Rethinking Personal Jurisdiction

1. Rethinking Personal Jurisdiction Dan Klerman USC Law School Faculty Workshop University of Virginia Law School March 1, 2013

2. Road Map • How I got into this topic • Short restatement of paper’s main points • Dependence of policy implications on open empirical questions • Strategies for answering empirical questions

3. “Jurisdictional Competition and the Evolution of the Common Law” U. Chi L. Rev. (2007) • Before 1799, English judges kept court fees • So had an incentive to hear more cases • From about 1600, English plaintiffs had near complete choice of forum in common law cases • Plaintiffs could sue in King’s Bench, Common Pleas, or Exchequer • Plaintiffs rationally chose court which offered highest expected recovery • Result was that English judges competed for litigation by making the law more pro-plaintiff • Constrained only by Parliament and Chancery (equity) • Got me thinking about the role that jurisdiction plays in the development of the law • Plaintiff choice leads to pro-plaintiff law • Could this help explain constitutionalization of jurisdiction in the US? • Could thinking about incentives that jurisdictional rules create for judges help explain and/or improve personal jurisdiction doctrine?

4. Key Points I • 2 effects of jurisdictional rules • Litigation costs • Quality of law • Substantive and procedural rules • Institutions (e.g. partisan judicial elections) • Biased or unbiased adjudication • Litigation costs • Probably less affected by location of forum than usually thought • Recent changes in communication, transportation, and structure of legal profession

5. Key Points II: Quality of Law • Plaintiff jurisdictional choice leads to jurisdictional competition and pro-plaintiff law • At least a few jurisdictions will find it profitable to attract litigation • They will do so by making the law more pro-plaintiff • Most suits will be brought in those pro-plaintiff fora • Example: Patents and E.D.Texas • Allowing suit where plaintiff resides also leads to pro-plaintiff law • Because judges and juries can use adjudication to redistribute wealth from out-of-state parties to in-state residents • Evidence: Tabarrok & Helland (1999, 2002). Damages against out-of-state parties are 30% higher in states with partisan-elected judiciaries • Allowing suit where defendant resides leads to pro-defendant law • Because judges and juries can use adjudication to protect in-state parties from having to pay money to out-of-staters • Because states can attract business and employment through pro-defendant rules and adjudication

6. Key Points III: Quality of Law (cont.) • Sometimes market provides incentives for state to moderate or eliminate biases • Even if rule is that plaintiff can sue where plaintiff resides, that will probably not lead to excessively pro-plaintiff employment law • Because state with excessively pro-plaintiff employment law will discourage businesses from locating in-state and/or result in lower wages for in-state residents • US Supreme Court’s “purposeful availment” requirement can be seen as allowing jurisdiction only when the market provides incentives for states to moderate or eliminate their biases.

7. Key Points IV: Quality of Law (cont.) • Quality of law problem could also be almost entirely eliminated by expanding or retargeting diversity jurisdiction • Little danger that state courts will engage in interstate redistribution if all cases involving parties from different states are heard in federal court • Eliminate complete diversity rule • Could focus diversity jurisdiction on cases where market incentives for states to provide unbiased adjudication are weak • Federal jurisdiction for stranger torts (e.g. defamation, pollution) • No federal jurisdiction for contracts or torts arising out of contracts (e.g. employment discrimination, medical malpractice)

8. Unfortunately, no jurisdictional rule is best for both litigation costs and quality of law

9. Policy and Empirical Issues • Best rule depends on empirical questions • If quality of law effects are small, then can focus just on litigation costs • Allow litigation wherever defendant resides? • Allow litigation wherever plaintiff resides? • If litigation cost effects are small, then can focus just on quality of law • If danger of jurisdictional competition is strong, but danger of interstate bias is low • Then any rule which restricts jurisdictional choice is fine • Or can legislate ad hoc to restrict jurisdictional choice when problems arise • Class Action Fairness Act (2005) • If danger of bias against out-of-state parties is high • Then purposeful availment or expanded/retargeted diversity jurisdiction is optimal • If both litigation cost and quality of law effects are small • Then deconstitutionalize personal jurisdiction • Like choice of law

10. Empirical Strategies • Litigation costs • NY retainer / contingent fee data • Insurance closed claims data • General Counsel data • Jurisdictional competition • Case studies • Patent • Bankruptcy • Mass torts / “judicial hellholes” • ICANN domain name dispute resolution (UDRP) • Bias against out-of-state parties • Jury verdict data • Choice of law • Suggestions welcome

11. Litigation Costs • Intuitive that more expensive to litigate away from individual’s residence or corporate headquarters • Surprisingly little evidence • Most lawyers I spoke to said that litigating out-of-state added at most 2% to cost of litigation • Defendant represented by insurance company • Large defendant with established network of local counsel • Plaintiff lawyers on contingent fee • Possible exception: mid-sized companies with established relationships with lawyers in one location • Even if litigation costs vary with distance, that provides little reason to favor one forum over another • Most plausible forum in most cases is either plaintiff’s residence (or headquarters) or defendants’ residence (or headquarters) • Both likely to lead to roughly similar total litigation costs • Plaintiff’s forum: cheaper for plaintiff, more expensive for defendant • Defendant’s forum: cheaper for defendant, more expensive for plaintiff

12. Quality of Law – Extreme Hypothetical • From Bruce Hay (1992) • Suppose there are no rules about jurisdiction • Plaintiffs can sue wherever they want • Judgments are automatically enforced where defendant has assets • State or country can enrich itself by being biased in favor of plaintiff • Since plaintiff chooses forum, plaintiff chooses pro-plaintiff forum • So state which offered double damages, one-way fee shifting, favorable choice of law, favorable substantive law, lenient evidentiary rules, etc. would gets lots of litigation • Enrich local lawyers, hotels, and restaurants • State could charge court fees (perhaps 10% of judgments) which more than compensated state for cost of running courts • Since all states would have the same incentive • Race to the bottom • All states compete to offer pro-plaintiff forum • Not so far fetched • England 1600-1800 • ICANN Domain Name Dispute Resolution System • Would Nevada or Cayman Islands restrain themselves? • Shows that unconstrained jurisdiction can encourage biased adjudication

13. Potential Bias of Simple Jurisdictional Rules • Jurisdiction where plaintiff resides gives courts incentive to be biased in two ways • I. Ad hoc bias in favor of local residents when litigating against foreigners • Transfer wealth from foreigners to locals • Evidence of local (“hometown”) bias in some US states • II. Pro-plaintiff bias in rules of general application • E.g. pro-plaintiff procedural, evidentiary, choice of law, or substantive rules • May not be attractive, because hurt local defendants too • But if foreigners dominate some types of cases (e.g. product liability), then might be attractive • Even if lots of local defendants • Gains and losses to parties in purely local disputes may be (incorrectly) perceived to net to zero, but net gain to local litigants in disputes with foreign defendants • May help explain why defendants generally prefer federal court • Jurisdiction where defendant resides gives courts incentive to be biased in opposite way -- in favor of defendant

14. 3 Ways to Constrain Court Bias • I. Fairness rules • Invalidate judgments produced by biased state • E.g. Due Process challenge to state judgment • Enforcement? • By superior court (e.g. US Supreme Court) • Only possible when such court exists (e.g. in federal states) • By enforcing court • Only possible where insufficient assets in forum state • Requires difficult examination of fairness • II. Federalize/internationalize adjudication • If all litigation involving diverse parties were in neutral forum, then states would have no incentive to be biased • Possible in U.S. -- abolish complete diversity rule in federal court • International civil court for disputes between citizens of different states? • III. Jurisdictional rules • Properly designed jurisdictional rules can reduce or eliminate incentive to be biased

15. Jurisdictional Rules that Constrain Bias I • Employment discrimination • Jurisdiction where plaintiff employed • If forum biased in favor of locals, then employers locate factories in other states • Forum has incentive to be fair to encourage employers to locate in state • Contracts • Jurisdiction where plaintiff or defendant resides or is headquarters • If forum biased in favor of locals, then out-of-state parties will not want to enter into contracts with locals or will charge higher prices • Forum has incentive to be fair to encourage contracts between locals and out-of-state parties • Suits relating to the internet sales • Suit in place where goods shipped • If defendants doesn’t want to be sued in forum state, then just blocks transaction or raises price • Since state wants its citizens to have access and low prices, has incentive to moderate bias • Defamation in printed publication • Jurisdiction where publication distributed • If forum biased, then no distribution or higher prices in forum

16. Jurisdictional Rules that Constrain Bias II • Car accident • Jurisdiction where accident occurred • If forum biased in favor of locals, then people avoid driving in state? • Suits relating to internet postings (e.g. defamation) • If defendant has ability to block access based on user’s location • Then jurisdiction where website accessed (usually plaintiff’s residence) • If defendant doesn’t want to be sued in forum state, then just blocks access or transaction • Technologically possible? • If defendant does not have ability to block access based on user’s location • Then neither plaintiff’s state nor defendant’s state likely to be unbiased • Jurisdiction in randomly chosen other state or federal jurisdiction • Pure cross-border torts (e.g. pollution) • Both state where action and where damage have incentive to be biased • Jurisdiction in randomly chosen other state or federal jurisdiction

17. Purposeful Availment • Rules on previous 2 slides are largely consistent with Supreme Court’s “purposeful availment” requirement • Except jurisdiction in randomly selected state other than plaintiff’s or defendant’s residence • Suggests that purposeful availment may have economic, ex ante justification • Unfair to subject defendant to foreign jurisdiction, unless “purposefully availed” self of that forum, because if no purposeful availment, then insufficient constraint on court bias. • Could reformulate “purposeful availment” requirement to maximize constraints on court bias: • State X can assert jurisdiction over an out-of-state defendant based on action Y, if: • Action Y conferred substantial benefit on the residents of state X, and • The defendant could have refrained from action Y without significantly harming itself • 1st requirement gives state incentive to moderate bias • 2nd requirement ensures that defendant has credible threat to exit state • If only way mfg can avoid suit in Oklahoma is to stop selling cars anywhere in North America, then threat to withdraw benefits from Oklahoma is hollow. See World-Wide Volkswagen (1980)

18. Choosing Best Jurisdictional Rules • Rules that minimize litigation cost • Suit in defendant’s state • Suit in plaintiff’s state • But both give states incentives to be biased against out-of-state parties • Rule that improve quality of law • Purposeful availment • But likely to be more expensive • Because sometimes will select state which is neither plaintiff’s nor defendant’s state • Because more ambiguous, so more expensive to litigate • If think quality of law effects are large and/or litigation costs effects are small • Choose purposeful availment • If think quality of law effects are small and/or litigation cost effects are large • Choose suit in defendant’s or plaintiff’s state

19. Other Issues • Random selection rules • Multiparty litigation • International litigation • Diversity jurisdiction • Focus diversity jurisdiction on cases where purposeful availment likely to fail • Abolish complete diversity requirement • Concern that high litigation costs will deter potential plaintiffs from suing • Personal jurisdiction of federal courts