Under what circumstances may a US plaintiff obtain jurisdiction over a foreign corporation merely because the foreign corporation has a subsidiary incorporated and doing business in the US? This question was recently before the US Court of Appeals for the Second Circuit in Jazini v Nissan Motor Company (2nd Cir. 1998).
Jazini and his family were injured while driving a Nissan Patrol automobile in Iran. The vehicle lost its rear assembly and crashed. Jazini sued Nissan Motor Company, Japan in federal court in New York. The Japanese company was not doing business in New York, but its US subsidiary was. Jazini alleged that the federal court had personal jurisdiction over the Japanese company through the activities in New York of its domestic subsidiary.
The trial court dismissed Jazini's complaint and the Second Circuit has affirmed. The appellate court stated that New York law is well settled on the standards which courts apply in determining whether they have jurisdiction over a foreign parent corporation on the basis of the presence of a subsidiary in the state. The plaintiff must establish that the domestic subsidiary is either an 'agent' or 'mere department' of the foreign parent. For New York courts to have personal jurisdiction. The presence of the subsidiary alone does not result in the parent being present in New York.
To establish that a subsidiary is an agent of the foreign parent, the plaintiff must show that the subsidiary "does all the business which [the parent] could do were it here [in New York] by its own officials". In determining whether the subsidiary is a mere department of the parent, a New York court will consider four factors:
- common ownership;
- financial dependency of the subsidiary on the parent;
- the degree to which the parent interferes in the selection and assignment of the subsidiary's executive personnel and fails to observe corporate formalities; and
- the degree of control over the marketing and operational policies of the subsidiary exercised by the parent.
The Second Circuit held in Jazini that the plaintiff had failed to meet either the agent or mere department test. Jazini had only asserted that one of Nissan's four managing executive directors was chairman of Nissan Motor Company USA and that excerpts of Nissan's Annual Report show the Japanese company's "pervasive control and domination of its New York subsidiaries". These allegations were not sufficient to establish jurisdiction over the Japanese parent company. In fact, the Second Circuit ruled that they were not sufficient to allow discovery on the jurisdictional issue, thereby preventing Jazini from developing more facts on which to present a case. As stated by the Second Circuit, Jazini's difficulty in establishing jurisdiction over Nissan "is the consequence of the problems inherent in attempting to sue a foreign corporation that has carefully structured its business so as to separate itself from the operation of its wholly-owned subsidiaries in the United States — as it properly may do".
These are comforting words to foreign corporations doing business in the US through US subsidiaries. However, foreign corporations must be careful to maintain the independence and profitability of their US subsidiaries if they want to be insulated from litigation in the US.