Commercial Litigation 101: Where To Sue Or Be Sued

Commercial and corporate litigation lawyers often must deal with clients who are sued in different states. Because transactions often occur between businesses in different states, the attorneys must figure out where the business litigation should take place. Los Angeles? New York? Boise? The legal question is: who has jurisdiction?

In California the personal jurisdiction statute provides: “A court of this state may exercise jurisdiction on any basis not inconsistent with the constitution of this state or of the United States.” California Code Civ. Proc. §410.10. Thus, California’s statutory limitation on the exercise of personal jurisdiction over a nonresident defendant is constrained by due process. Due process requires that a nonresident defendant must have certain “minimum contacts” with the foreign state such that the exercise of personal jurisdiction does not offend the traditional notions of fair play and substantial justice. Thiebaut v. Blue Cross of Indiana, 178 Cal.App.3d 1157, 1159 (1986). “The defendant’s ‘conduct and connection with the forum State’ must be such that the defendant ‘should reasonably anticipate being haled into court there.’” Stone v. State of Texas, 76 Cal.App.4th 1043, 1047 (1999).

“Minimum contacts” may give rise to “general” or “limited” personal jurisdiction. Id. For general jurisdiction to attach, the defendant’s activities must be “substantial, continuous, and systematic….” Perkins v. Benguet Consolidated Mining Co., 342 U.S. 437, 72 S. Ct. 413, 418-419 (1952); Cornelison v. Chaney, 16 Cal.3d 143, 147 (1976). The defendant’s contacts with the forum must be sufficiently “wide-ranging” that they take the place of the defendant’s physical “presence” in the forum as a basis for jurisdiction. Vons Cos. Inc. v. Seabest Foods, Inc., 14 Cal. 4th 434, 446 (1996). General jurisdiction arises “when a nonresident defendant’s activities in the forum are so substantial and continuous that due process does not require a connection between the cause of action pleaded and the nature of defendant’s activities in the state.” Thiebaut, 178 Cal. App. 3d at 1159-1160, citing International Shoe Co. v. State of Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 158, 90 L. Ed 95 (1945).

The test for limited jurisdiction, on the other hand, “does not sweep so broadly….” Id. The requirements of limited personal jurisdiction are as follows: (1) The nonresident defendant must do some act or consummate some transaction within the forum or perform some act by which he purposely avails himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws; (2) the claim must be one that arises out of or results from the defendant’s forum-related activities; and (3) exercise of jurisdiction must be reasonable. Thiebaut, 178 Cal. App. 3d at 1160.

“The courts have repeatedly refused to find minimum contacts under substantively indistinguishable circumstances. When an out-of-state resident’s only contact with California is a single purchase from a California vendor of goods for delivery out of state, there are insufficient minimum contacts to establish personal jurisdiction even through the California vendor supplies financing to the buyer. Hunt v. Sup. Ct. of San Diego County (Commercial Money Center) (2000) 81 Cal.App.4th 901, 906. “Although regular purchasing activities in this state may be a basis for jurisdiction over an out-of-state buyer, the predominant rule in the federal courts [citations omitted] and in California [citations omitted] is that a nonresident making a one-time purchase of goods from a seller in the forum state cannot be constitutionally subject to the exercise of personal jurisdiction by the courts of the seller’s state.” Id. In the Hunt case, the buyer “maintained no economic presence and did no business in California, the documentation for the purchase was executed outside of California, and the California seller provided financing to the nonresident buyer.” Id. at 907.

“If the nonresident defendant does not have substantial and systematic contacts in the forum sufficient to establish general jurisdiction, he or she still may be subject to the specific jurisdiction of the forum, if the defendant has purposefully availed himself or herself of forum benefits, and the ‘controversy is related to or ‘arises out of’ a defendant’s contacts with the forum.’” Stone v. Texas, 76 Cal.App.4th 1043, 1047-1048 (1999).

“’Purposeful availment’ requires that the defendant ‘have performed some type of affirmative conduct which allows or promotes the transaction of business within the forum state.’ A contract with an out-of-state party does not automatically establish purposeful availment in the other party’s home forum. Rather, a court must evaluate the contract terms and the surrounding circumstances to determine whether the defendant purposefully established minimum contact within the forum. Relevant factors include prior negotiations, contemplated future consequences, the parties’ course of dealings and the contract’s choice-of-law provision.” Id. at 1048. “Due process requires a ‘substantial connection’ between the contract at issue and the forum state.” Id. at 1049.

The seminal United States Supreme Court case dealing with this issue is Burger King v. Rudzewicz, 471 U.S. 462 (1985). The Supreme Court first held that “If the question is whether an individual’s contract with an out-of-state party alone can automatically establish sufficient minimum contacts in the other party’s home forum, we believe the answer clearly is that it cannot.” Id. at 478. “Instead, we have emphasized the need for a ‘highly realistic’ approach that recognizes that a ‘contract’ is ‘ordinarily but an intermediate step serving to tie up prior business negotiations with future consequences which themselves are the real object of the business transaction. It is these factors—prior negotiations and contemplated future consequences, along with the terms of the contract and the parties’ actual course of dealing—that must be evaluated in determining whether the defendant purposefully established minimum contacts within the forum.” Id.

In analyzing whether a party has purposefully directed or purposefully established his activities at the state, the court talks about parties who “reach out beyond one state and create continuing relationships and obligations with citizens of another state” (Id. at 473 [emphasis added]) or who “create a ‘+substantial+ connection’ with the forum state (Id. at 475 [emphasis added]). “Thus where the defendant “’deliberately’ has engaged in significant activities within a State, or has created ‘+continuing+ obligations’ between himself and residents of the forum,” he has availed himself of the forum. Id. at 476 [emphasis added].

The Burger King case involved a Michigan franchisee who challenged the jurisdiction of the Florida courts, where Burger King is headquartered. The franchise documents provided that all disputes would be governed by Florida law, the franchisee entered into a 20-year relationship with Burger King where he used their trademarks, accounted to them for his profits and expenses, was contractually bound to “exacting regulations” from Burger King’s Miami headquarters and even trained in Miami at their headquarters. The appellate court denied Florida jurisdiction but the Supreme Court held that this was a “substantial and continuing relationship with Burger King’s Miami headquarters” and that he “received fair notice from the contract documents and the course of dealing that he might be subject to suit in Florida” (Id. at 487). Therefore the Supreme Court allowed jurisdiction in Florida.

“When a nonresident defendant challenges personal jurisdiction the burden shifts to the plaintiff to demonstrate by a preponderance of the evidence that all necessary jurisdiction criteria are met. This burden must be met by competent evidence in affidavits and authenticated documentary evidence.” Ziller Electronics Lab GmbH v. Superior Court (1988) 206 Cal.App.3d 1222, 1232-1233 [emphasis added]. “Declarations are insufficient to support the assertions for which they are offered if they consist primarily of vague assertions of ultimate facts rather than specific evidentiary facts permitting a court to form an independent conclusion on the issue. Id.

For lawyers that are defending a business litigation lawsuit involving parties in two different states, the first question should be whether the specific court has jurisdiction over the client. If not, the remedy is to file a motion to quash service, which, if granted, will result in the dismissal of the case in that jurisdiction so that the plaintiff can file it in the proper jurisdiction.

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