Abbott, Charles B

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Constitutional Law—Jurisdiction over Foreign Corporation—Sales to an Independent Distributor Within the Forum.—Sanders Associates, Inc. v. Galion Iron Works

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Boston College Law ReviewVolume 4 | Issue 2 Article 201-1-1963Constitutional Law—Jurisdiction over ForeignCorporation—Sales to an IndependentDistributor Within the Forum.—SandersAssociates, Inc. v. Galion Iron WorksCharles B. AbbottFollow this and additional works at: http://lawdigitalcommons.bc.edu/bclrPart of the Business Organizations Law Commons, Constitutional Law Commons, InternationalLaw Commons, and the Jurisdiction CommonsThis Casenotes is brought to you for free and open access by the Law Journals at Digital Commons @ Boston College Law School. It has been acceptedfor inclusion in Boston College Law Review by an authorized administrator of Digital Commons @ Boston College Law School. For more information,please contact nick.szydlowski@bc.edu.Recommended CitationCharles B. Abbott, Constitutional Law—Jurisdiction over Foreign Corporation—Sales to an IndependentDistributor Within the Forum.—Sanders Associates, Inc. v. Galion Iron Works, 4 B.C.L. Rev. 412 (1963),http://lawdigitalcommons.bc.edu/bclr/vol4/iss2/20BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW70e 16 if an actual subsequent creditor existed under circumstances similarto those in the present situation. If such a creditor actually exists the trusteecan "step into his shoes" under the provisions of 70e which provide that anytransfer voidable under state or federal law by any creditor of the debtorhaving a provable claim under the Bankruptcy Act shall be null and voidas to the trustee. Since under the rule of the principal case, if an actualcreditor exists, 70c will automatically give the trustee a lien of that creditor,exercise of 70e powers in a similar situation would be impractical." Toreturn vitality to 70e the interpretation of 70c found in the Lewis casewould seem to be correct.Once one has accepted the above positions the result reached in theinstant case seems clearly wrong. The trustee's hypothetical creditor, sincehe is considered to have extended credit on the date of bankruptcy, wouldhave to be considered a subsequent creditor and as such would, under theWashington statute, have the power to avoid the contract here in question.' gIt is significant to note that under the Uniform Commercial Code acourt which properly construed 70c would give the trustee in bankruptcyrights superior to those of the conditional contract holder in circumstancessimilar to those in the instant case.' 9DAVID W. CARROLLConstitutional Law—Jurisdiction over Foreign Corporation—Sales toan Independent Distributor within the Forum.—Sanders Associates, inc.v. Galion iron Works CI Mfg. Cal—Sanders, a Delaware corporation withits principal place of business in New Hampshire, contracted with Galion,an Ohio corporation, to develop an automatic attachment for the latter'sroad grading equipment. Sanders brought an action in the United StatesDistrict Court for New Hampshire against Galion for breach of the contract.In addition to this contract, Galion's only other contacts with the state arose16 Bankruptcy Act § 70e, 66 Stat. 429 (1952), 11 U.S.C. § 110e (1958).17 Under section 70e, transactions are not automatically void as to the trustee.This section merely creates a power of avoidance which the trustee must exercise in aproper court. Collier, Bankruptcy Manual §§ 70.46 to .50 (2d ed. 1961). Under sec-tion 70c, the trustee automatically acquires a lien without any court action. Id. § 70.30.18 Sec Comment, 55 Nw. U.L. Rev. 783 (1961), where there is a discussion of theLewis case as applied to a Washington statute which is similar to the one involved inthe instant case.19 UCC § 9-302(1) (d) provides in part:(1) a financing statement must be filed to perfect all security interests exceptthe following ..(d) a purchase money security interest in consumer goods; but filingis required . . . for a motor vehicle required to he licensed.. . .UCC § 9-301(2) gives the secured party 10 days after the collateral comes intopossession of the debtor to file and thus perfect his interest.This result, however, would not be reached under the Massachusetts UniformCommercial Code (Mass. Gen. Laws Ann. ch. 106, § 9-302) (1958) which does notrequire filing to perfect security interests in consumer goods, and makes no exceptionfor motor vehicles required to be licensed.1 304 F.2d 915 (1st Cir. 1962).412CASE NOTESfrom its dealings with its exclusive New Hampshire distributor, R. G. Hazle-ton Co., Inc. Galion owns no Hazleton stock and all sales to Hazleton aremade f.o.b. Galion, Ohio. However, by virtue of the distributorship contract,Hazleton was subject to substantial control over its business in Galionequipment. Galion determined the retail price, established requirementsas to the maintenance of a sales force, proscribed the sales of comparableproducts of competitors and prescribed the employment of accounting andreporting procedures and personnel acceptable to it. The District Courtdismissed for want of jurisdiction over Galion, holding that while Galion'sactivities in New Hampshire may have been sufficient to subject it to suitby Hazleton or its customers, they were not such as would allow Galionto be sued by a third party on a matter collateral to the "mainstream" ofintercourse between Galion and Hazleton. HELD: Galion's contacts withNew Hampshire are • such as to render it liable to suit, both as to claimsconnected and unconnected with the central course of conduct involvingGalion and Hazleton.Limitations on the exercise by a state of in personam jurisdiction over aforeign corporation are found in the due process clause of the FourteenthAmendment and in the interpretation by the state courts of the local statutesproviding for the jurisdiction.2 The due process limitations have been setforth by the United States Supreme Court in two oft-cited cases: Interna-tional Shoe Co. v. Washington and Perkins v. Benquet Consol. Mining Co.S. A.3 In International Shoe the Court held that a foreign corporation couldbe subjected to in personam jurisdiction when it had "sufficient contactsor ties with the state of the forum to make it reasonable and just, accordingto our traditional conception of fair play and substantial justice, to permitthe state to enforce the obligations which appellant has incurred there." 4However, the holding in International Shoe could be restricted by itsfacts to jurisdiction over the enforcement of obligations arising out of orconnected with the activities of the foreign corporation within the state.In Perkins5 the Court held that the due process clause of the FourteenthAmendment does not prohibit a state from entertaining proceedings againsta foreign corporation which is doing business in the state, even though thecause of action sought to be enforced does not arise out of the corporation'sactivities within the forum.The New Hampshire Supreme Court has indicated that it would exerciseto the fullest the jurisdiction permitted by the due process clause. In La Bontev. American Mercury Co.,e the court cited with approval the "fair play and2 "There are two parts to the question whether a foreign corporation can be held• subject to a suit within a state. The first is a question of state law: has the state pro-vided for bringing the foreign corporation into its courts under the circumstances of thecase presented? ... If the state has purported to exercise jurisdiction over the foreigncorporation, the question may arise whether such attempt violates the due process clauseor the interstate commerce clause of the federal constitution." Pelson v. American RollingMill Co., 170 F.2d 193, 194 (1st Cir, 1948).3 326 U.S. 310 (1945) ; 342 U.S. 437 (1951).4 Id. at 320,5 342 U.S. 437 (1951).6 98 N.H. 163, 96 A.2d 200 (1953).413BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWsubstantial justice" rule formulated in International Shoe. Chief JusticeKenison in Benson v. Brattleboro Retreat' wrote: "We shall continue tofollow the rule laid down in La Bonte both in the spirit as well as the letterto the fullest extent permitted by due process and statutory requirements.""The Court of Appeals in the instant case, after finding that it was the ob-jective of the local statute to provide for the exercise of jurisdiction to theconstitutional limit, applied the International Shoe standard, as expanded byPerkins to the activities of Galion in New Hampshire, and found it amenableto jurisdiction.It has been held that more than mere sales of goods to independentdistributors within the forum are needed to provide a basis of jurisdictionover a foreign corporation.0 In addition to such sales there must be someother activity on the part of the corporation to meet the "sufficient contacts"test of International Shoe. In Kneeland v. Ethicon Suture Laboratories, Inc. 1 °and Taylor v. Klenzade Prod. Co.," in addition to sales to local distributors,the corporations employed agents to solicit business and stimulate demandfor their products in the state. In both cases it was held that the corporationswere amenable to jurisdiction. 12 Jurisdiction is also obtainable over foreigncorporations selling to local distributors when they maintain inventorieswithin the forum" or sell their products by consignment."Another possible area of activity by the foreign corporation which maysubject it to local jurisdiction may be termed the economic benefit theoryof sufficient contacts. Its applicability arises when the corporation exercisessuch a degree of control over the operations of the local distributor that itderives the same economic benefits that it would have obtained had itestablished its own branch outlet in the state. However, the courts endorsingthis theory generally base their finding of the availability of jurisdictionon a further finding that the distributor was the actual agent of the corpo-ration with respect to some activity carried on by the distributor. In SalesAffiliates, Inc. v. Superior Court 15 the court stated:Every factual situation where the question arises calls for a com-parison of the business advantages derived from the methods em-ployed by the corporation, with those it would enjoy if it conductedits business through its own offices or paid agents in the state. Ifthe representation which the petitioner maintained in the state gave7 103 N.H. 28, 164 A.2d 560 (1960).g Id. at 30, 164 A.2d at 562.9 Schmidt v. Esquire, Inc., 210 F.2d 908 (7th Cir. 1954) ; Favell-Utley Realty Corp.v. Harbor Plywood Corp., 95 F. Supp. 96 (N.D. Cal. 1954).10 18 Cal. App. 2d 211, 257 P.2d 727 (1953).11 97 N.H. 517, 92 A.2d 910 (1952).12 These cases represent an application of the "solicitation plus" test. See also Fanninv. Chesapeake & Ohio Ry., 204 F. Supp. 154 (W.D. Pa. 1962); Moore v. Atlantic CoastLine R.R., 98 F. Supp. 375 (E.D. Pa. 1951) and Long v. Victor Prod. Corp., 297 F.2d577 (8th Cir. 1961)13 Becker v. General Motors Corp., 167 F. Supp. 164 (D. Md. 1958).14 Thew Shovel Co. v. Superior Court, 35 Cal. App. 2d 183, 95 P.2d 149 (1939);Fielding v. Superior Court, 111 Cal. App. 2d 490, 244 P.2d 968 (1952). "19 96 Cal. App. 2d 134, 214 P.2d 541 (1950).414CASE NOTESit in a practical sense, and to a substantial degree, the benefitsand advantages it would have enjoyed by operating through its ownoffice or paid sales force, it was clearly doing business in the stateso as to be amenable to civil process.'However, the court went further and based its jurisdiction on a findingthat "with respect to the solicitation of operators to enter into licensingagreements with petitioner, the jobbers clearly act as agents of petitioner.""The court in the instant case recited the instances of control exercisedby Galion over Hazleton and, in these words, stated the economic benefittheory:. . . Galion had actually obtained all the economic benefits thatcould have been derived from establishing its own distribution out-let in New Hampshire and derived this economic benefit withoutincurring the burden of capital outlay to establish its own dis-tribution force. We believe that the degree of control and leveragewhich it exercised over Hazleton negates any due process objectionon the face of this record."However, the court was unwilling to make its decision depend upon thisreasoning alone. It alternatively found that maintenance of agents withinthe state for the purpose of investigating and satisfying customer com-plaints will subject the foreign corporation to the jurisdiction of that state."The court then noted that Hazleton serviced any complaints stemming fromthe sale of Galion equipment and added, "While . . . Hazleton apparentlybore the cost of this activity, the activity was undoubtedly calculated toinure to Galion's benefit and undertaken at its direction." 2° This languagecarries with it a strong implication that the court felt that with respectto the handling of complaints, Hazleton was the agent of Galion. If so,the agency relationship alone would have been sufficient to satisfy theminimum contacts necessary for the court's jurisdiction over Galion.Thus, because the court felt it necessary to bolster its decision onthe further finding that in one respect Hazleton had actually acted asGalion's agent, Sanders cannot be cited with complete confidence asauthority for the proposition that a foreign corporation should be amenableto jurisdiction on an economic benefit theory when it exercises substantialcontrol over the business of a local distributor. It is submitted that sucha result would be within the permissible limits of International Shoe.CHARLES B. ABBOTTla Id. at 136, 214 P.2d at 542.17 Id. at 137, 214 P.2d at 543. See also Kahn v. Maico Co., 216 F.2d 233 (4th Cir.1954), where the court found that the distributor unquestionably acted as the corpora-tion's agent when it gave the corporation's guaranty to its customers and adjustedcomplaints made under the guaranty.Is Supra note 1, at 921.19 The court followed this finding by citations to Wyshak v. Anaconda CopperMining Co., 328 Mass. 219, 103 N.E.2d 230 (1952) and Jet Mfg. Co. v. Sanford Ink Co.,330 Mass. 173, 112 N.E.2d 252 (1953).20 Supra note 1, at 922.415

Constitutional Law—Jurisdiction over Foreign Corporation—Sales to an Independent Distributor Within the Forum.—Sanders Associates, Inc. v. Galion Iron Works

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