April 20, 2017, Trial News

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No jurisdiction over foreign corporation for design defect claim, Ninth Circuit rules

Kate Halloran

photo of dictionary entry of jurisdiction

California courts cannot exercise jurisdiction over foreign corporation Yamaha Motor Co. Ltd., in a case involving design defect claims against its domestic subsidiary, the Ninth Circuit has ruled. The court held that the plaintiffs’ complaint did not allege sufficient facts to establish general or specific jurisdiction over Yamaha for allegedly defective boat motors.
 

California courts cannot exercise jurisdiction over foreign corporation Yamaha Motor Co. Ltd., in a case involving design defect claims against its domestic subsidiary, the Ninth Circuit has ruled. A group of plaintiffs alleged violations of federal and state warranty laws and state consumer protection laws for defective boat motors. The court held that the plaintiffs’ complaint did not allege sufficient facts to establish general or specific jurisdiction over Yamaha. The court also dismissed the complaint against the subsidiary for failure to sufficiently allege consumer fraud and unreasonable safety hazard claims. (Williams v. Yamaha Motor Co. Ltd., 2017 WL 1101095 (9th Cir. Mar. 24, 2017).)

Twenty plaintiffs alleged that outboard motors designed and manufactured by Yamaha in Japan were inherently defective, creating corrosion in the dry exhaust system that caused the motors to fail before their expected hours of use limit. Because of the average time the motors were generally used each year, the defect was not apparent until after the three-year warranty expired.

The motors were imported and marketed in California by Yamaha’s wholly owned subsidiary Yamaha Motor Corp., U.S.A. The district court granted Yamaha’s motion to dismiss, which argued that the court lacked jurisdiction over the defendant. It also granted the subsidiary’s motion to dismiss the state consumer fraud claims, and the plaintiffs appealed.

The Ninth Circuit explained that the U.S. Supreme Court had refined its test for general jurisdiction in Daimler AG v. Bauman (134 S. Ct. 746 (2014)), focusing on “whether a corporation is essentially ‘at home’ in the forum state” and rejecting that engaging “in a substantial, continuous, and systematic course of business” was sufficient. In subsequent Ninth Circuit case law, the court found that an “alter ego” theory for imputing general jurisdiction on a foreign parent corporation or subsidiary still existed. To establish that a foreign company is effectively the alter ego of the domestic entity, plaintiffs must show that the two are so entwined that the separate identities of each no longer exist and that not setting aside these separate identities “would result in fraud or injustice.”

The court determined that Yamaha did not meet the general jurisdiction test outlined in Daimler—it is incorporated and has its principal place of business in Japan, does not have employees or office space in California, and its widespread operations across the world and small percentage of net sales in California did not make Yamaha at home in the state. The court also rejected the plaintiffs’ argument that the domestic subsidiary is Yamaha’s alter ego because there was no prima facie evidence that the subsidiary’s contacts in California could be imputed to its foreign parent. Even if the plaintiffs could show that Yamaha is an alter ego, exercising general jurisdiction over the foreign parent does not necessarily follow.

Specific jurisdiction over a nonresident defendant also did not apply because the plaintiffs did not meet a three-part test: that Yamaha purposefully directed its activities at or took advantage of benefits in California, that their claims were connected to those activities, and that exercising jurisdiction would be reasonable. The court considered whether the subsidiary’s activities within California could be imputed to Yamaha through an agency theory, which the Daimler Court found could not apply to general jurisdiction but may be viable for specific jurisdiction.

However, the Ninth Circuit’s existing test for agency—that the parent would perform the subsidiary’s activities within the state if it did not have another entity or actor to perform them—could not be reconciled with Daimler, which found that such a standard could not apply in the context of general jurisdiction because it likely would always favor exercising jurisdiction. Instead, the court reasoned that, based on traditional notions of agency, the plaintiffs had not alleged prima facie evidence that the subsidiary acted on Yamaha’s behalf or that it was subject to Yamaha’s control over its activities in California.

The plaintiffs did allege sufficient facts to support that the subsidiary was aware of problems with the motors as early as 2001—it created a dedicated customer service center to deal with the complaints, which were recorded and then shared with management. However, because the plaintiffs failed to show that the motor corrosion was an unreasonable safety hazard, the court affirmed dismissal of their claim. The plaintiffs argued that the corrosion could lead to onboard fires and loss of steering power that could cause injuries, but the court was not persuaded that this posed an unreasonable risk—no injuries had occurred so far, the risk was highly speculative, and corrosion is a normal consequence of using outboard motors that was merely accelerated by the defect.

Seattle products liability attorney Dan Laurence explained that plaintiff lawyers need to adjust their approach to researching and pleading personal jurisdiction over a foreign company in the wake of Daimler. “Making profit in a state, collecting sales taxes and paying them to the state, enjoying the protection of the state’s law enforcement agencies, having access to the state’s courts to enforce debt collection or other rights, using the state’s highways maintained by the state’s taxpayers, being insured by insurance companies regulated by the state, drawing water from the state’s rivers, obtaining tax reductions and waivers and other incentives from the state, contracting for the labor of people working and living in the state—all are seemingly not enough to subject a corporation to that state’s general jurisdiction,” he said. “It’s a ridiculous rule. But it is the rule. Similarly, doing all those things through a domestic agent may not be enough to establish ‘minimum contacts’ required for specific jurisdiction.”

Laurence noted that plaintiff attorneys “need to do sufficient prefiling work” to survive dismissal, and he offered a few ways for lawyers to tackle jurisdiction head-on. “Daimler is not for alien (non-U.S.) companies only. Do as much prefiling homework as possible, and plead as specifically as possible. When lacking a domestic connection over a foreign defendant, look for a local affiliate,” he said. “If diligent prefiling investigation still does not produce enough facts to enable you to plead a solid jurisdictional case, then plead jurisdiction on information and belief formed after a reasonable inquiry, and seek jurisdictional discovery as soon as possible. Consider filing suit where jurisdiction clearly exists and then seeking a change of venue.”

Laurence further pointed out that although Daimler recognized in dicta that agency relationships may be relevant to specific jurisdiction, the Williams decision “establishes that, at least in the Ninth Circuit, the Daimler rationale that precludes agency contacts as a theory to establish general jurisdiction over a foreign principal also informs the specific jurisdiction analysis, such that specific jurisdiction can no longer rely on the agency theory from Doe v. Unocal Corp. (248 F.3d 915 (9th Cir. 2001))—that the foreign parent’s reliance on a domestic subsidiary to perform in-forum services is sufficient to constitute ‘minimum contacts.’”

Although the Ninth Circuit found that some form of agency analysis still could be viable, it did not elaborate on what that analysis would be, Laurence explained. “Moreover, while alter ego theory may remain viable, alter ego must be supported with pleaded specific facts. And when alter ego is used to support general jurisdiction, those facts must rise to the level of proving the foreign corporation ‘at home’ in the forum,” he said.