiconductor Manufacturing Company (TSMC), is a Taiwanese corporation headquartered in Taiwan. Yih applied for a job at TSMC. He interviewed remotely from New York several times with TSMC personnel in Taiwan but was not hired. Yih sued TSMC for discrimination based on national origin, sex, and age. TSMC asked the Court to dismiss the case for lack of personal jurisdiction over it.
The Court first addressed “general” personal jurisdiction, which as a matter of New York law allows a defendant to be sued on any claim within a court’s subject matter jurisdiction but requires that it be “present” in the State. The only relevant potential basis for “presence” here was TSMC’s solicitation of business in New York, so long as it was “substantial and continuous.” According to the opinion, there was alleged evidence that TSMC transacted a small percentage of its business in New York, but no evidence that it solicited any business there, let alone a substantial and continuous amount, so the test was not satisfied. A significant percentage TSMC’s shares were owned by a US bank as an investment vehicle but that similarly was not continuous or systematic solicitation of business in New York.
The Court also addressed “specific” jurisdiction, which arises where a defendant “purposefully directed” corporate actions at New York residents and the plaintiff’s claims are based on or related to those actions. The Court observed that even a single connection to New York could be sufficient to support the assertion of jurisdiction so long as it is substantial and supplies the connection upon which the lawsuit was based. Only one relevant New York activity was alleged in this case—TSMC’s attempt to recruit Yih. The Court found that alleged recruitment effort and related communications originated outside of New York, and would be relevant only if they were recruiting Yih for a job inside New York. Although Yih alleged that was the case, the Court found otherwise. Yih’s “subjective belief” he was being recruited for a job in New York, the Court concluded, “cannot create jurisdiction.”