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Delaware Supreme Court Ruling Changes Personal Jurisdiction Rules for Out-of-State Businesses

NY Photographic [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], via PicserverDoing business across state lines can potentially empower courts in other states to exercise jurisdiction over your business. The legal doctrine of personal jurisdiction determines when a court in a particular state may exercise its authority over a party located elsewhere, but the circumstances when this occurs can be difficult to define. The Delaware Supreme Court recently ruled that the mere act of registering in Delaware as an out-of-state, or “foreign,” corporation did not render a Georgia corporation subject to the state’s jurisdiction. Genuine Parts Co. v. Cepec, No. 528,2015, slip op. (Del. Sup. Ct., Apr. 18, 2016). While the ruling is only effective in Delaware, it could have important ramifications around the country.

Business entities created under state law protect owners from liability and offer other benefits. A business must form under the laws of a particular state, and businesses located all over the country choose to form as corporations under Delaware law. This makes them foreign corporations in their own home states, which means they must register as a foreign corporation before they may do business. In California, for example, foreign corporations must obtain a “certificate of qualification” from the Secretary of State. Cal. Corp. Code § 2105. The question for the Delaware Supreme Court was whether this registration, by itself, establishes personal jurisdiction.

Courts have held that exercising personal jurisdiction without justification violates a person’s due process rights. The U.S. Supreme Court has ruled that a court may only exercise personal jurisdiction over an out-of-state person if they have sufficient “minimum contacts” with that state. Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). The meaning of “minimum contacts” has generally been decided on a case-by-case basis. The court set a much higher standard for situations in which the claim of jurisdiction is based on contact by a defendant’s subsidiary company. Daimler AG v. Bauman, 571 U.S. ___ (2014).

States have enacted statutes establishing their courts’ rights to exercise “long-arm jurisdiction,” see, e.g. Cal. Code Civ. P. § 410.10, but the “minimum contacts” criterion remains a troublesome issue in many cases. California courts have found that they may exercise personal jurisdiction over, for example, an out-of-state company that advertises heavily within the state, Snowey v. Harrah’s Ent’mt, 112 P.3d 28 (Cal. 2005); and an out-of-state franchise of a California-based company, Vons Cos. v. Seabest Foods, Inc., 926 P.2d 1085 (Cal. 1996). The “minimum contacts” standard does not apply, however, to the mere act of posting to an internet forum hosted by a California business. Pavlovich v. Superior Court, 58 P.3d 2 (Cal. 2002).

The plaintiffs in the Cepec case are Georgia residents. They filed suit in Delaware against a Georgia corporation, whose principal place of business is in Georgia, for alleged asbestos exposure at a facility owned by the defendant in Florida. The defendant has registered as a foreign corporation in Delaware, but reportedly it did less than one percent of its business there.

The Delaware Supreme Court held that the defendant’s registration as a foreign corporation was not sufficient to establish personal jurisdiction. In ruling this way, the court overturned its own precedent, which held that registration constituted “express consent” to jurisdiction. Sternberg v. O’Neil, 550 A.2d 1105, 1111 (Del. 1988). The Court held that Daimler, decided in 2014, had “fundamentally undermined” the “view of federal jurisprudence” expressed in Sternberg. Cepec, slip op. at 2.

Business litigation attorney James G. Schwartz has represented Bay Area businesses and business owners since 1976. To schedule a free and confidential consultation with an experienced and skilled business advocate, contact us today online or at (925) 463-1073.

More Blog Posts:

State Court of Chancery Addresses Choice of Forum in Corporate Litigation Across International Borders, Pleasanton Business & Commercial Lawyer Blog, February 29, 2016

Delaware Law Applies to California Shareholder Derivative Suit, According to Court, Pleasanton Business & Commercial Lawyer Blog, February 13, 2015

Supreme Court Limits Jurisdiction of U.S. Courts over Foreign Corporations with Domestic Subsidiaries, Pleasanton Business & Commercial Lawyer Blog, March 28, 2014

Photo credit: NY Photographic [CC BY-SA 3.0], via Picserver.