The World in U.S. Courts: Spring 2017 - Personal Jurisdiction/Forum Non Conveniens | January.04.2017
Two executives of Volkswagen in Germany sought to be dismissed from class action litigation arising out of VW’s use of software designed to permit VW diesel cars falsely to pass federal and State emissions requirements. The case principally involved claims under Section 10(b) of the Securities Exchange Act of 1934 and implementing SEC Rule 10b-5 arising from purchases of American Depositary Receipts (ADRs) sponsored by VW and traded “over the counter” (OTC) in the US. The fraud described by the Court had the effect of inflating the price of VW’s ADRs in the US.
Among other arguments, the individuals sought dismissal on personal jurisdiction grounds and under the doctrine of forum non conveniens.
The plaintiffs asserted personal jurisdiction over one defendant who was alleged to have “controlled” the entity that committed the fraud. The Court noted that “controlling person” liability was a basis for jurisdiction and rejected the defendant’s argument that the principle should be limited to US “control” persons. The Court similarly rejected application of the “fiduciary shield” doctrine, under which contacts between certain company employees and a forum are ignored for purposes of personal jurisdiction if undertaken within the scope of their employment. The Court found this defense inapplicable to employees who are, as in the case at bar, officers or directors alleged to have participated directly in the fraud.
The Court independently found that it had jurisdiction over the two individual defendants, noting that in securities fraud cases jurisdiction could be premised either on the “purposeful direction” test usually applied to torts or the “purposeful availament” test usually applied to transactional matters, like breach of contract claims.
The Court found the “purposeful direction” test to require three elements: (i) an intentional act, (ii) “expressly aimed” at the forum state, (iii) causing harm the defendant knew was likely to be suffered in the forum state. It found these elements were satisfied by allegations that the individuals knowingly made misstatements that SEC rules established US investors could rely upon in purchasing the VW ADRs. The Court rejected one defendant’s attempt to analogize the case to the inability of statements made on a “passive website” to establish jurisdiction because the SEC regulation independently made representations made on the website relevant. The Court found the “purposeful direction” test also satisfied by the discretionary decision of a “control person” defendant to take advantage of the US OTC market. One defendant not found to be a “control person” was not, by contrast, subject to personal jurisdiction under the “purposeful direction” test.
[Editor’s Note: The In re Volkswagen case is also addressed in the Securities Law section of this report.]