International trade is a mainstay of today’s global economy, and businesses must navigate complex regulations and legal restrictions in order to engage in global commerce. International companies seeking to take advantage of the lucrative US market face costly litigation stemming from inevitable disputes. But when can a US state or federal court exercise power over a foreign company to adjudicate these disputes?
This article aims to provide a general framework for personal jurisdiction case law in the United States and an overview of the problems that foreign corporations may encounter when defending themselves against lawsuits in the United States.
I. First step: serve the documents on the foreign company
Before a foreign company can be arraigned in US state or federal court, it must first be notified of the lawsuit. Lawsuits in the United States begin with service of a complaint on a potential defendant. Service is generally a straightforward process governed by local and federal court rules. Most often, the main method of obtaining personal jurisdiction on a defendant is to personally serve that defendant with the subpoena and complaint in the state where the lawsuit is filed.
Often, foreign business entities maintain an authorized “registered agent” in the states where they regularly do business to expedite the service process. However, where a foreign entity does not have a physical presence or an authorized agent in the United States, service must be made in accordance with any international treaties or conventions. Generally, the “applicable international treaty or convention” regarding the 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 States and all member countries of the European Union. Union.
Specific service requirements vary from country to country, but the process to perform proper service under the Hague Convention is often both time-consuming and costly, sometimes taking two or more years complete. As such, US litigants only turn to service via The Hague as a last resort. Instead, those litigants with claims against large foreign companies will often seek to locate and serve a domestic subsidiary in order to circumvent The Hague requirements, which will be discussed in more detail below.
II. Jurisprudence of Personal Jurisdiction in the United States
Assuming for the moment that notice was properly made to a foreign company, this does not mean that a US court necessarily has the power to maintain a lawsuit against the foreign entity. Specifically, the due process clause of the Fourteenth Amendment to the U.S. Constitution “limits the power of a state court to exercise jurisdiction over a defendant.” Ford Motor Co. v. Montana Eight Judicial Dist. Court, 141 S. Ct. 1017, 1024 (2021). Thus, where a foreign entity invokes lack of personal jurisdiction as a defence, the court will need to consider the nature of that entity’s connection to the forum state to determine whether or not personal jurisdiction exists. Moreover, the defense can be considered abandoned if it is not raised at the beginning of the litigation.
Overcoming corporate separation 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 circumvent Hague requirements or show that there is otherwise personal jurisdiction. Traditionally, Supreme Court decisions have limited the circumstances in which US courts can exercise personal jurisdiction over foreign companies for claims arising from their conduct abroad.
Foreign parent companies, seeking to protect themselves from liability arising from the activities of a domestic organization, or to avoid being dragged into a US court, may insulate themselves from its subsidiaries if they operate separately from their subsidiary or related company . This is called the doctrine of separation of undertakings. For example, parent organizations may have marketing or sales subsidiaries located in the United States and elsewhere in the world that report to a larger company, but have a separate structure and organization. Generally, the parent organization can protect itself from liability claims brought against a related but separate organization or subsidiary.
Companies structured in this field should be wary of the possibility that American litigants seek to drag the foreign company into a lawsuit through its domestic subsidiaries.
If a plaintiff can establish that the U.S.-based subsidiary is an agent of the parent company with respect to the matter before the court, the closeness of the relationship between the parent company and the subsidiary could allow the court, in under an “alter ego” theory, to look beyond the legal wall of corporate separation. Previously, some state and federal courts applied a relaxed agency standard, but the U.S. Supreme Court rejected this personal jurisdiction theory in 2014. To see Daimler AG versus Bauman, 571 US 117, 135-36 (2014). the Daimler The case involved allegations that Mercedes-Benz of Argentina, a subsidiary of Daimler AG, was involved in the disappearance, torture and murder of several union leaders. Plaintiffs sued 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 United States. The United States Supreme Court ultimately rejected this theory of agency personal jurisdiction. From now on, litigants will ask the court to “pierce the corporate veil” and treat the parent and subsidiary organizations as one and the same person. This exposes the assets of the parent company to litigation.
Despite this risk, it is difficult to establish jurisdiction over a parent through an “alter ego” theory. The courts will thoroughly investigate the facts and examine the relationship between the parent company and the subsidiaries to determine, in essence, the degree of control the parent company has over the subsidiary or related entity. For example, the court will consider a parent company’s involvement in the day-to-day operations of its subsidiary, the quality and independence of the subsidiary’s capital, and whether the subsidiary maintains its own corporate formalities, among other factors.
In the example above, a court would look closely at the relationship between the foreign parent organization and its marketing subsidiary located in the United States. If the court were then to find that the two entities shared employees, were governed by the same board of directors, that the parent company capitalized the marketing subsidiary, that the parent company 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 company maintains no physical presence in the United States.
III. Tips for Arguing a Personal Jurisdiction Defense and Conclusion
A successful personal jurisdiction defense can ultimately mean avoiding the costs associated with years of endless litigation. That being said, a personal jurisdiction defense is not a panacea for litigating in the United States, as a US court will likely need to investigate a company’s contacts with the state where the lawsuit is brought. In addition, litigants may attempt to defeat a defense of personal jurisdiction by pointing the finger at the activities of domestic affiliates, which will require even further investigation by the parties.
While plaintiffs bear the burden of proof to demonstrate 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 allow a period of “jurisdictional discovery,” during which litigants will seek to uncover evidence regarding the entity’s contacts with the forum state and the underlying claims. As a result, jurisdictional discovery can itself be a time-consuming and costly process, as parties argue over the scope of discovery to allow. Since trial courts also have wide latitude to guide the discovery process and make a final determination of personal jurisdiction, these issues may also be further explored in subsequent appeals.
It is therefore imperative that foreign companies engage a US defense attorney as soon as they are aware of the risk of litigation in the United States.
These companies should work closely with an attorney to provide information regarding their corporate structure and business activities to determine if lack of personal jurisdiction is a viable defense.