The Now Even-Longer Reach of U.S. Law Over Foreign Corporations

Jay Mayesh and M. Tomas Murphy

Corporate Counsel

12-19-2012

As global commerce has expanded beyond traditional territorial bounds, the jurisdiction of the U.S. courts has undergone a similar expansion. Long behind us are the days when a foreign corporation could consider itself comfortably beyond the reach of a U.S. court so long as it maintained no “physical presence” in that court’s geographical jurisdiction. By the middle of the last century, a clear trend toward “expanding the permissible scope of state jurisdiction over foreign corporations” was already evident, in response to what the U.S Supreme Court in McGee v. Int’l Life Ins. Co. characterized as the “increasing nationalization of commerce.” In more recent years, driven by the increasing internationalization of commerce, the movement toward expanded extraterritorial jurisdiction has continued to gather momentum.

Under current Supreme Court precedents, including Hanson v. Denckla and its successors, a foreign manufacturer or other company may be subject to the jurisdiction of a U.S. court only if that company “purposefully avails itself of the privilege of conducting activities within the forum State.” As the Supreme Court acknowledged in J. McIntyre Mach., Ltd. v. Nicastro, this “purposeful availment” test “does not by itself resolve many difficult questions of jurisdiction that will arise in particular cases,” and the standard has proven highly elastic in the hands of the lower courts. Indeed, the Supreme Court’s own fractured decisions on personal jurisdiction have allowed lower courts wide latitude in interpreting the “purposeful availment” standard, enabling the contours of extraterritorial jurisdiction to be drawn expansively.

A Recent Federal Court Ruling That Shows the Trend Toward Expanded Jurisdiction

A recent federal district court ruling (Eastern District of Louisiana) in the much-publicized Chinese drywall litigation illustrates how far the trend toward expanded extraterritorial jurisdiction has progressed. In the case of In re Chinese Manufactured Drywall Prods. Liab. Litig., the judge affirmed his court’s jurisdiction over two closely affiliated Chinese companies—Taishan Gypsum Co. Ltd. and Taian Taishan Plasterboard Co. Ltd.—whose drywall was exported to various states in the U.S. The District Court’s jurisdictional findings have been vigorously challenged by the Taishan defendants, whose success or failure on appeal may have significant repercussions for foreign companies doing business—either directly or indirectly—with customers in the United States.

From the outset, the court acknowledged that the Taishan entities had no physical contacts with any of the states at issue—Virginia, Florida, and Louisiana. The facts with respect to Virginia are illustrative: Taishan Gypsum never manufactured or sold its drywall in Virginia, never performed any services in Virginia, maintained no offices in Virginia, owned no property in Virginia, and held no bank accounts in Virginia. Indeed, not a single officer, employee, or agent of Taishan Gypsum had ever set foot in Virginia for the purpose of doing business.

And although Taishan Gypsum touted itself as a worldwide supplier of building materials, Taishan Gypsum appears to have done virtually nothing to solicit business from Virginia. On the contrary, it was a Virginia company—Venture Supply, Inc.—that in November 2005 approached Taishan Gypsum regarding the purchase of drywall for export.

Taishan Gypsum’s subsequent interactions with its Virginia customer were, from a business point of view, entirely unremarkable: Taishan Gypsum met on multiple occasions with a Venture Supply representative in China, submitted product samples to Venture Supply, provided documentation that its products were in compliance with U.S. standards, and offered information regarding shipping agents, freight rates, and ship availability.

Taishan Gypsum ultimately entered into two contracts with Venture Supply, the first executed via fax and the second executed in China. Taishan Gypsum additionally “engaged in extensive discussions” with Venture Supply, “regarding their current and future business relationship,” and provisionally considered designating Venture Supply as the exclusive distributor of Taishan Gypsum drywall in the United States.

Interestingly, the Eastern District of Louisiana did not confine its jurisdictional analysis to Taishan Gypsum’s specific contacts with Venture Supply or Virginia, but also considered Taishan Gypsum’s more general engagement with the U.S. market. Perhaps most strikingly, the court found it significant that Taishan Gypsum’s website featured English-language content and that Taishan Gypsum advertised on an international website accessible in the U.S., suggesting that even the most modest gestures toward global trade may be marshaled as evidence of “purposeful availment” on the part of a foreign company.

Similarly, the court noted that Taishan Gypsum had “encouraged, welcomed, and accommodated representatives of U.S. companies to visit its drywall offices and factories in China.” The particulars of these visits were mundane, reflecting standard business courtesies: Taishan Gypsum’s U.S. guests were offered tours of the offices and factories, transportation assistance and hotel recommendations, lunch at the cafeteria, and promotional literature. The court also observed that Taishan Gypsum had made direct sales to other U.S. customers outside of Virginia, that Taishan Gypsum used English in its communications with its U.S. customers, and that Taishan Gypsum’s employees adopted “Americanized” names.

The court’s recitation of such “nationwide contacts” is remarkable, because factors such as these, indicating a general openness to U.S. customers without reference to any particular state forum, arguably have no place in state-specific jurisdictional analysis. As the Supreme Court recently stressed in Nicastro, “personal jurisdiction requires a forum-by-forum, or sovereign-by-sovereign, analysis.” A foreign litigant may have the “requisite relationship with the United States Government but not with the government of any individual State.” Accordingly, a foreign company’s general contacts with the U.S. are not sufficient to establish jurisdiction on the state level. Nevertheless, the court appears to have regarded Taishan Gypsum’s nationwide contacts as at least probative of the jurisdictional question.

The Eastern District of Louisiana concluded that all of Taishan Gypsum’s activities, taken together, were cumulatively sufficient to support the assertion of jurisdiction over Taishan Gypsum, despite Taishan Gypsum’s lack of “physical contacts with the forum.” In the words of the court, Taishan Gypsum had “purposefully directed its activities” at Virginia with the understanding that its drywall “would end up in and be used in Virginia.” For the court, this was sufficient to justify the exercise of personal jurisdiction, suggesting that a foreign company with no presence in the U.S. may nevertheless find itself subject to the judgment of a U.S. court simply by consenting to do business—and contemplating future business—with a U.S. company.

The implications of the court’s jurisdictional findings did not go unnoticed, least of all by counsel for Taishan Gypsum, who have appealed to the Fifth Circuit. Whether the Fifth Circuit will take this opportunity to curb the lower court’s expansive exercise of jurisdiction remains to be seen. However, the ruling is certainly not invulnerable. As the Eastern District of Louisiana itself has acknowledged, a “substantial ground exists for difference of opinion concerning the propriety” of the “exercise of personal jurisdiction over Taishan,” suggesting a recognition by the court that its assertion of jurisdiction approached, if it did not in fact overstep, the outer boundaries of the permissible.

Practical Application to Companies in the U.S. and Abroad

If the District Court’s decision stands, it could potentially affect companies (and, of course, their counsel) in a number of ways. First, consider the example of a manufacturer located in Japan, Taiwan, South America, or Europe, which has been very careful not to have a presence in the U.S. They don’t advertise there, or solicit U.S. customers. A U.S. citizen walks into their offices, unsolicited, and buys a few thousand bedspreads to be shipped back to the U.S. There’s a problem: The bedspreads haven’t been treated with flame retardant and catch fire. In the past, the customer would have great difficulty trying to sue this non-U.S. company in a U.S. court. But now? The situation is much blurrier.

Consider too, the U.S. manufacturer that incorporates foreign parts or products into its own products, but gets those products from a source that does not have a U.S. presence by going directly to the foreign source as an unsolicited customer. If that U.S. buyer is sued because of something that’s gone wrong with the foreign-sourced component part, the buyer wants to know that it can look to its foreign supplier for indemnity. This ruling potentially makes it easier to do that, by enlarging the types of contacts in the legal analysis.

Conclusion

The Eastern District of Louisiana’s assertion of jurisdiction over Taishan Gypsum is a compelling example of how the U.S. courts have stretched their territorial reach in tandem with the expansion of the global economy. For foreign-based businesses, the ultimate disposition of Taishan Gypsum’s appeal on the jurisdictional question will bear close watching. Taishan Gypsum does not appear to have actively sought out business in Virginia, but when a Virginia customer arrived at its doorstep, Taishan Gypsum did not turn that customer away. Instead, Taishan Gypsum negotiated with the customer in the customer’s language, tailored its product to meet the customer’s specifications, and assisted the customer with export logistics.

In short, Taishan Gypsum engaged in standard customer relations with a Virginia company and extended the most basic business courtesies. These unremarkable interactions, coupled with Taishan Gypsum’s expectation that its product would find its way to Virginia, may have been sufficient to place the Chinese company within the ambit of a U.S. court, half a world away.

Jay Mayesh is a partner in Kaye Scholer’s litigation group. He received his J.D. from Columbia University, where he is now an adjunct lecturer on forensic psychiatry. Mayesh has defended a broad range of clients at trial and has particular experience in evaluating contingent product liabilities arising out of corporate acquisitions and reorganizations. He also serves as national counsel to Knauf in the Chinese drywall litigation. M. Tomas Murphy is an associate in Kaye Scholer’s product liability and complex commercial litigation groups.