Recent NJ Appellate Court Decision Indicative of Continuing Uncertainty Regarding Personal Jurisdiction Over Foreign Manufacturers Using U.S. Distributors

The past few years have seen the United States Supreme Court issue a number of important decisions on the subject of personal jurisdiction. For example, the Court’s decisions in Daimler AG v. Bauman, 134 S. Ct. 746 (2014) and Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S. Ct. 2846 (2011), stressed that general jurisdiction may be exercised “only when the corporation’s affiliations with the State in which suit is brought are so constant and pervasive ‘as to render *it+ essentially at home in the forum State.’” Daimler AG v. Bauman, 134 S. Ct. 746, 751, 758 n. 11 (2014) (quoting Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S. Ct. 2846, 2851 (2011)). Many believe that these decisions reflect a purposeful shift by the Supreme Court to narrow the scope of personal jurisdiction, although the Court’s decisions do not themselves indicate that they are meant to represent any change in the law. Regardless, there is a discernible trend of lower courts more frequently granting motions challenging personal jurisdiction in the wake of these decisions than they did in the past.

Despite the Supreme Court’s recent pronouncements on personal jurisdiction, it has not resolved the question of when an entity can be subjected to personal jurisdiction in a U.S. forum based solely on its placement of a product that ended up causing injury into the “stream of commerce.” The Court most recently addressed this issue in J. McIntyre Machinery, Ltd. v. Nicastro, 131 S. Ct. 2780 (2011), which arose out of injuries the plaintiff sustained in New Jersey due to an allegedly defective metal- shearing machine that J. McIntyre Machinery, Ltd. manufactured in England, where it was incorporated and operated.

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By Barry S. Alexander and Lee C. Schmeer

The past few years have seen the United States
Supreme Court issue a number of important
decisions on the subject of personal jurisdiction. For
example, the Court’s decisions in Daimler AG v.
Bauman, 134 S. Ct. 746 (2014) and Goodyear Dunlop
Tires Operations, S.A. v. Brown, 131 S. Ct. 2846
(2011), stressed that general jurisdiction may be
exercised “only when the corporation’s affiliations
with the State in which suit is brought are so
constant and pervasive ‘as to render *it+ essentially at
home in the forum State.’” Daimler AG v. Bauman,
134 S. Ct. 746, 751, 758 n. 11 (2014) (quoting
Goodyear Dunlop Tires Operations, S.A. v. Brown, 131
S. Ct. 2846, 2851 (2011)). Many believe that these
decisions reflect a purposeful shift by the Supreme
Court to narrow the scope of personal jurisdiction,
although the Court’s decisions do not themselves
indicate that they are meant to represent any change
in the law. Regardless, there is a discernible trend of
lower courts more frequently granting motions
challenging personal jurisdiction in the wake of these
decisions than they did in the past.

Despite the Supreme Court’s recent pronouncements
on personal jurisdiction, it has not resolved the
question of when an entity can be subjected to
personal jurisdiction in a U.S. forum based solely on
its placement of a product that ended up causing
injury into the “stream of commerce.” The Court
most recently addressed this issue in J. McIntyre
Machinery, Ltd. v. Nicastro, 131 S. Ct. 2780 (2011),
which arose out of injuries the plaintiff sustained in
New Jersey due to an allegedly defective metal-
shearing machine that J. McIntyre Machinery, Ltd.
manufactured in England, where it was incorporated
and operated.

The Court held that there was no personal
jurisdiction over McIntyre in New Jersey despite the
fact that (1) a U.S. distributor agreed to sell
McIntyre’s machines in the U.S., (2) McIntyre officials
attended trade shows in the U.S., albeit not in New
Jersey, and (3) as many as four McIntyre machines,
including the one involved in the incident, ended up
in New Jersey. A plurality of the Court (four Justices,
one fewer than the five needed for a majority) held
that simply placing a product in the stream of
commerce would not permit the exercise of specific
personal jurisdiction unless the defendant could be
said to have targeted the forum; as a general rule,
the plurality added, it would not be sufficient that
the defendant might have predicted that its goods
would reach the forum state.

Unfortunately, the Supreme Court’s fragmented
decision in Nicastro, although it certainly did not
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render manufacturers more susceptible to specific
personal jurisdiction in the U.S., provides uncertain
guidance going forward because the plurality’s
decision does not constitute the holding of the Court.
Rather, a two-justice concurring opinion that decided
the case on narrower grounds constitutes the
opinion of the Court.

The Court’s failure to enunciate a straightforward
standard for applying the “stream of commerce”
theory in the context of specific personal jurisdiction
has left manufacturers and distributors alike in the
difficult position of having to guess when and where
personal jurisdiction might be exercised under such a
theory. The recent decision of the Superior Court of
New Jersey, Appellate Division in Patel v. Karnavati
America, LLC, et al., No. A-2737-13T4 (N.J. Super. Ct.
App. Div. Oct. 9, 2014), which surprised some, if not
many, of those following the case, is illustrative of
the uncertainty manufacturers and distributors
continue to face in planning their business operations
in anticipation of jurisdiction issues.

In Patel, the court held that New Jersey courts could
not exercise personal jurisdiction over Karnavati
Engineering, Ltd., an Indian corporation that
manufactured a tablet press machine alleged to have
caused injury to the plaintiff in New Jersey. In so
holding, the court rejected the plaintiff’s argument
that there was specific personal jurisdiction over
Karnavati because it sold a machine—in a foreign
country—to a New Jersey corporation with
knowledge that the machine was going to be
delivered by the distributor for use by another
corporation in New Jersey. The court added that
there was very little interaction between the Indian
manufacturer and the New Jersey corporate buyer,
the purchase agreement was structured entirely in
India, the machine was not integral to the New Jersey
user’s business, and the record did not contain
evidence of the user in New Jersey closely monitoring
the manufacturing process to ensure compatibility
with its operations.

The court’s analysis leaned heavily on the Supreme
Court’s plurality decision in Nicastro, referring to “a
post-Nicastro stream of commerce theory,” and
appeared to rely on it (rather than the concurring
opinion) as binding authority. The Appellate Division
also distinguished one of its previous personal
jurisdiction decisions, Cruz v. Robinson Engineering
Corp., 253 N.J. Super. 66 (N.J. Super. Ct. App. Div.
1992), as part of its reasoning, but it nevertheless
chiefly relied on the plurality in Nicastro.

While Patel provides another example of the trend of
courts moving away from liberal application of
personal jurisdiction over foreign manufacturers, not
all courts share the Patel court’s view. In Hatton v.
Chrysler Canada, Inc., 937 F. Supp. 2d 1356 (M.D. Fla.
2013), for example, a Florida federal court held that
it could exercise specific personal jurisdiction over
Chrysler Canada under similar circumstances. In
Hatton, the court found that the exercise of specific
personal jurisdiction was proper because “Chrysler
Canada assembled the subject Chrysler 300 M for
Chrysler United States, which distributes nationally in
the United States, and therefore Chrysler Canada
invoked the benefits and protections of these states,
including Florida.” Contrary to the court in Patel, the
court in Hatton expressly noted that the plurality
decision of the Supreme Court in Nicastro had no
effect on the law applicable in Florida federal courts
because it did not constitute the opinion of the
Court.

In the wake of decisions such as those in Patel and
Hatton, foreign product manufacturers and U.S.
distributors are left with the unsettling circumstance
that a foreign manufacturer’s risk of being subject to
U.S. litigation will often depend on the court in which
a case is brought, and possibly even the specific
judge assigned to handle the case, at least where a
manufacturer sells its product outside the U.S. to a
distributor that it knows is going to sell that product
within the U.S. Accordingly, it is important that
manufacturers and distributors consult with counsel
before entering into (or continuing with) these types
of business ventures.

Foreign manufacturers need to determine, as best as
possible, where and to what extent they might be
subject to U.S. liability based on their relationship
with a U.S. distributor. Distributors will want to
obtain the same information, as the extent to which
an injured plaintiff looks to the distributor for
compensation arising out of injury caused by an
allegedly defective product will often depend on
whether the manufacturer is subject to suit in the
U.S.

U.S. distributors can protect themselves by ensuring
that their contracts with foreign manufacturers
include terms that (1) require the manufacturer to
indemnify them for liability arising out of a defective
product and obtain insurance naming the distributor
as an additional insured for these types of claims, and
(2) subject the manufacturer to U.S. law and a
convenient forum, at least with regard to disputes
between the distributor and manufacturer.
Distributors also should ensure that they are given
the benefit of a vendor’s endorsement and insurance
rights in any purchase or distribution agreement.
Manufacturers, on the other hand, should take care
to set up their operations to avoid unanticipated
jurisdiction in the U.S., and to protect themselves
from claims by injured parties and/or distributors
wherever possible. For both manufacturers and
distributors, a few hours with their counsel and
modest expense prior to entering into a business
relationship, can potentially save hundreds of hours
of attorney time and millions of dollars of
expense/liability after an incident.

The Supreme Court may one day soon be presented
with a case that requires it to resolve all remaining
ambiguity about the “stream of commerce” theory of
specific personal jurisdiction. Until then, those who
may be affected must be vigilant in protecting their
rights, both during the contracting process, and after
an incident occurs and litigation is commenced.
This summary of legal issues is published for
informational purposes only. It does not dispense legal
advice or create an attorney-client relationship with
those who read it. Readers should obtain professional
legal advice before taking any legal action.

For more information about Schnader’s Aviation or
Product Liability services or to speak with a member of
the firm, please contact:

Jonathan M. Stern, Aviation Co-Chair
202-419-4202
[email protected]

Robert J. Williams, Aviation Co-Chair
412-577-5291
[email protected]

Keith E. Whitson, Product Liability Co-Chair
412-577-5220
[email protected]

Matthew S. Tamasco, Product Liability Co-Chair
212-973-8105
[email protected]

Barry S. Alexander
212-973-8099
[email protected]

Lee C. Schmeer
215-751-2506
[email protected]
*PA Bar Admission Pending

www.schnader.com
© 2014 Schnader Harrison Segal & Lewis LLP
* See: www.schnader.com/jakarta

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