In what could have a global effect on all foreign manufacturers, the Texas Supreme Court recently ruled that out-of-state companies who sell their goods in the Lone Star State via a local distributor are subject to personal jurisdiction.
In a case centering on Spir Star AG, a German manufacturer who sold its products in Texas through a Texas-based distributor, the Texas Supreme Court in May 2008 was tasked to decide whether the use of a distributorship insulates the manufacturer from the reach of a Texas court when one of the products injures a Texas citizen.
"We hold that a manufacturer is subject to specific personal jurisdiction in Texas when it intentionally targets Texas as the marketplace for its products, and that using a distributor-intermediary for that purpose provides no haven from the jurisdiction of a Texas court," states the Supreme Court's March 12 opinion, authored by Chief Justice Wallace Jefferson.
"Because, in this case, personal jurisdiction comports with traditional notions of fair play and substantial justice, we affirm the court of appeals' judgment."
According to court documents, Spir Star AG (AG) manufactures high-pressure hoses and fittings for sale throughout the world. In 1995, AG decided that Houston would be the optimal location for a distributorship because the Texas coastal region's numerous refineries were well suited for AG's energy-related products. AG's executives traveled to Houston, leased office space and established a Texas distributorship, Spir Star Inc., now Spir Star Limited (Limited), the opinion states.
AG's directors gave Limited permission to use the trademarked "Spir Star" name free of charge. Although it sells products other than AG's, Limited is AG's exclusive distributor in Texas and North America.
In 2003, an AG high-pressure hose ruptured and seriously injured Louis Kimich, a refinery laborer. AG had sold the hose to Limited, which in turn sold it to Kimich's employer. Kimich sued his employer and the premises owner, and later added claims against AG and Limited, the opinion states.
In response, AG filed for a special appearance, which both the trial court and the court of appeals denied.
"We granted AG's petition for review ... and now affirm," the opinion states.
"A court has specific jurisdiction over a defendant if its alleged liability arises from or is related to an activity conducted within the forum. Unlike general jurisdiction, which requires a 'more demanding minimum contacts analysis' ... specific jurisdiction 'may be asserted when the defendant's forum contacts are isolated or sporadic, but the plaintiff's cause of action arises out of those contacts with the state.'"
On appeal, AG argued that a parent company must control the subsidiary for personal jurisdiction to apply, and that this case involved a foreign corporation's use of a Texas distributorship, rather than a parent/subsidiary relationship, court papers say.
"When an out-of-state manufacturer like AG specifically targets Texas as a market for its products, that manufacturer is subject to a product liability suit in Texas based on a product sold here, even if the sales are conducted through a Texas distributor or affiliate," the opinion states.
"In such cases, it is not the actions of the Texas intermediary that count, but the actions of the foreign manufacturer who markets and distributes the product to profit from the Texas economy."
AG also argued that its individual owners—rather than AG itself—established Limited.
In a different point, AG also contended that because it receives none of Limited's profits and relinquishes title to the hoses before they reach Texas, AG does not benefit from Limited's Texas connections.
"AG's potential liability arises out of its contacts with Texas, and exercising personal jurisdiction over AG does not offend traditional notions of fair play and substantial justice," the opinion states. "The court of appeals and the trial court correctly concluded that Texas courts have personal jurisdiction over this claim against AG. We affirm the court of appeals' judgment."
The case was originally ruled on by the First Court of Appeals of Texas, located in Harris County.
AG is represented in part by Houston attorney Rick Oldenettel of the Oldenettel & Dies law firm.
SC case No. 07-0340