Texas Supreme Court Finds Jurisdiction over Foreign Manufacturer

Spir Star AG v. Kumich, No. 07-0340 (Tex. Mar. 12, 2010)

By: David Coale & Matthew Sikes, K&L Gates, Dallas

The recent Texas Supreme Court case of Spir Star AG v. Kumich affirmed jurisdiction over a foreign company that had deliberately structured its Texas business to be conducted through a separate intermediary.  No. 07-0340 (Tex. March 12, 2010).  This case illustrates an aspect of personal jurisdiction over foreign entities that can be critical to disputes about projects involving overseas consultants or specialty contractors.

Spir Star AG (“Spir”) manufactures high-pressure hoses and fittings.  The three German owners of Spir decided to expand their business into Texas.  They chose Houston as a location for a distributor because it was close to refineries and other likely customers for Spir’s products.  They traveled to Texas and established Spir Star Limited (“Limited”) to sell products in the area.  Spir does not have an ownership stake in Limited, which is owned 75% by the German owners of Spir and 25% by the employees of Limited.  Limited purchased products from Spir and sold them as Spir’s exclusive distributor in North America.  The two did not share profits, but Spir’s sales to Limited accounted for approximately 35% of its annual sales and the companies shared presidents.  Spir maintained separate accounts, and title to products purchased by Spir passed to Limited in Europe before ever reaching the United States.  Spir conducted its business in Texas exclusively through Limited, and never as itself.

The plaintiff sued Spir and Limited in Texas for products liability.  The Supreme Court focused on specific jurisdiction and did not address the court of appeals’ conclusion that Spir had enough “continuous and systematic” activities in Texas for general jurisdiction.  Specifically, the court examined Justice O’Connor’s concurrence in Asahi Metal to determine whether Spir engaged in the “additional conduct” she described as necessary for personal jurisdiction over a business that places products into the stream of commerce.

Spir relied on two previous Texas Supreme Court cases, PHC-Minden L.P. v. Kimberly Clark and BMC Software Belgium v. Marchand, which both declined to find general jurisdiction because of insufficient control and unity between parent and subsidiary.  The Court distinguished both cases, noting that the issue here was not whether Limited’s actions could be attributed to Spir, but whether Spir’s own conduct in marketing products in Texas created jurisdiction.  The Court concluded that, when a manufacturer specifically targets Texas, it is amenable to product liability suits in Texas, even if it does not make the sales itself and uses a distributor.  It noted several limitations to this principle: it arises only in the context of specific jurisdiction; it is limited to claims that “arise out of or relate to” a nonresident’s forum contacts; there must be a substantial connection between the claim and the actions of the nonresident; and the nonresident must intend to serve the Texas market.

The Court concluded that Spir’s actions satisfied these factors.  Spir marketed products exclusively through its Texas distributor Limited. Despite transferring title in Europe and not sharing profits with Limited, Spir enjoyed substantial economic gain through its relationship with Limited in Texas.  Limited was Spir’s largest distributor and was responsible for over a third of Spir’s sales.  Finally, the court noted that the location of the transaction was not as important as the sale being directed toward Texas.

Next, the Court concluded Spir intended to serve the Texas market and thus purposefully availed itself of the benefit of Texas, despite doing so through a distributor, noting that Spir’s owners formed Limited specifically to market to refineries in the Houston area, and that the president of both Spir and Limited spent half the year in Houston and received pay from both.  Spir’s website also included several references to Houston and Limited as the focal point of Spir’s North American operations.

This holding is relevant in planning corporate, deal, and joint venture structures before disputes arise. In the context of construction litigation, where claims may be for breach of contract or related business torts, this case will be persuasive authority but the specific type of claim made will have to be analyzed in the overall context of the parties’ Texas contacts.