Federal Bureau of Investigation
1900 Half Street
Washington, D.C. 20535
April 20, 1995
3801 Connecticut Avenue, Northwest
Washington, D.C. 20008
Dear Mr. Freedman:
This letter will acknowledge receipt of your letter dated April 13, 1995. For your information the Washington Metropolitan Field Office of the Federal Bureau of Investigation (FBI) has thoroughly reviewed this letter and can find no indication of a Federal violation over which the FBI has jurisdiction. Based on this fact, the referenced letter is being returned to you.
W. Lane Crocker
Assistant Director in Charge
David M. Bowie
Supervisory Special Agent
April 13, 1995
3801 Connecticut Ave., NW
Washington, DC 20008-4530
David M. Bowie
Supervisory Special Agent
Federal Bureau of Investigation
Washington Field Office
Washington, DC 20034
Dear Mr. Bowie:
Enclosed for your general information is additional background material: a legal memorandum that I prepared while I interned at the Office of General Counsel, U.S. International Trade Commission (USITC), from January to June 1984, while I was an LL.M. student at the American University.
General Counsel memo GC-H-084: Section 337 Panel Proposals, dated June 6, 1984 (I prepared Sections 2 and 3 only).
The name of my supervising attorney at the USITC was Jack Simmons, Esq.
Also enclosed is a law school exam answer, dated November 17, 1980, for a course in civil procedure taught by Professor Peter Sevareid at Temple University in Philadelphia. Professor Severeid selected my exam answer as the model exam answer.
[The professor’s handwritten notations are highlighted in yellow.]
Civil Procedure Practice Examination
November 17, 1980
November 17, 1980
I have neither seen anyone give or receive, nor have I given or received, unauthorized aid during this examination.
Student No. xxx-xx-xxxx
The question for decision is whether a Delaware statute providing that a nonresident who holds a directorship in a Delaware corporation and is deemed to have consented to the appointment of an in-state registered agent of the corporation as his personal agent for service of process in stockholders’ derivative suits satisfies the Fourteenth Amendment’s procedural and substantive due process requirements. We answer in the negative, and thus reverse the decision of the Supreme Court of Delaware. 1/
In order to meet the requirement of procedural due process, a court must have given the defendant adequate notice of the action against him. F. James, Civil Procedure, at 640-561 (2d ed. 1977). In the present case Section 3114 provides that service of process may be issued to the in-state registered agent of the corporation, yet it does not set forth the method by which said agent is to notify the defendant. In Hess v. Pawloski, we upheld the adequacy of a nonresident motorist statute since in addition to service on a designated state official, the statute mandated registered mail service on the defendant himself. Since Section 3114 does not prescribe the method for the in-state registered agent to notify defendant, the agent may apparently employ registered mail service or service by publication. However, the possibility that the agent may choose to notify the defendant by publication, which is not foreclosed by Section 3114, renders the statute invalid.
1/ Jurisdiction is based on 28 U.S.C. Section 1257(2), which provides: Final judgments or decrees rendered by the highest court of a State in which a decision could be had may be reversed by the Supreme Court . . . (2) By appeal, where is drawn in question the validity of a statute of any state on the ground of its being repugnant to the Constitution, treaties, or laws of the United States, and the decision is in favor of its validity.
In Mullane v. Central Hannover Bank, at 314, we noted that “[p]ersonal service has not in all circumstances been regarded as indispensable to the process due to residents, and it has more often been held unnecessary as to nonresidents.” However, we pointed out that “[w]here the names and post-office addresses of those affected by a proceeding are at hand, the reasons disappear for resort to means less likely than the mails to apprise them if its pendency.” Mullane, supra, at 318.
In the instant case, the addresses of the defendants are undoubtedly known to the in-state registered agent to whom processes is served. Therefore, nothing less than registered-mail service will satisfy the notice requirement as to nonresident defendants. Since Section 3114 does not explicitly mandate such service, we find the statute lacking for it does not foreclose the possibility that service by publication may be employed by the corporation’s agent.
It is apparent in this case that defendants were apprised of the suit since they did appear We held in Wuchter v. Pizzutti, 276 U.S. 13 (1928), however, that if the prescribed statutory method of notice is insufficient, the fact that the individual defendants actually received notice does not make the service valid. The defendants’ appearance in the present case, therefore, does not validate Section 3114.
We hold that Section 3114 is invalid since it fails to prescribe the method by which nonresident corporate fiduciaries, whose addresses are known to the corporation, are to be notified of the pendency of a proceeding against them and therefore does not meet the requirement of procedural due process.
This Court has long recognized that the Due Process Clause of the Fourteenth Amendment limits the power of state courts to obtain personal jurisdiction over persons not served with process within their boundaries. See McGee v. International Life Insurance Co., 355 U.S. 220, 222. In Pennoyer v. Neff, at 727, we held: “Process from the tribunals of one State cannot run into another State, and summon parties there domiciled to leave its territory and respond to proceedings against them.” Since Pennoyer, we have expanded the permissible scope of state jurisdiction over nonresidents. See McGee, supra, at 222. Thus, in International Shoe Co. v. Washington, at 316, this Court held that “due process requires only that in order to subject a defendant to a judgment in personam, if he not be 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.’”
Defendants in the present case argue Section 3114 is unconstitutional as applied to them because they do not have sufficient minimum contacts with Delaware to permit an assertion of jurisdiction. We agree with defendants’ contention and shall deal with the contrary arguments.
Plaintiff argues Delaware validly asserted jurisdiction since defendants accepted their directorships with explicit statutory notice 2/ that they could be haled into the Delaware courts to answer for alleged breaches of duties. However, this argument ignores the minimum
2/ Plaintiff has apparently derived the “expectation” test from the statement in Shaffer, at 216, that “[defendants] had no reason to expect to be haled before a Delaware court. Delaware, unlike some states, has not enacted a statute that treats acceptance of a directorship as consent to jurisdiction in the state.” In view of the fact that a corporation-director consent statute was not at issue in Shaffer, Mr. Justice Marshall’s statement must be considered dicta; the Court was not placing its imprimatur upon such statutes.
contacts standard of International Shoe. It is simply not enough that the defendants had the expectation that Delaware might assert personal jurisdiction. The question under International Shoe is whether defendants had the “contacts, ties, or relationships” to be amenable to process. Del. Statute Section 3114 cannot be read in a vacuum, but must be viewed in light of the constitutional standard established by this Court in International Shoe.
As a basis that Section 3114 is constitutional because it places defendants on notice that they may have to defend in the state of incorporation, plaintiff cites Swenson v. Thibaut (North Carolina Court of Appeals upheld that state’s corporate director long-arm statute), wherein it was held: “jurisdiction in the instant case is predicated upon the acceptance of a fiduciary position in a domestic corporation by an individual when the laws of the state of incorporation unequivocally give notice that such fiduciary may be called upon to defend himself in a forum of that state.” We reject this reasoning since "expectation” may be a necessary prerequisite to asserting jurisdiction (see note 2, supra), but it is not a sufficient precondition upon which a state may assert jurisdiction over a nonresident. Even if the defendants in Shaffer could reasonably have expected that Delaware would assert jurisdiction, such jurisdiction would have been invalid since the defendants did not have sufficient contacts with Delaware under the International Shoe test to sustain jurisdiction. A state may not substitute an “expectation” test for the minimum contacts test; at the very least, minimum contacts are required to ensure substantial justice.
Plaintiff argues that the jurisdictional question must be answered by reference to the quality and nature of defendants’ contact, not the quantity of the contacts. As directors, plaintiff contends, the defendants accepted significant benefits and protections under the laws of Delaware. However, it was stated in Shaffer, at 217, (concurring opinion), that the mere status of an individual as director or officer “of a Delaware corporation can [not] provide sufficient contacts to support the Delaware courts’ assertion of jurisdiction.” The Court in Shaffer, at 216, pointed out that “this line of reasoning establishes only that it is appropriate for Delaware law to govern the obligation of [defendants] to [the corporation] and its stockholders. It does not demonstrate that [defendants] have ‘purposefully avail[ed themselves] of the privilege of conducting activities within the forum State,' Hanson v. Denckla, . . . at 253, in a way that would justify bringing them before a Delaware tribunal.”
The result in Hanson supports our finding that defendants’ mere status as directors is insufficient for Delaware to subject them to in personam jurisdiction. In Hanson, at 253, we stated: “The unilateral activity of those who claim some relationship with a nonresident defendant cannot satisfy the requirement of contact with the forum state.” In the present case, plaintiff claims that because the corporation is chartered in Delaware, the nonresident directors, although they carry on no activity with Delaware, are subject to that state’s jurisdiction because they accepted positions with the corporation. It was the corporation’s unilateral action in obtaining a Delaware charter that provides the only real nexus with the state. Since the defendants’ relationship with the corporation does not involve “conducting activities within the forum state," this relationship alone “cannot satisfy the requirement of contact with
the forum state.”
The test enunciated in Shaffer for a state court to obtain personal jurisdiction over nonresident defendants is that there be “minimum contacts among the parties, the contested transaction, and the forum state.” Shaffer, at 220. As we have already pointed out, such minimum contacts are lacking here. However, it might be argued that defendants’ out-of-state breach of fiduciary duties caused foreseeable harm to a “citizen” of Delaware, i.e., the corporation, and the defendants should therefore be amendable to suit in Delaware. See Gray v. American Radiator Corp. We reject the Gray test as applied to shareholder derivative suits on the ground that, although technically the Delaware corporation was harmed, in reality the true harm was done to the corporation’s shareholders who may be scattered nationwide. Viewed in this light, the “contacts among the parties, the contested transaction, and the forum state” in the present case appear even more tenuous.
Plaintiff contends that Delaware is the proper forum in the present case because of Delaware’s interest in overseeing the conduct of those owing fiduciary duties to shareholders of Delaware corporations and in enforcing and developing that state’s corporation law. In Shaffer, at 215, the Court noted:
- [E]ven if [plaintiff’s] assessment of the importance of Delaware’s interest is accepted, his argument fails to demonstrate that Delaware is a fair forum for this litigation. The interest [plaintiff] has identified may support the application of Delaware law to resolve any controversy over [the defendants’] actions in their capacities as officers and directors. But we have rejected the argument that if a State’s law can properly be applied to a dispute, its courts necessarily have jurisdiction over the parties to that dispute.
And, as was noted in Hanson, at 258 (dissenting opinion), “the question whether the law of a state can be applied to a transaction is different from the question whether the courts of that State have jurisdiction to enter a judgment. . . .”
Plaintiff notes that if we were to hold Section 3114 unconstitutional it would lead to the anomalous result that a choice-of-law rule would require application of Delaware corporation law, while a jurisdictional rule would make it impossible to enforce those duties in Delaware courts. All of the several states, however, have an interest in developing their own law. The argument ignores reality since choice-of-law problems are an intrinsic “anomaly" of our federal system, that present difficulties not merely for Delaware, but for all the states.
Plaintiff further contends that if Section 3114 is found unconstitutional the result may be that a shareholder may not be able to bring a derivative suit against management anywhere else if unable to bring such a suit in Delaware. But, as we noted in Shaffer, at 211, “when the existence of jurisdiction in a particular forum under International Shoe is unclear, the cost of simplifying the litigation by avoiding the jurisdictional question may be the sacrifice of ‘fair play and substantial justice.’ That cost is too high.”
We conclude that Section 3114 as applied to the defendants is unconstitutional in that it attempts to subject nonresident defendants to jurisdiction solely on the basis of their status as directors of a Delaware-chartered corporation without regard to any business activities conducted in the state. The mere expectation that one may be called to defend in a foreign jurisdiction is not a sufficient basis upon which a state may claim jurisdiction since it ignores
the requirement of contact with the forum state.
Dear Professor Sevareid: This paper is 2016 words. You stated that a minimal over-run would not subject a student to a penalty. I feel that 16 words is minimal, and I respectfully urge your indulgence in this matter.
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