Articles

Jurisdiction: A Personal Matter—The Shrinking World of Jurisdiction in California

I. INTRODUCTION

It is often said that, due to technological advances, the world is getting smaller. In a practical sense, this is true. Products and component parts can be manufactured in one country and then shipped to the far corners of the Earth with relative ease. While one would expect this globalization to enlarge personal jurisdiction, paradoxically, in California, the grounds for personal jurisdiction are shrinking. In Bombardier Recreational Products, Inc. v. Dow Chemical Canada ULC (2013) 216 Cal.App.4th 591 (Bombardier), the California Court of Appeal re-affirmed that California, at least for the time being, will not impose personal jurisdiction on a foreign manufacturer which does “nothing more” than place an item in the stream of commerce, even if the manufacturer can foresee its product ultimately reaching California customers and consumers. This decision flows from the Supreme Court’s plurality opinion in J. McIntyre Machinery, Ltd. v. Nicastro (2011) ___ U.S. ___, 131 S. Ct. 2780, itself the latest in a series of decisions tackling the application of the “stream of commerce” theory to exercise specific jurisdiction under the Due Process Clause of the Constitution.

Bombardier carries with it substantial implications with placing risk for California insureds, particularly as to those insureds that are a link (or even worse—at the end) in the distribution chain for goods. In the post-Bombardier world, such insureds may find their suppliers can escape the exercise of jurisdiction and potentially leave the insured as the sole “target” who must defend, and potentially indemnify, a claim for damages.

This article will analyze the Bombardier decision and its likely implications for the exercise of personal jurisdiction in California, as well as a comparison of the case law emerging from other jurisdictions since the Nicastro case. Moreover, this article will explore the practical effect of the Bombadier decision.

 

II. THE LIMITS OF SPECIFIC JURISDICTION IN CALIFORNIA

A. A Primer on Specific Jurisdiction and the “Stream of Commerce” Test

Generally, due process requires that, in order to subject a defendant who is not present within the territory of the forum to a judgment in personam, the defendant must have certain minimum contacts with the forum state such that the maintenance of the suit does not offend “traditional notions of fair play and substantial justice.” (International Shoe Co. v. State of Washington (1945) 326 U.S. 310, 316, quoting Milliken v. Meyer (1940) 311 U.S. 457, 463; Shearer v. Superior Court (1977) 70 Cal.App.3d 424.)

Whether an individual or a corporation, a state court must have personal jurisdiction over a defendant to impose personal liability or obligation in favor of a plaintiff. (Burnham v. Superior Court (1990) 495 U.S. 604, 609; Kulko v. California Superior Court (1978) 436 U.S. 84, 91.) Personal jurisdiction is based on the presence of reasonable notice to the defendant that an action has been brought and a finding that a sufficient connection exists between the defendant and the forum state. (Kulko, supra, 436 U.S. at 91.)

Personal jurisdiction over a non-resident may be either “general” or “specific.” (Goodyear Dunlop Tires Operations, S.A. v. Brown (2011) 131 S. Ct. 2846, 2851; Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarain Co. (9th Cir. 2002) 284 F.3d 1114, 1123 (Glencore Grain).) Specific jurisdiction requirements prevent a defendant from being dragged into court based on “‘random,’ ‘fortuitous,’ or ‘attenuated’ contacts” or based on the “‘unilateral activity of another party or a third person,’ [citation].” (Burger King Corp. v. Rudzewicz (1985) 471 U.S. 462, 475.) Further, there must be some act by which the defendant creates a “‘substantial connection’” with the forum state “‘such that he should reasonably anticipate being haled into court there.’” (Id. at 475-476, 486.) In California, specific jurisdiction only arises “if the defendant has purposefully availed himself or herself of forum benefits and the ‘controversy is related to or ‘arises out of’ a defendant’s contacts with the forum.” (Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 444; see also Brown, supra, 131 S. Ct. at 2851 (a forum may exercise “specific” jurisdiction only if the case pertains to “issues deriving from, or connected with, the very controversy that established jurisdiction”).)

The U.S. Supreme Court first adopted he “stream of commerce theory,” a specific jurisdiction concept, in World-Wide Volkswagen v. Woodson (1980) 444 U.S. 286. There, the Supreme Court concluded that:

If the sale of a product by a manufacturer or a distributor . . . is not simply an isolated occurrence, but arises from the efforts of the manufacturer or distributor to serve directly or indirectly, the market for its product in other States, it is not unreasonable to subject it to suit in one of those States if its allegedly defective merchandise has there been the source of injury to its owner or to others.

(Id. at 297.)

Since its inception, the stream of commerce theory has branched into two separate theories, which have been coined the “stream of commerce theory” (representing the broader approach set forth in World-Wide Volkswagen) and the “stream of commerce plus theory.” The latter emerged from the U.S. Supreme Court’s plurality opinion in Asahi Metal Industry Co. v. Superior Court of California (1987) 480 U.S. 102, 107 S. Ct. 1026, 94 L.Ed.2d 92, which sought to require more than the mere placing of a product into the stream of commerce to establish purposeful availment of a forum state.

In J. McIntyre, the Supreme Court revisited the law of personal jurisdiction and the stream of commerce theory. There, the plaintiff injured his hand in New Jersey while using a machine manufactured by the defendant. The machine had been manufactured in England, where the defendant was incorporated and operated. The machine was then sold to a U.S. distributor, which in turn sold and shipped the machine to New Jersey. The defendant did not market, sell, or ship machines to New Jersey, and the U.S. distributor had only sold one of the defendant's machines in New Jersey—the machine that injured the plaintiff. The plaintiff sued the defendant, and the New Jersey Supreme Court held personal jurisdiction was proper.

The Supreme Court reversed the decision of the New Jersey Supreme Court, but it did not produce a majority opinion. Justice Kennedy authored a plurality opinion, joined by Chief Justice Roberts, Justice Scalia, and Justice Thomas. Under the plurality's approach to personal jurisdiction, "[t]he defendant's transmission of goods permits the exercise of jurisdiction only where the defendant can be said to have targeted the forum; as a general rule, it is not enough that the defendant might have predicted that its goods will reach the forum State." (J. McIntyre, supra, 131 S. Ct. at 2788.)

B. The Bombardier Decision

As noted above, Bombardier provides the latest snapshot of California’s take on the “stream of commerce” theory.

In Bombardier, the plaintiff sued Bombardier Recreational Products, Inc. (“Bombardier”) for personal injuries stemming from a fire on a Sea-Doo personal watercraft. (216 Cal.App.4th at 595.) The plaintiff alleged that the watercraft contained a defective fuel tank. (Ibid.) Bombardier filed a cross-complaint against Dow Chemical Canada ULC (“Dow Canada”), a successor company to a one-time manufacturer of fuel tanks used in Sea-Doo watercraft. (Ibid.)

Dow Canada moved to quash Bombardier’s summons and complaint on the basis that it was not subject to personal jurisdiction in the State of California. (Ibid.) To support this motion, Dow Canada presented evidence that its predecessor had manufactured fuel tanks exclusively in Canada, sold the fuel tanks in Canada pursuant to orders made in Canada, and that Bombardier manufactured its Sea-Doo watercraft in Canada. (Ibid.) Further, Dow Canada argued that its predecessor never had a registered agent in California, never qualified to do business in California, never manufactured any products in California, never had any employees, offices, or facilities in California, and never advertised or sold any personal watercraft fuel tanks in California. (Ibid.)

In opposition, Bombardier argued that Dow Canada’s predecessor had known Bombardier would incorporate its fuel tanks and fuel tank filler necks in personal watercraft it intended to sell in the United States, including California. (Id. at 596.)

The trial court granted Dow Canada’s motion to quash. The Court of Appeal affirmed, holding:

We conclude both the plurality and the concurring opinions in J. McIntyre agree that mere foreseeability, at least where products are not sold in a state as part of the regular and anticipated flow of commerce into that state, is not enough to establish minimum contacts with the forum state. Beyond that, the opinions do not significantly add to the state of personal jurisdiction jurisprudence, and we thus rely on existing precedent to define and apply the purposeful availment prong of the minimum contacts test.

(Id. at 598.)

The Court of Appeal also concluded the United States Supreme Court’s jurisprudence demonstrated that “[a]n inquiry into a foreign defendant's purposeful availment of the forum state's benefits must find more than merely entering a product into the stream of commerce with knowledge the product might enter the forum state.” (Id. at 602.) However, the Court of Appeal cautioned that how much more, or less, must be shown to establish purposeful availment remained unclear. (Ibid.) As such, the Court of Appeal turned to California jurisprudence, which required a finding that Dow Canada had “clear notice that it is subject to suit [in California]” and could “act to alleviate the risk of burdensome litigation by procuring insurance, passing the expected costs on to customers, or, if the risks are too great, severing its connection with the state.” (Id. at 602-03.

Applying this test, the Court of Appeal concluded that Dow Canada could not be subject to personal jurisdiction:

Dow Canada and its predecessors did not purposefully direct their activities toward the residents of California. They created no substantial connection with California or continuing obligations between them and California. They did not deliberately engage in any significant activities within California. Because of their lack of contacts with California, they could not reasonably expect to be subject to California's jurisdiction.

(Id. at 603.)

In dicta, the Court of Appeal noted that even with additional evidence demonstrating that Dow Canada knew the Sea-Doo would be sold in California, as well as the high volume of sales of such watercraft, the result would be the same. (Id. at 605.) The Court focused on the nature of the particular transaction at issue—i.e., Dow Canada’s predecessor’s sale to Bombardier, noting that it would be “unfair” to hale a Canadian corporation into California to litigate issues of indemnity arising from a transaction between two Canadian companies in Canada.

C. Bombardier and the Road Ahead

Bombardier constitutes the latest enunciation of California’s approach to personal jurisdiction. After Bombardier, California appears to have expressly embraced the somewhat vague notion that mere foreseeability is not enough to constitute purposeful availment of a forum state. Beyond that, though, California will require that a manufacturer have “clear notice” that it can be subject to suit in a forum state. In addition, the Bombardier court also indicated that, at least under the “reasonableness” standard of the Due Process Clause, personal jurisdiction does not exist where the two foreign companies seek to litigate a dispute arising in a foreign nation.

The implications of this case may be significant, particularly in product liability cases. While the Bombardier court did not firmly establish what, beyond foreseeability, is necessary to establish purposeful availment (i.e., to provide “clear notice”), the analysis it undertook examined factors such as continuing obligations or concerted activity in the State of California. This, in turn, suggests that even actual knowledge that a product will make its way into California may not be enough to allow for the exercise of personal jurisdiction.

Thus, at least for the time being, distributors and other parties “in the supply chain” who do business in California must be wary of litigation where other members in the chain restrict their operations to a foreign jurisdiction. After all, if litigation were to arise, such distributors would likely need to present evidence above and beyond knowledge of the end market for a product, or the distributor’s volume of sales. Rather, some type of affirmative conduct, e.g., advertising by the manufacturer or other contractual relations in California, is likely necessary to allow for the exercise of personal jurisdiction.

From a risk placement perspective, the implications of the case are particularly clear. Underwriters must be cautious when insuring distributors and other parties “in the supply chain.” As discussed above, where other members in the chain restrict their operations to a foreign jurisdiction, an insured may find their suppliers are not subject to jurisdiction and leaving the insured (and potentially the insurer) as the sole “target” who must defend, and potentially indemnify, a claim for damages. In some situations, the shrinking of personal jurisdiction will foreclose risk transfer to the appropriate parties. Accordingly, a careful analysis of an potential insured’s manufacturing process at the underwriting stage may yield significant benefit. Insureds who can demonstrate that utilize local suppliers will likely pose a more quantifiable risk. Conversely, potential insured who cannot so demonstrate or that use foreign suppliers might best be treated as though they utilize a vertically integrated manufacturing process when assessing the risk and determining premiums.


III. A COMPARATIVE ANALYSIS OF OTHER JURISDICTIONS’ POST-J.MCINTYRE APPROACHES

Bombardier is not the only appellate decision to attempt to clarify the state of personal jurisdiction law following the J. McIntyre. Since its publication, state courts in both Louisiana and Illinois have published appellate decisions which conducted a thorough analysis of the issues therein. The following sections will address each decision in turn.

A. Louisiana - Jacobsen v. Asbestos Corporation

In Jacobsen v. Asbestos Corporation Limited, 2013 La. App. LEXIS 1066 (La.App. 5 Cir. May 30, 2013), the plaintiff brought an action for injuries relating to asbestos exposure. One of the defendants was Norca Corporation (“Norca”), an industrial broker. Norca asserted that the State of Louisiana lacked personal jurisdiction over it, citing its lack of physical presence in the state. Further, Norca argued that it never directly handled any asbestos, but rather served only as an intermediary between producers and purchasers. (Id. at *30-32.) Norca also presented evidence indicating that it neither knew nor had control over where the purchaser would ultimately use or sell asbestos. (Id. at *31.) In opposition, the plaintiff introduced evidence suggesting that Norca also served as a supplier of asbestos and, in that capacity, placed asbestos in the stream of commerce. (Id. at *32.)

The trial court granted Norca’s motion, finding that Louisiana lacked personal jurisdiction. The Louisiana Court of Appeal affirmed, but first discussed the J. McIntyre decision. In this regard, the Louisiana Court of Appeal noted that plurality approach did not command binding precedent, and proceeded to apply a broader stream of commerce test, wherein “a defendant's placing of its product into the stream of commerce with the knowledge that the product will be used in the forum state is enough to constitute minimum contacts.” (Id. at *23, 28.) Ultimately, however, the Louisiana Court of Appeal found “there is no evidence that Norca could ever reasonably anticipate that its products would find their way to Louisiana.” (Id. at *40.)

Thus, Louisiana law presently would allow the exercise of jurisdiction where a manufacturer, distributor, or other supplier places an item in the stream of commerce with knowledge that it will reach Louisiana. (Or, in Jacobsen’s parlance, where the manufacturer can reasonably anticipate that the product will reach Louisiana. Thus, Louisiana’s approach following Jacobsen appears to be more expansive than California’s post-Bombardier landscape.

B. Illinois – Russell v. SFNA

In Russell v. SFNA (Ill. 2013) 965 N.E.2d 1, the plaintiff filed a product liability claim arising from a fatal helicopter crash. One defendant, SFNA, moved to dismiss the plaintiff’s action for lack of personal jurisdiction. (Ibid.) SFNA manufactured tail-rotor bearings which were custom made for the helicopter piloted by the decedent. (Id. at 2.) After jurisdictional discovery, the plaintiff produced evidence demonstrating that SFNA knew that its parts were incorporated into the particular model of helicopter and that the helicopter manufacturer also retained SFNA parts for individual sale. (Id. at 5.) However, SFNA denied specific knowledge as to the final destination of its parts after sale to the helicopter manufacturer, although it knew that helicopters would be sold in the United States. (Id. at 5, 8.)

SFNA also sold parts to U.S. customers, including to a manufacturer (Hamilton Sundstrand) that had a division in Illinois. (Id. at 6.) However, SFNA shipped parts sold to Hamilton Sundstrand solely to Hamilton Sundstrand’s division in San Diego, California. (Id. at 7.) Nevertheless, SFNA’s contract with Hamilton Sundstrand indicated that the latter’s place of business was in Illinois, and provided that the agreement would be interpreted under Illinois law. (Id. at 8.) The trial court granted SNFA’s motion to dismiss. This ruling was then reversed on appeal, and the Illinois Supreme Court granted review.

The Illinois Supreme Court first engaged in an analysis of J. McIntyre, concluding that the opinion constituted a unanimous endorsement of the “continued validity of the stream-of-commerce theory . . . although the proper application of that theory is not settled.” (Id. at 37.) Further, the Russell court noted that J. McIntyre established that “specific jurisdiction should not be exercised based on a single sale in a forum, even when a manufacturer or producer 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.” (Id. at 37-38, internal quotation marks omitted.)

Ultimately, the Illinois Supreme Court declined to interpret J. McIntyre as requiring a change in Illinois’ present stream of commerce analysis, which requires that a defendant is “aware that the final product is being marketed in the forum State.” (Id. at 29, 40, emphasis in original.) With this framework established, the Illinois Supreme Court concluded that the State of Illinois could exercise personal jurisdiction over SFNA. The court found that SFNA could reasonably foresee that its parts would either be distributed to markets throughout the United States, because the helicopter manufacturer it sold to conducted business throughout the country. (Id. at 42-44.) Further, the court noted that SFNA’s relationship with Hamilton Sundstrand, which involved direct interaction with Illinois, created sufficient minimum contacts to allow for the exercise of personal jurisdiction. (Id. at 45-46.)

Russell suggests that Illinois’ approach to the “stream of commerce” test is more akin to Louisiana’s, rather than California. As in Peterson, Illinois requires only that a manufacturer be aware that their product will likely make its way to the forum state. Moreover, Russell made this determination largely based on the volume of sales and general market of SFNA’s helicopter manufacturer. As noted above, the Bombardier court, in dicta, suggested that such evidence is insufficient to provide the “clear notice” necessary under California law.


IV. CONCLUSION

The boundaries of the stream of commerce test for establishing personal jurisdiction remain undefined by the Supreme Court. However, the Supreme Court’s most recent decision has prompted further clarification of California’s approach to the stream of commerce theory, wherein the California Court of Appeal signifying that mere foreseeability is not sufficient to allow for the exercise of personal jurisdiction. Rather, a manufacturer must have “clear notice” that it will be subject to lawsuits in California. This approach appears to be narrower than the approaches taken by Illinois and Louisiana in their most recent decisions. Thus, for the time being, distributors who contract with foreign companies that have little contract with California are faced with a potential “empty seat” in actions for damages and risk should be assessed accordingly.

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