Sometimes it takes the Supreme Court to remind us … well … what the law is!
Dig into certain corporate Foreign Corrupt Practices Act enforcement actions and it would appear that legal liability seems to hop, skip, and jump around a multinational company. This of course would be inconceivable in other areas, such as contract liability, tort liability, etc. absent an “alter ego” / “piercing the veil” analysis for the simple reason that is what the black letter law commands.
Yet, as often highlighted on these pages, black letter legal principles (whether statute of limitations, jurisdiction, etc.) are seemingly ignored in certain instances of corporate FCPA enforcement because the name of the game is primarily cooperation and risk aversion. (See here for the prior post, “Does DOJ Expect FCPA Counsel to Roll Over and Play Dead?”).
With increasing frequency, the DOJ and SEC have advanced broad “agency” theories in which the acts of a subsidiary are attributed to a parent corporation absent any allegations to support an “alter ego” or “veil piercing” exception.
One of the more forceful critics of this trending DOJ and SEC approach has been Philip Urofsky (a former high-ranking DOJ FCPA enforcement attorney) see prior posts here and here. As Urofsky recently – and rightfully – noted:
“[just because a corporate FCPA enforcement action is resolved] ”through an NPA rather than a DPA (or a guilty plea) does not excuse this approach—when the DOJ announces it will not prosecute but requires the company to admit to facts establishing a criminal violation of the law, it is stating, as a fact, that the company committed a crime. In such case, it is obligated to demonstrate, through the pleadings, in whatever form they are presented, that it could, in fact, prove each and every element of the offense.”
The above is all necessary background to the Supreme Court’s decision earlier this week in a non-FCPA case in which the court slammed the “agency” theory seemingly serving as the basis for several recent corporate FCPA enforcement actions.
Daimler A.G. v. Bauman, an opinion authored by Justice Ginsburg, concerned “the authority of a court in the United States to entertain a claim brought by foreign plaintiffs against a foreign defendant based on events occurring entirely outside the United States.”
The complaint “alleged that during Argentina’s 1976-1983 ‘Dirty War,’ Daimler’s Argentinian subsidiary, Mercedes-Benz Argentina (MB Argentina) collaborated with state security forces to kidnap, detain, torture, and kill certain MB Argentina workers, among them, plaintiffs or persons closely related to plaintiffs.” Damages for the alleged human rights violations were sought from Daimler and U.S. jurisdiction “over the lawsuit was predicated on the California contacts of Mercedes-Benz USA, LLC (MBUSA), a subsidiary of Daimler incorporated in Delaware with its principal place of business in New Jersey.”
“The question presented,” as described by Justice Ginsburg, was “whether the Due Process Clause of the Fourteenth Amendment precludes the District Court from exercising jurisdiction over Daimler in this case, given the absence of any California connection to the atrocities, perpetrators, or victims described in the complaint.”
As noted by the court, the plaintiffs were seeking to hold “Daimler vicariously liable for MB Argentina’s alleged malfeasance” and it was noted that “MB Argentina was a subsidiary wholly owned by Daimler’s predecessor in interest.”
In response to Daimler’s motion to dismiss for lack of personal jurisdiction, the plaintiffs argued ”that jurisdiction over Daimler could be founded on the California contacts of MBUSA, a distinct corporate entity that, according to plaintiffs, should be treated as Daimler’s agent for jurisdictional purposes.”
The district court granted Daimler’s motion to dismiss and declined, in relevant part, to “attribute MBUSA’s California contacts to Daimler on an agency theory, concluding that plaintiffs failed to demonstrate that MBUSA acted as Daimler’s agent.” The Supreme Court opinion states:
“The Ninth Circuit at first affirmed the District Court’s judgment. Addressing solely the question of agency, the Court of Appeals held that plaintiffs had not shown the existence of an agency relationship of the kind that might warrant attribution of MBUSA’s contacts to Daimler.”
However, the Ninth Circuit granted plaintiffs’ petition for rehearing, the panel withdrew its initial opinion, and replaced it with one which concluded that the agency test was satisfied. Daimler petitioned for rehearing, but the Ninth Circuit denied Daimler’s petition.
The Supreme Court’s decision is heavy on jurisdiction issues – including much discussion of general jurisdiction and specific jurisdiction.
Turning to the agency issues, the opinion states “while plaintiffs ultimately persuaded the Ninth Circuit to impute MBUSA’s California contacts to Daimler on an agency theory, at no point, have they maintained that MBUSA is an alter ego of Daimler.”
Next, the opinion states (internal citations omitted) as follows.
“In sustaining the exercise of general jurisdiction over Daimler, the Ninth Circuit relied on an agency theory, determining that MBUSA acted as Daimler’s agent for jurisdictional purposes and then attributing MBUSA’s California contacts to Daimler. The Ninth Circuit’s agency analysis derived from Circuit precedent considering principally whether the subsidiary “performs services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the substantially similar services.”
“This Court has not yet addressed whether a foreign corporation may be subjected to a court’s general jurisdiction based on the contacts of its in-state subsidiary. Daimler argues, and several Courts of Appeals have held, that a subsidiary’s jurisdictional contacts can be imputed to its parent only when the former is so dominated by the latter as to be its alter ego. The Ninth Circuit adopted a less rigorous test based on what it described as an “agency” relationship. Agencies, we note, come in many sizes and shapes: “One may be an agent for some business purposes and not others so that the fact that one may be an agent for one purpose does not make him or her an agent for every purpose.” A subsidiary, for example, might be its parent’s agent for claims arising in the place where the subsidiary operates, yet not its agent regarding claims arising elsewhere. The Court of Appeals did not advert to that prospect. But we need not pass judgment on invocation of an agency theory in the context of general jurisdiction, for in no event can the appeals court’s analysis be sustained.”
“The Ninth Circuit’s agency finding rested primarily on its observation that MBUSA’s services were “important” to Daimler, as gauged by Daimler’s hypothetical readiness to perform those services itself if MBUSA did not exist. Formulated this way, the inquiry into importance stacks the deck, for it will always yield a pro-jurisdiction answer: “Anything a corporation does through an independent contractor, subsidiary, or distributor is presumably something that the corporation would do ‘by other means’ if the independent contractor, subsidiary, or distributor did not exist.” The Ninth Circuit’s agency theory thus appears to subject foreign corporations to general jurisdiction whenever they have an in-state subsidiary or affiliate, an outcome that would sweep beyond even the “sprawling view of general jurisdiction” we rejected in Goodyear.”
It was therefore error for the Ninth Circuit to conclude that Daimler, even with MBUSA’s contacts attributed to it, was at home in California, and hence subject to suit there on claims by foreign plaintiffs having nothing to do with anything that occurred or had its principal impact in California.”
Applying this Supreme Court’s conclusion to the FCPA context, the notion that because a subsidiary’s services are important to a parent corporation - and thus the subsidiary is an agent of the parent corporation for purposes of imputing liability – stacks the deck, for it will always yield a pro-agency answer.
The Supreme Court’s decision is Daimler is also notable for another reason.
As highlighted in this April 2013 post concerning the Supreme Court’s notable Kiobel decision (a non-FCPA case, but a case in which the logic and rationale of many justices has direct bearing on certain aspects of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of certain aspects of FCPA enforcement), the Supreme Court was concerned about the “delicate foreign policy consequences” of expansive U.S. jurisdiction over foreign actors.
Continuing with this concern, in the Daimler case, the court stated:
“Finally, the transnational context of this dispute bears attention. The Court of Appeals emphasized, as supportive of the exercise of general jurisdiction, plaintiffs’ assertion of claims under the Alien Tort Statute (ATS) and the Torture Victim Protection Act of 1991 (TVPA). Recent decisions of this Court, however, have rendered plaintiffs’ ATS and TVPA claims infirm.
The Ninth Circuit, moreover, paid little heed to the risks to international comity its expansive view of general jurisdiction posed. Other nations do not share the uninhibited approach to personal jurisdiction advanced by the Court of Appeals in this case.
The Solicitor General informs us, in this regard, that “foreign governments’ objections to some domestic courts’ expansive views of general jurisdiction have in the past impeded negotiations of international agreements on the reciprocal recognition and enforcement of judgments.” […] See also U. S. Brief 2 (expressing concern that unpredictable applications of general jurisdiction based on activities of U. S.-based subsidiaries could discourage foreign investors); Brief for Respondents 35 (acknowledging that “doing business” basis for general jurisdiction has led to “international friction”). Considerations of international rapport thus reinforce our determination that subjecting Daimler to the general jurisdiction of courts in California would not accord with the “fair play and substantial justice” due process demands.”
It is nothing short of remarkable that the U.S. government urged restraint of expansive jurisdictional theories in Daimler because such “unpredictable applications” of expansive jurisdiction “could discourage foreign investors” and result in other foreign policy difficulties, yet at the same time the U.S. government advances unpredictable, creative, and dubious jurisdictional theories against foreign actors in FCPA enforcement actions.