June 2011

Yesterday, the United States Supreme Court delivered two of its most significant opinions on  the subject of personal jurisdiction in nearly twenty-five years (since Asahi Metal Ind. Co. v. Superior Court of California, 480 U.S. 102(1987)).  The new cases are J. McIntyre Machinery, Ltd. v. Nicastro and Goodyear Dunlop Tires Operations, S.A. v. Brown. (linked below)

In Goodyear, Justice Ginsburg authored a unanimous opinion in which the Court reversed a decision by the North Carolina Court of Appeals which she said had "confused" or incorrectly "blended" jurisdictional principles.  The plaintiffs in Goodyear were the parents of two young soccer players who had been killed in a bus accident in France.  Tires manufactured by Goodyear’s Turkish subsidiary  were the alleged cause.

The foreign subsidiaries had lost a motion to dismiss made on jurisdictional grounds in the trial court, which had been affirmed by the North Carolina Court of Appeals.  The NC Supreme Court denied a petition for discretionary review, but the Supreme Court accepted certiorari

The Supreme Court reversed, disagreeing with Judge Ervin’s conclusion that the sale by the subsidiaries of thousands of tires to North Carolina customers supported a finding of general jurisdiction over them because they had "purposefully injected [their] product into the stream of commerce" without excluding North Carolina from that distribution.  To him, this meant that they had "purposefully availed themselves of the protection of the laws of this State."  681 S.E.2d at 68-69. 

He had concluded that stream of commerce analysis can support a finding of general jurisdiction, necessary because the injury to the soccer players hadn’t flowed from the NC sales.

Justice Ginsburg said that the "attenuated connections" to North Carolina fell "far short" of the "’continuous and systematic general business contacts’ necessary to empower North Carolina to entertain suit against them on claims unrelated to anything that connects them to the State."

That ruling seems pretty clear, but the companion decision in J. McIntyre clouded things.  It is a fragmented opinion, with Justice Ginsburg this time in the dissent, Justice Breyer concurring, and Justice Kennedy (joined by the Chief Justice and Justices Scalia and Thomas) delivering the plurality opinion.

J. McIntyre had been more deliberate about the sales of its metal recycling machinery in the United States than Goodyear had been for its tires.  J. McIntyre had an affiliated Ohio-based distributor which handled the U.S. sales it had deliberately sought, and it had attended numerous trade shows in the U.S., and it had sold at least one machine in New Jersey, to Nicastro’s employer.  The injury to Nicaastro, which involved the severing of four fingers on his right hand, had occurred in New Jersey.

 The New Jersey Supreme Court considered in its opinion the Supreme Court’s conflicting opinions in Asahi on how the stream of commerce analysis fits into the personal jurisdiction paradigm (the competing opinions in that case, one by Justice O’Connor and one by Justice Brennan, are discussed by Justice Kennedy in his plurality opinion), and held:

that a foreign manufacturer that places a defective product in the stream of commerce through a distribution scheme that targets a national market, which includes New Jersey, may be subject to the in personam jurisdiction of a New Jersey court in a product-liability action

Justice Kennedy, in the plurality opinion, disagreed, stating that "as a general rule, the exercise of judicial power is not lawful unless the defendant ‘purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.’"  It was not enough to the plurality that J. McIntyre had targeted the entire United States as a market and that it perhaps should have foreseen sales in New Jersey.  Forseeability is not the test.  As Justice Kennedy held:

[t]his Court’s precedents make clear that it is the defendant’s actions, not his expectations, that empower a State’s courts to subject him to judgment.

Plurality Op. at 8.

It’s hard to assess where jurisdiction stands over foreign entities which  sell some product in various areas of the United States.  The availment of a state’s laws must certainly be "purposeful," which isn’t a new concept.  It was first articulated by the Supreme Court in Hanson v. Denckla, 357 U.S. 235 (1958).  Justice Ginsburg said that the majority:

turn[s] the clock back to the days before modern long-arm statutes when a manufacturer, to avoid being haled into court where a user is injured, need only Pilate-like wash its hands of a product by having independent distributors market it.

Dissenting Op. at 2.  She said that the majority took "a giant step away from the notions of fair play and substantial justice" imbedded in the notion of the "minimum contacts" necessary to support a finding of personal jurisdiction. 

You can find deeper analysis of these two important Supreme Court opinions at the Civil Procedure & Federal Courts Blog.  There’s a lot more to be said about their impact.   They will be confounding those teaching Civil Procedure in our law schools for the next twenty years.  Certainly as much as Asahi did

If you are making an Offer of Judgment per Rule 68 of the Federal Rules of Civil Procedure, be sure to think about whether to include costs and attorneys’ fees in the amount offered.  Yesterday, the Fourth Circuit underscored the need for "precise drafting" of such Offers,and required the offering party to pay triple the amount specified in its imprecise Offer to cover the attorneys’ fees and other costs not mentioned in the Offer.  The case is Bosley v. Mineral County Commission.

The Plaintiff had made an offer "in the amount of Thirty Thousand Dollars ($30,000.00) as full and complete satisfaction of [Plaintiff’s] claim against . . . Defendants."  The Offer was accepted by the Defendants, who then made a motion for an award of attorneys’ fees pursuant to a fee shifting statute, 42 U.S.C. §1988(b), as the prevailing party.

When the District Court awarded over $66,000 in attorneys’ fees (which are defined as "costs" per 42 U.S.C. §1988(b)) plus other recoverable costs on top of the $30,000 offer, the Plaintiff screamed that its Offer in "full and complete satisfaction" of the claims  had implicitly included all attorneys’ fees because attorneys’ fees had been requested in the ad damnum clause of the complaint.  Judge Davis, writing for the Court, said this contention was without merit."

Quoting a Supreme Court opinion on Rule 68, Marek v. Chesney, 473 U.S. 1 (1985), Judge Davis wrote:

if the offer does not state that costs are included and an amount for costs is not specified, the court will be obliged by the terms of the Rule to include in its judgment an additional amount which in its discretion. . . it determines to be sufficient to cover the costs.

Judge Davis declined to consider the negotiations between the parties leading to the Rule 68 Offer, which the Plaintiff said would show that the $30,000 Offer had been understood to include fees and other costs.  He said that considering such evidence would be "imprudent, impractical, and . . . wholly foreclosed by the reasoning of [the Supreme Court’s Marek decision."

The June 8th opinion from Business Court Judge Judge Gale in Best Cartage, Inc. v. Stonewall Packaging, LLC, 2011 NCBC 15, dismissed the Plaintiff’s complaint, finding its allegations that an alleged partner should be liable for the partnership debts, or otherwise liable on a veil piercing basis, were insufficient to state a valid claim.  There’s also a choice of law issue.

The Plaintiff Best, which had contracted with the Defendant Stonewall to provide transportation services, sued another defendant, Jackson, arguing that Jackson and Stonewall were partners or joint  venturers or alternatively that Stonewall was Jackson’s alter ego, and therefore liable for Stonewall’s debt to the Plaintiff.

The facts that seemed to the Court  to be most detrimental to Plaintiff’s claims of partnership were Best’s own allegations that it had known of the claimed partnership before it entered into its contract only with the Defendant Stonewall LLC instead of with the partnership itself, and also that the contract made no mention at all of a relationship between Stonewall and Jackson but instead disclaimed the existence of any third party beneficiary to the contract.

The Court faulted Plaintiff for its pleading of the basis for partnership liability, stating:

A party seeking to impose partnership liability on a fellow partner when neither the partnership nor that partner is a party to the contract faces a particularized pleading burden to show that the contract was for partnership purposes.

Op. ¶19.  Judge Gale said that the Plaintiff "hadn’t alleged the minimal elements to show that the [contract] was entered into for partnership purposes," including a lack of an allegation that the alleged partners had shared profits and losses, an "essential element of a partnership."  Op. ¶22

 The lack of specificity in Plaintiff’s complaint  also did in its claim that the Court should pierce Stonewall’s corporate veil and find Jackson behind the veil.  The Court said the veil piercing allegations were "broad and conclusory" and were missing the "critical element" that Jackson had misused the corporate form to "achieve a wrongful or inequitable result."  Op. ¶30  Judge Gale concluded by saying that:

Disregarding the protection of the limited liability company under these circumstance reaches beyond the intended purpose of the doctrine and improperly seeks to use a “drastic remedy” which should be utilized sparingly. See Dorton v. Dorton, 77 N.C. App. 667, 672, 336 S.E.2d 415, 419 (1985).

On the choice of law issue, Plaintiff had argued that the Court couldn’t decide the corporate veil issue without evidence as to Stonewall”s state of formation, which the contract recited was Delaware.  Judge Gale agreed that the appellate courts of this State had not ruled on which state’s law should apply to a veil piercing claim.

He nevertheless concluded that the claim couldn’t survive under either North Carolina law or Delaware law, based on an opinion from Judge Beaty of the Middle District in Richmond v. Indalex, Inc., 308 F.Supp.2d 648 (M.D.N.C. 2004) in which Judge Beaty dismissed a veil piercing claim based on insufficient allegations to support a veil piercing claim under the law of the same two states.  Judge Beaty’s opinion contains an extensive discussion of what Delaware law requires to pierce a corporate veil.  He said in the Richmond case that that the entity alleged to be liable must exercise “complete domination and control” over the alter ego and have "used such control to commit a fraud or injustice."