State Supreme Court Directed to Reconsider Jurisdiction Over Foreign Defendant

The U.S. Supreme Court earlier this month instructed Oregon's supreme court to reconsider the state court's exercise of jurisdiction over a Taiwanese manufacturer.  See China Terminal & Electric Corp. v. Willemsen, No. 10-1262 (U.S.; order issued 10/3/11).

In the short order, the Court granted review, vacated the Oregon opinion denying the manufacturer's challenge to jurisdiction, and remanded the case for further consideration in light of J. McIntyre Machinery, Ltd. v. Nicastro.

Readers may recall from our earlier posts that Nicastro resulted in a plurality opinion which tracked Justice O'Connor's plurality opinion in Asahi Metal Industry Co. v. Superior Court of California, 480 U.S. 102 (1987), and two other concurring in the notion that the foreign product manufacturer lacked sufficient minimum contacts to allow a New Jersey court to exercise jurisdiction over it, but concluding that because this case did not present the new and special issues arising from recent changes in commerce and communication, it was unnecessary to get into full analysis of the steam of commerce issue as it might be applied to 21st century marketing. Rather, the outcome of the case could be determined by the Court’s existing precedents, which have held that a single isolated sale, even if accompanied by the kind of sales effort indicated in the record in the case, is not sufficient.

The Oregon case arise from a fire allegedly caused by a battery charger manufactured by CTE, a Taiwanese company;  the battery charger was incorporated into a motorized wheelchair. Plaintiffs allege that the fire began in the chair, bacuase of a defect in the charger. CTE sought dismissal on the grounds the state court lacked personal jurisdiction. The trial court denied the motion, and the Oregon Supreme Court denied defendant's petition for a writ of mandamus on the issue.

On remand, it will be interesting to see what the state court does, given what many observers see as their recent resistant approach on directions from the high Court on remands.

Dukes v. Wal-Mart: What It May Mean for Mass Torts

Three new Supreme Court decisions to comment on this week.  Let's take one at a time and start with Dukes v. Wal-Mart, 564 U.S. __ (2011). The U.S. Supreme Court yesterday overturned a lower-court decision that had certified a massive class action against retailer Wal-Mart. The suit was filed by current or former employees of petitioner Wal-Mart, who sought judgment against the company for injunctive and declaratory relief, punitive damages, and backpay, on behalf of themselves and  a class of some 1.5 million female employees.  They claimed that local managers exercised their discretion over pay and promotions disproportionately in favor of men.

The District Court certified the class, finding that respondents satisfied Federal Rule of Civil Procedure 23(b)(2)’s requirement of showing that “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.”  The Ninth Circuit substantially affirmed,and ruled that the class action could be "manageably" tried without depriving Wal-Mart of its right to present its statutory defenses.

We will leave to our colleagues on the Employment Litigation & Policy  team how this decision impacts employee discrimination claims.  But let's talk about the larger potential significance of the decision for mass tort class actions.

The Court began where we always like to begin in class certification briefing, reminding everyone that a class action is an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only.  In order to justify a departure from that rule, a class representative must be part of the class and possess the same interest and suffer the same injury as the class members. Rule 23(a) ensures that the named plaintiffs are appropriate  representatives of the class whose claims they wish to litigate. The Rule’s four requirements—numerosity, commonality, typicality, and adequate representation—effectively limit the class claims to those fairly encompassed by the named plaintiff’s claims, when applied correctly.

The crux of this case, said the Court, was commonality—the rule requiring a plaintiff to show that “there are questions of law or fact common to the class.”  But that language, warned the Court, is "easy to misread" as any competently crafted class complaint can raise seemingly common questions. (citing the late mass tort scholar R. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N. Y. U. L. Rev. 97, 131–132 (2009)). Such as the standard ones relating to defendant's alleged conduct.  But simply reciting these questions is not sufficient to obtain class certification. Commonality requires the plaintiff to demonstrate that the class members have suffered the same injury, which in turn does not mean merely that they have all suffered a violation of the same provision of law. The allegedly common contention must be of such a nature that it is capable of class-wide resolution—which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.  So, what matters is not the raising of seemingly common questions, but, rather, the capacity of a class-wide proceeding to generate common answers apt to drive the resolution of the litigation. Thus, the Court came down on the side of the lower courts that have applied the commonality rule with rigor and with common sense, requiring meaningful common questions.  And commonality thus becomes a more potent weapon in your efforts to defeat mass tort class actions.

Second, the Court re-emphasized that a party seeking class certification must affirmatively demonstrate his compliance with the Rule.  Sometimes it may be necessary for the trial court to probe behind the pleadings before coming to rest on the certification question. Certification is proper only if the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.  And frequently that “rigorous analysis” will entail some overlap with the merits of the plaintiff’s underlying claim. "That cannot be helped." The class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff’s cause of action.  Not completely new, but an important reminder.

Third, the Court noted that the parties disputed whether plaintiffs' expert's testimony met the standards for the admission of expert testimony under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U. S. 579 (1993). The District Court concluded that Daubert did not apply to expert testimony at the certification stage of class action proceedings. Although dicta, the Court went out of its way to note, " We doubt that is so."  A signal to the lower courts who somehow think junk science is acceptable at the class certification hearing, and a green light to those that apply Daubert.

Fourth, the Court also concluded that respondents’ claims for backpay were improperly certified under Federal Rule of Civil Procedure 23(b)(2), holding that such claims cannot be, at least where (as here) the monetary relief is not incidental to the injunctive or declaratory relief.  One possible reading of this provision is that it applies only to requests for injunctive or declaratory relief and does not authorize the class certification of monetary claims at all. The Court did not have to reach that question because, at a minimum, claims for individualized relief (like the backpay at issue here) do not satisfy this Rule. The key to the (b)(2) class is “the indivisible nature of the injunctive or declaratory remedy warranted—the notion that the conduct is such that it can be enjoined or declared unlawful only as to all of the class members or as to none of them.”  Thus, Rule 23(b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class. It does not authorize class certification when each individual class member would be entitled to a different injunction or declaratory judgment against the defendant. Similarly, it does not authorize class certification when each class member would be entitled to an individualized award of monetary damages. The Court said it was "clear that individualized monetary claims belong in Rule 23(b)(3)."  While not deciding in this case whether there are any forms of truly  “incidental” monetary relief that are consistent with this interpretation of Rule 23(b)(2) and that comply with the Due Process Clause, the Court's ruling may impact mass torts such as medical monitoring claims in which the plaintiffs try to avoid the predominance test of Rule 23(b)(3) by seeking a so-called court administered fund to pay for medical monitoring for the class rather than individual medical monitoring damages.  When the "program" sought is in essence an injunction ordering defendant to pay for each class member's individual medical screening tests, (b)(2) should not be available.

Fifth, the Court noted that the 9th Circuit had found the trial of the proposed class action to be manageable and in accord with due process by ignoring the traditional procedures and proceeding "with Trial by Formula."  In other words, a sample of the class members would be selected, as to whom liability for sex discrimination and the backpay owing as a result would be determined in depositions supervised by a special master. The percentage of claims determined to be valid would then be applied to the entire remaining class, and the number of (presumptively) valid claims thus derived would be multiplied by the average backpay award in the sample set to arrive at the entire class recovery—without further individualized proceedings. This extrapolation methodology has been proposed by many mass tort plaintiffs (including in asbestos) as a means to make the class trial "manageable."  The Supreme Court was clear: "We disapprove that novel project." Because the Rules Enabling Act forbids interpreting Rule 23 to abridge,enlarge or modify any substantive right, a class cannot be certified on the premise that the defendant will not be entitled to litigate its defenses to individual claims.  The same issue applies to the trial plans proposed by many mass tort plaintiffs, which try to use the class rule to prevent defendants from ever having an opportunity to litigate individual defenses as to individual class members. 

Lots to think about.

Companion Bill Introduced To Ease Suits Against Foreign Manufacturers

Previously we alerted readers to the introduction of The Foreign Manufacturers Legal Accountability Act of 2009 (S. 1606),  introduced in the Senate in August 2009 by Sen. Sheldon Whitehouse (D-R.I.). The bill followed up on hearings last Spring during which witnesses testified about the perceived delays and difficulties with serving foreign manufacturers with process and establishing jurisdiction.

Last week, Rep. Betty Sutton (D-Ohio) and several co-sponsors introduced in the House their own version of the Foreign Manufacturers Legal Accountability Act of 2010 (H.R. 4678). The operative provisions of the House bill overlap those in the Senate bill, although the Senate bill also includes a section which discusses the alleged need for the legislation.

The proposed legislation would impact five categories of products: drugs, devices and cosmetics; biological products; chemical substances; pesticides; and consumer products. The bills only apply to manufactured products “in excess of a minimum value or quantity established by the head of the applicable agency" in regulations applying the legislation.

Both bills make consent to jurisdiction and service of process a condition of importing products into the United States. That is, the bills instruct several relevant product-regulating agencies to issue regulations requiring foreign manufacturers and producers to designate a registered agent. A person would not be able to import into the United States a covered product (or component part that will be used in the United States to manufacture a covered product) if such product or any part of such product (or component part) was manufactured or produced outside the United States by a manufacturer or producer who does not have a registered agent. 

Such a system which requiring an agent for service of process for every foreign manufacturer or producer who imports products into the U.S. would render the Hague Convention's  methods for service abroad unnecessary for such companies, and raises the risk that other countries may choose to create similar rules, subjecting U.S. companies to litigation in those other countries where their products may be sold.

Under the bills, a foreign manufacturer or producer of covered products that registers an agent as above thereby consents to the personal jurisdiction of the State or Federal courts of the State in which the registered agent is located for the purpose of any civil or regulatory proceeding.  Presumably, the expanded jurisdiction would also make it easier for U.S. companies to pursue indemnification claims against foreign manufacturers who were upstream suppliers.

Currently, foreseeing that one's product may enter a state is not, on its own, a sufficient basis for that state to assert jurisdiction. Asahi Metal Industry Co., Ltd. v. Superior Court, 480 U.S. 102, 112(1987); but cf. Nicastro v. McIntyre Machinery America Ltd., No. A-29-08 (N.J. 2/2/10).  It has been argued that Congress cannot create jurisdiction where the Constitution would forbid it. And it may be that a constitutional challenge would lie to some applications of the proposed bills. E.g., Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300 (2d Cir. 1981). Presumably, the sponsors are looking to bypass the due process concerns by providing for consent to jurisdiction.

It is unclear what the effect of the bills might be on countries around the world regarding their willingness to enforce judgments entered in the United States, as the issue of the lack of foreign manufacturer assets in the U.S. is not addressed by the proposed legislation.


 

 

Summary Judgment Granted on Successor Liability Claim

The issue of successor liability is a recurring one in products liability, and the specter of mass tort liability should be an important aspect of due diligence in corporate acquisitions. This point is illustrated by a recent case in which the federal court in Oregon granted summary judgment to alleged successor corporations of a company that manufactured allegedly defective pain pumpsCox v. DJO LLC, Case No. 07-1310 (D. Or. 11/16/09).

Plaintiffs underwent arthroscopic shoulder surgery in which surgeons inserted pain pump devices in their shoulder joints to deliver pain medication via catheter.  Plaintiffs alleged they subsequently developed glenohumeral chondrolysis - a condition involving the deterioration and loss of cartilage in the shoulder joint.  McKinley LLC manufactured the pain pumps devices, part of product lines known commercially as the Accufuser and beeLINE.  Plaintiffs alleged strict products liability and negligence against McKinley LLC as the manufacturer, and against Moog Inc. and Curlin Medical Inc. as successors in interest. Defendants Moog and Curlin moved for summary judgment on plaintiffs' claims that they were liable as the successor corporations, arguing that the acquisition of the Accufuser and beeLINE product lines was nothing more than a purchase of assets that cannot establish successor liability.

Under Oregon law, as is the general rule, when a corporation purchases the assets of another corporation, the purchasing corporation generally does not assume the debts and liabilities of the selling corporation. However, the purchaser may be responsible for the seller's liabilities if: 1) the purchasing corporation expressly or impliedly agrees to assume those liabilities; 2) the transaction
constitutes a consolidation or merger of the corporations; 3) the purchasing corporation is a "mere continuation" of the selling corporation; or 4) the corporations effectuated the transaction for
fraudulent purposes to escape liability.

The court reviewed the possible exceptions. First, Moog and Curlin did not expressly or impliedly agree to assume liability arising from pain pump products manufactured and sold by McKinley LLC prior to the conveyance of assets. To the contrary, the Assignment and Merger Agreement expressly and specifically identified the existing liabilities that were transferred after the merger.

Second, despite plaintiffs' repeated assertions, neither Moog nor Curlin merged or consolidated with McKinley LLC. Instead, it is undisputed that Curlin merged with McKinley Medical Corp., a separate corporation,  and acquired the Accufuser and beeLINE product lines as a result. That is, Moog and its wholly owned subsidiary, Curlin, entered into an agreement to purchase McKinley LLC's Accufuser and beeLINE product lines. Under the terms of the agreement, McKinley LLC transferred these product lines to McKinley Medical Corp., a subsidiary it created solely for purposes of the asset transfer. Curlin then merged with McKinley Medical Corp. and acquired the product lines. Plaintiffs tried to imply that this transaction constituted a de facto merger between McKinley LLC and Moog/Curlin, because it effectively continued the pain pump business of McKinley LLC. Plaintiffs emphasize that the manufacture, distribution, and sales of the Accufuser and beeLINE pain pumps continued uninterrupted. However, Oregon has explicitly rejected a "product line" exception to the general rules governing successor liability.

Third, the evidence did not support a finding that Moog or Curlin is a "mere continuation" of McKinley LLC. "A successor corporation is merely a continuation of the predecessor
corporation, despite a business transformation, if it is substantially the same as the predecessor corporation." Alicki v. Intratec USA, Inc., 769 F. Supp. 336, 340 (D. Or. 1991). Here, importantly, McKinley LLC retained assets after the Assignment and Merger Agreement and distributed the Walkmed pain pumps until 2007. McKinley LLC remains an existing, separate corporate entity and an active defendant in this cases.  Moreover, no continuity of management, directors, or
shareholders exists between McKinley LLC and Curlin or Moog.

Finally, plaintiffs presented no persuasive evidence that the corporate forms of McKinley LLC, Curlin, or Moog were improperly manipulated for purposes of fraud, or that the Assignment and
Merger Agreement left McKinley LLC insolvent or otherwise unable to answer for its debts.

Use of Company Conduct Evidence to Prove Liability or Punitive Damages

As due process considerations have taken their more appropriate place in the law of punitive damages, see BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), trial courts have struggled with the intersection of traditional product liability law and new rules on evidence necessitated by such due process concerns. 

For example, plaintiffs frequently seek to use evidence of other allegedly similar conduct and allegedly substantially similar accidents, injuries, incidents for liability related issues such as notice and defect.  In Philip Morris USA, Inc. v. Williams, 127 S.Ct. 1057 (2008), however, the Court confirmed a significant constitutional principle limiting punitive damages awards: the Due Process Clause prohibits juries from basing punitive damages awards even in part upon the desire to punish a defendant for harm to persons that are not before the court. 

Williams arose from an Oregon trial wherein a jury awarded $821,000 in compensatory damages and $79.5 million in punitive damages against cigarette manufacturer Philip Morris. At trial, the plaintiff’s attorney had urged the jury to punish Philip Morris for alleged harm to smokers other than the plaintiff by referring to the defendant’s market share and the number of smokers not only in the state of Oregon, but nationwide, who had allegedly contracted a smoking-related illness in the last 40 years. The Supreme Court held that the Due Process Clause forbids a jury from assessing punitive damages to punish a defendant for injury that it inflicts upon non-parties or “strangers” to this litigation. While a jury may consider the actual or potential harm to non-parties in the narrow context of determining “reprehensibility” of the conduct, which in turn is one of the factors relevant to an analysis whether the punitive damages award is excessive or not, it may not punish the defendant for the impact of its alleged misconduct on other people, who may bring lawsuits of their own in which other juries can resolve their claims.

The Supreme Court cautioned state courts that they must make sure that the “jury will ask the right question, not the wrong one.”  That is, evidence regarding alleged injuries of those not before the court must be used solely to judge the reprehensibility of the conduct, not to assess damages for the harm caused to those strangers. While the Court commented on the Oregon court’s refusal to give a jury instruction clarifying this distinction, it noted generally that state courts cannot authorize any procedures that create an unreasonable and necessary risk of any such confusion occurring. When evidence is introduced or argument made that risks this confusion, the state court must take steps to protect against that risk. 

Another such conflict was seen in the recent Montana case involving the trial court's exclusion of a car seat manufacturer's evidence of regulatory compliance.  Malcolm v. Evenflo Co., 2009 WL 2917799 (Mont., September 14, 2009).  The state supreme court ruled that while the evidence should have been excluded from the jury's consideration of liability for compensatory damages, the evidence should have been admitted for purposes of assessing punitive damages.  It let stand the compensatory award, but vacated the punitive damages award.

The case arose from a motor vehicle accident during which plaintiff's decedent  rode in the back of an SUV in the OMW model 207 child seat. A northbound motorist swerved into plaintiff Malcolm's lane and forced Malcolm off the road. The vehicle rolled three times, traveled down a steep incline, and stopped in a ditch.  The left belt hook of the OMW broke off during the rollover. The seat belt slipped out from the open-ended belt hook on the opposite side of the seat. The forces of the accident ejected the OMW from the vehicle, which resulted in death, according to plaintiffs.

The theory at trial was strict liability in tort, design defect theory. The Malcolms claimed that the Evenflo OMW model 207 infant child safety seat constituted a defectively designed product that failed even though they had used the seat in a reasonably anticipated manner. The Malcolms pointed to the OMW's open-ended belt hook design that might have prevented the injury. The Malcolms contended that Evenflo could have manufactured the OMW using an allegedly  feasible superior alternative design that required the vehicle's seatbelt to be routed through an enclosed seat belt tunnel even when the seat was used without the base. The Malcolms also sought punitive damages. The Malcolms alleged that Evenflo “continued selling the defective product in conscious, deliberate and intentional disregard of the danger presented.”

Evenflo contended that the OMW model 207 was not defective in any way. Evenflo argued that the severity of the forces involved in the accident were the sole cause of the death. Evenflo argued that the “tremendous forces” that occurred during the rollover forced open the rear passenger door, which was immediately adjacent to Tyler's child seat. Evenflo posited that Tyler's car seat came into direct contact with the ground as the Suburban rolled. Evenflo argued that the contact caused the seat to detach from the seat belt system and ultimately fly out the open door.

The National Highway Traffic and Safety Administration (NHTSA) requires that all child restraint systems comply with the minimum requirements of Federal Motor Vehicle Safety Standard 213. See 49 C.F.R. § 571.213 (2009). NHTSA required Evenflo to conduct internal testing of the OMW to determine if it complied with the FMVSS 213 standards, which it did. NHTSA and Transport Canada, the Canadian testing agency, conducted random audit FMVSS 213 tests in addition to Evenflo's internal testing.

The first issue was the basic products issue: Evenflo argued that the trial court erred when it excluded any evidence that the OMW model 207 complied with FMVSS 213. Evenflo contended that the fact that the OMW model 207 passed 341 tests performed under FMVSS 213 was highly relevant to the claim that the model 207 was defective and unreasonably dangerous.

Evenflo noted that the standard would be admissible in a negligence case, and  there is no reason why such highly relevant evidence should not be used in strict products liability cases. Thus, Evenflo urged the Court to adopt the Restatement (Third) of Torts: Products Liability § 4 (1998). Section 4 provides that compliance with an applicable regulation is admissible in connection with liability for defective design. Evenflo noted that a majority of jurisdictions hold that compliance with product safety regulation is relevant and admissible on the question of defectiveness, even if it is not necessarily controlling.

The four-justice majority reiterated this court's adherence to “well-settled, decades-old principles of strict liability” that consider irrelevant a manufacturer's reasonableness and level of care. The court declined to adopt the Restatement (Third) of Torts: Products Liability, §4.  Montana thus continues to be one of those few states that cling to the now-discredited "bright line" verbal distinction between cases asserting strict liability in tort and those grounded in negligence theory. (This Court had previously distinguished strict liability from negligence when it rejected the “state of the art” defense, for example, because it raises issues of reasonableness and foreseeability --concepts fundamental to negligence law.)  It still argues that any attempt to inject so-called negligence principles into strict liability law would somehow sever Montana's strict products liability law from the core principles for which it was adopted.  The focus in design defect cases must be on “the condition of the product,” rather than “the manufacturer's conduct or knowledge."  And the way to do this, apparently, is to exclude relevant, material, probative evidence that the product passed regulatory muster.

On the punitive damages issue, Evenflo argued that the trial court's decision to exclude evidence of the OMW model 207's compliance with FMVSS 213 prevented it from introducing evidence bearing on its state of mind. A defendant's state of mind is a “key element” in assessing punitive damages, and the car seat maker should have been able to present evidence of its regulatory compliance. 

The trial court had concluded that the OMW model 207's compliance with FMVSS 213 had “absolutely no bearing at all upon the reprehensibility of the conduct of Evenflo.” But the supreme court could not sustain the verdict on punitives in light of the court's decision to exclude evidence that might show why Evenflo acted as it did, or failed to act, when the jury considered whether to award punitive damages. Evidence of Evenflo's good faith effort to comply with all government regulations, including FMVSS 213, would be evidence of conduct inconsistent with the mental state requisite for punitive damages.

Interestingly, the supreme court noted that while here a new jury here could consider evidence of the OMW model 207's compliance with FMVSS 213 for the purposes of determining whether Evenflo acted with actual fraud or actual malice, generally the Montana system provides for the presentation of evidence regarding liability for compensatory damages and punitive damages to the jury in a single proceeding. Thus, bifurcation is disfavored, and the trial courts must ordinarily trust that the jury will heed the court's instructions as to how to evaluate the evidence presented.

One dissenting justice would have also reversed the compensatory damages. He differed from the majority on how the trial was conducted and saw it as improperly biased against Evenflo. Two other dissenters agreed with the majority on the compensatory damages but would have sustained the punitive award, arguing that Evenflo's inability to present evidence of its compliance with regulations did not prejudice the company.