American Telephone & Telegraph Co. v. Compagnie Bruxelles Lambert: A New Line of Defense for Parent Corporations

Steven F. Baicker-McKee

Editors' Summary: With their often substantial assets, parent corporations make attractive targets for parties seeking to remedy environmental harm. However, by challenging a court's jurisdiction over the parent, the parent may force a change of forum or, ultimately, a dismissal ofthe claims. This Article examines the scope of a parent's liabilities for the actions of its subsidiaries and discusses the jurisdictional issues. The author surveys several district court cases that involve challenges to personal jurisdiction and analyzes the Ninth Circuit's decision in American Telephone & Telegraph Co. v. Compagnie Bruxelles Lambert. He concludes that contesting personal jurisdiction may be a useful strategy for corporations that are sued for the environmental liabilities of theiir subsidiaries.

The author is a shareholder in the litigation group of Babst, Calland, Clements & Zomnir. He received his B.A. from Yale University in 1980, and his J.D. from Marshall-Whythe School of Law, College of William and Mary, in 1987. Mr. Baicker-McKee is also the author of FEDERAL CIVIL RULES HANDBOOK (1996), a guide to the rules of civil procedure for litigation in federal court.

[27 ELR 10450]

Parties facing large environmental liabilities are trolling for solvent defendants with an increasingly wide net. Parent corporations are one category of defendants that is more and more frequently being snared by the environmental litigation net. Both federal and state statutes allow parties conducting environmental remediations or incurring response costs to bring claims against parent corporations or shareholders. These statutes, and the case law interpreting them, have eroded some of the protections typically afforded to shareholders or parent corporations. One defense that appears to have retained its vitality, however, is personal jurisdiction.

Personal jurisdiction is not typically at issue in environmental cases. Most of the time, a party alleged to be liable for environmental conditions at a site will have had sufficient contacts with the state in which the site is located to eliminate challenges to personal jurisdiction from serious consideration. Where a parent corporation is being sued for the environmental liabilities of its subsidiary, and the parent does not independently conduct business in the forum state, however, a challenge to personal jurisdiction can offer a viable defense.

The few cases that discuss the matter suggest that personal jurisdiction for a parent corporation should not be based on the activities of its subsidiary. Rather, parent corporations should only be subject to personal jurisdiction if their own presence or activities inside the forum state warrant the exercise of jurisdiction. The Ninth Circuit recently applied this principle in the environmental context in American Telephone & Telegraph Co. v. Compagnie Bruxelles Lambert (AT&T).¹

Personal Jurisdiction in Two Paragraphs

In simple terms, personal jurisdiction is shaped by both the U.S. Constitution and the long-arm statute of the state in which the action is filed.² The long-arm statutes spell out when a plaintiff may hale a nonresident defendant into a state to defend litigation. Typically, the long-arm statute will provide a list of circumstances in which specific conduct will lead to jurisdiction over the defendant for litigation "arising out of" that conduct. Jurisdiction under such provisions is referred to as "specific jurisdiction."³ Courts generally exercise specific jurisdiction when a tort is commited or a contract is breached within the forum, but the court may also extend jurisdiction over one who takes actions outside the state that result in a tort inside the state. Additionally, some states have "general jurisdiction" provisions that allow for jurisdiction over a defendant who systematically conducts business in the forum state, even if the litigation is unrelated to the business conducted in that state.⁴ Finally, some states have long-arm statutes that extend jurisdiction to the maximum extent allowable under the Constitution.⁵

The Due Process Clause acts as a ceiling on state long-arm statutes. Courts have generally approached personal jurisdiction [27 ELR 10451] in due process challenges by requiring that the defendant purposefully establish minimum contacts with the forum state and purposefully avail itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws.⁶ In addition, the assertion of jurisdiction must not offend "traditional notions of fair play and substantial justice."⁷ Thus, for personal jurisdiction to exist, the defendant must be servable under the state long-arm statute, and the application of the long-arm statute to the defendant must not offend the Due Process Clause.

Jurisdiction Over Parent Corporations

Jurisdiction over parent corporations outside the environmental context has received a reasonable amount of attention from the courts. It is well settled that a court normally cannot exercise jurisdiction over a nonresident parent corporation based on the activities of its subsidiary.⁸ Jurisdiction over a nonresident parent corporation based on a subsidiary's activities can only be asserted in the exceptional situation when the parent has completely ignored the separate corporate existence of the subsidiary and the corporate veil can be pierced.⁹ In fact, courts presume the institutional independence of parent and subsidiary corporations when determining whether jurisdiction may be asserted over the parent on the basis of the subsidiary's contacts with the forum.¹⁰ This presumption of corporate separateness may only be overcome by "clear evidence".¹¹

In the environmental context, however, personal jurisdiction over parent corporations has received less attention. Although no published case has been found that indicates a lesser standard for jurisdiction in the environmental context, the standard for parent corporation liability varies among courts, leading to some natural confusion as to the proper standard for determining jurisdiction. The general rule that shareholders (including parent corporations) are only liable for acts of a corporation if the corporate veil can be pierced does not generally hold in the environmental context. Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and many state superfund statutes, shareholders can be liable directly as operators of the corporation, without piercing the corporate veil.¹² The test for such operator liability by a shareholder is typically whether the shareholder exercised sufficient "actual control" over the corporation,¹³ or sometimes whether the shareholder had the "capacity to control" the corporation.¹⁴

Although these different, less stringent standards for shareholders were created only for environmental liability, the issue of jurisdiction over a shareholder is so closely related to the issue of shareholder liability that there is a significant risk that the distinction between these analyses will be blurred. This risk is, perhaps, exaggerated by the fact that environmental policy concerns require a broad distribution of liability, creating a tendency to bring a defendant to trial without careful application of the jurisdiction doctrines.

Case Law Prior to AT&T

Before 1996, there were seven cases, all at the district court level, discussing personal jurisdiction over parent corporations for environmental liability. Each of these cases applied a test that is at least loosely akin to the corporate veil-piercing test. None of these cases, however, squarely confronts the complicated interaction between the standard for parent liability and personal jurisdiction over the parent.

The earliest case is Wehner v. Syntex Agribusiness, Inc.¹⁵ In Wehner, a lawsuit was filed in Missouri under CERCLA for response costs incurred in connection with dioxin exposure at a site owned by Syntex Agribusiness. The plaintiffs named as a defendant Syntex's parent corporation, Syntex Corporation, which owned 100 percent of Syntex Agribusiness' stock.¹⁶ The parent corporation moved to dismiss for lack of personal jurisdiction. It argued that it did not transact any business in Missouri, own any property in Missouri, or otherwise have contacts with Missouri to support jurisdiction.

The court first considered whether the fact that the wholly owned subsidiary conducted business in Missouri was enough, on its own, to establish jurisdiction over the parent corporation. The court rejected this notion, writing that "this Court … adheres to the well settled rule that the mere fact that a subsidiary does business within a state does not confer jurisdiction over its nonresident parent, even if that parent is the sole owner of the subsidiary."¹⁷

In order to obtain jurisdiction over a parent corporation based on the activities of its subsidiary, the court held, the plaintiff must pierce the corporate veil and demonstrate that the subsidiary is only a shell for the parent.¹⁸ The court examined the relationship between the parent and the subsidiary, and determined that the corporate veil should not be pierced. Consequently, the court dismissed the claim against the parent corporation.

Six months later, the Eastern District of Missouri again tackled the issue of jurisdiction over parent corporations in United States v. Bliss.¹⁹ In Bliss, the United States brought a CERCLA action for response costs incurred at six sites in Missouri. The United States named as a defendant Syntex Corporation, the same parent corporation that was the defendant in Wehner.

[27 ELR 10452]

The United States argued that the parent corporation should be liable because it controlled the subsidiary. Chief Judge Nangle wrote that "if a subsidiary's presence in the state is primarily to carry on its own business and the subsidiary has preserved some semblance of independence from the parent, jurisdiction over the parent may not be acquired on the basis of the local activities."²⁰ Some control by the parent corporation does not result in imputing the subsidiary's activities to the parent corporation. Rather, "the test is whether the parent so dominates and controls the subsidiary that the companies lose their separate identities.²¹

The court then examined the relationship between the parent corporation and the subsidiary. The court noted that the parent corporation's sole ownership of the subsidiary gives it substantial control over the entity.²² Moreover, the court found that the parent corporation in this case had chosen to assert its control.²³ Nonetheless, because the control did not rise to the level of piercing the corporate veil, the court concluded that it did not have jurisdiction over the parent corporation.

Next came two 1986 cases. In one, City of New York v. Exxon Corp.,²⁴ New York City sued the parent corporation of subsidiaries that conducted illegal dumping in the City's landfills. The court recited a four factor test for imputing activities of a subsidiary to the parent corporation to establish jurisdiction. The four factors were: (1) common ownership, (2) financial dependency, (3) interference in the selection and assignment of the subsidiary's personnel and failure to observe corporate formalities, and (4) the degree of control over marketing and operational policies of the subsidiary.²⁵ Thus, the test was slightly more specific and narrow, but comparable to, piercing the corporate veil.

In the other 1986 case, Idaho v. Bunker Hill Co.,²⁶ Gulf Resources & Chemical Corporation challenged the court's personal jurisdiction over it in an action to recover for the environmental liabilities of its subsidiary. The court noted that jurisdiction over parent corporations was not automatic, and could not be based on the subsidiary's activities "if the subsidiary is carrying on its own business and the corporate formalities have been observed."²⁷ After reciting a litany of examples illustrating Gulf's control over its subsidiary, the court concluded that Gulf was subject to the court's jurisdiction.²⁸ As in City of New York, the analysis was somewhat, but not exactly, like a traditional veil-piercing analysis.

The next case to consider parent corporation jurisdiction in the environmental context was In re Acushnet River & New Bedford Harbor: Proceedings re Alleged PCB Pollution.²⁹ In Acushnet, plaintiffs brought an action under CERCLA against a parent corporation relating to a Massachusetts facility operated by its subsidiary. The parent corporation did not transact business in Massachusetts, and brought a motion to dismiss based on personal jurisdiction. In opposition to the motion, the plaintiffs argued that CERCLA's policy of facilitating the allocation of environmental liability favored relaxing the doctrines of corporate separateness. The court found the plaintiffs' argument to be "without support in policy or precedent," and conducted a corporate veil-piercing analysis.³⁰ Because the parent's alleged control did not occur in Massachusetts and was not extensive enough to pierce the corporate veil, the court dismissed the action against the parent for lack of personal jurisdiction.

Until AT&T, the most recent cases to consider parent corporation jurisdiction in the environmental context were decided in 1993. An Idaho case, Idaho v. M.A. Hanna Co.,³¹ involved an extremely complicated set of corporate relationships. The plaintiffs had asserted a claim against Alumax, Inc. based on its ownership of two other corporations. The court used a veil-piercing analysis to determine whether jurisdiction could be based on the activities of the subsidiaries. One of the subsidiaries conducted business in Idaho, but this business was not related to the contamination at issue. The court held that the activities of that subsidiary could not be used to support jurisdiction, because the contacts did not qualify for specific jurisdiction under the state's long-arm statute.³² The other subsidiary was the successor to the company causing the contamination. The court held that while the subsidiary was liable for the predecessor's liability, the predecessor's activities could not be imputed to the successor's parent.³³ Accordingly, the court dismissed the claim against Alumax.

In re Tutu Wells Contamination Litigation³⁴ involved water contamination resulting from leaking underground storage tanks at a Texaco station in the Virgin Islands. An indirect subsidiary of defendant Texaco, Inc., called Texaco Caribbean, Inc., owned and operated the Texaco station. Texaco, Inc., moved to dismiss for lack of personal jurisdiction, arguing that it had insufficient contacts with the Virgin Islands.

In analyzing Texaco's motion, the court looked both at Texaco's own contacts with the Virgin Islands and at the relationship between Texaco and its subsidiary. The court found that Texaco representatives traveled to the Virgin Islands on a continuing basis to oversee and implement compliance with its policy programs, including environmental standards and controls.³⁵ More important, the court also found that Texaco was involved in the installation and replacement of the underground storage tanks that caused the contamination at issue in the case.³⁶ Accordingly, the court concluded that Texaco itself had sufficient contacts with the Virgin Islands to support jurisdiction.³⁷

The court then conducted a brief analysis of whether jurisdiction could be based on the subsidiary's contacts with [27 ELR 10453] the Virgin Islands. In the text of the opinion, the court noted that Texaco "undoubtedly receives notice of papers served on its subsidiaries.³⁸ This language seems to suggest that the court viewed notice of the claim as the benchmark for personal jurisdiction, certainly a novel approach that would not likely survive constitutional challenge. However, in a footnote, the court interpreted Texaco's financial documents as indication that "Texaco merges its business purpose with that of its subsidiaries."³⁹ Therefore, the court may have concluded that the subsidiary was an alter ego for Texaco and that the corporate veil should be pierced.

Thus, these cases generally seem to indicate that jurisdiction over parent corporations in the environmental context is no different than in other settings. However, the cases do not contain specific language clearly discrediting the idea that the CERCLA policies that lead to the relaxed standard of parent corporation liability do not lead to a corresponding relaxation in the standard for personal jurisdiction over the parent corporation. That language was finally articulated late last year.

The AT&T Decision

In AT&T,⁴⁰ a federal circuit court finally addressed parent corporation jurisdiction in the environmental context. An action had been brought under CERCLA for environmental costs at a California site. A subsidiary operated the site, but plaintiffs brought claims against the parent corporation. The parent corporation contested personal jurisdiction, the district court dismissed the complaint against it for lack of personal jurisdiction, and the plaintiffs appealed.

The basis for the claim against the parent corporation was that its stock ownership, combined with its "total control" over the subsidiary, rendered it liable as an operator of the facility.⁴¹ The plaintiffs also claimed that the parent corporation's control over the subsidiary rendered the parent corporation subject to personal jurisdiction in California.

The parent corporation's activities were insufficient, on their own, to support personal jurisdiction in California. The parent corporation conducted no business and owned no property in California,⁴² had no presence at the California facility, and did not control the facility's day-to-day affairs.⁴³ The parent corporation's alleged general control over the subsidiary did not take place in California, but rather in Pittsburgh, New York City, or Brussels.⁴⁴ The plaintiffs did not attempt to demonstrate that the parent corporation had any meaningful contacts with California, but rather argued that the parent corporation's general control over the subsidiary outside California could subject the parent corporation to jurisdiction within California.⁴⁵ The plaintiffs presented evidence that the parent corporation had broad control over financial matters, including control over environmental expenditures.⁴⁶ The plaintiffs also presented evidence of activities undertaken by directors of the subsidiary who the parent corporation had elected.⁴⁷

The plaintiff then argued that the control that the parent corporation exercised outside the jurisdiction had its effects inside the forum state. The plaintiff cited the provision of California's long-arm statute that imposes jurisdiction over one who "merely engages in conduct aimed at, and having effect in, the situs state,"⁴⁸ and argued that because the effects of the parent corporation's control occurred within the forum, the exercise of jurisdiction over the parent corporation was appropriate. The plaintiff also argued that the subsidiary should be deemed the agent of the parent corporation for purposes of jurisdiction.

The Ninth Circuit considered the contacts of both the parent corporation and the subsidiary with California. It described the parent's contacts as "attenuated at best," notwithstanding numerous examples of general control exercised over the subsidiary outside California.⁴⁹ With respect to use of the subsidiary's contacts to establish jurisdiction over the parent corporation, the court found that such imputed jurisdiction could only occur in an alter ego, piercing the corporate veil situation, which the plaintiff had not established.⁵⁰

The Ninth Circuit emphatically rejected the notion that general control over a subsidiary subjects the parent to personal jurisdiction in every state the subsidiary conducts business.⁵¹ The court held that the proper test for using a subsidiary's contacts as the basis for jurisdiction over the parent is the alter ego test, and CERCLA does not diminish the parent corporation's due process rights by allowing personal jurisdiction based on a degree of control that would not support piercing the corporate veil, even if the control might be sufficient for CERCLA operator liability.⁵² The Ninth Circuit unequivocally rejected the notion that CERCLA's policies might somehow warrant a lesser standard of personal jurisdiction: "Even if the requirement of personal jurisdiction allows a Parent corporation to avoid liability, and thus undercuts CERCLA's sweeping purpose 'to affix the ultimate cost of cleaning up these disposal sites to the parties responsible for the contamination,' liability is not to be conflated with amenability to suit in a particular forum."⁵³ The court realized that to allow jurisdiction based on general allegations of control exercised outside the jurisdiction would merge the jurisdictional analysis into the liability analysis. As the court wrote, "even if [the parent corporation] would be liable under CERCLA, [the plaintiff] may not use liability as a substitute for personal jurisdiction."⁵⁴ Therefore, the case against the parent was dismissed for lack of personal jurisdiction.

Conclusion

Following AT&T, a parent corporation should give serious consideration to contesting jurisdiction in an action involving environmental liabilities of its subsidiary. While personal [27 ELR 10454] jurisdiction is not a defense to liability, it may enable a parent corporation to avoid a particular forum and/or lawsuit. Depending on the number of parties involved and the relative share of the parent's liability, being dismissed from a particular lawsuit may end the parent's involvement with the site altogether. Furthermore, there may be advantages to being sued in a different state from that where the property or the plaintiff is located. Thus, while challenging personal jurisdiction may not make sense in every situation, it is certainly a defense that should be evaluated.

1. 94 F.3d 586, 26 ELR 21617 (9th Cir. 1996).

2. A detailed discussion of the doctrines of personal jurisdiction is beyond the scope of this Article. An overview of the concepts of jurisdiction in federal court can be found in STEVEN F. BAICKER-MCKEE ET AL., FEDERAL CIVIL RULES HANDBOOK (1996).

3. For an example of a specific jurisdiction provision from a state long-arm statute, see MASS. GEN. LAWS ch. 223A, § 3 (1992).

4. For an excellent discussion of general jurisdiction see Helicopters Nacionales De Colombia, S.A. v. Hall, 466 U.S. 408 (1984).

5. See, e.g., 42 PA. CONS. STAT. ANN. § 5322 (1981) ("In addition to the provisions of subsection (a) the jurisdiction of the tribunals of this Commonwealth shall extend to all persons who are not within the scope of [the other jurisdiction provisions] to the fullest extent allowed under the Constitution of the United States and may be based on the most minimum contact with this Commonwealth allowed under the Constitution of the United States.").

6. See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474-75 (1985).

7. International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945).

8. See, e.g., Escude Cruz v. Ortho Pharm. Corp., 619 F.2d 902, 905 (1st Cir. 1980); Lakota Girl Scout Council, Inc. v. Havey Fund-Raising Management, Inc., 519 F.2d 634 (8th Cir. 1980).

9. See, e.g., Cannon Mfg. Co. v. Cudahy Packing Co., 267 U.S. 333 (1925).

10. See Donatelli v. National Hockey League, 893 F.2d 459, 465 (1st Cir. 1990).

11. Id.

12. But see United States v. Cordova Chem. Co. of Michigan, 27 ELR 20949 (6th Cir. 1997).

13. See, e.g., Lansford-Coaldale Joint Water Auth. v. Tonolli Corp., 4 F.3d 1209, 23 ELR 21534 (3d Cir. 1993).

14. See, e.g., City of New York v. Exxon Corp., 633 F. Supp. 609, 16 ELR 20850 (S.D.N.Y. 1986); Colorado v. Idarado Mining Co., 18 ELR 20578 (D. Colo. 1987).

15. 616 F. Supp. 27, 15 ELR 20346 (E.D. Mo. 1985).

16. Actually, Syntex Corporation owned 100 percent of Syntex (U.S.A.) Inc.'s stock, which owned 100 percent of the stock of Syntex Agribusiness. For clarity, Syntex Corporation will be referred to as the parent corporation and Syntex Agribusiness will be referred to as the subsidiary.

17. Wehner, 616 F. Supp. at 29, 15 ELR at 20347.

18. Id.

19. 108 F.R.D. 127, 16 ELR 20368 (E.D. Mo. 1985).

20. Id. at 131, 16 ELR at 20369.

21. Id.

22. Id. at 132, 16 ELR at 20370.

23. Id.

24. 633 F. Supp. 609, 16 ELR 20850 (S.D.N.Y. 1986).

25. Id. at 620, 16 ELR at 20855.

26. 635 F. Supp. 665, 16 ELR 20879 (D. Idaho 1986).

27. Id. at 670, 16 ELR at 20880.

28. Id., 16 ELR at 20880-81.