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We Are Being Sued Where?

Date: 12/6/11

Imagine that your company manufacturers snow sleds.  Now imagine you were just served with a summons and complaint for a lawsuit filed against you in south Texas.  No doubt your next thought will be "We are being sued where?  We do not sell sleds in Texas!"  Such a remark would not be unusual upon receipt of a Complaint filed in a state where there is no snow, no mountains and no hills, and where you do not “do business,” or so you would think!  As the world gets smaller via marketing efforts and the internet, you may want to closely examine where you “do business.”  Some of you may be unknowingly or unintentionally doing business in states you never thought of. 

What am I talking about?  It is called subject matter jurisdiction, and it will get you hauled into Court in a state where you wish you were not, i.e., South Texas, Florida, Louisiana, Cook County, Illinois, etc.  (Not many sledders in South Texas, Florida, Louisiana, unique laws, and large verdicts too!)

Here are the nuts and bolts of subject matter jurisdiction:  
 
You are being sued in Federal Court in a foreign jurisdiction, such as south Texas (no offense to you all from Texas).  In diversity, cases (those in which the plaintiff and defendant are citizens of different states) the existence of personal jurisdiction is a two-step analysis.  First, the court must determine whether the law of the forum state, the state the suit is brought in, permits the exercise of jurisdiction over your company.  Second, the exercise of jurisdiction under state law must comport with the Fourteenth Amendment Due Process Clause.  However, most courts will hold that a state’s Long Arm Statute, a law which allows a foreign state to reach into your state of domicile and pull you within its authority, stretches to the limits of federal due process.  Thus, the inquiry of subject matter jurisdiction will ultimately turn on whether the exercise of personal jurisdiction over your company comports with the Due Process Clause of the Fourteenth Amendment.

Due process clause analysis under the Fourteenth Amendment has two components.  The first prong of the analysis is that your company must have “purposefully availed itself of the benefits and protections of the forum state by establishing ‘minimum contacts’ with that forum state.”  International Shoe Co. v. Washington, 326 U.S. 310, 315-17 (1945).  This “purposeful availment” requirement ensures that a non-resident defendant will not be hauled into a jurisdiction based upon “random,” “fortuitous,” or “attenuated” contacts or the “unilateral activity of another party or a third person.”  Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985).  In other words your company’s activities must demonstrate an intention to submit to the powers of a foreign state.  J. McIntyre Machinery, LTD.  v. Nicastro, 131 S. Ct. 2780 (2011).  

The second prong is that the exercise of personal jurisdiction over the nonresident defendant must not “offend traditional notions of fair play and substantial justice.  Asahi Metal Industry Co., Ltd. v. Superior Court of Cal., Solano County, 480 U.S. 102 (1987).

Prong Number One

The purposeful availment prong of the due process analysis is twofold:  specific personal jurisdiction versus general personal jurisdiction.

Specific jurisdiction arises when your company's relationships or contacts within the state where the suit is filed arise from or are directly related to the cause of action.  For example:  you are being sued in Texas as a result of an injury sustained by a person who was injured when the company's CEO runs her over in the company limousine.  General jurisdiction, however, will attach, even if your company's contacts with the forum state are not directly related to the cause of action.  For instance, if your company is “in” Texas on a “continuous and systematic” basis, a court may find general jurisdiction in a case involving a Texas resident who is injured in your state of domicile.  For example, putting on presentations for and sponsoring a Texas sledding club with sleds for a longhorn sledding pull in Colorado.  (Okay, dim-witted example, you get the idea.  Besides, what do Texans do with sleds anyway?)

What does this mean in English?  It means:  ‘Watch what you do in other states!”

There are numerous factors a court may look at in reaching its determination whether a company purposefully availed itself to jurisdiction in that state, for example, the court may consider whether your company maintains or conducts some or all of the following in its jurisdiction:  employees, trade shows, marketing, advertising, public relations, contracts, bank accounts,  property, independent contractors, loans, recruits employees, attends employment shows or consumer shows, maintains a presence in the airports, conducts meetings, broadcasts radio or television promotions, maintains a web site from which people can purchase your product, retains any services including legal or financial, direct mail to residents, advertises in magazines, places telephone calls to the jurisdiction, visits the jurisdiction, receives revenue from the jurisdiction, maintains relations with companies of any kind, or purchases products from the jurisdiction, i.e., is Texas Instruments the official software provider of your company; is Texaco the official oil supplier?

In summary, take a look at the above factors and determine what contacts your company has with various states.  You may be shocked!

Prong Number Two

The second prong of the due process analysis relates to the traditional notions of fair play and substantial justice; in other words, the unfairness of forcing your company to defend an action in another state.  That analysis considers a number of factors:

(1) [T]he burden upon the nonresident defendant; (2) the interests of the forum state; (3) the plaintiff’s interest in securing relief; (4) “the interstate judicial system’s interest in obtaining the most efficient resolution of controversies”; and (5) “the shared interest of the several States in furthering fundamental substantive social policies.”

World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 292 (1980).

Arguably, your company's defenses would be that it is prejudiced because its witnesses, resources, and documents are located in your state.  Moreover, your home state clearly has a substantial interest in the resolution of disputes involving a major manufacturer such as your company.  Plaintiffs would be equally able to pursue their claim against your company in your state and would arguably not be prejudiced.  Further, the resolution of the potential claims of the plaintiffs would be more efficient in your state, as a local court is familiar with the applicable law. 

In reality, if a court finds the first prong of the test is met, the second prong of the test usually follows suit.

Now you are asking yourself “so what if we are sued in south Texas, we receive a lot of revenue from our presence in Texas!  They are good people!”  That is a business question your company must ask itself.  The best approach is not to maintain a bank account in a foreign state, not to have employees residing in a foreign state, retain an advertising agency in your home state, etc. Marketing and public relations can be done effectively while still minimizing the chances that a plaintiff can exert jurisdiction over your company in a foreign state.  Of course, the internet has created a whole new area of consideration, and is worthy of a separate article.  Humm, maybe my next article!  For now, take a look at your contacts; it is worth your time and maybe your money. 

Article By:
Kimberly A. Viergever, Partner
Rietz Law Firm, LLC
kim@rietzlawfirm.com

 

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