Alter Ego Jurisdiction over Foreign Corporations - Part 1 Chapter 18 - The Practice of International Litigation - 2nd Edition
Lawrence W. Newman has been a partner in the New York office of Baker & McKenzie since 1971, when, together with the late Professor Henry deVries, he founded the litigation department in that office. He is the author/editor of 4 works on international litigation/arbitration.
Michael Burrows, Formerly, Of Counsel, Baker & McKenzie, New York.
Foreign parents of U.S-based companies are to a great extent protected, through their lack of physical presence and direct business dealings in the United States, from civil suits stemming from actions of their subsidiaries. The attenuation of these contacts with the United States assists foreign companies in avoiding what they least want—being subject to the personal jurisdiction of United States courts.
A parent may be subjected to the jurisdiction of the court under the applicable state long-arm statute or the Constitution’s due process principles. The usual way that a court asserts jurisdiction over a foreign parent in addition to the subsidiary is by characterizing the company’s U.S.-based subsidiary as an agent of the parent with respect to the matter before the court. Even if there is no applicable long-arm statute that would allow for the assertion of jurisdiction, the closeness of the relationship between the parent and the subsidiary may permit the court, under an “alter ego” theory, to look beyond the legal wall of corporate separateness. The result of such a ruling would be that the foreign parent, which had hoped to avoid the jurisdiction of the U.S. courts, finds itself subject to that jurisdiction.
The application of an “alter ego” theory for purposes of piercing the corporate veil of the U.S. subsidiary and thus obtaining jurisdiction over the foreign parent has been attempted in numerous reported cases. For the most part, however, these applications have failed because of the inability of the plaintiffs to satisfy the requirements that would justify the courts in piercing the corporate veil for jurisdictional purposes.
The standards that have been applied have generally been the same or similar to that for piercing the corporate veil for liability purposes. This standard may have two components. The first, and indispensable, component is that it must be shown that the relationship between the parent and the subsidiary makes the former the “alter ego” of the latter. The second element, which a plaintiff may or may not have to establish, is that there was some sort of fraudulent activity or intent on the part of the parent with respect to its relationship with its subsidiary. Traditionally, plaintiffs seeking to establish fraud have faced a higher hurdle to surmount.
However, a crack in the protective wall between parents and their subsidiaries may be coming to the surface. In a case decided by the United States District Court for the District of Massachusetts, a plaintiff was permitted to pierce the veil of a domestic corporation for purposes of exercising in personam jurisdiction over the corporation’s parent, a foreign company with no other ties to the United States.
In Schaefer v. Cybergraphic Systems, Inc., No. CIV. A. 93-12421-WGY, 1994 WL 548139 (D. Mass., Sept 21, 1994), Kathleen Schaefer brought a suit under the federal Fair Labor Standards Act and the RICO statute against her former employer, Cybergraphic Systems, Inc. (“Systems”), a company incorporated and doing business in Massachusetts. Schaefer sought damages for gender bias and sales commissions allegedly owed to her by Systems. When it became apparent that the domestic subsidiary would soon be insolvent, Schaefer, argued that she should be permitted to pierce System’s corporate veil in order to obtain jurisdiction over the company’s parent, Cybergraphic Systems, Pty., Limited (“Limited”), an Australian corporation which was not otherwise subject to suit by Schaefer under the Massachusetts long-arm statute. Schaefer based her claim on an alter-ego theory, arguing that “Limited so completely controls Cybergraphic’s [Systems] daily business activities in Massachusetts that the Court ought to disregard Cybergraphic’s [Systems] separate corporate identity.” The court ultimately found that the plaintiff had made a sufficiently strong prima facie case to allow the court to pierce the corporate veil, and permitted Limited to continue as a co-defendant.