Supreme Court Rules that Daimler is Too Big to be Sued

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In the Daimler AG v. Bauman decision handed down on January 14th, the U.S. Supreme Court delivered another strong blow to human rights. This one, though, was much quieter. We didn’t have to wait in line at midnight to get in to hear the arguments. The press coverage was minimal. But like so many dark horses, there’s a lot more to this decision.

The suit was brought in California by employees of DaimlerChrysler’s Buenos Aires plant who were tortured, disappeared, and killed during Argentina’s “Dirty Wars.” The victims alleged that the plant management worked with the military regime to turn over employees who they considered “subversive.” The decision did not address whether these abuses occurred, but rather whether the court in California – where Daimler did billions of dollars’ worth of business where its subsidiary Mercedes Benz USA (MBUSA) had its regional headquarters – had jurisdiction, the authority to hear the case, at all.

The big takeaway was what may be a dramatic change to the Court’s approach to “general jurisdiction,” the authority of a California court to hear a case against a defendant that has nothing to do with California. To determine whether there is general jurisdiction over a person or company, the Court has up to now used a test which looks at whether the company has  “continuous corporate operations” that are “so substantial and of such a nature” that it would be fair to sue them in that state, even for actions that did not occur there.

The Court held that Daimler could not be sued in California. While the decision itself did not come as a surprise, the majority’s reasoning was troubling, seeming to require that courts now examine not only a business’s contacts within that state, but also in comparison to its contacts in other places. So while Daimler had extensive ties in California, it couldn’t be sued there because it may have done more business somewhere else. Justice Sotomayor’s concurring opinion criticizes the majority for creating a “too big for general jurisdiction” precedent.

While not argued in the lower courts, this issue of comparative jurisdiction came up at oral argument.  When asked why they be allowed to sue in a California court, Kevin K. Russell, arguing on behalf of the plaintiffs, answered that MBUSA does billions of dollars of business in California, and was quickly cut-off by Justice Kagan’s response that these billions of dollars equaled only 2.4% of Daimler’s sales. Mr. Russell’s on-point response is possibly what triggered Justice Sotomayor’s opinion.

[T]he problem is a corporation shouldn’t be jurisdictionally better off simply because it’s bigger than its competitors who are smaller and therefore necessarily do a bigger portion of their business in a smaller number of places. I think there is a very significant fairness problem with the proportionality test… Nobody ever argued that MBUSA didn’t do enough business in California, and in fact it’s done billions of dollars of business there and it’s enjoyed the benefits of being in the State, of doing business in the State, to a far greater degree than many of its competitors, say Tesla, which is subject to general jurisdiction for suits for anything that it does anywhere in the world.

Justices Alito, Scalia and Kagan seemed hung up on the idea of creating a test using a percentage versus an amount to decide what significant contacts with a state would look like, explicitly favoring the idea of a percentage. This preference obviously carried over to the decision.  Now a plaintiff may have to show not only that the defendant had significant contacts in the state where they are suing, but also that those contacts are more significant than ones they have in other states.

How does a test like that retain “traditional notions of fair play and substantial justice,” the phrase the Court has long used to describe the limits of jurisdiction under the Constitution? Where is the fair play in ruling that a small business headquartered in California, with a few employees and a small volume of sales, may generally be sued there, but a large multinational with a thousand times the sales and staff may not? Where is the fair play in disincentivizing companies from setting up headquarters in the U.S.? Where is the substantial justice in allowing Daimler to reap tremendous profits from the people of California, but not allow them to scrutinize its operations abroad – simply because it may make more money or have a bigger office somewhere else? Whose justice is that, exactly?

A much simpler formulation, the one that has been part of the Court’s jurisprudence for a long time, offers much more fairness than insisting on a relative standard. Justice Sotomayor reminds us that,

our precedents had established a straightforward test for general jurisdiction: Does the defendant have “continuous corporate operations within a state” that are “so substantial and of such a nature as to justify suit against it on causes of action arising from dealings entirely distinct from those activities”?… In every case where we have applied this test, we have focused solely on the magnitude of the defendant’s in-state contacts, not the relative magnitude of those contacts in comparison to the defendant’s contacts with other States.

In its haste to shield large companies from even the possibility of suit, the Court tossed aside good precedent, and created a new test that may have impacts that reach far beyond the type of factual scenario that the decision was based on.

Photo by Sergio Moises Panei Pitrau, used here under a CC-BY-SA license.

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