Supreme Court Weighs Subsidiary Jurisdiction, Liability

, Corporate Counsel

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A case argued before the U.S. Supreme Court Tuesday could have important consequences for corporations with subsidiaries abroad, allowing significant expansion or reduction of the jurisdictions where multinationals can be sued.

The story of DaimlerChrysler A.G. v. Bauman [PDF] began many years ago at a Mercedes-Benz plant in Gonzalez-Catan, Argentina. During the country’s “dirty war” of the 1970s and 1980s, plant management allegedly colluded with government forces to detain, kidnap, and torture unionized auto workers. The question before the court this session, however, is not about culpability of Mercedes-Benz Argentina or its German parent company, DaimlerChrysler A.G.—now known as Daimler A.G.—for human rights violations. It’s about where to try the case.

In 2004, 22 Argentine residents, who are former employees of the Gonzalez-Catan plant or are survivors of deceased employees, filed a lawsuit against Daimler in the state of California. “The issue here is, the only connection that Daimler has with California is that it has a subsidiary that does some business there,” Suzanna Sherry, the Herman O. Loewenstein Professor of Law at Vanderbilt Law School told CorpCounsel.com.

The U.S. Court of Appeals for the Ninth Circuit determined in 2011 that Daimler’s California connection—the existence of a distributor for Daimler subsidiary Mercedes-Benz USA in the state—was sufficient to justify a suit there, allowing California State courts to assert “general personal jurisdiction” over the parent company.

Sherry said that if the Supreme Court upholds the Ninth Circuit decision in its entirety, it would make it “open season” on multinational corporations. “The biggest pitfall would be that they might be sued from a subsidiary in one place for something that a different subsidiary did in another,” she said.

Burt Neuborne, the Inez Milholland Professor of Civil Liberties at New York University School of Law and legal director at the Brennan Center for Justice, told CorpCounsel.com that a total repudiation of the Ninth Circuit ruling could create the opposite problem.

“If the defense [the petitioner in the Supreme Court case] wins, what it allows are corporate entities like Daimler or any of the major multinationals to divide themselves up into lots of corporate boxes and to minimize their exposure to jurisdiction and to taxation and regulation,” he said.

Although it’s difficult to predict what the nuances of the decision by the Supreme Court will be, Neuborne predicted that the Ninth Circuit decision will probably be torn apart, and the oral arguments on Tuesday seemed to confirm his suspicions. Corporate Counsel sibling publication The National Law Journal reported that the justices exhibited skepticism about the merits of the Argentinians’ case for Californian jurisdiction.

“I'm seeing it through the lens of corporate law,” Justice Stephen Breyer said. “Five shareholders get together from outside California and they set up a corporation in California. Why? To insulate themselves from liability, particularly lawsuits. Now, instead of those five shareholders, everything is the same, but now it's a German corporation and suddenly they can't insulate themselves from the lawsuits in California. I think it unlikely that California would have such a corporate law, whether it goes by the name of jurisdiction or some other name.”

What's being said

  • Ethan S. Burger

    Greetings:

    I believe that most Civil Law countries have secondary liability for parent companies. This occurs most commonly in instances where thinly capitalized "special purpose" entities were established in foreign jurisdictions.

    My recollection of the Russian Civil Code provides something to the effect that in the event the daughter company has insufficient assets to satisfy its creditor(s), the parent company has secondary liability,

    If a recall correctly, the parent company need not have a 100% ownership of its subsidiary, only practical control.

    The Russian Civil Code is largely based on the Dutch Civil Code,

    Regards.

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