Argument preview: The reach of U.S. courts

At 10 a.m. next Tuesday, the Supreme Court will return to the issue of the authority of U.S. courts to rule on cases that involve claims of human rights violations in other countries.  In the case of Daimler/Chrysler AG v. Bauman (docket 11-965), Thomas H. Dupree, Jr., of the Washington, D.C., office of Gibson, Dunn & Crutcher will be arguing for the German auto company, with twenty minutes of time.  Deputy U.S. Solicitor General Edwin S. Kneedler, with ten minutes of time, will argue for the U.S. government as an amicus in support of the auto company.  Representing the individuals who sued the auto company will be Kevin K. Russell of the Washington, D.C., firm of Goldstein & Russell, with thirty minutes of time.

For a law that old, the Alien Tort Statute (passed by Congress more than two centuries ago) has had a remarkable revival in recent decades, and shows up with some frequency in the Supreme Court.  It is back again, in a case that focuses on the authority of a federal court in the U.S. to reach claims of human rights abuses in the so-called “Dirty War” during a dictatorship in Argentina in the 1970s and 1980s.

In one sense, the case of Daimler/Chrysler v. Bauman is a sequel to the Court’s decision last Term, limiting the overseas reach of the old tort law.  In fact, this new case was held on the Court’s docket until the ruling in Kiobel v. Royal Dutch Petroleum emerged last April, at which point the Court granted review.  Kiobel declared that the ATS does not reach misconduct that had no connection to the U.S.

The Ninth Circuit Court ruled that the Daimler case did have a connection to the U.S., but the issue the Justices are to decide is whether that connection was significant enough to give a federal district court in California jurisdiction to decide the case.  The only connection was that the German automaker had a subsidiary — said to be independent of the parent company — that distributes the company’s luxury cars in California.  The subsidiary is Mercedes-Benz USA.

The case is one of a lengthy series of lawsuits that have sought to use U.S. law, including the ATS, to challenge overseas misconduct.  The 1789 law had very little history before it was revived in a federal appeals court ruling in 1980.  Since then, it has been an active source of disputes in U.S. courts over a wide variety of human rights claims.  (In the Daimler/Chrysler case, there also were claims of violations of the Torture Victim Protection Act (TVPA), but a federal judge cast some doubt on whether those could go forward as a separate claim.)

This case involves twenty-two individuals living in Argentina (one is a Chilean national).  After the Argentine military overthrew President Isabel Peron in 1976, a dictatorship took control of the country.  Those suing are former employees (or their relatives) who worked at the Gonzalez-Catan plant of Mercedez-Benz Argentina, a wholly owned subsidiary of Daimler.  (The company was known as Daimler/Chrysler after a merger with U.S. automaker Chrysler.  The company has since sold its interest in Chrysler and now has the new name Daimler AG, although the papers in this case retain the version including Chrysler.)

During the “Dirty War,” the lawsuit claimed, the Argentine subsidiary identified workers at the plant as alleged subversives or union agitators, pointing them out to state security forces within the plant.  The result, the lawsuit said, was that the individuals were arrested, or simply disappeared and presumably were murdered.  The subsidiary, according to the claims, arranged for raids of the plant to round up the doomed workers.  The subsidiary allegedly hired the police chief who was behind the plant raids as chief of security, and gave him a lawyer when he was accused of carrying out the alleged human rights abuses.

Aside from the ATS claims and those under the TVPA, the lawsuit added claims under California state law for wrongful death and intentional infliction of emotional distress.   The basis for jurisdiction in California, the lawsuit asserted, was the commercial activity in the state of Mercedes-Benz USA, an auto distributor.

The parent company does no manufacturing or sales in California, and has no property or employees there, and it insists that the California unit is an indirect subsidiary operating independently of the parent company.   While a federal judge ruled that the lawsuit could not proceed to trial because these connections were not sufficient to give the district court “personal jurisdiction” over the parent, the Ninth Circuit disagreed.   The subsidiary’s sales of the company’s luxury cars in California gave Daimler/Chrysler a sufficient link, the court of appeals ruled.

The Ninth Circuit used what is called an “agency” test, to determine whether the California subsidiary’s operations were of sufficient importance to the parent company.  If the subsidiary in the state went out of business, that court found, the parent would take on the task itself or arrange for someone else to distribute its cars in the state.  It said that actual control of the subsidiary was not necessary, but that, in any event, a distribution agreement gave the parent legal rights in its dealings with the local unit.

Allowing Daimler to be sued in the state, the court of appeals concluded, would not violate its constitutional rights to due process.  When the full court of appeals denied further review, eight judges dissented.

Petition for certiorari

Daimler took the case to the Supreme Court in February 2012.  It raised the single question whether its due process rights were violated by requiring it to go to trial in a federal court based solely on the activities in California of “an indirect corporate subsidiary.”

The case against it, the petition noted, involved a dispute between foreign individuals who sued a foreign company based upon alleged foreign conduct committed by a foreign subsidiary of a predecessor firm of Daimler “more than 30 years ago.”  That formulation, of course, was used to illustrate the stretch that the parent company saw in the jurisdictional reach of the American court.

The company argued that the federal appeals courts are deeply split on the jurisdictional issue, with five of those courts rejecting the “agency” basis of the Ninth Circuit ruling and declaring that a subsidiary has to be an actual “alter ego” of a parent for the parent to be reached.  But even among those five courts, the petition said, “there is substantial disagreement” about how to establish a jurisdictional link.

The Ninth Circuit ruling, the company lawyers argued, “vastly expands” the jurisdictional reach of an American court, violates the principles that corporations can be operated as separate entities, and jeopardizes U.S. international relations by encouraging foreign courts to expand their reach over U.S. companies that have foreign subsidiaries.

The petition had the support of trade groups for auto manufacturers in the U.S. and globally, U.S. and foreign business organizations, and a conservative legal advocacy group, the New England Legal Foundation.

The lawyers for the Argentine residents asked the court to deny review, arguing that Daimler and its California subsidiary were far closer than Daimler had insisted.  The subsidiary is wholly owned by the parent, the two have the same chairman, the subsidiary sold cars only for Daimler, the parent set prices for the cars and collected all the profits, and the parent managed “virtually all aspects” of the subsidiary’s business in the state.

Moreover, the brief in opposition said, Daimler “makes billions of dollars every year selling its luxury cars in California.”

It hardly offends “fair play and substantial justice,” the brief said, for a federal court to be deciding a case with such a variety of links to the state in which it sits.  It argued that there is actually no genuine conflict among lower courts on the due process issue.   The brief urged the Court at least to hold the case until the Kiobel decision had been reached, because that might raise jurisdictional complications for an ATS case like this one.

Five days after the Supreme Court decided the Kiobel case, it granted review in this case.  The Court apparently did so to address whether this case could be tried at all, and not whether the claims of the Argentine residents could be pursued in the wake of the Kiobel decision.

The Court also may have been interested in the potential impact on this case of Goodyear Dunlop Tires Operations, S.A., v. Brown — a 2011 ruling that appeared to sharply curtail the reach of U.S. courts (in that case, a state court) to decide cases involving a foreign company lacking “continuous and systematic” contacts with the place where the case would be tried.

Briefs on the merits

Not surprisingly, Daimler’s brief on the merits put a strong emphasis on the Court’s ruling in the Goodyear Dunlop case, which had been issued after the Ninth Circuit panel ruling but before the court of appeals denied en banc review.   The Goodyear Dunlop precedent, the company contended, requires that an outside entity must be “essentially at home” in a place for it to be subject to lawsuit there.  But Daimler simply is not present itself in California, and the contacts with that state of an independent subsidiary cannot be attributed to Daimler, it contended.

The Ninth Circuit’s decision, the brief asserted, “exposes corporations to personal jurisdiction in any state where they have a subsidiary, a distributor, or independent contractor that regularly conducts business,” and would reach activities of the parent or of any subsidiary anywhere in the world.

The only way that the California entity’s business could be linked to the parent company, Daimler contended, was if the two were actually alter egos, and they are not.  Even the Argentine residents suing the company do not contend they are so linked, the document said.   The California unit, it added, also does not function as an agent of Daimler, since the two have maintained their corporate separateness.

This lawsuit, the company brief summed up, simply “has no connection to the United States.”

The Daimler brief also sought, briefly, to make some use of the Court’s decision last Term in the Kiobel case.  First, it argued in a footnote that that ruling wiped out the Argentine residents’ claims under ATS and the torture law, but noted that the residents still are asserting claims under California state law.  And second, the company brief relied upon the government of Germany’s expression of concern over this very case, in that nation’s amicus brief in the Kiobel case.

At the merits stage, Daimler has picked up the support of the federal government.  While the federal government’s interests are sometimes served by allowing a lawsuit against a foreign entity in a U.S. court, the government brief said, “expansive assertions of general jurisdiction over foreign corporations may operate to the detriment of the United States’ diplomatic relations and its foreign trade and economic interests.”

The Ninth Circuit decision, the Justice Department lawyers argued, “fails even to give foreign defendants fair warning of what conduct would subject them to suit in domestic courts, and thus leaves them unable to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit.”

Turning to its diplomatic argument, the government brief asserted that negotiations over international agreements on respect for each nation’s courts are sometimes impeded when foreign governments object to a domestic court’s “expansive views of general jurisdiction.”

The Argentine residents’ merits brief opened with a reminder to the Court that Daimler was seeking to make a constitutional case based upon a generalized complaint of unfairness out of what really is just a factual matter of how Daimler has chosen to construct its business operations in this country.  It is basically upon to the legislatures — Congress and state legislatures — to work out the details of court jurisdiction, and they are better suited to consider the realities of commerce than a court trying to figure out what is “the most fair or the best policy,” according to this brief.  In short, it contended, nothing in the Constitution puts decisive weight on the choice of how Daimler sells its cars.

The Court’s task, the suing individuals’ filing said, is only to decide a limited question of constitutional law — the outer boundaries that confine legislatures’ choice about when a court may disregard “corporate formalities” and claim jurisdiction.   It should not matter, for purposes of determining the scope of the Due Process Clause, that Daimler sells cars in California through a subsidiary instead of a subdivision of the company, the brief said.

On the merits of the case, the Argentine residents argued that the Court should not elevate to constitutional rank the notion that a court can reach a parent of a local firm only if they actually function as alter egos.  No one at the time of the inclusion of the Due Process Clause in the Fourteenth Amendment “would have thought” that the Clause “would significantly limit states’ leeway in deciding when to disregard corporate formalism.”

If Daimler is dissatisfied with the policy implications of the result in this case, the opposing brief asserted, that complaint should be made to Congress, not to the courts.  Defining American courts’ jurisdiction over foreign companies is for legislators, and the Court should refrain from attempting to develop a common law rule” by an act of judicial policymaking, the brief said.

In a final thrust, the Argentine residents’ brief urged the Court to send the case back to lower courts to let them assess any potential impact of the Kiobel ruling.  With Daimler arguing that allowing jurisdiction here would be unreasonable, and suggesting that the end of the federal law claims is a part of that analysis, lower courts should be the first to weigh those complaints, the residents argued.

Daimler’s reply brief on the merits sought to claim a genuine advantage from the fact that the Argentine residents had not explicitly asked the Justices to uphold the Ninth Circuit, but rather had suggested that the the lower court’s decision be vacated.  This position, Daimler contended, further demonstrates that the Ninth Circuit’s conclusion simply cannot be defended.

Daimler’s amici support, in addition to that of the federal government, includes that of business advocacy organizations both in the U.S. and abroad — including some in Germany, European banks and their trade groups, conservative legal advocacy foundations, and a brief by Yale law professor Lea Brilmayer, a specialist on jurisdictional matters, arguing that the Ninth Circuit ruling would give those who file lawsuits “almost unlimited opportunities to sue defendants with few, if any connections to the forum.”

The Argentine residents have enlisted the support of human rights organizations, German legal experts, and lawyers specializing in personal injury litigation.

Analysis

The Court’s mere grant of review of this case may have taken the suspense out of whether the Ninth Circuit’s decision is going to survive review.  But what remains a mystery is just what the Court will wind up doing with this case.

It could make a major new pronouncement to further limit the reach of U.S. courts over claims of foreign misconduct, it could give new meaning to the definition of how corporate shape affects court power, it could say as little as it needs about “alter ego” or “agency” law to find that the Ninth Circuit got both wrong, it could return the case to lower courts to see if there is anything left of the Argentine residents’ legal claims or enough to keep the case going, it could return the case to let the Ninth Circuit ponder the impact of the Goodyear Dunlop precedent.  And those are only the most obvious alternatives.

The fact that the Argentine residents do not defend — at least not very heartily — the result in the Ninth Circuit might wind up making it easier for the Court to overturn that result.

This, then, is a case where much is likely to be foretold by how the oral argument goes.   That may be the best chance to give the case some real shape as a legal controversy.

[Disclosure: Kevin Russell of Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the respondents in this case.  The author of this post, however, operates independently of any law practice.]