Is there a constitutional right to corporate separateness?
posted by Marco Simons
(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?