Essay Question 1.
D lives in New York. He owns and runs a business, under the name “D Diamonds,” which sells diamonds over the internet. D Diamonds is not incorporated. (As a result, D is personally liable for D Diamonds’ debts.) D runs D Diamonds out of an office in New Jersey. He has one employee, X, who, like D, lives in New York and works in the New Jersey office. D describes X as an “assistant manager.”
The P Corp, a large diamond distributing company, is incorporated in Delaware. Its main office and headquarters are in New Jersey, but all its diamonds are kept in a number of safes in a small guarded storeroom in New York. The P Corp has appointed the New Jersey Secretary of State as its agent for service of process, as a condition for a license to do business in the state.
D has had a long-standing relationship with the P Corp and D commonly orders diamonds directly from the P Corp’s New York storeroom. In a phone call from D’s home in New York to the P Corp’s storeroom, D ordered $200,000 worth of diamonds. D paid a $100,000 deposit by phone, using his personal credit card. Delivery was to be to the D Diamonds office in New Jersey. The P Corp shipped the diamonds, but they were stolen in New York soon afterward, before they made it to New Jersey. D refused to pay the remaining $100,000 for the diamonds.
The P Corp filed a complaint in the Federal District Court for the District of New Jersey for state-law breach of contract, naming “D, doing business as D Diamonds” as the defendant. The complaint asked for the remaining $100,000 owed for the diamonds. The P Corp argued that D Diamonds had ownership of the diamonds at the moment they left the P Corp storeroom in New York. Since ownership was transferred, D Diamonds (and therefore D) was obliged to pay in full.
Service of the summons and complaint was upon X at X’s home in New York. D answered, alleging that he was not liable for the remaining $100,000, because ownership of the diamonds was never transferred. Transfer would have occurred only if there had been successful delivery of the diamonds to D Diamonds’s New Jersey office. D also included in the answer the defenses of lack of personal jurisdiction, lack of subject matter jurisdiction, and insufficient service of process, and a counterclaim for the return of the $100,000 deposit.
In its reply, the P Corp offered the following defense to D’s counterclaim: The counterclaim could not succeed, the P Corp argued, because D had failed to satisfy a New Jersey statute that states that any company doing business in New Jersey “may maintain an action in any of the courts of this state” only if it has appointed the New Jersey Secretary of State as its agent for service of process. D had never appointed the New Jersey Secretary of State as its agent for service of process. Should the P Corp’s defense to D’s counterclaim succeed? Should D’s defenses of lack of personal jurisdiction, subject matter jurisdiction, and improper service succeed?
The P Corp’s defense to D’s counterclaim
The first thing to notice is the strong similarity between this case and Woods v. Interstate Realty. I lifted the language of the New Jersey statute from the statute at issue in Woods. But in Woods the question was whether a plaintiff suing a defendant in federal court sitting in diversity had to satisfy the statute. The court concluded that the plaintiff did. (Notice that the P Corp did satisfy the New Jersey statute, since it has appointed an agent for service.) The question here is whether a defendant bringing a compulsory counterclaim must satisfy the statute.
One way of looking at this question is to say that, unlike in Woods, there is a Fed R Civ P that is directly contrary to the state statute. That federal rule is the compulsory counterclaim rule – 13(a). So conceived, the answer to our question is simple. Under Hanna, the federal rule, not the state law, applies (assuming that the federal rule is valid under the Rules Enabling Act, which 13(a) clearly is). The New Jersey statute says that, under certain circumstances, a counterclaim may not be brought (namely when no agent has been appointed), while Rule 13(a) says it must be brought. The federal rule wins.
This appears to be the approach taken in Avondale Shipyards, Inc. v. Propulsion Sys., Inc., 53 F.R.D. 341 (C. D. La. 1971) on facts similar to ours, although the argument in that case is not as clear as it might be.
But one might argue that there isn’t a direct conflict between 13(a) and the New Jersey state statute. There are exceptions to 13(a) that are not identified in the language of 13(a) itself. See Wright & Miller § 1412. Perhaps we should understand 13(a) as having an implicit exception when procedural barriers for the counterclaim exist. Given this exception in 13(a), one might see no direct conflict between 13(a) and the New Jersey statute. So it was a good idea to also examine the question assuming that there is merely a federal common law rule of not requiring appointment of an agent to bring a compulsory counterclaim.
Using the common law analysis one would first look to whether a difference between state and federal procedure on this matter would promote forum shopping and the inequitable administration of the law. Many of you said that there would be forum shopping because a plaintiff would go to federal court to avoid having to appoint an agent to sue. That’s wrong. We already know (from Woods, which is probably still good law), that a plaintiff in federal court would be obligated to satisfy the statute. The question is whether a defendant bringing a compulsory counterclaim is obligated to satisfy it. It unlikely that a plaintiff would go to federal court to make it easier for the defendant to bring a counterclaim against him. Indeed, the real forum shopping likelihood is a defendant removing to federal court in order to be able to bring a counterclaim without having to satisfy the New Jersey statute. And plaintiffs would forum shop by avoiding federal court.
Is the New Jersey statute bound up with state-law right in the counterclaim? Highly unlikely. Indeed, the right in the countercliam is probably not under New Jersey law at all.
Finally, are there any countervailing federal interests in favor of the common law rule? There are the very strong efficiency interests in having all causes of action concerning the same transaction and occurence litigated at the same time (since the relevant witnesses are there etc.). These interests, which stand behind the compulsory counterclaim rule, are very significant and, to my mind, strongly argue against the application of the New Jersey statute in federal court.
Quite a few of you claimed that the New Jersey statute was contrary to Fed. R. Civ. P. 4 (which governs service). That's not true. The New Jersey statute does not say how D must serve the P Corp when bringing the counterclaim. It does not say, for example, that D must serve the P Corp's agent for service of process. (Nor does it say how the P Corp must serve D.) All it says is that if D wants to bring a counterclaim, D must appoint an agent for service of process. That agent might then be used for service in connection with other lawsuits brought against D, but D's appointing that agent is not a means of service itself. (And, incidentally, the way that service for counterclaims must be effected is determined by Rule 5, not Rule 4.) If there is a direct conflict with a federal rule, that rule is 13(a).
Now let me discuss some issues that caused some of you to bypass the question entirely (those who did not have problems with part of the question can skip this):
1) Some of you questioned whether even in New Jersey state courts the statute would obligate D to have appointed an agent for service of process in order to bring the compulsory counterclaim. The statute, you argued, would apply only to plaintiffs, not to defendants bringing compulsory counterclaims. You were rewarded for mentioning this issue, but since it makes the problem in the question disappear (and you had no real evidence that the NJ statute has not been applied to defendants bringing compulsory counterclaims), it was essential to discuss the question assuming that D would be obligated to satisfy the statute in New Jersey state courts. Given this assumption, is D is obligated when the case is in a federal court sitting in diversity?
2) Others of you argued that the New Jersey statute was unconstitutional insofar as it applied to individuals - including individual plaintiffs. (This too would make the question of whether the statute should apply in federal court moot). You argued that under the Privileges and Immunities Clause of Art. IV, a state cannot condition an individual's (as opposed to a corporation's) doing business in a state upon his appointment of a permanent agent for service of process within the state. The idea is that because, under the P&I Clause, a state cannot forbid the individual from doing busines in the state, it cannot put a condition of this sort upon the individual doing business. I mentioned this idea (the relevant case is Flexner v. Farson) in class in the 2007 semester. The context of the discussion was attempts within the Pennoyer framework to get PJ over defendants for past acts within the state. States used the fiction that an activity in the state created a permanent agent for service of process to get PJ over defendants for past acts, but, under Flexner, this fiction could not be used to get PJ over individuals who had done business in the state.
I gave you some credit for mentioning this. But in fact I also said in class that this argument is no longer accepted (see Doherty & Co. v. Goodman). Indeed, the theory of PJ in Int'l Shoe and its progeny is contrary to the principle in Flexner, since Int'l Shoe and its progeny say generally that if someone enters a state and gets the protections of its laws, this puts upon him reciprocal obligations to return to answer for causes of action related to those activities. There is no claim that one's reciprocal obligations are limited by the P&I Clause. An individual who does business in the state can be obligated by the state to return and answer for his activities, even though the state could not have forbidden him from doing business.
Furthermore, even if the Flexner argument were still accepted, it is not directly relevant to the New Jersey statute, which requires those who are doing business in the state AND suing in its courts to appoint an agent for service of process.
So it was important to go on and consider the question on the (correct) assumption that the statute is constitutional.
3) Still others of you said that the New Jersey statute did not apply to federal court because it says that any company doing business in the state “may maintain an action in any of the courts of this state” only if it first appoints an agent for service of process. By "courts of this state" the statute, you argued, meant only New Jersey state courts.
But even if it is true that the phrase was meant to apply only to New Jersey state courts, not federal courts in New Jersey (which is not clear), it is common for Erie analysis to recommend the application of state procedural law in a federal diversity case even though the state procedural law, by its own terms, applies only to that state's courts. Remember, I took the language of the statute from Woods, where the Supreme Court concluded that the statute applies to federal courts sitting in diversity, even though the statute spoke only of "courts of this state."
There are a number of reasons why this is so. First of all, it is unlikely that the legislature was actually thinking of Erie situations when the statute was drafted. "Courts of this state" was probably used to distinguish state courts in New Jersey from state courts in, say, New York (in particular state courts in New York that are entertaining New Jersey causes of action). The legislature did not want to dictate to these New York state courts what procedure to use. The New Jersey legislature probably did not even consider the question of whether federal courts in New Jersey should use the statute.
Second, let us assume that a legislature does not want the statute to apply in federal court. It is not clear that Erie analysis would not still recommend that it applies in federal court. Keep in mind that a main issue in Erie analysis is whether the difference between state and federal procedure would cause the type of forum shopping that is contrary to the purposes of diversity jurisdiction. A federal court might conclude that the avoidance of forum shopping is important enough to use state procedural law, even though the state legislature doesn't want its law to apply in federal court. It would be federal, not state, purposes that recommend the application of state law in federal court.
So here too it was important to go on to detailed analysis of whether the state statute should apply in federal courts sitting in diversity.
In connection with service, PJ, venue, and SMJ, this question introduced an issue about which very little was discussed in class or in the reading. A good deal was said about individuals with respect to these requirements. And some was said about corporations and even unincorporated associations, like labor unions or partnerships. But what about sole proprietorships – that is cases in which an individual simply does business, without being incorporated? In such cases the individual is personally liable for the business’s debts.
P Corp appears to be suing D as a sole proprietorship – D doing business as (d/b/a) D Diamonds. I did not expect you to be able to get the law right here, since we did not discuss these issues and they weren’t dealt with in the reading. What I expected you to do was identify the problem and use what you do know to try to solve it.
The first thing to mention is that we cannot know whether service is adequate, because we don’t know New Jersey and New York law on the matter. In fact, states’ procedural codes often have rules for serving sole proprietorships. But assuming that New Jersey and New York law do not allow this manner of service, the question remains which provision of Fed R Civ P 4 applies to a sole proprietorship – 4(e), which speaks of “Serving an Individual Within a Judicial District of the United States” or 4(h), which speaks of “Serving a Corporation, Partnership, or Association.”
If 4(e) applies, service was inadequate. D was not served in hand; a copy of the commons and complaint was not left at D’s dwelling or usual place of abode with someone of suitable age and discretion who resides there; and D’s agent for service of process was not served (there is no reason to think that X was such an agent).
If 4(h) applies, then there is a chance that service was adequate. We might understand service as being upon an officer, a managing or general agent of D Diamonds (namely X), although there is a question about whether X deserves to be called a managing or general agent.
In fact, I have been unable to find a case discussing this matter. The problem is that in the vast majority of cases the plaintiff satisfies 4(e) and 4(h) by simply having the owner of the sole proprietorship served in hand. And when that doesn't happen, there are usually are state law methods for serving sole proprietorships and the plaintiff satisfies those methods even when 4(e) is not satisfied. So I am unsure about how a court would handle our case.
A simply statutory argument might suggest that 4(e) applies, since a sole proprietorship is not a corporation, partnership, or association. On the other hand more practical considerations might suggest that 4(h) is appropriate. This is especially true when one thinks of a very large sole proprietorship, with many employees. Why, if a large sole proprietorship is being sued, would it be wrong to serve by giving a summons and complaint to a managing agent?
Lack of SMJ
In this case, you had more to go on. First of all, the SMJ must be diversity if it is anything (it is not indicated the P Corp was suing under federal law). We know the jurisdictional minimum is met (there is $100,000 in controversy). The question is solely whether the parties are diverse. The P Corp has Delaware citizenship (its place of incorporation) and the citizenship of the state of its principal place of business. This is New Jersey under the nerve center test accepted by the SCt in Hertz.
The real question is the citizenship of the defendant. Here you should have been able to reason that it is New York. After all, you should have known that with respect to unincorporated associations (e.g. unions and partnerships), the state of citizenship is the domicile of all the members. So that same rule must apply to sole proprietorships as well. The defendant’s citizenship must be New York, since D is domiciled in New York. One does not look to the principal place of business, the way one does with corporations – although arguably one should, particularly when the sole proprietorship is large.
Lack of PJ
First of all, it was good to say that the federal court in NJ would have PJ only if a state court in NJ would (according to Fed R Civ P 4(k)(1)(A)). It is also good to mention that the New Jersey long-arm statute and New Jersey Constitution would be relevant to one’s analysis about whether a NJ state court would have PJ. But since you don’t know anything about them, they can be set aside. We are concerned solely with the 14th Amendment inquiry. Would a NJ state court have PJ under the 14th Amendment over D (or D Diamonds)? Once again, we have to deal with the problem of sole proprietorships.
Let us first consider whether there is specific jurisdiction. One problem here is that the activities giving rise to the P Corp’s cause of action (namely D’s ordering the diamonds in a call from his home in NY to the storeroom in NY) occurred in NY. Some tried to argue that the breach of the contract occurred in NJ, because that is where there was no delivery of the diamonds. But this assumes that the suit is for non-delivery of the diamonds by the P Corp. In fact, the suit is for non-payment by D. The relevant breach is D’s not paying (although it is conceivable that D’s non-payment occurred in NJ, since that is where D runs D Diamonds).
In the end, there is probably a simpler argument for specific jurisdiction. After all, D reached out to the state of NJ in his phone call, by asking that the diamonds be delivered there. It should not matter (although it might to a court that fetishizes physical contact in PJ cases) that D’s act of reaching out did not express itself in physical contact with NJ.
The McGee factors also argue in favor of PJ, especially since NJ has a very strong interest in asserting PJ over a person doing business in its state, especially when the plaintiff also does business in the state and the cause of action concerns their business relationship.
Things really get interesting when one looks to general jurisdiction over D, d/b/a D Diamonds. With respect to individuals, a court will have general jurisdiction (that is jurisdiction for any cause of action) if the defendant is tagged in the state (not so here) or the defendant is domiciled there (not so here). So one might conclude that there is no general PJ. (Some of you did this.)
But that is surely a mistake, at least if one is talking about a suit against D, d/b/a D Diamonds. After all, D runs D Diamonds out of New Jersey. The sole proprietorship is located there. There are substantial continuous contacts with the state (and it is "at home" there), which should allow D, d/b/a/D Diamonds, to be sued on any cause of action concerning D Diamonds, whether or not the cause of action arose in New Jersey.
Imagine, for example, that X, acting as an agent for D Diamonds, went to Connecticut to pick up some diamonds. There X got into a car accident with Y (from Connecticut). Surely it would be fine for Y to sue D, d/b/a D Diamonds, in New Jersey state court, under a theory of respondeat superior, even though the activities giving rise to the cause of action occurred in Connecticut. Since D Diamonds is located in New Jersey, if it is located anywhere, it seems that D, d/b/a D Diamonds, can be sued on any cause of action (that is, any cause of action having to do with D Diamonds).
Of course, to say that D’s contact with New Jersey is enough for general jurisdiction over D for causes of action having to do with D Diamonds (even if the cause of action did not arise in New Jersey) might not mean that it is enough for general jurisdiction over D for any cause of action. D might not be able to be sued in New Jersey by a German with whom D got in a brawl in Germany.
It seems clear, therefore, that there is general jurisdiction. What is more, when one does the specific jurisdiction analysis, these substantial continuous contacts with New Jersey would also argue for PJ, since, as we have seen, a court is more likely to find specific jurisdiction if one throws in unrelated contacts with the forum state. In this case the unrelated contacts are overwhelming.
I therefore expected you to find that there was PJ . But in particular I expected sensitivity to the problems of general personal jurisdiction over sole proprietorships.
How have courts deal with these issues? Let's start with unincorporated associations and then move on the sole proprietorships. Courts have certainly spoken of unincorporated associations as subject to general personal jurisdiction on the basis of the same type of substantial continuous contacts that apply to corporations (now, given Goodyear and Daimler, the question would be whether the unincorporated association is "at home" in the forum state). Indeed some courts consider the domiciles of the association’s members to be irrelevant for determining general personal jurisdiction over the unincorporated association. Unincorporated associations are treated like corporations as far as general personal jurisdiction is concerned. (The domiciles of the shareholders of a corporation are irrelevant in determining general personal jurisdiction over the corporation.) One court has insisted that “an unincorporated association which does not itself conduct significant activities in or enjoy affiliating circumstances with, a state cannot be subject to the general personal jurisdiction of the state's courts on the basis of a member's contacts within the state unless the member carries on the in-forum activities under the association's substantial influence.” Donatelli v. National Hockey League, 893 F.2d 459 (1st Cir 1990).
Notice how differently unincorporated associations are treated with respect to SMJ and PJ. For SMJ, the domicile of the members establishes citizenship, even if the members’ activities in their states of domicile have nothing to do with the activities of the unincorporated association. On the other hand, courts are inclined to find general PJ over unincorporated associations only on the basis of activities of the unincorporated association. For that reason it considers the activities of the association’s members only insofar as they are association-related activities.
For example, consider the case of a law firm (a partnership) located in New York, but whose members live in New York, New Jersey and Connecticut. For SMJ purposes, the law firm has NY, NJ and CT citizenship, even if the partners living in NJ and CT never work at home. But for PJ purposes, there would not be general jurisdiction over the law firm in NJ and CT simply by virtue of the fact that some partners live in those states. This is true even though the partners are personally liable for the law firm's debts.
This approach to general PJ over unincorporated associations makes sense. It would be wrong to submit the law firm to general PJ in CT simply because some partners of the law firm live in CT. After all, if a CT court asserted general PJ over the law firm, it would in effect be asserting PJ over all the firms members (since they are personally liable for the firms debts). But the partners domiciled in NJ and NY have not reached out to CT in a way that would allow that state to assert general PJ over them. On the other hand, there should be general jurisdiction jurisdiction over the firm (and so all its members) in NY, since the firm has substantial continuous contacts with the state, even though some of the firm's members are domiciled in NJ and CT.
What result would this reasoning have for sole proprietorships? Well, if an unincorporated association can be subject to general PJ in a state other than the domiciles of the association's members (provided the association has substantial continuous contacts with that state), it should follow that there is general PJ over D Diamonds (and so D) in New Jersey, since D Diamonds has substantial continuous contacts with NJ. It would not matter that D is domiciled in NY.
What about general PJ over D, d/b/a/ D Diamonds, in NY? As we have seen, not only can an unincorporated association be subject to general PJ in a state other than the domiciles of the associations members, the asociation cannot be subject to general PJ in a state simply because some association members are domiciled there. Would it follow, therefore, that there is no general PJ over D, d/b/a D Diamonds, in NY? No. Since a sole proprietorship has only one member, there is no reason that there cannot also be general PJ over the proprietorship in the state of domicile of the owner. The situations would be analogous to a NY law firm whose partners all live in CT. There would be general PJ over the firm both in NY and CT.
To sum up, the substantial continuous contacts that D Diamonds has with the state of New Jersey should certainly allow for general PJ over D, d/b/a/ D Diamonds, in New Jersey. This is backed up by the case law on the matter. Sole proprietorships are commonly held subject to general jurisdiction if there are substantial continuous contacts with the state of the sort that D Diamonds has with New Jersey (although in all the cases I could find the defendant-owner was also domiciled in the state asserting PJ, which made the conclusion that there was general jurisdiction simpler).
NOTE: In the original question the defendant also brought up the defense of lack of venue. That part I have omitted, because the puzzle about the residence of sole proprietorships for the purpooses of the venue statute has been solved by the Clarification Act of 2011.