Thursday, February 2, 2012

Circuit Split Watch: Mercedes-Benz and the (very) long arm of the law

This article first appeared in the February 1, 2012, issue of the National Law Journal’s Supreme Court Insider.

Can a suit alleging brutal suppression of union agitators at a Mercedes-Benz plant in Argentina be heard in the United States? The U.S. Court of Appeals for the 9th Circuit recently said yes. This result perpetuates a circuit split about U.S. jurisdiction over foreign corporations, which the Supreme Court could soon review. The Court has already agreed to hear argument February 28 on related issues.

The plaintiffs in Bauman v. DaimlerChrysler Corp. allege that Mercedes-Benz Argentina, a subsidiary of Daimler, a German corporation, coordinated with the Argentine military to kidnap, torture, and kill employees it viewed as subversive, beginning around 1976. The plaintiffs are alleged victims and their family members. All are citizens of Argentina, except one who is a Chilean citizen.

So, why are U.S. courts involved?

The Alien Tort Statute (“ATS”) and Torture Victim Protection Act (“TVPA”), 28 U.S.C. § 1350 and its note, open that door. ATS provides that U.S. district courts can hear civil tort actions brought by aliens for violations of the law of nations or a U.S. treaty. TVPA permits liability for torture and killings under color of a foreign nation’s law. But, ATS and TVPA do not have an unlimited reach.

The plaintiffs filed suit against Daimler in California federal district court, which dismissed the case for lack of jurisdiction. The 9th Circuit originally agreed. Then, in a rare move, the panel granted rehearing and two judges changed their votes. What had originally been a 2-1 win for Daimler became a 3-0 loss.

The unanimous 9th Circuit panel held that foreign corporations like Daimler “reap enormous profits from the sale of their goods in the United States.” It would be strange, the panel reasoned, “if the manufacturer of Mercedes-Benz vehicles, which are sold in California in vast numbers by its American subsidiary, for use on the state’s streets and highways, could not be required to appear in the federal courts of that state.”

In November 2011, a majority of the 9th Circuit’s active judges voted to deny rehearing en banc, without explanation, but eight judges dissented. The 9th is one of only a few circuits where eight active judges are not a majority.

To the eight-judge dissent, the decision pushes “jurisdiction far beyond its breaking point” and “is an affront to due process,” since the actors and action were both abroad. The U.S. Mercedes-Benz subsidiary, the basis for U.S. jurisdiction according to the panel, is a separate entity from the Argentine Mercedes-Benz subsidiary accused of misconduct.

Further, the court’s use of the agency test is “contrary to the law of at least six of our sister circuits,” the dissent maintained.

The agency test looks at whether a foreign corporation may be subject to jurisdiction through a subsidiary. The principal question is whether the subsidiary’s functions are “sufficiently important” to the corporation such that if the subsidiary did not perform them, the corporation would step in and perform the functions itself. The panel, citing 9th Circuit precedent that recognizes the agency test (drawn from 2nd Circuit case law), determined that if Mercedes-Benz stopped operating in the United States, Daimler would step in to sell its cars or hire another representative. The panel found jurisdiction over Daimler.

Citing 4th, 5th, 6th, 7th, 8th, and 11th Circuit decisions issued between 1990 and 2008, the dissent observed that these circuits do not use the agency test. Several focus instead on control, called the alter ego test. If a parent heavily controls a subsidiary, it can be open to suit via that subsidiary. The dissent concluded that the 9th Circuit’s approach in the Mercedes-Benz case “would be improper in many other circuits.”

Since the 9th Circuit denied rehearing en banc in November, a petition for certiorari could be filed with the Supreme Court soon. The circuit split, along with concerns about international comity, could raise the case’s profile.

On February 28, the Supreme Court is scheduled to hear argument on related issues in Kiobel v. Royal Dutch Petroleum Co. and Mohamad v. Palestinian Authority. These cases ask whether ATS and TVPA even apply to corporations or organizations. Since the Mercedes-Benz plaintiffs seek to hold a corporation liable under those laws, Kiobel and Mohamad are also cases to watch.