Capitalization, and major challenges in foreign market

 

You will continue with the course project in this module by reviewing specific areas concerning labor and legal issues, capitalization of the company in the marketplace, and competition.

Carry out individual research on the following with your chosen MNC IKEA in USA market

1. The company’s capitalization in the foreign market
   1. Current capitalization
   2. Opportunities to tap into new capital in the markets where it operates
2. Major challenges the company is facing or can anticipate
   1. Labor market
   2. Competition

• From the textbook, International business law and its environment, read the following chapters:

Resolving International Commercial DisputesLegal issue

CHAPTER 3: Resolving International Commercial Disputes

AVOIDING BUSINESS DISPUTES

Long-term business relationships are generally the most profitable ones. Experienced executives and international managers know this, and they work very hard to foster them, at both the personal and organizational levels. Long-term relationships are based on trust. In a world where we do business with people who look, speak, and act differently from ourselves and who live and work oceans away, trust takes on a new and even more important significance. Indeed, it has been said that all of international business is based on trust. Any dispute that threatens the bonds of trust can threaten future business opportunities, do irreparable harm to individual and corporate reputations, and permanently damage long-term relationships. Moreover, when disputes become combative, it can be costly, time consuming, and physically and mentally exhausting for all parties. After all, there is the real possibility that one or both of the parties will have to litigate in a protracted and expensive trial in a foreign court, before a foreign judge, and in a foreign language, and have their rights determined under foreign procedural rules and possibly foreign law. Quite often the parties must retain attorneys in more than one country. So, when disagreements break out, amicable settlements are usually the best outcome and offer the best hope of salvaging a business relationship. It is always helpful if the parties have a reservoir of trust and goodwill that they can draw on to settle the dispute in a friendly way. But, of course, this is not always possible, and the prudent international businessperson, in any contract or any venture, will seek good legal advice and always “hope for the best and plan for the worst.”

Nowhere is this more important than in negotiating and drafting business contracts. The contract is the basis of any bargain and its importance cannot be overstated. If and when a dispute arises, the terms of the contract provide the basis for dispute resolution.

Cultural Attitudes toward Disputes

Keep in mind that cultural factors will influence a party’s attitude toward how disputes are settled. Americans are notorious litigators, quickly turning to the courts to redress grievances. Their combative stance can result in a “win or lose” mentality. On the other hand, Asians are notable for going to great lengths to seek an amicable settlement. After all, by tradition, it is a virtue to seek harmony and a vice to seek discord. These differences are evident in the way American and Japanese businesspeople approach contract or business negotiations. It is quite common for Americans to include their attorney or corporate counsel as a member of the negotiating team. Indeed, many Western managers and executives would never dream of it being any other way. But to the Japanese, this may seem a little confrontational, a little unnecessary, and a bad omen or a sign that disagreement is inevitable.

All too often, Americans view the negotiating process as something to be gotten out of the way so the deal can be closed, the contract signed, and all can go back home. People of many other cultures, from Asia to Latin America, might see the negotiating process as a time to build a relationship and new friendships. Of course, these attitudes differ throughout the world, and from country to country, and no generalizations should be made. But one thing is certain, and that is that the rest of the world views Americans as confrontational and quick to call in the lawyers. Perhaps the words of the English Lord Denning best sum up the foreign view:

As the moth drawn to the light, so is a litigant drawn to the United States. If he can only get his case into their courts, he stands to win a fortune. At no cost to himself; and at no risk of having to pay anything to the other side…. The lawyers will charge the litigant nothing for their services but instead they will take forty percent of the damages…. If they lose, the litigant will have nothing to pay to the other side. The courts in the United States have no such cost deterrents as we have. There is also in the United States a right to trial by jury. These are prone to award fabulous damages. They are notoriously sympathetic and know that the lawyers will take their forty percent before the plaintiff gets anything. All this means that the defendant can be readily forced into a settlement. Smith Kline and French Laboratories v. Bloch, [1983] 1 W.L.R. 730, 733–4 (Eng. C.A.).

The resolution of disputes between citizens of different countries, with business transactions that span continents and cultures, raises many complicated legal and tactical problems. Consider a dispute involving an American manufacturer that purchases thousands of meters of cloth from a Chinese supplier. The cloth is shipped to Vietnam where the manufacturer contracted to have it embroidered and sewn into pillow shams. When the finished goods arrive in the United States, it is discovered that they are damaged. Apparently the fabric was shipped from China in a defective condition, but the Vietnamese firm failed to inspect for damage as it normally did. The Chinese company claims that the time for bringing the defective fabric to its attention has long passed. The Vietnamese company says it was not its responsibility. Consider all the questions presented. To whom does the manufacturer look for remuneration? Is the relationship between the parties worth keeping, and is the case capable of being settled or should the manufacturer “take the gloves off”? Was there a contract with either party and did it specify the method of resolution, such as mediation, arbitration, or litigation, and, if so, where and under what law? If the contract does not specify, what legal rules apply to determine where the case should be heard and what law should govern? Finally, if a judgment is obtained through litigation, how will it be enforced across international borders? These are some of the questions discussed in this chapter.

Methods of Resolution

This chapter presents several alternatives for dispute resolution, including mediation, arbitration, and litigation. Consider a domestic dispute in which a New York supplier tries to sue a Texas distributor. This situation raises several questions: Should the parties settle, mediate, arbitrate, or litigate? Where should the dispute be heard—in New York or Texas? In federal or state court? Which law applies to the transaction—the law of New York, Texas, or some other jurisdiction? Finally, if a resolution is reached (be it a settlement, a verdict, or a judgment), how will it be enforced?

Changing the parties to an American supplier and a foreign distributor adds several dimensions to the problem. Many of the same questions that are relevant to a domestic dispute are equally relevant to an international dispute, but they become infinitely more complex. This chapter examines these questions as they apply to commercial disputes in international business.

ALTERNATIVE DISPUTE RESOLUTION

Alternative dispute resolution (ADR) usually offers a faster, cheaper, and more efficient alternative to resolving international commercial disputes than litigation. Unlike litigation, ADR requires that the parties voluntarily submit to the resolution process.

Mediation

Mediation is a voluntary, nonbinding, conciliation process. The parties agree on an impartial mediator who helps them amicably reach a solution. The final decision to settle rests with the parties themselves. It is private, and there are no public court records or glaring articles in the local press to influence local opinion about the firms. The parties reserve all legal rights to resort to binding arbitration or litigation.

Arbitration

Arbitration is a more formalized process resulting in a binding award that will be enforced by courts of law in many countries. The parties must agree to arbitration, but once they do, they may not withdraw. Arbitration is frequently used in international business because it “levels the playing field” since the case may be heard in a more impartial tribunal. First, arbitration may permit the resolution of the case in a third “neutral” country, rather than in the country of one of the parties. The parties are generally free to choose a location for arbitration that is mutually convenient. For example, a dispute between an American company and a Russian company might be arbitrated in Paris or Stockholm. Disputes between American companies and Chinese companies are often arbitrated in Hong Kong. (Not only is Hong Kong still considered a neutral site, but its awards are enforceable by the courts of both the United States and China.) Secondly, the arbitrator may be chosen by the parties from a roster of impartial industry experts or distinguished lawyers, who may also be from a third country. Finally, the case may be resolved using the impartial and straightforward rules of the arbitrating organization, rather than the procedures buried in the statutes or rules of a court of the country of one of the parties. Arbitration rules are the rules of arbitral tribunals that address issues such as the qualification and appointment of arbitrators, the conduct of proceedings, procedures for finding the facts and applying the law, and the making of awards. These rules are often published in multiple languages.

There are other advantages to arbitration besides neutrality. Pretrial discovery is faster and more limited than that available in the United States, resulting in less expense and delay. The process is private and records of proceedings are not publicly available as are court records. Arbitration and attorney fees are far less than similar fees in a court of law. The rules for evidence admissibility are more flexible than in many national courts. And finally, a party’s right to appeal is more limited.

Although parties can always agree to arbitration, a requirement to submit to arbitration is often set out in many international contracts. Arbitration clauses might be used in contracts for the sale of goods, commodities, or raw materials. They are used in international shipping contracts, employment contracts, international construction contracts, financing agreements, and cruise ship tickets, to name a few, as well as in multimillion- or billion-dollar contracts. Today, arbitration is being used more to resolve disputes over intellectual property and licensing agreements.

Despite its reputation for being less costly than litigation, arbitration is not cheap. The International Chamber of Commerce (ICC) estimates that for a $1 million claim before its International Court of Arbitration in Paris, the average arbitrator’s fee would be approximately $37,000, with about $19,500 in administrative expenses, for a total of approximately $56,500 in costs—or about 5 percent. For a $100,000 claim, the average arbitrator’s fee would be approximately $9,325, with about $4,650 in administrative expenses, for a total of approximately $13,975 in costs—or about 13 percent.

National Arbitral Laws.

Most commercial nations today have laws permitting arbitration and specifying the effect of an arbitral award (see Exhibit 3.1). The British Arbitration Act went into effect in 1996. The Arbitration Law of the People’s Republic of China became effective in 1994 (it provides that arbitrators must have eight years’ prior legal experience), and the Russian arbitration law was enacted in 1993. (Notably, it provides that arbitration may be conducted in Russia in any language agreed upon by the parties). The laws of many countries, such as China, Russia, Mexico, and Canada, were patterned after the 1985 Model Law on International Commercial Arbitration of the United Nations’ Commission on International Trade Law (UNCITRAL). The U.S. Federal Arbitration Act dates back to 1925, but it has been modernized. It applies to both domestic and international arbitration and defers to the specific procedural rules of the arbitral body conducting the arbitration proceedings. Many U.S. states (e.g., California, Connecticut, Illinois, Oregon, and Texas) have enacted statutes on international commercial arbitration, some patterned after the UNCITRAL model.

Exhibit 3.1: Some Arbitration Treaties in Force Worldwide

Arab Convention on Commercial Arbitration (1987)

Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention, 1959)

Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (Washington Convention, 1966)

European Convention Providing a Uniform Law on Arbitration (Strasbourg Convention, 1966)

Geneva Protocol on Arbitration Clauses (1923)

Geneva Convention on the Execution of Foreign Arbitral Awards (1927)

Inter-American Convention on International Commercial Arbitration (Organization of American States, Panama Convention, 1975)

Arbitration Bodies.

There are many organizations worldwide providing arbitral services. The choice is up to the parties, and this is often decided in advance and set out in the terms of the contract. Some of the leading private organizations for arbitration of commercial disputes are the following:

• American Arbitration Association

• Arbitration Institute of the Stockholm Chamber of Commerce

• Cairo Regional Center for International Commercial Arbitration

• China International Economic and Trade Arbitration Commission

• Dubai International Arbitration Center

• Hong Kong International Arbitration Centre and the HK Mediation Centre

• International Court of Arbitration of the International Chamber of Commerce (ICC)

• Japan Commercial Arbitration Association

• London Court of Arbitration

• St. Petersburg International Commercial Arbitration Court

• Singapore International Arbitration Centre

• World Intellectual Property Organization (WIPO) Arbitration and Mediation Center

Two additional organizations provide dispute resolution between private parties and national governments:

• The International Centre for Settlement of Investment Disputes (ICSID), a part of the World Bank group, provides arbitration for the settlement of disputes between member countries and investors who qualify as nationals of other member countries.

• The Permanent Court of Arbitration at The Hague provides arbitral services for commercial disputes to states, private parties, and intergovernmental organizations, including handling mass claims and environmental disputes where one of the parties is a national government.

Each of these organizations operates under a different set of procedural rules. The ICC uses its own rules, which are highly respected. Many other arbitral bodies use the widely accepted rules drafted by UNCITRAL, which take into account the various legal systems and countries in which they might be used. The UNCITRAL rules, for example, are used by the Hong Kong Arbitration Center, by the WIPO, and by other organizations throughout the world.

Arbitration Clauses.

Many contracts contain clauses requiring that disputes be submitted for arbitration because it removes much of the uncertainty in the event of a breach of contract or other dispute. Here is a typical example:

All disputes or claims arising out of this contract, or breach thereof, shall be resolved by arbitration before [name of arbitral body], and according to the rules of that body. Any award rendered thereby may be entered in any court of competent jurisdiction.

While the validity of these clauses is now generally accepted, that was not always clear. In the following case, Scherk v. Alberto-Culver, the U.S. Supreme Court considered an arbitration clause in an international contract calling for arbitration in Paris.

Enforcement of Arbitration Awards.

Arbitral awards are recognized and enforceable by the courts of most nations. In the United States, an arbitral award will usually be enforced if the following conditions are met:

• The award is enforceable under the local law of the country where the award was made

• The defendant was properly subject to the jurisdiction of the arbitral tribunal

• The defendant was given notice of the arbitration proceeding and an opportunity to be heard

• Enforcement of the award is not contrary to public policy

• The subject matter of the contract at issue is not unlawful under applicable law

• The contract at issue is not void for reasons of fraud or the incapacity of one of the parties

 Scherk v. Alberto-Culver

417 U.S. 506 (1974) United States Supreme Court

BACKGROUND AND FACTS

Alberto-Culver Co., a Delaware corporation with its principal office in Illinois, manufactured toiletries and hair products in the United States and abroad. In February 1969, Alberto-Culver signed a contract in Austria to purchase three businesses of Fritz Scherk (a German citizen) that were organized under German and Liechtenstein law, as well as the trademarks to related cosmetics. In the contract, Scherk warranted that he had the sole and unencumbered ownership of these trademarks. The contract also contained a clause that provided that “any controversy or claim [that] shall arise out of this agreement or the breach thereof would be referred to arbitration before the International Chamber of Commerce in Paris, France, and that the laws of Illinois shall govern.” One year after the closing, Alberto-Culver discovered that others had claims to Scherk’s trademarks. Alberto-Culver tried to rescind the contract; Scherk refused, and Alberto-Culver filed suit in federal court in Illinois claiming that the misrepresentations violated the Securities and Exchange Act, Sec. 10(b), and SEC rule 10b-5. Scherk moved to dismiss or to stay the action pending arbitration. In the U.S. District Court, the motion to dismiss was denied and arbitration was enjoined. The U.S. Court of Appeals affirmed. The U.S. Supreme Court granted certiorari.

JUSTICE STEWART

The United States Arbitration Act, now 9 U.S.C. 1 et seq., reversing centuries of judicial hostility to arbitration agreements, was designed to allow parties to avoid “the costliness and delays of litigation,” and to place arbitration agreements “upon the same footing as other contracts….”

Alberto-Culver’s contract to purchase the business entities belonging to Scherk was a truly international agreement. Alberto-Culver is an American corporation with its principal place of business and the vast bulk of its activity in this country, while Scherk is a citizen of Germany whose companies were organized under the laws of Germany and Liechtenstein. The negotiations leading to the signing of the contract in Austria and to the closing in Switzerland took place in the United States, England, and Germany, and involved consultations with legal and trademark experts from each of those countries and from Liechtenstein. Finally, and most significantly, the subject matter of the contract concerned the sale of business enterprises organized under the laws of and primarily situated in European countries, whose activities were largely, if not entirely, directed to European markets.

Such a contract involves considerations and policies significantly different from those found controlling in Wilko v. Swan [citation omitted]. In Wilko, quite apart from the arbitration provision, there was no question but that the laws of the United States generally, and the federal securities laws in particular, would govern disputes arising out of the stock-purchase agreement. The parties, the negotiations, and the subject matter of the contract were all situated in this country, and no credible claim could have been entertained that any international conflict-of-laws problems would arise. In this case, by contrast, in the absence of the arbitration provision considerable uncertainty existed at the time of the agreement, and still exists, concerning the law applicable to there solutions of disputes arising out of the contract.

Such uncertainty will almost inevitably exist with respect to any contract touching two or more countries, each with its own substantive laws and conflict-of-laws rules. A contractual provision specifying in advance the forum in which disputes shall be litigated and the law to be applied is, therefore, an almost indispensable precondition to achievement of the orderliness and predictability essential to any international business transaction. Furthermore, such a provision obviates the danger that a dispute under the agreement might be submitted to a forum hostile to the interests of one of the parties or unfamiliar with the problem involved.

A parochial refusal by the courts of one country to enforce an international arbitration agreement would not only frustrate these purposes, but would invite unseemly and mutually destructive jockeying by the parties to secure tactical litigation advantages. In the present case, for example, it is not inconceivable that if Scherk had anticipated that Alberto-Culver would be able in this country to enjoin resort to arbitration he might have sought an order in France or some other country enjoining Alberto-Culver from proceeding with its litigation in the United States. Whatever recognition the courts of this country might ultimately have granted to the order of the foreign court, the dicey atmosphere of such a legal no-man’s-land would surely damage the fabric of international commerce and trade, and imperil the willingness and ability of businessmen to enter into international commercial agreements….

For all these reasons we hold that the agreement of the parties in this case to arbitrate any dispute arising out of their international commercial transaction is to be respected and enforced by the federal courts in accord with the explicit provisions of the Arbitration Act.

Decision. Reversed and remanded.

Comment. The Court understood that an arbitration agreement was the ultimate type of forum selection clause. The Court made reference to national legislation that indicated an acceptance of arbitration (the Arbitration Act, 9 U.S.C 1 et. seq.). Other countries have similar national legislation or are signatories to the New York Convention and/or the European Convention on International Arbitration.

Case Questions

1. What were the Court’s reasons for upholding the arbitration provision?

2. What needs of international businesses were served by the Court’s holding? How were these needs addressed?

3. What factors would Alberto-Culver need to have shown in order to have overturned the arbitration provision?

More than 140 nations have signed the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention, further strengthening the ability to enforce awards in those countries. The New York Convention requires that an arbitral award made in one country be honored and enforced by the courts of another country, where both countries are parties to the convention. The award will be enforced unless one of the defenses listed above exists, or if the original award has been set aside or suspended by a court in the country in which it was made.

LITIGATION

Litigation in a court of law is the final alternative for resolving a dispute. It is used more frequently in the United States than in virtually any other country. Many countries have different procedural rules for litigating cases. First, many concepts familiar to American and English students, such as trial by jury and other traditions, may not be used in the civil law countries. While we take jury trials in criminal and civil cases almost for granted in the United States, the same is not true throughout the world. The role of the judge may be very different; in some countries, the judge is an impartial arbiter of fairness and procedure, while in other countries, he or she may examine witnesses and take an active role in the search for the truth. The discovery process, by which the parties attempt to uncover evidence in advance of trial, can also be different. For instance, oral depositions taken under oath outside of court may be routinely done in the United States, while in China and some other countries, their use is prohibited. There are different rules for compensating lawyers; in the United States, for instance, contingent fees are widely used in tort cases, while in other countries, they are barred. The entire issue of damages is frequently handled differently. Finally, appeals are handled differently in many countries, with some, like the United States, limiting appeals to reconsidering issues of law applied by the trial courts. In other countries, appellate courts will consider new or additional evidence.

There can also be many differences in substantive law (“the law of the case”), although this topic is too broad for this chapter. Suffice it to say that almost every body of law—contracts, torts, crimes, property, business regulation, intellectual property, and so forth—can vary from legal system to legal system and country to country. This will have a tremendous impact on the outcome of litigation. Certainly, parties to a contract can have some control over the choice of substantive law and procedural rules by incorporating a choice of law clause in the contracts. They may also be able to have control over where the litigation takes place by utilizing a forum selection clause in the contract. These are critical issues that must be kept in mind as you read on.

Jurisdiction

Jurisdiction, one of the key concepts of jurisprudence, is the power of a court to hear and decide a case. A court that has jurisdiction is said to be a “competent” court. The term has different meanings depending on how it is used. For example, territorial jurisdiction refers to the power of criminal courts to hear cases involving crimes committed within their territory. In rem jurisdiction refers to a court’s power over property within its geographical boundaries. Subject matter jurisdiction refers to the court’s authority to hear a certain type of legal matter, such as tort cases or breach of contract. In the United States, for example, federal courts have subject matter jurisdiction over cases involving federal statutes and federal government agencies, constitutional issues, and cases arising between citizens of different states or between citizens of the United States and citizens of foreign countries (where the amount in controversy exceeds $75,000). The latter is known as diversity of citizenship jurisdiction. Thus, we see that the term “jurisdiction” can be used in many different ways. But one thing is certain—without it, courts are powerless to act.

In Personam Jurisdiction.

In personam jurisdiction or “jurisdiction over the person” refers to the court’s power over a certain individual or corporation. No party can be made to appear before a court unless that court has personal jurisdiction. If there is no personal jurisdiction, the case will be dismissed upon the defendant’s motion. Typically, jurisdiction is obtained by having a summons served on an individual or on the legal agent of a corporation. In certain types of cases, service over those not present in the territory can be done by registered mail or even through publication in the “legal notices” section of approved newspapers. In the United States, the requirement of obtaining service of process on a defendant in a case, and of having jurisdiction over them, is required by the Due Process Clause of the 5th and 14th Amendments to the U.S. Constitution. The method used must be authorized by statute and be fundamentally fair.

The basic concept is that one should not be “hauled into court” in some distant state or country unless that person has some connection to that place. Every national legal system has its jurisdictional requirements. For example, the French Civil Code states that “a foreigner, even if not residing in France, may be cited before French courts for the execution of obligations by him contracted in France with a citizen of France.” In Germany, the presence of property owned by the defendant, whether the property is insignificant or even if it is not related to the case, can still be the basis of jurisdiction. Similarly, in the United States, there are many federal and state statutes that define when a court is competent to hear and decide a case.

Requirement for In Personam Jurisdiction: Minimum Contacts.

At one time in U.S. legal history, the U.S. Supreme Court had interpreted the Due Process Clause to limit personal jurisdiction to people physically present in the court’s territory. As the nation grew and as interstate commerce expanded, the concept was broadened to allow jurisdiction over persons who were not present within the court’s geographical territory, but who, for reasons of justice and fairness, should be held to answer a complaint there. A modern example is a state “implied consent” statute, by which one operating a motor vehicle on the highways of a state “impliedly consents” to submitting to the jurisdiction of the courts of that state for all suits arising out of the operation of the vehicle there.

The due process requirements for in personam jurisdiction over persons absent from a state or territory have been carefully considered by the courts. In the now famous language of U.S. Supreme Court decisions dealing with both interstate and international commerce, “due process requires only that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.” International Shoe Co. v. Washington, 326 U.S. 310 (1945). Just how much of a connection to a foreign state or country does it take for the courts to require one to defend a case there? The courts have answered the question on a case-by-case basis, looking to see whether it would be fair to ask a nonresident to come to their jurisdiction to defend a case. The courts have looked at many factors, including the extent of the defendant’s presence in the state, what business he or she may have conducted there, the burden on the defendant, fairness to the plaintiff, and the interest of the state in having the case resolved there. Did the defendant have an office, branch location, or salespeople in the territory of the forum? Did any of its employees or agents travel there on business? Did it advertise or otherwise solicit business there? Did it ship goods there? Did it enter into a contract there, or was the contract to be performed there? In Worldwide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980), the U.S. Supreme Court stated that a New York automobile distributor was not required to appear in Oklahoma to defend a products liability suit based on the sale of a vehicle that took place in New York and was later involved in a serious accident in Oklahoma.

Petitioners carry on no activity whatsoever in Oklahoma. They close no sales and perform no services there. They avail themselves of none of the privileges and benefits of Oklahoma law. They solicit no business there either through salespersons or through advertising reasonably calculated to reach the State. Nor does the record show that they regularly sell cars at wholesale or retail to Oklahoma customers or residents or that they indirectly, through others, serve or seek to serve the Oklahoma market. In short, respondents seek to base jurisdiction on one, isolated occurrence and whatever inferences can be drawn therefrom: the fortuitous circumstance that a single Audi automobile, sold in New York to New York residents, happened to suffer an accident while passing through Oklahoma.

A similar concept exists in the international context. The following case, Asahi Metal Ind. v. Superior Ct. of California, 480 U.S. 102 (1987), questions whether a Japanese manufacturing company should be forced to defend a lawsuit in California for an accident that occurred there. As you read, keep in mind that these cases are resolved on a case-by-case basis after a consideration of all of the facts. A decision on jurisdiction may depend on one or more different factors not present in other cases. In other words, it is very difficult for lawyers to counsel whether your actions will or will not subject you to a foreign court’s jurisdiction some time in the future. In reading this case, think about what factors, if they had been present, might have forced Asahi to appear in court in California.

 Asahi Metal Industry, Co. v. Superior Court of California, Solano County

480 U.S. 102 (1987) United States Supreme Court

BACKGROUND AND FACTS

Asahi Metal Industry, a Japanese corporation, manufactured valve assemblies in Japan and sold them to tire manufacturers including Cheng Shin (a Taiwanese corporation) from 1978 to 1982. Cheng Shin sold tires all over the world, including in California. On September 23, 1978, in Solano County, California, Gary Zurcher was injured riding his motorcycle. His wife was killed. He filed a products liability action against Cheng Shin, the manufacturer of his motorcycle’s tires, alleging that the tires were defective. Cheng Shin filed a cross-complaint seeking indemnification from Asahi. Cheng Shin settled with Zurcher. However, Cheng Shin pressed its action against Asahi. The California Supreme Court held that California state courts possessed personal jurisdiction over Asahi, and Asahi sought review by the U.S. Supreme Court. The case presented the question of whether a dispute between a Taiwanese company and a Japanese company with the above-described relationship to California should be heard by the California courts. In other words, did the California courts have personal jurisdiction over Asahi?

JUSTICE O’CONNOR

The placement of a product into the stream of commerce, without more, is not an act of the defendant purposefully directed toward the forum State. Additional conduct of the defendant may indicate an intent or purpose to serve the market in the forum State, for example, designing the product for the market in the forum State, advertising in the forum State, establishing channels for providing regular advice to customers in the forum State, or marketing the product through a distributor who has agreed to serve as the sales agent in the forum State. But a defendant’s awareness that the stream of commerce may or will sweep the product into the forum State does not convert the mere act of placing the product into the stream into an act purposefully directed toward the forum State.

Assuming, arguendo, that respondents have established Asahi’s awareness that some of the valves sold to Cheng Shin would be incorporated into tire tubes sold in California, respondents have not demonstrated any action by Asahi to purposefully avail itself of the California market. It has no office, agents, employees, or property in California. It does not advertise or otherwise solicit business in California. It did not create, control, or employ the distribution system that brought its valves to California. There is no evidence that Asahi designed its product in anticipation of sales in California. On the basis of these facts, the exertion of personal jurisdiction over Asahi by the Superior Court of California exceeds the limits of due process.

The strictures of the Due Process Clause forbid a state court from exercising personal jurisdiction over Asahi under circumstances that would offend “traditional notions of fair play and substantial justice.” International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945), quoting Milliken v. Meyer, 311 457, 463 (1940).

We have previously explained that the determination of the reasonableness of the exercise of jurisdiction in each case will depend on an evaluation of several factors….

Certainly the burden on the defendant in this case is severe. Asahi has been commanded by the Supreme Court of California not only to traverse the distance between Asahi’s headquarters in Japan and the Superior Court of California in and for the County of Solano, but also to submit its dispute with Cheng Shin to a foreign nation’s judicial system. The unique burdens placed upon one who must defend oneself in a foreign legal system should have significant weight in assessing the reasonableness of stretching the long arm of personal jurisdiction over national borders.

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