Legally Distinct Corporate Entities and Agency Theory in Bauman v. Daimler AG and Kiobel

by Kenneth Anderson

Guest commentary here at OJ by Adam N. Steinman (Seton Hall) on the Supreme Court’s oral argument in Daimler AG v. Bauman, along with earlier comments on the case by John Bellinger at Lawfare, have been helpful to me – no expert in civil procedure, certainly – in understanding issues of jurisdiction in Daimler, Kiobel, and other such cases.  As Professor Steinman notes, although Daimler is an ATS case, the question for SCOTUS argument is much broader than merely the ATS statute alone.  The Court’s question runs to the kinds of contacts necessary to sustain jurisdiction not just across borders, but across legally distinct (though, through share ownership, economically interlinked) corporate entities that make up the contemporary multinational enterprise:

“[W]hether it violates due process for a court to exercise general personal jurisdiction over a foreign corporation based solely on the fact that an indirect corporate subsidiary performs services on behalf of the defendant in the forum State.”

This is a different question from that presented in Kiobel, which addresses so-called “foreign-cubed” ATS cases. It is instead to ask when it is proper for a US court to find jurisdiction over a foreign corporate entity on the basis of of a US corporate subsidiary.  Chief Justice Roberts flagged the importance of this further question at the very end of his Kiobel opinion, which relied upon the presumption against extraterritoriality; for something to “touch and concern” the United States, he said, sufficient to satisfy jurisdictional requirements under the ATS, contacts would have to be more than mere corporate presence.  Corporations are often

present in many countries, and it would reach too far to say that mere corporate presence suffices … a statute more specific than the ATS would be required.

Daimler offers a case premised on this issue.  What contacts, activities, and relationships across legally distinct corporate entities suffice?  What is merely “mere” and doesn’t? The Ninth Circuit’s ruling in favor of jurisdiction over Daimler AG (a foreign corporation – not its US, Delaware-chartered corporate subsidiary) relied upon an agency theory that had the effect, with respect to jurisdiction at least, of disregarding the separation of distinct corporate legal entities in favor of treating the multinational enterprise as a unitary enterprise.  The agency theory permitted the Ninth Circuit to find, in turn, “general jurisdiction” over Daimler AG.

Professor Steinman gives a much more nuanced account of this, but at a crude level, it’s a two-step process using agency theory to disregard the legal walls between corporate entities, and then a “general jurisdiction” assertion over the whole enterprise.  This means, however, that if the Court is inclined (as observers widely think it is) to rule for Daimler, it has a variety of ways and places where it could fault the Ninth Circuit’s steps to general jurisdiction, some broader than others.

In an essay on Kiobel for the most recent Cato Supreme Court Review, I remarked that it might turn out the real work of the Chief Justice’s Kiobel opinion might be done, less by the presumption against extraterritoriality, than by the answer to final, dangling question: how much “corporate presence” is enough?

In earlier days, ATS plaintiffs didn’t see themselves having to worry about questions contacts with the forum, jurisdiction over persons or the territorial locus of activities.  Jurisdiction was satisfied by having (only) a foreign plaintiff and a violation of the law of nations or a treaty of the United States. Sosa v. Alvarez-Machain put some (delphic) limits on the nature of the “law of nations” violations that had to be at issue, but those were in terms of subject matter, not where the alleged violations took place or by what kind of a defendant. Kiobel made territory, contacts, presence, nationality of defendants an issue running beyond beyond Sosa‘s subject matter constraints.  I added in my Cato essay, comparing Kiobel to Daimler:

[T]he questions [in Daimler] are not the same as an acknowledged “foreign-cubed” case [Kiobel] because at issue is whether and what contact are sufficient to establish perosnal jurisdiction.  Bauman [v. Daimler AG] is really an attempt by the plaintiffs to turn a foreign-cubed case into one by which agency theory provides a path to finding personal jurisdiction – and thus is no longer entirely “foreign” or premised purely on “universal” considerations.

Analysis and discussion of these ATS cases has mostly been in terms of cross-border jurisdiction. I’m pretty sure corporation law scholars have not taken note; I teach both Business Associations and International Business Transactions and don’t see stirrings among scholars of business organizations.  It’s tangential to corporate law, at one level, of course. Still, just under the surface of the jurisdiction issues is a question about the robustness of corporate form. (Note: Since posting this, I’ve been reading more extensively through the amicus briefs – the corporate questions were thoroughly discussed there, and they do show up throughout the oral argument; I’ve added one quotation from Justice Breyer in the oral argument, below.)

How much legal separation (that is, legal insulation) does legally distinct corporate existence confer, whether for purposes of jurisdiction or liability? Seen from within corporation law doctrines, the question is one of piercing the corporate veil, at least to get at other corporations that have links to each other through share ownership, even if not to get to ultimate shareholder-investors. The opening questions from Justice Scalia to the Daimler AG counsel ask, after all, about the legal effects of the “corporate form” (not corporate forum, as the initial oral argument transcript puts it). Late in the argument, Justice Breyer says to counsel to Bauman (the Argentine plaintiffs in the underlying ATS suit):

You’re seeing it through the lens of jurisdiction. I’m not. I’m seeing it through the lens of corporate law. 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. But that’s a State law question. So what am I supposed to do?

As I remarked in my Kiobel essay, Daimler AG is an attempt by plaintiffs to

sidestep the formal doctrine of legal separation of corporate entities; it asserts a view that multinational corporate enterprises are to be treated as essentially one economic entity.  This is, indeed, a plausible view of their globally unitary economic substance, but by arguing for economic substance over legal form, it renders impossible any real legal principle for why any particular national court should or should not hear a case.

Not to mention (as I forgot to do in that essay) that this agency theory would seem to be equally fatal to any legal form over economic substance basis for respecting corporate forms in US domestic settings as well – and that does not seem likely to be a result embraced by US courts any time soon. Justice Sotomayor asks why this case shouldn’t be settled on the economic substance over legal form argument of tax cases dealing with attribution of income; the response – correct, in my view – is that tax cases have consistently been viewed very differently from personal jurisdiction cases.  But the oral argument in this case leaves me wondering whether the next rounds of cases in the ATS and cross-border jurisdiction areas might be less about jurisdiction as such, and more about the strength of the walls that separate corporate entities across borders – at least as an essential underlying predicate to the jurisdictional issues as such.  How much will the corporate form be respected in establishing jurisdiction in cross border cases?

The broad agency theory embraced by the Ninth Circuit in Daimler will be swept away – I can’t imagine that it won’t – but there can much more nuanced approaches to it. The federalism issues of Daimler are complicated, certainly, and might mix up easy predictions about how justices will view the issues, certainly; they touch not just federal jurisdiction issues but also questions about state corporation law (including state-to-state issues, given that the US subsidiary is incorporated in Delaware).

Though I happen to think that there might be circumstances in which corporate form should not necessarily be treated the same in domestic situations as cross-border ones, I’m think the Court should not shift the understanding of the corporate form or increase – in the context of global investment and business activities – uncertainties surrounding its legal protections.  Certainly, judging by the amicus briefs, the United States’ trading partners abroad do not want to see increases in uncertainty over the separation of entities, whether in jurisdiction or liability.  On whatever ground the Court rules, however, broad or narrow, I’m pretty sure John Bellinger is right to say that the Court would not have accepted the case unless …

it plans to reverse the Ninth Circuit.  Conservative justices are loathe to miss an opportunity to try to curb the Ninth Circuit’s consistent efforts to be a world court, and the more liberal justices may have wanted to demonstrate (as Justice Breyer argued in his concurrence in Kiobel) that the extraterritorial reach of the Alien Tort Statute can be limited by other jurisdictional restrictions.

http://opiniojuris.org/2013/10/19/legally-distinct-corporate-entities-agency-theory-bauman-v-daimler-ag-kiobel/

2 Responses

  1. Thanks for this. Echoes of the Italian Philip Morris Tax case which to universal condemnation found sister companies of an Italian resident corporation to each have a permanent establishment in Italy by virtue of their common corporate parenthood. 

  2. Prof. Anderson,
    Is there a Full Faith & Credit issue lurking here?  That is, is California bound by the law of the state of incorporation with respect to piercing the corporate veil for jurisdictional purposes?

Trackbacks and Pingbacks

  1. There are no trackbacks or pingbacks associated with this post at this time.