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— Judgment Call —
One important barrier to foreign investment in U.S. companies has been pension liability. A U.S. law -- the Employee Retirement Income Security Act of 1974, or Erisa -- automatically imposes pension liability on the 80% or greater owner of a U.S. company that has an underfunded pension plan when the plan terminates or the employer withdraws. The Pension Benefit Guaranty Corp. has said pension liabilities apply to foreign corporations as well as U.S. corporations. As a result, if a foreign corporation buys 80% or more of a U.S. corporation that has pension liabilities, the foreign corporation supposedly inherits those existing liabilities. However, the 7th Circuit Court of Appeals recently decided a case that may allow certain foreign companies to avoid pension claims if the company's U.S.-based subsidiary subsequently fails or is sold. In the recent case of Graphic Communications International Union (GCIU) Employer Retirement Fund v. The Goldfarb Corporation, the 7th Circuit Court of Appeals affirmed a lower court's decision to dismiss an Erisa pension withdrawal liability claim against a Canadian corporation, finding that the federal district court lacked personal jurisdiction over the Canadian corporation defendant -- the Goldfarb Corp. -- even though Goldfarb had multiple contacts with its subsidiary's lenders in the U.S. and had consented to jurisdiction in the U.S. in connection with a loan agreement with its U.S. bank. This builds on the 7th Circuit's earlier decision in Cent. States, Se. & Sw. Areas Pension Fund v. Reimer Express World Corp., which had already denied pension funds the ability to sue foreign defendant companies solely on the basis that the foreign company owned 80% or more of a U.S.-based subsidiary's stock.
The Reimer and Goldfarb decisions create exceptions for foreign companies from the normal Erisa pension liability rules. U.S. companies have no way of avoiding personal jurisdiction for purposes of these suits. The Reimer and Goldfarb cases focus on personal jurisdiction -- the legal rules about when a defendant can be haled into court. Those cases establish limitations on using U.S. courts to obtain judgment against foreign parent companies. In the recent Goldfarb case, Goldfarb Corp.'s subsidiary, U.S.-based Fleming Packaging Corp., failed financially, was placed into bankruptcy proceedings, and its assets were sold. That sale included the assets of Fleming's own subsidiaries, two manufacturing companies in California. As a result of the bankruptcy and sale, Fleming's two subsidiaries discontinued their contributions to GCIU's pension fund. The fact that the contributions were discontinued triggered Erisa pension withdrawal liability. With no means to recover from bankrupt Fleming or its subsidiaries, GCIU sued Fleming's parent corporation, Goldfarb, in federal district court in Illinois, seeking to recover the withdrawal liability from Goldfarb. Goldfarb moved the district court to dismiss GCIU's claim for lack of personal jurisdiction. Personal jurisdiction falls into two categories -- general and specific jurisdiction. The 7th Circuit had earlier held in RAR Inc. v. Turner Diesel Ltd. that for general jurisdiction, a defendant can be haled into court for the determination of a case that is unrelated to its contacts to the state where the action is brought if the defendant conducts continuous and systematic general business within that state. Everyone agreed that Goldfarb's contacts with Illinois (or any other state) did not rise to that level. The Goldfarb case involved specific jurisdiction. Specific jurisdiction allows a defendant to be brought into court based on limited actions -- even just one act -- if that action, as described by the Court of Appeals in RAR, "arises out of" or "relates to" the cause of action. In short, a close, casual connection between the defendant's action in the U.S. jurisdiction and the lawsuit must exist for a court to exercise specific jurisdiction. The court in the Goldfarb case was required by the Reimer case to identify the contacts that Goldfarb had with the forum (in this Erisa case, the U.S. as a whole), analyze these contacts and decide whether exercising jurisdiction on the basis of these contacts is fair and just. The court was also required to determine, if Goldfarb had sufficient minimum contacts to exercise jurisdiction, were those related to the cause of action involved in the suit, which in this case was the Erisa withdrawal liability. Goldfarb did not maintain a place of business, employ individuals, serve customers or have a designated agent for service inside the U.S. However, Goldfarb had directly negotiated with Fleming's lenders over several loan agreements, and, the district court found, and the Court of Appeals affirmed, that Goldfarb had minimum contacts (as defined by the due process clause of the U.S. Constitution) with the U.S. that could merit specific jurisdiction in suits arising out of those contacts. However, the district court concluded that GCIU's Erisa claim did not arise out of or relate to Goldfarb's contacts in the U.S. and the Court of Appeals affirmed. The Court of Appeals determined that although Goldfarb had been involved in discussions with Fleming's lenders regarding Fleming's fate, Goldfarb did not participate in any final decisions about how Fleming would be sold, to whom it would be sold and under what terms. In fact, any discussions Goldfarb participated in took place before an actual buyer had been identified. The courts held Goldfarb could not be made to defend in the U.S. because it did not participate in the action that triggered withdrawal liability. The courts determined that general discussions of Fleming's sale could not make Goldfarb subject to specific personal jurisdiction, since it was the way the actual sale of Fleming's assets was structured that triggered the withdrawal liability. Additionally, the courts found that Goldfarb's actions vis-à-vis Fleming were too remote in time for them to form the basis of personal jurisdiction. Goldfarb surrendered all of its controlling interest in Fleming months before Fleming was sold. The court stated that the failure of Goldfarb's negotiations with Fleming's lenders was "temporally far from the actual withdrawal, and several independent decisions were made by the lenders between the failed negotiations and the withdrawal." In sum the Court of Appeals affirmed the district court dismissal of GCIU's suit on the basis that GCIU failed to meet its burden to make out a case that its cause of action arose out of or was related to Goldfarb's minimum contacts with the U.S. Based on the Reimer and Goldfarb decisions then, foreign companies that make investments in U.S. companies should not inherit the U.S. company's pension liabilities just because of the investment. The applicability of Reimer and Goldfarb to other lawsuits will depend, however, on the facts involved in those individual cases. The threat of pension liability is still very real for many foreign companies investing in the U.S. We know from Reimer that corporate affiliation by itself is not enough for personal jurisdiction, but beyond that the devil is in the details. Goldfarb further instructs that a foreign company can have some contacts with the U.S. and still avoid Erisa withdrawal liability, as long as those contacts are not considered to have triggered the subsidiary's liability. But personal jurisdiction analysis requires a court to examine the facts of each case carefully. For a foreign company to gamble that its contacts will fall inside the Goldfarb framework, rather than outside, is risky business. The case law is not developed enough to fully instruct foreign companies about which contacts are safe and which ones will lead to expensive litigation. The Goldfarb case does not help a foreign company whose contacts with the U.S. are substantial enough to subject it to general jurisdiction. Likewise, even if a foreign parent is careful to limit its contacts with U.S. subsidiaries, if it owns more than one U.S. subsidiary, all of those subsidiaries would be responsible for the pension liabilities of the other U.S. subsidiaries. An as yet unanswered question is whether, if a foreign corporation has sufficient contact with the U.S. to be subject to personal jurisdiction, Congress really intended to saddle them with these liabilities. As indicated above, the PBGC has taken the position that it did, but so far the issue has not been litigated in court leading to a published decision. Although the Goldfarb case involved a multiemployer plan, the jurisdictional principles involved should also apply to PBGC claims for pension underfunding, which involve single employer plans and which cover many more participants. The PBGC was not a party to the Goldfarb case, however. All in all, at present, foreign corporations do enjoy some protection from Erisa pension liabilities depending on the nature and degree of the foreign companies' contacts with the U.S., and this may lower one important bar to foreign investment in the U.S. Rebecca R. Hanson is an associate with Foley & Lardner LLP and a member of the firm's General Commercial Litigation Practice. Lloyd J. Dickinson is a partner with Foley & Lardner and a member of the firm's Tax & Individual Planning and Tax & Employee Benefits Practices and the Automotive Industry Team. Michael M. Conway is a partner at Foley & Lardner and the leader of the firm's Chicago Office Litigation Department. They represented Goldfarb in the case discussed. |
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