Responsibility of the Swiss Manufacturer?
Specific Personal Jurisdiction
Alter-Ego Theory
Undercapitalization
To Pierce the Corporate
Veil
Distribution Agreement
Michigan Law
Class Action
Consumer Law
Telephone
Consumer Protection Act (TCPA), 47 U.S.C. § 227
Unsolicited Advertisement
Appeal from
the United States District Court for the Eastern
District of Michigan at Detroit.
This case
involves two unsolicited fax advertisements received by Brian Lyngaas, D.D.S.,
in March 2016. Lyngaas asserts, on behalf of himself and all similarly situated
class members, that Curaden AG and its U.S. subsidiary, Curaden USA, violated
the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227, by sending the
advertisements.
At the
summary-judgment stage of the case, the district court ruled that Lyngaas could
not pierce the corporate veil to hold Curaden AG liable for Curaden USA’s
action, that faxes received by a computer over a telephone line (in addition to
faxes received by traditional fax machine) violated the TCPA, and that it had
personal jurisdiction over both defendants. Following a bench trial, the
district court held that Curaden USA violated the TCPA by sending the two
unsolicited fax advertisements to Lyngaas, but that Curaden AG was not liable
as a “sender” under the TCPA. The court further held that Lyngaas’s evidence
and expert-witness testimony as to the total number of faxes successfully sent
by Curaden USA were inadmissible due to unauthenticated fax records. It
therefore established a claims-administration process for class members to
verify their receipt of Curaden USA’s unsolicited fax advertisements.
Both Lyngaas
and Curaden USA appeal the judgment of the district court, and both Lyngaas and
Curaden AG cross-appeal. For the reasons set forth below, we affirm the
judgment of the district court.
Lyngaas is a
dentist who practices in Livonia, Michigan. On March 8 and again on March 28,
2016, Lyngaas received on his workplace fax machine unsolicited faxes
advertising the Curaprox Ultra Soft CS 5460 toothbrush. The toothbrush in
question is manufactured by Curaden AG, a privately owned Swiss entity. Curaden
USA, an Ohio corporation headquartered in Arizona, is a subsidiary of Curaden
AG that promotes Curaden AG products, including the Curaprox Ultra Soft CS
5460 toothbrush, throughout the United States.
Although a
standard written distribution agreement typically governs the practices
of Curaden AG’s subsidiary distributors, Curaden AG and Curaden USA operated
instead under an oral agreement. This is because the written
distribution agreement was exchanged but never formally executed. But since “everybody
had assumed it had been signed,” according to the managing director of Curaden
AG, many of the tenets of the standard written distribution agreement have been
observed in practice by both entities. For example, Curaden USA was the exclusive
distributor of Curaden AG products within the United States, consistent
with § 2.1 of the distribution agreement, and Curaden USA “used its best
endeavours to promote the sale of the Curaden AG products throughout the
Territory,” consistent with § 5.1.
Some of the
terms of the standard distribution agreement, however, were not observed by
Curaden USA. As relevant to this case, Curaden USA never presented its
advertising materials to Curaden AG for review or approval, even though § 5.7
and § 5.8 of the distribution agreement gave Curaden AG the right to approve
all marketing materials developed by its distributors.
Curaden USA
planned a fax campaign as part of its marketing efforts. It purchased a target
list of thousands of dental professionals’ fax numbers, and Curaden USA
employee Diane Hammond created the two fax advertisements at issue in this
case. Both advertisements promoted the Curaprox Ultra Soft CS5460 toothbrush
and were directed to “dental professionals.” Displayed on the advertisements
was Curaden USA’s contact information, including a fax number, phone number,
email address, website, and social media accounts, all of which were connected
to and exclusively maintained by Curaden USA. The advertisements made no
mention of Curaden AG, instead referring all communications to Curaden USA.
Curaden USA
did not provide the advertisements for review to either Curaden AG or to Richard
Thomas, the managing director of Curaden UK and an advisor to all Curaden AG
subsidiaries. Rather, on February 23, 2016, Curaden USA’s vice president and
managing director Dale Johnson approved the advertisement and directed Hammond
to broadcast the faxes. Hammond in turn instructed Curaden USA employee Magen
James to send the advertisement to the purchased target list of over 46,000 fax
numbers. Curaden USA hired AdMax Marketing, a fax broadcasting company, to send
the faxes. AdMax then hired another company, WestFax, to complete the job.
(…) After the faxes were transmitted, AdMax invoiced Curaden
USA, and Curaden USA paid the invoices.
B. Personal jurisdiction over Curaden AG
In resolving Curaden AG’s motions to dismiss and for summary
judgment, the district court found that it had specific personal jurisdiction
over Curaden AG based on Curaden AG’s contacts with the state of Michigan and
that, in the alternative, jurisdiction was proper under Rule 4(k)(2) of the
Federal Rules of Civil Procedure based on Curaden AG’s contacts with the United
States as a whole. But the court then granted summary judgment in favor of
Curaden AG on the question of whether Curaden USA served as an “alter ego” of
Curaden AG, holding that the court should not pierce the corporate veil to
exercise personal jurisdiction over Curaden AG on the basis of Curaden USA’s
actions. Lyngaas renews his “alter ego” theory on appeal, whereas Curaden AG
again argues that the district court lacked personal jurisdiction over it on
any basis.
1.
Curaden USA as an
alter ego of Curaden AG
We agree with the district court’s conclusion that Curaden
USA is not Curaden AG’s alter ego. The alter-ego theory can subject a parent
company to personal jurisdiction where “the parent company exerts so much
control over the subsidiary that the two do not exist as separate entities but
are one and the same for purposes of jurisdiction.” Indah v. S.E.C., 661
F.3d 914, 921 (6th Cir. 2011). In the present case, both parties correctly rely
on Michigan law in determining whether alter-ego liability applies. See
Bd. of Trustees, Sheet Metal Workers’ Nat’l Pension Fund v. Courtad, Inc.,
No. 12-2738, 2014 WL 3613383, at *3–4 (N.D. Ohio July 18, 2014) (“Outside of
labor law or ERISA claims, courts tend not to supplant state corporate
liability doctrine with federal common law.”).
To pierce the corporate veil under Michigan law, “first, the corporate entity must be a mere
instrumentality of another; second, the corporate entity must be used to commit
a fraud or wrong; and third, there must have been an unjust loss or
injury to the plaintiff.” In re RCS Eng’rd Prods. Co., Inc., 102 F.3d
223, 226 (6th Cir. 1996) (citing Nogueroas v. Maisel & Assocs. of Mich.,
369 N.W.2d 492, 498 (Mich. 1985)). Lyngaas argues that the district court
erred, first, by not taking Curaden USA’s undercapitalization into full account
in the “mere instrumentality” analysis and, second, by using the incorrect
standard in requiring Lyngaas to show that Curaden AG “engaged in deliberate
wrongful conduct that was either designed to or actually did produce injury.”
Regarding undercapitalization, that factor indeed
provides at least prima facie weight in favor of finding that Curaden USA was a
“mere instrumentality” of Curaden AG because Curaden USA was not profitable,
and the evidence is unclear as to what extent Curaden USA paid Curaden AG for
the products it purchased. But undercapitalization is just one factor in the
analysis. Whether the corporate entity is a “mere instrumentality of another”
is determined by analyzing
(1) whether the corporation is undercapitalized, (2) whether
separate books are kept, (3) whether there are separate finances for the
corporation, (4) whether the corporation is used for fraud or illegality, (5)
whether corporate formalities have been followed, and (6) whether the
corporation is a sham.
Lim v. Miller Parking Co.,
560 B.R. 688, 706 (E.D. Mich. 2016) (quoting Glenn v. TPI Petrol., Inc.,
854 N.W.2d 509, 520 (Mich. 2014)).
Lyngaas does not dispute the district court’s findings that
“the two companies keep separate books . . . and follow corporate formalities,”
nor that “Curaden USA has its own employees and its own offices.” Because the
evidence further shows that the plan was for Curaden USA, launched in 2014, to
be profitable within eight years, the district court did not err in finding
that Curaden USA’s “undercapitalization” was outweighed by the other five
factors, none of which supported the finding of an alter-ego relationship.
See Needa Parts Mfg., Inc. v. PSNet, Inc., 635 F. Supp. 2d 642, 647
(E.D. Mich. 2009) (“While it may be true that PSNet was an undercapitalized
start-up company, it does not follow that the court must rule as a matter of
law that PSNet is a mere alter ego of PSNet Communications.”).
Lyngaas also fails to point to any other telling signs of
undercapitalization, such as leaving creditors unpaid or using Curaden USA
as the parent company’s bank account. Cf. Laborers’ Pension Trust Fund v.
Sidney Weinberger Homes, Inc., 872 F.2d 702, 705 (6th Cir. 1988) (piercing
the corporate veil where the individual defendant paid corporate expenses out
of his own pocket, the corporation paid the individual’s personal expenses, the
individual withdrew money from the corporation and left creditors unpaid, and
the financial records were inadequate); Grass Lake All Seasons Resort v.
United States, 2005 WL 2095890, at *13 (E.D. Mich. Aug. 29, 2005) (piercing
the corporate veil where the individual defendant looted the corporation for
personal use, did not have his own bank account or property in his own name,
and used the company to avoid paying taxes for over ten years).
As to whether “the manner of use effected a fraud or
wrong on the complainant . . . , it is not necessary to prove that the
owner caused the entity to directly harm the complainant; it is sufficient that
the owner exercised his or her control over the entity in such a manner as to
wrong the complainant.” Green v. Ziegelman, 873 N.W.2d 794, 807 (Mich.
Ct. App. 2015). Lyngaas states the correct standard, but points to no
evidence showing how Curaden AG exercised its control over Curaden USA in such
a manner as to wrong him or to pursue some unlawful end. See Seasword v.
Hilti, Inc., 537 N.W.2d 221, 224 (Mich. 1995) (holding that the corporate
veil “may be pierced only where an otherwise separate corporate existence has
been used to subvert justice or cause a result that is contrary to some other
clearly overriding public policy”)
2.
Personal
jurisdiction over Curaden AG due to its contacts with the United States
This leads us to the question of whether there is some other
basis for personal jurisdiction over Curaden AG. The district court held
that, pursuant to Rule 4(k)(2) of the Federal Rules of Civil Procedure, it had
personal jurisdiction over Curaden AG due to Curaden AG’s contacts with the
United States as a whole. Notably, Curaden AG does not offer any argument
to the contrary. Rule 4(k)(2) “acts as a sort of federal long-arm statute,”
Sunshine Distrib., Inc. v. Sports Auth. Mich., Inc., 157 F. Supp. 2d
779, 788 (E.D. Mich. 2001).
To establish that jurisdiction is proper under Rule 4(k)(2),
“(1) the cause of action must arise under federal law; (2) the defendant must
not be subject to the personal jurisdiction of any state court of general
jurisdiction; and (3) the federal court’s exercise of personal jurisdiction
must comport with due process.” Plixer Int’l, Inc. v. Scrutinizer GmbH,
905 F.3d 1, 6 (1st Cir. 2018); see also Cent. States, Se. & Sw. Areas
Pension Fund v. Reimer Express World Corp., 230 F.3d 934, 940 (7th Cir.
2000) (similar). There is no dispute that the first two requirements are met
here: this is a federal-question case and Curaden AG has pointed to no state
where it could properly be sued. See Adams v. Unione Mediterranea Di Sicurta,
364 F.3d 646, 651 (5th Cir. 2004) (“So long as a defendant does not concede to
jurisdiction in another state, a court may use 4(k)(2) to confer jurisdiction.”
(citing ISI Int’l, Inc. v. Borden Ladner Gervais LLP, 256 F.3d 548, 552
(7th Cir. 2001))). The remaining question is whether personal jurisdiction comports
with due process.
Because this is a federal-question case in federal court,
the due process requirements emanate from the Fifth rather than the Fourteenth
Amendment. Sunshine Distrib., 157 F.
Supp. 2d at 788. But they “are the same as with any other personal jurisdiction
inquiry, i.e. relatedness, purposeful availment, and reasonableness,
only in reference to the United States as a whole, rather than a particular state.”
Id. (citing Cent. States, 230 F.3d at 941–42).
Curaden AG purposefully availed itself of the American
market by launching Curaden USA here. And
it mandated that Curaden USA “use its best endeavours to promote the sale of
the Products throughout the United States.” Finally, although it did not
exercise its right of prior approval over Curaden USA’s marketing materials in
this case, Curaden AG nevertheless retains such a right. Curaden AG, in short,
made a deliberate decision to target and exploit American markets, thus
showing purposeful availment. See Sunshine Distrib., 157 F. Supp. 2d
at 789 (holding that the defendant purposefully availed itself of the American
market where it “not only sought out and negotiated a licensing agreement
with Razor U.S.A. to distribute its products throughout North America,
including the United States,” but also “essentially created Razor U.S.A. for
this sole purpose”); see also J. McIntyre Mach., Ltd. v. Nicastro, 564
U.S. 873, 885 (2011) (noting that J. McIntyre directed marketing and sales
efforts at the United States when it contracted with a U.S. distributor to
sell its machines in the country).
The next consideration is whether Lyngaas’s TCPA claims
arise out of—or relate to— Curaden AG’s contacts with the United States. This
court’s standard for meeting that requirement is “lenient.” See Bird v.
Parsons, 289 F.3d 865, 875 (6th Cir. 2002). “If a defendant’s contacts with
the forum state are related to the operative facts of the controversy, then an
action will be deemed to have arisen from those contacts.” CompuServe, Inc.
v. Patterson, 89 F.3d 1257, 1267 (6th Cir. 1996).
Lyngaas’s
alleged injuries caused by the fax advertisements “relate to” Curaden AG’s
creation of its U.S. subsidiary and its direction for the subsidiary to promote
Curaden AG’s products throughout the United States. Curaden AG is correct, as
we discuss later, that it was not the “sender” of the faxes for purposes of
TCPA liability. But the standard here is not so stringent, and it is met when “the
operative facts are at least marginally related to the alleged contacts”
between the defendant and the forum. Bird, 289 F.3d at 875. That
standard is clearly met here.
The final consideration is whether the exercise of
jurisdiction over Curaden AG would be reasonable, such that it would “comport
with traditional notions of fair play and substantial justice.” CompuServe,
89 F.3d at 1268. An inference arises that the third factor is satisfied if, as
here, the first two factors are met. Id. But where the case involves a
“non-resident alien defendant,” the court must give “special weight to
the ‘unique burdens placed upon one who must defend oneself in a foreign legal
system.’” Theunissen v. Matthews, 935 F.2d 1454, 1460 (6th Cir. 1991)
(emphasis in original) (quoting Asahi Metal Indus. Co. v. Superior Court of
Cal., 480 U.S. 102, 114 (1987)).
We recognize that the burden on Curaden AG is high because
it had no prior contact with the U.S. federal-court system. But that burden is
nonetheless outweighed by other factors.
First, the United States has an interest in enforcing federal laws. Second,
Lyngaas’s interest in obtaining relief is particularly high given that Curaden
USA is not profitable and is unlikely to be profitable in the immediate future.
Cf. City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651,
666 (6th Cir. 2005) (finding the interests of the United States and class
plaintiffs to be “relatively light” where the court’s jurisdiction over the key
defendants was already conceded and “the marginal addition of one of the
defendants would add little or nothing to the potential recovery should the
plaintiffs ultimately prevail on the merits and be awarded damages”). We
therefore conclude that the district court’s exercise of personal jurisdiction
over Curaden AG is reasonable, and that it comports with due process.
And because the district court properly exercised personal jurisdiction over
Curaden AG due to Curaden AG’s contacts with the United States as a whole, we
need not reach the question of whether the court has personal jurisdiction over
Curaden AG due to the latter’s contacts with Michigan alone.
C. Curaden AG’s liability under the TCPA
Having decided that personal jurisdiction over Curaden AG
exists, we will now examine whether the district court erred in concluding that
Curaden AG was not a “sender” for purposes of TCPA liability. The TCPA makes it
“unlawful for any person within the United States . . . to use any telephone
facsimile machine, computer, or other device to send, to a telephone facsimile
machine, an unsolicited advertisement.” 47 U.S.C. § 227(b)(1)(C). In 2006, the
Federal Communications Commission (“FCC”) promulgated regulations that defined
the “sender” of a fax as “the person or entity on whose behalf a facsimile
unsolicited advertisement is sent or whose goods or services are advertised or
promoted in the unsolicited advertisement.” 47 C.F.R. § 64.1200(f)(10).
(…) In sum, the TCPA does not impose strict liability on a
manufacturer simply because its products wind up on the face of an unsolicited
fax advertisement; the manufacturer must independently fit the role of a
“sender.”
(…) But the present case differs slightly from Health One because,
although Curaden AG did not hire a fax broadcaster to advertise its products,
it did enter into a distribution agreement with Curaden USA to “use its
best endeavours to promote the sale of the Products throughout the Territory.” The
determinative question, therefore, is whether entering into such a distribution
agreement “caused” the sending of the fax advertisements.
(…) The distribution agreement in this case mirrors the
agreement in Garner Properties. Further, the undisputed evidence shows
that Curaden AG did not even know that Curaden USA planned to use faxes as a
method of advertisement, much less that Curaden USA had hired a fax broadcaster
or created the fax advertisements at issue. Curaden USA, not Curaden AG, paid
AdMax’s invoices and communicated with AdMax. Cf. Garner Properties,
2018 WL 6788013, at *3 (“Marblecast did not discuss the Fax with anyone at
American Woodmark before it was sent . . . . American Woodmark had no
independent knowledge that Marblecast was sending the Fax.”). Indeed, all of
the contact and social media information listed on the faxes directed consumers
to Curaden USA and not to Curaden AG.
(…) Because Curaden AG clearly lacked knowledge of
and involvement in the fax advertisements, we agree with the district court’s
conclusion that Curaden AG was not a “sender” and thus not liable under the
TCPA.
(…) But, the FCC stated, the statute’s prohibition “does not
extend to facsimile messages sent as email over the Internet.”
(…) The Bureau also clarified its earlier email caveat: “By
contrast, a fax sent as an email over the Internet—e.g., a fax
attached to an email message or a fax whose content has been pasted into an
email message—is not subject to the TCPA.” 30 F.C.C. Rcd. 8623–24 ¶ 10
(emphasis in original). In other words, with an efax “there is an end-to-end
communication that starts when the faxed document is sent over a telephone line
and ends when the converted document is received on a computer,” whereas emails
originate not as a fax over a telephone line, but “over the Internet.” Id.
Secondary sources: William B. Rubenstein, Newberg on Class Actions
§ 12:15 (5th ed. 2017)
(U.S.
Court of Appeals for the Sixth Circuit, March 24,
2021, LYNGAAS
v. CURADEN AG, Docket Nos. 20-1199/1200/1243,
recommended for publication)
