United States – Cross-border guide to parent company liability for foreign subsidiaries
Mondial | Publication | mai 2021
How and when can a parent company be liable for conduct of its (foreign) subsidiaries
Though the law in each state may differ, the general principle of corporate law in the United States federal courts1 is that “a parent corporation . . . is not liable for the acts of its subsidiaries.”2
The threshold to hold a parent company liable for its subsidiary’s conduct is high—a parent company is not liable for its foreign subsidiaries’ actions absent an agency or alter ego relationship.3 The plaintiff must establish that the subsidiary is, in fact, an alter ego or agent of the parent. Courts have dismissed entire actions for the failure to join the subsidiary as a defendant where no agency relationship between the parent and the subsidiary could be established.4
Liability based on an alter ego or agency theory is an intrinsically factual inquiry requiring the court to look to the facts of each case. To establish this relationship “the controlling corporation ‘must have used the corporate entity to perpetrate a fraud or have so dominated and disregarded the corporate entity's form that the entity primarily transacted the [subservient entity's] personal business rather than its own corporate business.’”5 The plaintiff must do more than merely claim that the alter ego relationship exists, it must detail the role and control that the parent played over the subsidiary.6 This is a high standard that requires a showing of essentially “complete control.”
It is worth also noting that plaintiffs had sought to use the Alien Tort Statute (ATS) to sue U.S. corporations for alleged violations committed outside of the U.S. The ATS gives federal courts jurisdiction over any civil action brought by foreign nationals for a tort in violation of international law or a treaty of the U.S. However, the jurisdictional reach of the ATS has been narrowed in recent years, with the Supreme Court confirming that it does not grant jurisdiction over torts committed outside the U.S. unless they touch and concern the territory of U.S. with sufficient force to displace the presumption against extraterritorial application7, nor does it permit federal courts to recognize causes of action against foreign corporations regardless of the connection to the U.S.8 The impact of these developments is still a topic of debate among U.S. practitioners and has caused uncertainty for the future ATS litigation. But by eliminating the ability to sue foreign corporations in the U.S. under the ATS, one effect could be an increase in attempts to sue U.S. parent companies or corporate officials for human rights violations involving its foreign subsidiaries instead of directly bringing actions against the foreign subsidiary corporation.
Jurisdiction gateway considerations
Federal courts in various U.S. circuits have held that where “a defendant is sued solely in connection with its subsidiary’s conduct, the subsidiary is a necessary and indispensable party”9 because without the subsidiary, the court cannot award complete relief to the plaintiff.10 This is particularly true where the subsidiary is the primary participant in the complained-of actions. But where the parent is the principal actor, the foreign subsidiary is not a necessary and indispensable party.11
Jurisdictional disputes in U.S. federal courts are common and are often litigated at the outset of the dispute. In the United States, the plaintiff must establish that the court has subject matter jurisdiction12 and personal jurisdiction. For purposes of a parent company’s liability for foreign subsidiary actions, this analysis focuses on personal jurisdiction, which is the court’s authority to require a party to appear before it. A court can have either general or specific personal jurisdiction over a party where the party has sufficient minimum contacts with the forum. “General jurisdiction authorizes suit against a corporation in forums where it is ‘essentially at home,’ which ordinarily means its place of incorporation or principal place of business.”13 “Specific jurisdiction considers whether a sufficient nexus exists between the forum and the defendant's conduct giving rise to the claims.”14
As a threshold matter, therefore, a plaintiff will have to establish that the court has personal jurisdiction to exercise control over the parent company. To establish a principal-agency relationship sufficient for a court to exercise personal jurisdiction, the plaintiff must sufficiently allege that the foreign defendants purposefully availed themselves of the benefit of doing business in the federal forum, and that the foreign subsidiary acted with the knowledge, consent, or extensive control of the U.S. parent.15
Moreover, where the foreign subsidiary is a necessary and indispensable party, as discussed above, the court must determine whether that missing foreign subsidiary may be joined to the U.S. lawsuit pursuant to Rule 19(a) of the Federal Rules of Civil Procedure. “Joinder” of the absent party is not feasible where (1) venue is improper, (2) the absentee is not subject to personal jurisdiction, and (3) when joinder would destroy subject matter jurisdiction.16
The plaintiff would therefore have to establish that the court has personal jurisdiction over the foreign entity before it may be joined. To do this, the plaintiff must either establish that the foreign subsidiary sufficient minimum contacts with the forum, as it does with the parent, or establish the agency or alter ego relationship. U.S. federal courts are typically hesitant to conclude that an alter ego or agency relationship exists such to exercise jurisdiction over a foreign defendant absent facts establishing extensive control. This provides a significant hurdle for plaintiffs to overcome as a threshold matter.
Key recent cases and developments
One example where the court has undertaken this analysis is Carl Schroeter GmbH & KO., KG. v. Crawford & Co.17 In this case, the plaintiffs sued Crawford & Company (“Crawford”), an American company, based on the allegedly faulty inspection of apple shipments in Venezuela conducted by Crawford’s wholly-owned subsidiary, Crawford Venezuela Adjustadores de Perdias CA (“Crawford Venezuela).18
Crawford moved to dismiss the case for failure to join an indispensable party, arguing that Crawford Venezuela is an indispensable party and that Crawford is not liable for its subsidiary’s actions.19 Crawford further argued, however, that Crawford Venezuela could not be joined because the court lacked personal jurisdiction over it.
The court recognized the general U.S. principle that a parent is not liable for its foreign subsidiary’s conduct. It further recognized that the subsidiary is a necessary and indispensable party where a plaintiff seeks to hold the U.S. parent liable for the subsidiary’s conduct. The court held that “[s]ince Crawford, as a corporate grandparent, is not liable for its subsidiary’s actions absent an agency or alter ego relationship, this Court cannot award complete relief to Plaintiffs in Crawford Venezuela’s absence.”20 However, the plaintiffs did not allege any alter ego or agency relationship in the complaint. Because this is a fact-intensive inquiry, the court concluded that the plaintiffs could amend their complaint to assert such theories, but that further discovery would be required to determine “whether this action could fairly proceed without Crawford Venezuela.”21
Practical implications and key takeaways from the U.S. approach
In the U.S., the general rule is that parent companies generally are not liable for the actions of its subsidiaries unless the plaintiff can prove an agency or alter ego relationship. Absent such a relationship, the foreign subsidiary must be joined to the lawsuit for the court to order complete relief. If the foreign subsidiary is a necessary and indispensable party required for the plaintiff to obtain relief, the plaintiff must establish that the court has personal jurisdiction over that foreign subsidiary.
In conclusion, plaintiffs have a number of hurdles to overcome in order to hold a parent company liable for the actions of a foreign subsidiary, or to join a foreign subsidiary in a U.S. court action. U.S. parent companies can protect themselves by ensuring it does not establish the requisite agency or alter ego relationship with the foreign subsidiary.
Kiobel v. Royal Dutch Petroleum Co., 569 U.S. 108 (2013). Chief Justice Roberts noted that “Corporations are often present in many countries, and it would reach too far to say that mere corporate presence suffices.”
Id. at *5.
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