Is there a constitutional right to corporate separateness?

(Marco Simons is Legal Director of EarthRights International.  He is a graduate of Yale Law School, where he received the Robert L. Bernstein Fellowship in International Human Rights.)

Although it’s gone largely unnoticed amid the blockbuster campaign finance and affirmative action cases, what could be one of the most significant cases of this Supreme Court term will be argued tomorrow – DaimlerChrysler v. Bauman. This happens to be an Alien Tort Statute (ATS) case arising out of Daimler’s alleged participation in targeting labor activists during the Dirty War in Argentina, but the issue in the case is far broader than the ATS. The Supreme Court is considering whether there is personal jurisdiction over Daimler, a German corporation, and Daimler is essentially arguing that it has a constitutional right to be treated separate from its subsidiaries. (One of the few institutions to notice Bauman is the Vanderbilt Law Review, which hosted a roundtable on the case.)

The Ninth Circuit held that the contacts of Daimler’s US subsidiary could be attributed to the parent for personal jurisdiction purposes, because, functionally speaking, they were essentially acting as a single business – the subsidiary was performing acts on behalf of the parent, which the parent would have had to do if the subsidiary did not exist. Daimler argues that this is a violation of due process, because the Constitution requires that it be treated separately from its subsidiary.

My organization, EarthRights International (ERI), submitted an amicus brief on the side of the Bauman plaintiffs, arguing that the Constitution does not enshrine any right to corporate separateness. Indeed, it’s difficult to see how it could – when both Due Process clauses were adopted, it was illegal in all states for one corporation to own another. How can a corporation have a constitutional right to be treated separately from its subsidiaries when subsidiaries did not exist when the constitutional provisions at issue were adopted?

It’s important to note that this case is not about what the “best” rule would be. Due to the interplay of the Federal Rules of Civil Procedure and the California long-arm statute, personal jurisdiction here extends to the limits of constitutional due process, and has not in any way been restricted by Congress. Back in 1925, under a different statutory regime, Justice Brandeis wrote for the Court in Cannon Manufacturing Co. v. Cudahy Packing Co. that a parent corporation’s presence in a state could not be established through the presence of a subsidiary – but he stated that this was due to the absence of statutory authority, not because the Constitution forbids it:

No question of the constitutional powers of the State, or of the federal Government, is directly presented. The claim that jurisdiction exists is not rested upon the provisions of any state statute or upon any local practice dealing with the subject. . . . Congress has not provided that a corporation of one State shall be amenable to suit in the federal court for another State in which the plaintiff resides, whenever it employs a subsidiary corporation as the instrumentality for doing business therein.

This situation has now changed, however, because – in California – Congress has effectively provided that anyone is amenable to suit in federal court whenever the Constitution permits exercise of jurisdiction. And in many other contexts, the Court has already determined that it’s okay to attribute the business of subsidiaries to the parent corporation.

In some ways Bauman is a followup to Kiobel v. Royal Dutch Petroleum, in which the Court decided earlier this year that claims under the ATS could not proceed where the only connection to the United States was the “mere presence” of a foreign multinational corporate defendant. (See ERI’s recent publication about Kiobel, Out of Bounds.) But Bauman has much more far-reaching implications. The Court is faced with the decision of whether to constitutionalize relatively recent innovations in corporate law, and hold that simply because state laws now allow corporations to own other corporations, due process forbids a more functional approach to jurisdictional contacts with the forum.

In other contexts, including tax law, the Court has declined to hold that corporations must be treated separately from their subsidiaries. Changing that in Bauman could have significant implications for a number of areas of the law where corporate separateness is not the rule, and add a new constitutional right that is uniquely available to corporations. Previously, questions of whether to credit separateness between parent and subsidiary corporations have generally been thought of as issues of state law, not the Constitution. After all, corporations can only exist when state law allows them to.

A ruling in favor of Daimler could also have the effect of further incentivizing offshoring of U.S. corporations. A U.S. corporation, headquartered here, is always subject to U.S. jurisdiction for its acts. But if that corporation changes its nationality, and its U.S. operations are now that of a subsidiary, the parent corporation – and, by extension, the rest of the corporation’s global operations – would become insulated from any scrutiny by U.S. courts.

I am most interested to see the approach of the Court’s self-identified originalists to this question. There can be no question that the original intent of the due process clause was not to afford some right to maintain distinctions between parents and subsidiaries, concepts which did not exist at the time. Will the originalists disregard their approach to the Constitution when it comes to protecting the interests of foreign multinational corporations?

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10 Responses

  1. Calvino says:

    Honest question:

    Who cares that Marco is a graduate of Yale Law School? Does it matter for this post? Does he introduce himself that way at parties?

  2. Marco Simons says:

    Honest response: I’m a guest here, and was told to put in that blurb ahead of my posts. At parties I usually just say, “I sue oil companies.”

  3. I, for one, appreciate learning of the educational background of bloggers.

  4. Calvino says:

    Honest sur-response (?):

    I like that line much better.

  5. Joe says:

    The intro blurb provides a mini-bio, which might not be the way it is handled in parties, and education info is pretty common there, isn’t it?

  6. TJ says:

    I don’t think you are framing the question quite right. Daimler is not arguing that “the Constitution requires that it be treated separately from its subsidiary” as much as it is arguing that principles of corporate law require that an stockholder be treated separately from an owned corporation, and that, given this principle of corporate law, it then violates Due Process to deem its subsidiary’s contacts its own.

    The difference in articulation matters quite a bit, I think. When I first read your title, I thought the proposition that the constitution establishes a right to corporate separate personality to be ludicrous, since nothing in the Constitution requires corporations to exist at all. But if the proposition is really that, once Delaware chooses to establish a corporation that is legally separate from its stockholders, the Due Process clause obliges California to recognize this principle, I think that proposition is eminently defensible.

  7. Douglas Levene (@DouglasLevene) says:

    Is the question whether there is a constitutional prohibition against haling into a US court a foreign entity whose only contact with the US is owning shares in a US subsidiary? Or or there other contacts asserted?

  8. Marco Simons says:

    TJ – Although that distinction is made primarily by the US in its amicus brief, I don’t think it is defensible. Delaware’s (or in this case Germany’s) internal rules on corporate separateness – which have never purported to be for all purposes, but general establish limited liability – have little bearing on the constitutional limits on California’s exercise of its judicial power. And indeed, numerous jurisdictions do disregard corporate separateness in a number of circumstances, and it’s never been thought of as a violation of due process. (Actually the US brief doesn’t even go that far; it is essentially says that California, or Congress, could choose to disregard corporate separateness for purposes of personal jurisdiction, but that the current California statute does not give notice to corporations that that’s what’s going to happen.) What if Delaware allowed corporations to hold subsidiaries but California deemed this illegal (as all states did in the 19th Century)? The Supreme Court has, for example, had no problem agreeing that California can disregard corporate separateness in the taxation context, and take a more functional economic approach.

    Framing it in terms of Delaware vs. California presents one set of issues, but I think the question is set in clearer relief if you look at it in terms of Germany vs. the United States. What if the U.S. Congress were to pass a law saying that foreign multinationals who do business here through subsidiaries are subject to general jurisdiction in the forums where their subsidiaries are present? Are you suggesting that due process would forbid such a statute, simply because Germany has chosen to endow its corporations with a certain set of privileges? In my view, that’s effectively what has been done here. Federal law – in the form of the FRCP – allows federal courts to exercise personal jurisdiction according to the rules of the states in which they sit. (If the Supreme Court thinks this rule is bad policy or too permissive, they could turn to the body with authority to change the Federal Rules… which happens to be the Supreme Court.) California has chosen to extend personal jurisdiction to the limits of due process. So if Congress could pass that law, and jurisdiction would be constitutional, then it should be allowed here as well.

    Douglas – that’s basically the question presented, yes. In this case all of the asserted contacts were attributed to the parent from the wholly-owned, indirect US subsidiary.

  9. TJ says:

    I really was trying to make a point about accuracy in framing rather than saying that your ultimate position was wrong. My point is that the principle of the corporate veil is coming from Delaware corporate law, not from the Due Process clause. The analytical question being presented is whether, and in what circumstances, Due Process permits a state to pierce the corporate veil, not whether the Due Process clause mandates that a corporate veil exist.

    That said, I do regard the opposing argument as at least defensible. Two points. First, the fact that the Due Process clause permits California to pierce the corporate veil established by another state in some contexts (taxation) is relevant to, but not dispositive of, whether it permits California to do so in the personal jurisdiction context. Second, I think your framing of the question as U.S. versus Germany misses the point I was making. Of course Congress can pass and enforce your hypothetical statute, but that is because it has authority over the U.S. subsidiary and could simply preempt Delaware law by holding that U.S. corporations have no corporate veil for personal jurisdiction purposes (or even that they have no corporate veil as against non-human owners). It requires nothing to do with the German parent or German law whatsoever. And this precisely illustrates why the question at issue is not whether Due Process itself requires corporate separateness (it doesn’t, and Congress can eliminate it) but only whether it requires a state to honor a corporate veil that is established by another state’s law.

  10. Marco Simons says:

    TJ – In the context of a parent and subsidiary, I guess I don’t really see the distinction; you can only meaningfully talk about parents and subsidiaries if there is a corporate veil of some form, so the question is whether the Constitution requires that that separation be honored in all circumstances. I do think that’s accurately framed as a right to corporate separateness – if two corporations exist, and one owns the other, does due process mandate that they be treated separately? That is the question here.

    And the question has not been framed in terms of whether California needs to honor a Delaware corporate veil; I think the question would be presented in the same way if it were a California corporation. The question has been framed as whether California can disregard corporate separateness for jurisdictional purposes in broader circumstances than it does so for liability purposes.

    I don’t think the hypothetical statute can depend only on the US ability to regulate a US subsidiary, because it wouldn’t need to be a US subsidiary. A German parent could incorporate a German subsidiary that does extensive business in the US and, under traditional rules, is subject to general jurisdiction here. Would Congress be restricted in any way from applying whatever test it wanted to exercise jurisdiction over the German parent? I don’t think so, but the President has yet to see fit to place me on the Supreme Court.