Lower Courts Grapple With Nicastro Meaning

We have posted before about the thorny and important issue of U.S. courts exercising personal jurisdiction over foreign product sellers.  Earlier this year, the Supreme Court decided two important personal jurisdiction cases, J.McIntyre Machinery Ltd. v. Nicastro, U.S., No. 09-1343, and Goodyear Luxembourg Tires SA v. Brown, U.S., No. 10-76, the first high court opinions on this issue in two decades.  But because the former was a plurality decision, lower courts have continued to struggle.

In the past few weeks, two courts have confronted what type of conduct may subject a foreign product maker to personal jurisdiction.  The first today, and the second in a later post.

In Windsor v. Spinner Industry Co., No. 1:10-cv-00114 (D.Md., 10/20/11), plaintiffs alleged that the front wheel of their bicycle dislodged, causing him and his toddler son, Tyler, to be thrown to the ground. Defendant  Joy is a Taiwanese corporation that designs and manufactures bicycle components, including a mechanism called a “quick release skewer,” which is used to hold wheels in place. Plaintiffs alleged that their bicycle contained one of Joy’s quick release skewers and that a defect in the skewer contributed to the cause of their accident.

The parties agreed that Joy sells its products to distributors, manufacturers, and trading companies who then market them in every state in the U.S., but that Joy has no direct contacts with the forum state of Maryland. Plaintiffs contended that the nationwide marketing of Joy’s products by intermediaries created sufficient minimum contacts between Joy and Maryland to subject Joy to specific jurisdiction there. Joy moved to dismiss.

The district court noted that the Due Process Clause of the Fourteenth Amendment sets the outer boundaries of state judicial authority. See Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S.Ct. 2846, 2853 (2011). Consistent with due process, jurisdiction over non-resident defendants exists only to the extent that the defendants have certain minimum contacts with the state such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.

Readers know that such contacts, if they exist, can give rise to one of two species of personal jurisdiction: general or specific. General jurisdiction exists where a non-resident maintains “continuous and systematic” contacts with the forum state. Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 416 (1984). Under these conditions, courts of the forum state may exercise jurisdiction over the defendant in any suit properly before them, even if the subject matter is completely unrelated to the defendant’s activities in the forum. Specific jurisdiction arises where a non-resident lacks continuous and systematic contacts with the forum, but has nonetheless purposefully availed itself of the privilege of conducting activities within the forum state. Hanson v. Denckla, 357 U.S. 235, 253 (1958). Under these latter circumstances, courts of the forum state may exercise jurisdiction over the defendant only with respect to claims that arise out of the defendant’s activities in the forum.

The issue presented in this case was the extent to which a state may exercise specific jurisdiction over a non-resident manufacturer whose only connection to the forum is that its products were sold there by third-party distributors. Although the idea that jurisdiction automatically travels with the chattels has long been rejected, some courts have at times endorsed a so-called “stream of commerce” doctrine, approving the assertion of personal jurisdiction over a corporation that delivers its products into the stream of commerce with the expectation that they will be purchased by consumers in the forum state.

The Supreme Court in  McIntyre addressed, but split, on how to handle these issues. The deciding votes were cast by Justices Breyer and Alito, who concurred in the judgment reversing the New Jersey Supreme Court. In his concurring opinion, Justice Breyer rejected the notion that a non-resident defendant could be subjected to suit in a state based solely on foreseeability, agreeing with the plurality that personal jurisdiction required purposeful availment of a particular forum. He further explained that the standard of purposeful availment,  the correct legal standard, may still require further explication in the context of modern global commerce, but that the facts of that case did not present an adequate vehicle for crafting any new rules. Although the concurrence and the plurality differed as to what might constitute “purposeful availment” in the context of national or global marketing, they both firmly embraced the continuing significance of individual state sovereignty and, on that basis, noted that specific jurisdiction must arise from a defendant’s deliberate connection with the forum state.

With that understanding, the facts alleged, even if proven, would be insufficient to demonstrate jurisdiction over Joy, said the court. First, although plaintiffs made much of the Internet marketing of Joy’s products, the web presence of Joy or its distributors in Maryland was immaterial because plaintiffs did not purchase their bicycle on the Internet. Further, plaintiffs offered no details about the particular chain of distribution that brought the allegedly defective skewer to the end seller.  At best, plaintiffs’ theory of jurisdiction amounted to no more than the “knew or should have known” standard that the Supreme Court explicitly rejected in McIntyre.

The court also rejected the plaintiffs' arguments that jurisdiction was proper because certain of the manufacturers and distributors to whom Joy sold its products not only market their products in Maryland, but maintain established channels of distribution there.  The argument was that where a foreign manufacturer sells its products to large national retail chains that have an established and ongoing presence in every state in the U.S., such a relationship evinces more than the mere foreseeability, but an actual intent to serve the forum market, and hence purposeful availment. But the court found this line of reasoning indistinguishable from the clearly rejected position  that jurisdiction lies in a forum when a defendant places its product in the stream of commerce with the expectation that it will be sold there. 

State Appeals Court Finds Personal Jurisdiction Over Foreign Part Maker

An Illinois appeals court recently held that Illinois courts may exercise jurisdiction over a French manufacturer of helicopter parts. Russell v. SNFA, No. 1-09-3012 (Ill. App. Ct.,  3/31/11).  The court reversed the trial court's decision to dismiss the case for lack of personal jurisdiction.

Readers know that the issues of personal jurisdiction over foreign product manufacturers is currently pending before the U.S. Supreme Court as we have posted before. This case underscores the importance of Supreme Court guidance in this area.

Plaintiff’s brother died during a helicopter crash in Illinois. He was the pilot and sole occupant, and was working for Air Angels, a medical air service that did business primarily in Illinois and, in particular, Cook County.  Defendant SNFA, a French company, made a part for that helicopter, which plaintiff claims was defective and the cause of the crash. Specifically, plaintiff alleged that the crash was caused by  the failure of one of the helicopter’s tail-rotor drive-shaft bearings, which defendant manufactured. Plaintiff alleged that, as a result of this failure, the drive shaft fractured, leaving the tail rotor inoperable; and the helicopter spun out of control.

Defendant moved to dismiss on the ground that Illinois had no jurisdiction over it.  Illinois has a jurisdictional statute, like many states, with a catchall provision which permits Illinois courts to exercise jurisdiction on any other basis now or hereafter permitted by the Illinois Constitution
and the Constitution of the United States. This permits an Illinois court to exercise personal jurisdiction to the extent permitted by the due process clause of the 14th Amendment to the United States Constitution.

General jurisdiction exists when defendant’s general business contacts with the forum state are continuous and systematic. Specific jurisdiction exists when the cause of action arose out of defendant’s contacts with the forum state.  Here, the court of appeals found that the state court had specific jurisdiction over defendant.  One relevant factor is whether the litigation results from alleged injuries that arise out of or relate to the defendant's activities in the state or directed to the state. For a tort action, the state in which the injury occurs is often considered to be the state in which the tort occurred. In the case at bar, the injury occurred in Illinois, and thus Illinois was deemed the state in which this tort occurred.  Numerous prior cases had noted that tortfeasors must expect to be haled into Illinois courts for torts where the injury took place there.

The court of appeals was also persuaded by the fact that the defendant was the same, and indeed many of the facts alleged the same, as in Rockwell International Corp. v. Costruzioni Aeronautiche Giovanni Agusta, S.P.A., 553 F.Supp. 328 (E.D. Pa. 1982).  The federal court there had held that the forum state, which was the site of the crash, could exercise specific personal jurisdiction over defendant SNFA. In both cases defendant had allegedly custom-made bearings for an A-109 helicopter; a subsequent owner replaced the tail-rotor drive-shaft bearings, with ones also manufactured by defendant. In both cases plaintiff alleged that the bearings and the drive shaft
failed, causing the helicopter to crash.

The Illinois court also determined that a relevant sale occurred in the state, despite the fact that the defendant sold the parts outside the U.S. It found that the cause of action could be traced from the sale of the ball bearings by SNFA, through its chain of distribution, to the apparent malfunction that allegedly caused the helicopter to crash. As a result, the court concluded that the “sale, malfunction and injury all occurred within” the forum state.

Defendant argued against minimum contacts claiming that its sales of ball bearings to the helicopter-maker Agusta were confined to Europe and that a court should not blur the distinction between Agusta.  But the court stressed that because the ball bearings were custom-made, SNFA intended its products to be an inseparable part of the marketing plan of Agusta.  That is, the bearing was uniquely designed for incorporation into Agusta’s helicopter, and SNFA had to
distribute its product through Agusta’s distributions system.  Agusta provided defendant with precise specifications, and defendant manufactured the bearings according to those specifications. Defendant acknowledged that it knows that its custom-made tail-rotor bearings are
incorporated by Agusta into helicopters and also sold as individual replacement parts.

SNFA did not deny that it knew that Agusta helicopters were sold throughout the United States, and that Agusta had an American subsidiary for the purpose of American distribution. Given the distribution system, SNFA had ample reason to know, said the court, and expect, that its bearing, as a unique part of a larger product, would be marketed in any or all states, including the forum state. By virtue of having a component specifically designed for the Agusta helicopter, SNFA had a "stake in" and expected to derive definite benefit from sales of the Agusta A-109 (and replacement parts) in the United States.

In essence, Agusta was the marketer and distributor to the consumer of their joint and ultimate product. SNFA has chosen to leave to Agusta the marketing and distribution to the consumer. Agusta was thus called the conduit through which this SNFA product, custom-made for Agusta, reached the ultimate consumers.

Finally, because the court found that SNFA designed and manufactured a component that was incorporated into a product which was intended to be, and was in fact, sold in the United States, it also concluded that where that component allegedly fails and causes injury in the very market in which the product was expected to be sold, it is not unreasonable or unfair to require the defendant to be subject to suit in that forum.

In one respect, this case does not present the most aggressive application of specific jurisdiction, in that the facts suggest something beyond mere stream of commerce jurisdiction, something more than just plain having sold a product that found its way into the forum.  But of great concern for foreign manufacturers would be the analysis of the nationwide distribution scheme, and the notion that by selling a part to a customer that has a national distribution system, a manufacturer thereby exposes itself to tort suits everywhere in the U.S.

 


 

Supreme Court Hears Oral Argument in Class Action Preclusion Case

This week, we are going to explore some of the more interesting cases pending before the Supreme Court. In Smith v. Bayer Corp., No. 09-1205 (U.S., oral argument 1/18/11), the Court took up a case involving the preclusive impact of a decision denying class certification. We recently posted on a case involving the significant problem of plaintiffs hopping from court to court, state to state, shopping for a court that will certify their class after it has already been denied.

The Smith case involves the issue whether a federal court can enjoin class members from bringing a product liability class suit in state court after the federal court declined to certify a similar class.  Specifically, the Baycol MDL court in Minnesota had denied class certification, and the court of appeals upheld the injunction barring plaintiffs from bringing the same suit in state court. The court of appeals in fact unanimously affirmed, holding that the injunction was authorized by the All Writs Act and the re-litigation exception to the Anti-Injunction Act, and that petitioners did not have a due-process right to re-litigate class certification.

Plaintiffs have argued that they should not be enjoined, nor barred under the doctrine of collateral estoppel, because the state's (West Virginia's) rule for class certification is not identical to the federal rule:  while a putative class may not meet one test, it may meet the other. As plaintiffs told Justice Ginsburg, a state has the right to apply and interpret that rule of civil procedure "as it sees fit to manage its own docket and administrate its own docket as it sees fit."

The defendants argue that class members were adequately represented in the first class action, and whatever the technical differences may be, the heart of the West Virginia rule is substantively identical to the federal rule. Petitioners have not been foreclosed from seeking relief on their individual claims, but only from seeking to represent other people through a class action. Whether a class should be certified has been fully and fairly litigated in proceedings that are binding on petitioners and in which petitioners’ interests were adequately represented by an identically situated named plaintiff.  The plaintiffs' position is that class certification is a “heads-I-win, tails-you-lose” proposition. Under this theory, every unnamed plaintiff could re-litigate class certification, no matter how large the putative class, no matter how many times certification had already been denied, and no matter how adequately the class members’ interests were represented in the prior proceedings.

Part of the issue facing the Court is the application of preclusion to a non-party (as the class was not certified, absent class members were not "parties" for some purposes), and this was explored at oral argument. In response to questioning from the Court, plaintiffs argued that the re-litigation exception to the Anti-Injunction Act did not apply here. Because the plaintiffs are not the same "parties" that litigated the federal class action, and because the same issues were not litigated in the prior case -- that is, West Virginia's own class certification rule vs. Federal Rule 23.  Counsel argued that the state court has said "we do not want our legal analysis to be nothing more than a mere Pavlovian response to Federal decisional rules."

A number of Justices wondered what were the supposed differences, and part of the response to Justice Sotomayor was that the federal "court's not only trying to bind us on the procedural ruling, but is also trying to bind us in a substantive ruling as to what the elements of the claims in West Virginia are and as to what's needed to prove those claims." The state court was free to disagree with that federal ruling, counsel argued. In response to Justice Kagan, Bayer noted that the predominance requirement under the West Virginia version of Rule 23 is essentially identical to the Federal version, and there is no evidence of any content that's different from the Federal version on this point. But Justice Ginsburg pressed defendant on the issue that "sometimes Federal judges, they try their best, they're not the last word on what the State law is."

Several Justices raised the issue of forum shopping in their questions for petitioners' counsel. Justice Alito asked petitioners, whether after a class certification denial is entered in one federal court, a plaintiff's attorney could simply substitute the name of a new named plaintiff and file the same complaint in another federal court. Plaintiffs agreed that an attorney could do that.

Justice Alito asked about some of the possible implications of the plaintiffs' argument. If part of the issue is notice, would that compel federal courts to engage in a lengthy and expensive class notice period even in cases in which the class is denied? Plaintiff responded that notice would be required to bind the absent class members. Bayer argued in response to similar questions from Justice Sotomayor that the preclusion test focuses on whether the parties' interests are aligned, and the class members' interests were identical,  the first named plaintiffs understood that they was acting in a representative capacity, and the federal court took normal steps to protect the interests of non-parties, i.e., absent class members.  All that was met here. But Justice Scalia asked whether the counsel had ever been found adequate since the class was denied certification on other grounds.

Justice Kagan asked about CAFA, and Congressional intent to prevent forum shopping with classes and keep state courts from too freely certifying these kinds of class actions, which plaintiff had to concede.

Plaintiff had a hard time with the Court's questions about due process and how it affects procedural rights as opposed to substantive or property rights, particularly, as Justice Sotomayor asked, where the Federal litigation has applied essentially the same standard that the State has, and there has been adequate representation on the procedural question, and where no substantive right of a plaintiff has been extinguished. Chief Justice Roberts similarly asked about line-drawing, with a hypo about the second court limiting discovery because of what happened in the first court: "So now it's not only that you're entitled to your day in court substantively; you're entitled to your day in court procedurally as to some procedural aspects but not others?"

Justice Ginsburg asked counsel for Bayer whether there was a difference between preclusion being applied by the state court and the federal court issuing the injunction based on preclusion, calling the latter a "heavy gun.”  Meaning we're "not going to trust the West Virginia court to apply issue preclusion. We're going to stop that court from proceeding altogether."  Bayer replied that the injunction was very important because trial courts in West Virginia need not follow other trial courts, and there is no intermediate appeals court.  Thus plaintiff could go from county to county until they found a court that refused to apply preclusion.  

 

Use of Contingency Fee Private Counsel Appealed

A variety of business groups have weighed in as amici, asking the Supreme Court to recognize how contingency fee arrangements by California counties and cities pursuing lead paint litigation violated the due process rights of the defendants. Atlantic Richfield Co. v. County of Santa Clara, No. 10-546 (U.S., amicus curiae brief submitted 11/24/10).

Readers may recall our previous posts about how the California supreme court had taken a major step backward by modifying a 1985 decision that had limited the power of government agencies to retain private plaintiffs attorneys on a contingency fee basis to prosecute nuisance litigation. County of Santa Clara v. The Superior Court of Santa Clara County, No. S163681 (Cal. 7/26/10).

A group of public entities composed of various California counties and cities were prosecuting a public-nuisance action against numerous businesses that manufactured lead paint. Defendants moved to bar the public entities from compensating their privately retained counsel by means of contingent fees. The lower court, relying upon People ex rel. Clancy v. Superior Court, 39 Cal.3d 740 (1985), ordered that the public entities were barred from compensating their private counsel by means of any contingent-fee agreement, reasoning that under Clancy, all attorneys prosecuting public-nuisance actions must be “absolutely neutral.”

The state supreme court acknowledged that Clancy arguably supported defendants' position favoring a bright-line rule barring any attorney with a financial interest in the outcome of a case from representing the interests of the public in a public nuisance abatement action. The court proceeded to engage in a reexamination of the rule in Clancy, however, finding it should be "narrowed," in recognition of both (1) the wide array of public-nuisance actions (and the corresponding diversity in the types of interests implicated by various prosecutions), and (2) the different means by which prosecutorial duties may be delegated to private attorneys supposedly without compromising either the integrity of the prosecution or the public's faith in the judicial process.

The state court had previously concluded that for purposes of evaluating the propriety of a contingent-fee agreement between a public entity and a private attorney, the neutrality rules applicable to criminal prosecutors were equally applicable to government attorneys prosecuting certain civil cases. The court had noted that a prosecutor's duty of neutrality stems from two fundamental aspects of his or her employment. As a representative of the government, a prosecutor must act with the impartiality required of those who govern. Second, because a prosecutor has as a resource the vast power of the government, he or she must refrain from abusing that power by failing to act evenhandedly.

But then, the court concluded that to the extent Clancy suggested that public-nuisance prosecutions always invoke the same constitutional and institutional interests present in a criminal case, that analysis was "unnecessarily broad" and failed to take into account the wide spectrum of cases a state may bring. The court described a range of cases; criminal cases require complete neutrality. In some ordinary civil cases, neutrality is not a concern when the government acts as an ordinary party to a controversy, simply enforcing its own contract and property rights against individuals and entities that allegedly have infringed upon those interests. The nuisance cases fall between these two extremes on the spectrum of neutrality required of a government attorney. The case was not an “ordinary” civil case in that the public entities' attorneys were appearing as representatives of the public and not as counsel for the government acting as an ordinary party in a civil controversy. The case was being prosecuted on behalf of the public, and, accordingly, the concerns identified in Clancy as being inherent in a public prosecution were, indeed, implicated.

But, despite that, state supreme court found that the interests affected in this case were not similar in character to those invoked by a criminal prosecution or the nuisance action in Clancy. The case would not have resulted in an injunction that prevents the defendants from continuing their current business operations. The challenged conduct (the production and distribution of lead paint) has been illegal in the state since 1978. Accordingly, whatever the outcome of the litigation, no ongoing business activity would be enjoined. Nor would the case prevent defendants from exercising any First Amendment right. Although liability may be based in part on prior commercial speech, the remedy would not involve enjoining current or future speech, said the court.

While a heightened standard of neutrality was required for attorneys prosecuting public-nuisance cases on behalf of the government, that heightened standard of neutrality is not always compromised by the hiring of contingent-fee counsel to assist government attorneys in the prosecution of a public-nuisance abatement action. Use of private counsel on a contingent-fee basis is permissible in such cases if neutral, conflict-free government attorneys retain the power to control and supervise the litigation.

In so finding, the court downplayed the reality that the public attorneys' decision-making conceivably could be influenced by their professional reliance upon the private attorneys' expertise and a concomitant sense of obligation to those attorneys to ensure that they receive payment for their many hours of work on the case.To pass muster, neutral government attorneys must retain and exercise the requisite control and supervision over both the conduct of private attorneys and the overall prosecution of the case. Such control of the litigation by neutral attorneys supposedly will provide a safeguard against the possibility that private attorneys unilaterally will engage in inappropriate prosecutorial strategy and tactics geared to maximize their monetary reward. .

The list of specific indicia of control identified by the state supreme court seem quite strained, however, and to elevate form over substance, and written agreements over human nature. The authority to settle the case involves a paramount discretionary decision and is an important factor in ensuring that defendants' constitutional right to a fair trial is not compromised by overzealous actions of an attorney with a pecuniary stake in the outcome.  In reality, even if the control of private counsel by government attorneys is viable in theory, it fails in application because private counsel in such cases are hired based upon their expertise and experience, and therefore always will assume a primary and controlling role in guiding the course of the litigation, rendering illusory the notion of government “control”.

Defendants are seeking cert review. In amicus filings, various trade organizations including the American Chemistry Council, the American Coatings Association, and the National Association of Manufacturers, have argued that the financial incentives inherent in contingency-fee agreements simply distort the decision-making of both the government lawyers and the private attorneys they retain. Inadequately grounded contingency fee arrangements distort the state's duty of even-handedness not only to defendants, but also to the public.  The amici argue that public nuisance cases are not typical tort lawsuits because they claim to be pursued in the public interest. It violates due process for the type of personal financial assessment made by contingency fee private lawyers impacts the decisions in a public nuisance action brought in the government's sovereign capacity. The briefing also raises another important practical issue: the attorney-client privilege and work-product doctrines will block any meaningful inquiry into whether the government is actually exercising the appropriate control that he state court said would solve these issues.

Federal Court Rejects Nicastro Analysis of Personal Jurisdicition

We don't often post on orders denying a motion for reconsideration, but it's worth noting that a federal trial court recently reaffirmed its earlier rulings of lack of personal jurisdiction in a products case.  Leja v. Schmidt Manufacturing Inc., No. 01-5042, (D.N.J. 10/19/10).  The court, in so doing, questioned the reasoning of the New Jersey Supreme Court opinion on personal jurisdiction that was recently accepted for review by the U.S. Supreme Court.  Nicastro v. McIntyre Machinery America Ltd., 987 A.2d 575 (N.J. 2010).

In the underlying industrial accident, plaintiff alleged he suffered severe injuries when he attempted to open a bulk sandblasting unit manufactured by Schmidt while it was still pressurized. The machine was custom-built by Schmidt Co. for the Sylvan Equipment Corporation, which acts as a machinery distributor and has its primary place of business in New York. In doing so, Schmidt assembled various component parts that were produced by other manufacturers. Included among those parts was a "camlock closure," which was designed and manufactured by yet another company, Sypris, a Kentucky company.  This was the allegedly defective part.

Sylvan leased the machine to L&L Painting Company, a New York company, for use in the removal of paint from bridges. When it proved inadequate for that task, Sylvan took the machine back from L&L and sold it to plaintiff's employer, the West Virginia Paint and Tank Company. The day of the accident, Mr. Leja attempted to open the camlock closure without first releasing the pressure inside the machine by activating the blow-down valve. The result was that pressure stored inside the machine apparently caused an explosion that propelled the lid off.

Plaintiff sued manufacturer Schmidt in state court, who removed to federal court and brought in component part maker Sypris. Arguing that it lacked the minimum contacts with New Jersey necessary for the court to exercise jurisdiction, Sypris moved to dismiss the third-party claims asserted against it by Schmidt pursuant to Federal Rule of Civil Procedure 12(b)(2).

In its original ruling, the court granted granted the motion.  In doing so, it first distinguished between the two types of personal jurisdiction – specific and general – stating that specific personal jurisdiction would exist if the cause of action arises out of or is related to Sypris's contacts with New Jersey. Sypris' conduct and connection with New Jersey must be such that it could reasonably anticipate being haled into court here. World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980). Additionally, Sypris must have purposefully availed itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws.

Where the cause of action does not arise out of the defendant's forum activities, a court may exercise another variety of personal jurisdiction known as general personal jurisdiction, if the defendant has engaged in “continuous and systematic” contacts with the state, here New Jersey. Such general jurisdiction requires “a very high threshold of business activity.”

In this case, the court had previously found that the cause of action did not arise out of, and was not related to, Sypris' contacts with New Jersey. Sypris did not purposefully sell or direct the top closure, which allegedly caused the injuries, to New Jersey. In fact, the Sandblaster to which the part was attached arrived in New Jersey only after multiple transactions and travels to interim locations outside of New Jersey. The travels and eventual resting place of the Sandblaster in New Jersey was not the result of Sypris' purposeful conduct. Rather, the eventual sale of the Sandblaster to plaintiff's employer in New Jersey was a “random, fortuitous, or attenuated contact” that was insufficient to exercise specific personal jurisdiction.

As to general jurisdiction, the court had found that Sypris had no daily or regular contact with New Jersey that was central to the functioning of its business.  The percentage and absolute amount of sales to New Jersey is generally irrelevant.  Rather, the focus of analysis should be on whether the nature of defendant's contacts with the forum state was central to the conduct of its business, and here they were not. All of the defendant's activities were better characterized as sporadic, intermittent contacts rather than substantial and continuous.

Then along comes Nicastro.  The motion for reconsideration relied on Nicastro's holding that: the stream-of-commerce theory supports the exercise of jurisdiction if the manufacturer knew or reasonably should have known of the distribution system through which its products were being sold in the forum state. According to the NJ Supreme Court, due process permits the state to provide a judicial forum for its citizens who are injured by dangerous and defective products placed in the stream of commerce by a foreign manufacturer that has targeted a geographical market that includes New Jersey.  Here, Sypris had stipulated during the prior proceedings that it was aware that Schmidt generally distributed its machines throughout the nation.

There were procedural problems with the motion, and in addition, on the issue of the "intervening law," the court noted that the question of whether New Jersey's long-arm statute allows this federal court to assert personal jurisdiction over Sypris turns on the interpretation of the United States Constitution – an area that is uniquely the province of the federal courts.

On the merits of the reconsideration argument, the court said that the NJ holding was at odds with the decisions of the Supreme Court of the United States in World-Wide Volkswagen and Asahi Metal Industry Co. v. Superior Court of California, 480 U.S. 102 (1987).  The former ruled that, “the foreseeability that is critical to due process analysis is not the mere likelihood that a product will find its way into the forum State. Rather, it is that the defendant's conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there.”  World-Wide Volkswagen, 444 U.S. at 297. The mere foreseeability that a product one sells may end up in the forum state does not render the seller amenable to suit in the forum state.  Justice Brennan's opinion in Asahi – the less restrictive of the two plurality decisions in that case – included a similar requirement, stating that the stream of commerce theory only creates personal jurisdiction over a foreign manufacturer if it “delivers its products into the stream of commerce with the expectation that they will be purchased by consumers in the forum State.” Asahi, 480 U.S. at 119-20. In doing so, Justice Brennan noted the contrast between “the foreseeability of litigation in a State to which a consumer fortuitously transports a defendant's product (insufficient contacts) and the foreseeability of litigation in a State where the defendant's product was regularly sold (sufficient contacts).”

The court concluded that this case falls under the “insufficient contacts” category identified by Justice Brennan in Asahi, and the fortuitous series of events by which the machine found its way to New Jersey is illustrative of that point. In light of the fact that Sypris custom-built the type of closure at issue in this case according to Schmidt's specifications and did not sell similar closures to other manufacturers, Sypris cannot be said to have introduced those closures “into the stream of commerce with the expectation that they w[ould] be purchased by consumers” in New Jersey. See Asahi, 480 U.S. at 119-20. Therefore, the court reaffirmed its earlier rulings that it lacked specific personal jurisdiction over Sypris, and the Motion for Reconsideration was denied.

We will see if the Supreme Court agrees as it reviews Nicastro directly.

 

Supreme Court Grants Cert in Important Personal Jurisdiction Cases

Last week, the Supreme Court granted review in two product liability cases that raise cutting edge personal jurisdiction issues that may not only impact foreign manufacturers but and may also alter due process/personal jurisdiction jurisprudence. See J. McIntyre Machinery Ltd. v. Nicastro, U.S., No. 09-1343 (certiorari petition granted 9/28/10); Goodyear Luxembourg Tires SA v. Brown, U.S., No. 10-76 (certiorari petition granted 9/28/10).  Personal jurisdiction addresses the reach of the court’s power over a party, and without such jurisdiction, any ruling by the court is not binding on the party. Plaintiff lawyers focus on personal jurisdiction as part of the equation where they can sue; defendants as part of where they can be sued properly.  As a general matter, a defendant can only be sued where it has sufficient minimum contacts with the state such that a suit there does not offend traditional notions of fair play and substantial justice.

The issue framed in Nicastro is: Whether, consistent with the Due Process Clause and pursuant to the stream-of-commerce theory, a state may exercise in personam jurisdiction over a foreign manufacturer when the manufacturer targets the U.S. market for the sale of its product and that product is purchased by a forum state consumer.  The corresponding issue in Brown is: Whether a foreign corporation is subject to general personal jurisdiction, on causes of action not arising out of or related to any contacts between it and the forum state, merely because other entities distribute in the forum state products placed in the stream of commerce by the defendant.

Readers may recall our previous post on Nicastro. The state court held that a foreign manufacturer will be subject to its jurisdiction if it knows or reasonably should know that through its distribution scheme its products are being sold in the state. A manufacturer that knows or reasonably should know that its products are distributed through a nationwide distribution system that might lead to those products being sold in any of the fifty states must expect that it will be subject to the state’s jurisdiction if one of its defective products is sold to a consumer, causing injury, said the state court. The focus under this approach is not on the manufacturer’s control of the distribution scheme, but rather on the manufacturer’s knowledge of the distribution scheme.  If a manufacturer does not want to subject itself to the jurisdiction of a state court while targeting the United States market, then, the court said, it must take some reasonable step to prevent the distribution of its products in that state.

The power of the state to subject a person or business to the jurisdiction of its courts has evolved with the changing nature of the American economy, said the court. As the nation is part of a global economy driven by startling advances in the transportation of products and people and instantaneous dissemination of information, the expanding reach of a state court’s jurisdiction, as supposedly permitted by due process, has reflected those historical developments, found the state court.

The stream-of-commerce doctrine of jurisdiction is particularly suitable in product-liability actions, opined the court. It will not necessarily be a substitute for other jurisdictional doctrines -- such as minimum contacts -- that will apply in contract and other types of cases. The exercise of jurisdiction by New Jersey in this case was called "a reasoned response" to the globalization of commerce that permits foreign manufacturers to market their products through distribution systems that bring those products into the state. With the privilege of distributing, indirectly, products to consumers comes the responsibility of answering in a New Jersey court if one of those consumers is injured by a defective product, concluded the majority in Nicastro

"Stream of commerce" personal jurisdiction, if recognized, would allow any state to assume jurisdiction over any product manufacturer whose product found its way into the state, no matter how many independent, separate distributors the product had passed through in separate legal transactions. A lengthy dissent in Nicastro argued that the majority had ignored the fact that the original stream of commerce idea had included the element of a manufacturer's expectation that its products will be purchased in the forum state.  Many foreign and out-of-state manufacturers reasonably should know that their products are distributed through a system that might result in sales in any given state.  As applied in this case, it seems to eliminate any requirement of intentional state-specific activity by the defendant. And in that respect, has potential implications for lots of entities besides foreign product manufacturers. 

You may recall that the Supreme Court took a look at "stream of commerce" jurisdiction over 20 years ago, and split with no majority decision. But a plurality rejected the "stream of  commerce" concept in Asahi Metal Industry Co. v. Superior Court of California, 480 U.S. 102 (1987). 

The Court called for these cases to be argued in tandem.  The Brown case arises from a bus accident in France that killed two North Carolina residents whose families sued foreign affiliates of Goodyear Tires.  Again this case raises the issue whether activities on the part of the foreign manufacturer should subject them to personal jurisdiction in the U.S., and whether there is "purposeful availment" just because the product is sold in a state -- that is, as long as the defendant intentionally placed their products into the stream of commerce without attempting to exclude a specific state. Brown also raises the issue whether the state court confused "specific jurisdiction"--which applies only in suits arising out of or related to the defendant’s contacts with the forum--  with "general jurisdiction," which, where applicable, permits a defendant to be haled
into court in the state on any claim whatsoever, but only when the defendant’s activities in a state are so substantial and of such a nature as to justify suit against it on causes of action arising from dealings entirely distinct from those activities.

State Supreme Court Issues Noteworthy Personal Jurisdiction Opinion

The New Jersey Supreme Court has recently ruled that a New Jersey court can exercise jurisdiction in a product liability action over a foreign manufacturer based on the manufacturer's relationship with a nationwide distributor and on its presence at national trade shows. Nicastro v. McIntyre Machinery America Ltd.,  No. A-29-08 (N.J. 2/2/10).

Personal jurisdiction addresses the reach of the court’s power over a party, and without such jurisdiction, any ruling by the court is not binding on the party. Plaintiff lawyers focus on personal jurisdiction as part of the equation where they can sue; defendants as part of where they can be sued properly. The rules governing personal jurisdiction are well described in numerous reference works. As a general matter, a defendant can only be sued where it has sufficient minimum contacts with the state such that a suit there does not offend traditional notions of fair play and substantial justice.

In 2001, plaintiff was injured while operating the McIntyre Model 640 Shear, a recycling machine used to cut metal. The Model 640 Shear was manufactured by J. McIntyre Machinery, Ltd., a company incorporated in the United Kingdom, and then sold, through its exclusive United States distributor, McIntyre Machinery America, to the employer.  Plaintiff sued, alleging that the shear machine was defective in that it did not have a safety guard that allegedly would have prevented the accident. The trial court granted the foreign defendant's motion to dismiss the action, finding that the English manufacturer did not have sufficient minimum contacts with New Jersey to justify the state’s exercise of personal jurisdiction. The Appellate Division reversed, concluding that the exercise of jurisdiction by New Jersey “would not offend traditional notions of fair play and substantial justice” and was justified “under the ‘stream-of-commerce plus’ rationale."  Under that test, the actions of a defendant must be “purposefully directed toward the forum State” for a court of that state to exercise personal jurisdiction. Acknowledging that the English company had no presence in, or minimum contacts with, New Jersey, the state Supreme Court said plaintiff's argument for jurisdiction “must sink or swim with the stream-of-commerce theory of jurisdiction.”
 

New Jersey has a long-arm rule that permits service of process on a non-resident defendant “consistent with due process of law.”  Therefore, its courts may exercise jurisdiction over a non-resident defendant “to the uttermost limits permitted by the United States Constitution.” The Supreme Court seemed influenced by the view  that we live in a global marketplace. It also noted that a state has a strong interest in protecting its citizens from defective products as well as a paramount interest in ensuring a forum for its injured citizens who have suffered catastrophic
injuries due to allegedly defective products in the workplace. While its conception of jurisdiction must surely comport with traditional notions of fair play and substantial justice, the court noted it must also reflect modern truths – the radical transformation of the international economy.

Accordingly, the court held that a foreign manufacturer will be subject to this state’s jurisdiction if it knows or reasonably should know that through its distribution scheme its products are being sold in New Jersey. A manufacturer that knows or reasonably should know that its products are distributed through a nationwide distribution system that might lead to those products being sold in any of the fifty states must expect that it will be subject to the state’s jurisdiction if one of its defective products is sold to a New Jersey consumer, causing injury. The focus under this approach is not on the manufacturer’s control of the distribution scheme, but rather on the manufacturer’s knowledge of the distribution scheme through which it is receiving economic benefits in each state where its products are sold. A manufacturer cannot shield itself merely by employing an independent distributor – a middleman – knowing the predictable route the product will take to market. If a manufacturer does not want to subject itself to the jurisdiction of a New Jersey court while targeting the United States market, then, the court said, it must take some reasonable step to prevent the distribution of its products in that state.

The power of the state to subject a person or business to the jurisdiction of its courts has evolved with the changing nature of the American economy, said the court. As the nation is part of a global economy driven by startling advances in the transportation of products and people and instantaneous dissemination of information, the expanding reach of a state court’s jurisdiction, as permitted by due process, has reflected those historical developments.

The stream-of-commerce doctrine of jurisdiction is particularly suitable in product-liability actions, opined the court. It will not necessarily be a substitute for other jurisdictional doctrines -- such as minimum contacts -- that will apply in contract and other types of cases. Within the confines of due process, jurisdictional doctrines must reflect the economic and social realities of the day. The exercise of jurisdiction by New Jersey in this case was called "a reasoned response" to the globalization of commerce that permits foreign manufacturers to market their products through distribution systems that bring those products into the state. With the privilege of distributing products to consumers comes the responsibility of answering in a New Jersey court if one of those consumers is injured by a defective product, concluded the majority.

A lengthy dissent argued that the majority had ignored the fact that the original stream of commerce idea had included the element of a manufacturer's expectation that its products will be purchased in the forum state.  It also criticized an apparent shift in focus from the defendant to the plaintiff, including the severity of injuries.

The majority's test may come to have implications for manufacturers selling to other states as well, outside New Jersey. Many foreign and out-of-state manufacturers reasonably should know that their products are distributed through a nationwide system that might result in sales in any given state. It is quite possible the U.S. Supreme Court will want to clarify the reach of the so-called stream of commerce test, which was mentioned in Justice O’Connor’s plurality opinion in
Asahi Metal Industry Co. v. Superior Court of California, 480 U.S. 102 (1987).