On September 28, 2010, the United States Supreme Court granted certiorari in two important Due Process Clause cases dealing with the assertion of personal jurisdiction against foreign corporations:

• In Goodyear Luxembourg Tires v. Brown, the Court will consider “whether a foreign corporation is subject to general personal jurisdiction, on causes of action not arising out of or related to any contacts between it and the forum state, merely because other entities distribute in the forum state products placed in the stream of commerce by the defendant.”
• In J. McIntyre Machinery Ltd. v. Nicastro, the Court will consider a related  question: whether a state may be permitted to exercise specific jurisdiction over a foreign manufacturer under the stream-of-commerce theory “solely because the manufacturer targets the United States market for the sale of its product and the product is purchased by a forum state consumer.”

Although there are no direct state tax implications in these two cases, they will raise issues among corporations engaging in electronic commerce and are concerned about being subject to tax in every state. If the Court rules that jurisdiction was properly asserted in either of these cases, businesses, and particularly those engaged in electronic commerce, will be faced with the daunting prospect of being haled into court anywhere in the United States with no connection to the forum state beyond selling items on a third-party website. So much for purposeful availment!

On September 28, 2010, the United States Supreme Court granted certiorari in two important Due Process Clause cases dealing with the assertion of personal jurisdiction against foreign corporations:

• In Goodyear Luxembourg Tires v. Brown, the Court will consider “whether a foreign corporation is subject to general personal jurisdiction, on causes of action not arising out of or related to any contacts between it and the forum state, merely because other entities distribute in the forum state products placed in the stream of commerce by the defendant.”
• In J. McIntyre Machinery Ltd. v. Nicastro, the Court will consider a related  question: whether a state may be permitted to exercise specific jurisdiction over a foreign manufacturer under the stream-of-commerce theory “solely because the manufacturer targets the United States market for the sale of its product and the product is purchased by a forum state consumer.”

Although there are no direct state tax implications in these two cases, they will raise issues among corporations engaging in electronic commerce and are concerned about being subject to tax in every state. If the Court rules that jurisdiction was properly asserted in either of these cases, businesses, and particularly those engaged in electronic commerce, will be faced with the daunting prospect of being haled into court anywhere in the United States with no connection to the forum state beyond selling items on a third-party website. So much for purposeful availment!

The United States Supreme Court has previously considered the Due Process Clause standard in the state tax context.  In Quill v. North Dakota, 504 U.S. 298 (1992), the Court applied the Due Process Clause analysis that is applied generally to whether a defendant could be subject to suit in another jurisdiction: “Building on the seminal case of International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), we have framed the relevant inquiry as whether a defendant had minimum contacts with the jurisdiction ‘such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’ ’ Id., at 316, 66 S.Ct., at 158 (quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 343, 85 L.Ed. 278 (1940)).” Id. at 307. Thus, the Court has made clear that general Due Process Clause analysis applies for purposes of state tax nexus, and in this manner, there is concern that any expansion of Due Process Clause jurisdiction will have a direct effect on state tax nexus principles.

Although both cases deal with a question of personal jurisdiction over a foreign corporation, some key facts make the question presented in each case notably different. That factual difference hinges on the type of personal jurisdiction being asserted; in Goodyear, the plaintiff/appellee is attempting to assert general jurisdiction over the foreign corporation, while in McIntyre, the case deals with specific jurisdiction over the defendant. Where specific jurisdiction is available in suits “arising out of or related to the defendant’s contacts with the forum,” general jurisdiction, if applicable, allows for a defendant to be haled into court in the state on any claim whatsoever and unrelated to the actual forum contacts. Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414-15 nn. 8-9 (1984).  General jurisdiction may be asserted only when the defendant’s contacts and activities in the forum state are “so substantial and of such a nature as to justify suit against it on causes of action arising from dealings entirely distinct from those activities.” Int’l Shoe Co. v. Washington, 326 U.S. 310, 318 (1945). Indeed, the petitioners in Goodyear point out that, similar to the Commerce Clause physical presence standard affirmed in Quill, the Court has consistently held that a company is required to have contacts so substantial that it is “constructively present” in a state before general jurisdiction may be asserted by that state.

The assertion of general jurisdiction based upon the mere act of inserting product into the stream of commerce, as challenged in Goodyear, is an extreme position that we expect to be decided in favor of the foreign corporation. The stream-of-commerce theory has been only successfully asserted in specific jurisdiction cases. The closer question, and the case that bears watching, is McIntyre. According to defendant’s petition for certiorary, the New Jersey Supreme Court “contended that traditional notions of fair play and substantial justice . . . should reflect what it termed ‘the radical transformation of the international economy.’” In other words, because technology has advanced and international (and interstate) commerce has become so important to the economy, businesses should reasonably expect to be haled into a court in any state where it knows its product may possibly be purchased. No purposeful availment would be necessary. If the lower court ruling is upheld, no longer will a corporation need to purposefully direct its sales activities to the forum state to satisfy Due Process Clause concerns; rather, a product sold on a website that the business knows may be viewed within any state could be sued in that state’s court if the business’s product happens to end up in that state and causes harm to a person there.

Particularly within the realm of the digital economy, where a company is not shipping goods but merely providing electronically delivered products and services to end users in undisclosed locations, such an expansion of the concepts of personal jurisdiction would be an impediment to the free market concepts that drive the American economy. The Supreme Court should treat the lower court decision premised on the “radical transformation” of the economy with a skeptical eye, because those quaint notions of “fair play and substantial justice” have not changed at all.