USA June 28 2023
Hidden amidst the more high profile end of term decisions from the Supreme Court is a seemingly boring procedural decision that could have significant impact on businesses and expose them to litigation in a multiplicity of states where they never expected to be sued.
Nine years ago, in Daimler AG v. Bauman, 571 U.S. 117 (2014), the Court ruled that businesses are generally susceptible to suit only where they are incorporated and in their principal place of business. They are not subject to suit in a state on any matter merely because they happened to do some business there, including through a subsidiary. And businesses with a national distribution network therefore are not subject to suit anywhere their goods happen to end up. Id. 760-62.
In the new Mallory v. Norfolk Southern R. Co. decision, however, 600 U.S. ___ (Jun. 27, 2023), the Court dialed that back and held that Daimler should not be read so broadly. Instead, companies are also subject to suit in states where they are registered to do business if the registration statute of the particular state provides for a consent to jurisdiction. In that event, they are deemed present in the state just as a domestic company would be and can be sued for anything — contract, tort or otherwise — even if the lawsuit has no connection to any business the company transacted in the state.
Relying on the concept that consent has always been an exception to the old rule in International Shoe Co. v. Washington, 326 U.S. 210 (1945), that the Due Process clause protects against the unfairness of “haling” someone into court in another state with which it has few (if any) contacts, the Court held that the rule about personal jurisdiction being “specific” or “general” — which underpins Daimler — exists “side by side” a regime that continues to allow jurisdiction based on presence. And consent to jurisdiction under Pennsylvania’s registration to do business statute was held to be tantamount to physical presence since the statute says that an out of state business, once registered, is “deemed … located” in the state and treated the same as a local Pennsylvania business, and that once registered, state courts may “exercise general personal jurisdiction” over an out of state company. Norfolk Southern, slip op. at 10-11.
Of course, not all state foreign business registration statutes are written the same way, and Pennsylvania’s was particularly clear about registration constituting consent to jurisdiction. This made it easier for the Court to point to Norfolk Southern’s 20 years of registration-based consents and significant Pennsylvania operations as evidence that there was nothing unfair about making it litigate in Pennsylvania even in cases having no connection to the state. Id., slip op. at 17-20. But as the Court itself notes, some state business registration statutes are vaguer and just appoint the Secretary of State as agent for service of process, without saying for what types of cases they are appointed, or limit the jurisdictional consent to certain types of suits or certain types of companies. Id., slip op. at 6-7. The Court, relying on Pennsylvania Fire Inc. Co. v. Gold Issue Mining & Milling Co., 243 US. 93 (1917), nonetheless suggests that such a general appointment may well constitute a broad consent to jurisdiction. Norfolk Southern, slip op. at 8-9.
The Court’s decision in Norfolk Southern was limited to the question of whether holding an out of state company to jurisdiction in such circumstances violates the Due Process clause of the Constitution, and the Court held (5-4) that it does not. But the Court fractured — with four separate opinions — on what that means going forward.
Notably, Justice Alito’s concurrence highlights an argument not only for the Pennsylvania courts to consider on remand of Norfolk Southern, but also for businesses to use in other cases in an effort to narrow the impact of the Court’s ruling. Specifically, he noted that notwithstanding the purported consent, allowing states to mandate that companies must consent to all-purpose jurisdiction in their state as a condition of doing business may violate the Commerce Clause, either as discrimination against, or an undue burden on, interstate commerce. Concurring slip op. at 11-13. In that regard, he questioned what legitimate local purpose a state can have in seeking to exercise jurisdiction over companies based elsewhere when the claim has nothing to do with that forum state. And applied 50 times over, that would mean that every state can host litigation against companies that do business nationwide — the exact opposite of the result in Daimler — as long as their foreign business registration statute has some type of non-negotiable consent language, such that the commercial imperative of registering to do business in a state renders the company susceptible to all manner of lawsuits there.
As a practical matter, there is not much that many businesses can do about this conundrum. The commercial necessity of selling goods and services nationwide means that they may have no choice but to “consent” to broad jurisdiction in states that leave a company no option but to “consent” if they want to transact in the state. Whether a company with a sufficient appetite for litigation is willing to undertake a lengthy Commerce Clause challenge to such a regime in a later case has yet to be seen. For now, businesses need to be mindful that what was once perceived as a ministerial act of registering to do business in multiple states (and paying any required fees and taxes there) may now be a broad license to be sued in the courts of that state even in matters having nothing to do with the business transacted there.
Fried Frank Harris Shriver & Jacobson LLP – Peter L. Simmons, Michael C. Keats, Samuel P. Groner and Michael P. Sternheim