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SCOTUS Speaks on General Jurisdiction, Hague Service, and Arbitration Clauses

June 9, 2017 in  News

New York Law Journal 

In case readers haven’t noticed, the U.S. Supreme Court has been busy issuing recent rulings that can affect litigation practice. In my column last month, the Court’s pronouncement on sanctions for discovery misconduct was discussed. Since then the nation’s high court has: (1) issued a significant decision on May 30 rejecting general jurisdiction over a defendant in a state where that defendant was neither incorporated nor headquartered (BNSF R. Co. v. Tyrrell, 2017 U.S. LEXIS 3395); (2) held on May 22 that service of process of a foreign defendant by mail is permitted by the terms of the Hague Service Convention, provided the foreign country has not objected to such service by mail (Water Splash v. Menon, 2017 U.S. LEXIS 3212); and (3) ruled on May 15 that a nursing home’s arbitration agreement had to be enforced as preempting tort claims for injuries filed in Kentucky courts (Kindred Nursing Centers L.P. v. Clark, 2017 U.S. LEXIS 2948).

Because this article discusses three decisions of broad sweep and space here is limited, our focus is on the pith and substance of each ruling and its likely impact for the practitioner, rather than describing the thicket of facts and circumstances considered by the courts below in each case. If a particular topic resonates with the reader, he or she can take it from there as far as the details go.

General Jurisdiction

Two separate Federal Employers’ Liability Act (FELA) lawsuits for personal injuries were filed in Montana state court against BNSF, a railway company with over 2,000 miles of track in Montana and more than 2,000 workers in the state. However, neither plaintiff Robert Nelson’s knee injuries nor decedent Brent Tyrrell’s exposure to carcinogenic chemicals arose from or related to work performed for BNSF in Montana. Neither injured worker resided in Montana. Further, despite having about 6 percent of its total railroad track and less than 5 percent of its total workers in Montana, BNSF was not incorporated there nor had its principal place of business there. It was a Delaware corporation headquartered in Texas. BNSF operates railroad lines in 28 states.

BNSF moved to dismiss both lawsuits on jurisdictional grounds. It contended that it was not “at home” in Montana, as required for the exercise of general personal jurisdiction under Daimler AG v. Bauman, 571 U.S. ___ (2014), the U.S. Supreme Court’s pivotal decision. The lower courts dismissed Nelson’s case but denied the motion in Tyrrell’s. The Montana Supreme Court consolidated the two cases and held that Montana courts could exercise general personal jurisdiction over BNSF. The state court advanced two reasons: The FELA authorized state courts to exercise personal jurisdiction over railroads “doing business” in the state and, further, Montana law authorizes exercise of general jurisdiction over “[a]ll persons found within” the state.

The U.S. Supreme Court shot down both rationales. First, the FELA provision relied on by the Montana court did not confer personal jurisdiction. It was a venue rule that also allowed concurrent subject matter jurisdiction of state courts in FELA actions. Second, the “persons found within Montana” standard for personal jurisdiction did not satisfy the “due process” requirements here. In neither lawsuit was there a basis for the exercise of “specific” (or case-linked) jurisdiction. Nor was BNSF “at home” in Montana. The two “paradigm forums” for general (or all-purpose) jurisdiction, as explained in Daimler, are a corporation’s place of incorporation and its principal place of business. There may be “exceptional cases” in which the “at home” standard is met by other locations but Montana was not such a forum here.

In BNSF, the court essentially held that Daimler‘s “at home” standard for the exercise of general jurisdiction controls and state courts that do not abide by that standard are offending due process. The court did not reach the “consent jurisdiction” argument raised by plaintiff—namely that defendant “consented” to the jurisdiction of the Montana courts by registering to do business in the state and appointing an agent for service of process—because the Montana Supreme Court did not address this contention. For a recent New York decision rejecting “consent jurisdiction” post-Daimler, see N.Y. County Supreme Court Justice Ellen M. Coin’s ruling in Mischel v. Safe Haven Enterprises, 2017 NYLJ LEXIS 1345 (May 25, 2017).

Hague Service Convention

The United States is a signatory to a multilateral treaty intended to simplify, standardize and generally improve the process of serving documents abroad. The treaty has a long title—Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters—but is often referred to as the Hague Service Convention. The treaty preempts “inconsistent methods of service” wherever it applies.

In Water Splash v. Menon, the court addressed a question that had split lower courts. Did the Convention prohibit service of defendants abroad by mail? Under the treaty, each state was to establish a “central authority” to receive requests to serve documents from other countries. That entity would then serve or arrange for service of documents upon the foreign party and provide a Certificate of Service.

But was the “central authority” approach the only method of service? No. Other articles of the treaty permit service through diplomatic and consular agents; through service modalities two countries can agree upon outside the Convention; and where internal laws of a country permit service from abroad via methods not otherwise allowed by the Convention. In Water Splash, the specific question that had divided lower courts in prior cases was whether service by mail could properly be effected.

The plaintiff corporation sued Menon, its former employee, in a Texas court. However, Menon was a resident of Canada. Water Splash obtained permission to serve Menon by mail. Menon did not respond. A default judgment was entered in Texas which Menon then sought to set aside on the grounds he wasn’t properly served. A majority of the Texas intermediate appellate court sided with Menon. The U.S. Supreme Court granted review to resolve the conflict whether the Hague treaty forbade service by mail. The court held that service by mail was permissible, provided that the foreign country did not object to such service. Some countries, indeed, have objected, for example, Germany. Service by mail to a party in Germany would therefore be inconsistent with the Hague Service Convention. Litigators seeking to serve foreigners by mail need to do some homework first.

Arbitration Clauses

In Kindred Nursing Centers, L.P. v. Clark, the Supreme Court reversed a Kentucky Supreme Court decision that invalidated arbitration clauses in agreements with a nursing home entity that were signed by a wife and daughter of nursing home patients. The relatives signed paperwork pursuant to broad powers of attorney. Each patient died and the relatives (representing the estates) sued Kindred Nursing Centers claiming that the deaths were caused by substandard nursing care. Defendant unsuccessfully moved to dismiss both suits, arguing that the arbitration agreements barred the disputes from being heard in court.

The Kentucky Supreme Court consolidated the cases and affirmed that the suits in court could go forward. The arbitration agreements were held invalid because neither power of attorney “specifically” entitled the representative to enter into an arbitration agreement. Since the Kentucky Constitution declares access to the courts to be “sacred” and “inviolate”, the state court determined that an agent could deprive her principal of such rights only if expressly provided in the power of attorney. This rationale became known in the appeal as the “clear-statement” rule.

The preemptive effect of valid arbitration agreements to preclude lawsuits in court, even class actions via arbitration clause class action waivers, has been reinforced by the U.S. Supreme Court time and again in recent years. My column “Arbitration Clause Class Waivers Upheld Again,” NYLJ, Feb. 17, 2016, discussed salient case law. For a more copious legal study, see M. Hoenig and L. Brown, “Arbitration and Class Action Waivers Under Concepcion: Reason and Reasonableness Deflect Strident Attacks,” 68 Ark. L. Rev. 669 (Dec. 2015). In Kindred Nursing Centers, the Supreme Court emphatically echoed its prior decisions. The Kentucky court’s “clear statement” rationale for not upholding the arbitration clauses had to be reversed. The decision violated the Federal Arbitration Act (FAA) by singling out arbitration agreements for disfavored treatment. The state court (despite three judges dissenting) reflected the kind of “hostility to arbitration” that led Congress to enact the FAA.

The Kentucky court’s “clear statement” rule failed “to put arbitration agreements on an equal plane with other contracts.” It did “exactly what Concepcion [563 U.S. 333] barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial. Such a rule is “too tailor-made to arbitration agreements.” It subjects them to “uncommon barriers” to survive the FAA’s edict against singling out those contracts for disfavored treatment.

The U.S. Supreme Court also rejected plaintiffs’ “contract formation” argument, namely, that the Kentucky “clear statement” rule only affects agents without explicit authority from entering into arbitration agreements. That contract formation issue, plaintiffs claimed, was different from the question of “enforcing” contracts which the FAA controls. But, said the court, the FAA states that an arbitration agreement must ordinarily be treated as “valid, irrevocable and enforceable.” Hence, by its terms, the FAA “cares not only about enforcement of arbitration agreements but also their validity—that is, about what it takes to enter into them.” And precedent confirms that point. The Kentucky court thus “flouted the FAA’s command to place those agreements on an equal footing with all contracts.” The arbitration agreements were enforceable.