International Shoe Co. v. State of Washington 1945
International Shoe Co. v. State of Washington 1945
Appellant: International Shoe Company
Appellee: State of Washington
Appellant's Claim: That a state can not require a company based outside the state to contribute monies into the state's unemployment compensation fund simply for selling products in the state.
Chief Lawyer for Appellant: Henry C. Lowenhaupt
Chief Lawyer for Appellee: George W. Wilkins, Washington Assistant Attorney General
Justices Dissenting: None (Robert H. Jackson did not participate)
Date of Decision: December 3, 1945
Decision: Ruled in favor Washington by finding that International Shoe had sufficient contacts in the state to pay state unemployment tax.
Significance: The decision established an important rule to determine when an out-of-state company has enough presence in a state to come under that state's jurisdiction. The rule of "minimum contacts" established that very little contact by an out-of-state corporation was necessary to make it subject to state regulation.
If a person living in Oregon took a road trip across country and happened to cause a minor traffic accident in Ohio, the Ohio resident involved in the mishap could sue the Oregonian under the state laws of Ohio. The out-of-state driver could not claim that, as a resident of Oregon, he was bound only by decisions made in an Oregon court. In legal terms, this kind of problem is known as personal jurisdiction. Jurisdiction refers to a geographic area over which a government or court has authority. When the term personal is added to jurisdiction, the phrase refers to the power of a court to hear cases where the court is located based on the situation or amount of contact a person, the defendant, has within the court's jurisdiction.
A Shoe Company's Predicament
Now suppose that a large shoe company has several sales agents working in the state of Washington. The shoes are all made in St. Louis, Missouri. The company's headquarters are located in Delaware. The only thing the company does in Washington state is to have its salesmen sell shoes there. The question arises as to whether the shoe company must pay unemployment tax—a percentage of the salespeople's salaries—to the state of Washington.
In the 1930s, a time of high unemployment, Washington had passed a law setting up a state compensation (to make up for lost income) fund to pay unemployment wages to individuals who had lost their jobs through no fault of their own. To help with expenses of the program, companies who employed workers in the state were required to make annual contributions, known as the employment tax, to the program.
Should the Delaware shoe company be required to pay this tax to the state of Washington? The Supreme Court was faced with this problem in the case of International Shoe Co. v. State of Washington. The Court considered the case as a question of personal jurisdiction. The decision still carries enormous influence in settling problems of personal jurisdiction.
Personal Jurisdiction and Corporations
Legally a corporation is considered a person under U.S. law. Therefore, corporations are covered by personal jurisdiction laws. Chief Justice Harlan F. Stone commented in International Shoe, " . . . the corporate personality is a fiction although a fiction intended to be acted upon as though it were a fact."
Personal Jurisdiction and Minimum Contacts
Business in the late 1930s for International Shoe Company in the state of Washington was good. Between ten and thirteen salesmen employed by the company lived and worked in the state earning a total of $31,000 from 1937 to 1940, a large sum for the times. Washington wanted the tax due on those earnings. A state official personally delivered a notice to one of the company's salesmen living in the state and mailed a copy to the company's office in Delaware demanding that the company pay unemployment tax. The notice asserted the company owed back taxes from 1937 to 1940 when it had not paid unemployment tax.
The company refused to pay claiming that even though they had salesmen working in the state, they did not really have a corporate presence. No company offices were located in the state, no stocks of shoes were kept there, and no contracts of sale were actually signed there. All orders were normally sent by the salesmen to St. Louis where the orders were accepted and the shoes were then shipped from one of several places, all located outside the state of Washington. Since the company itself was not physically present in the state, the company claimed it should not come under Washington state jurisdiction. Therefore, it should not be required to pay unemployment tax.
In such a situation, the idea of a corporation as a person hence falling under personal jurisdiction laws becomes important. Returning to the example of an Oregonian causing a traffic accident which in Ohio, the Oregonian, upon receiving a summons at home in Oregon from Ohio, could argue that he is not present in Ohio, therefore Ohio has no personal jurisdiction over him. However, although the Oregonian was back home, it could be said that the traffic accident in Ohio established "minimum contacts" with Ohio. This minimum contact under personal jurisdiction laws in fact brings him under the jurisdiction of a Ohio state court. Similarly, did International Shoe Company's salesmen working in Washington establish enough contact for the company to fall under Washington state's jurisdiction?
The case first went to a Washington state Superior Court which ruled in favor of the state, ordering International Shoe to make the payments.
P ersonal jurisdiction refers to the legal power a court holds to hear and decide a civil law (private noncriminal) case based on the degree of contact that defendant (individual who is the target of a lawsuit) has in the area in which the court is located. Every state has personal jurisdiction over all its residents and all visitors within its boundaries. This includes residents who leave the state for a brief period of time or people from out-of-state who enter the state only briefly. This jurisdiction comes from the sovereign (politically independent) governmental powers held by each state. However, if the person named in a suit is located outside the state boundaries, then they must have made some form of contact within the state for the state's courts to take the case.
Questions of personal jurisdiction when dealing with individuals as defendants have been fairly straightforward. However, when corporations, who are considered "citizens" by law, are involved, complications can readily occur. For national corporations located in one state, but doing business in others, state courts sometimes have difficulty determining if they have jurisdiction. The corporation is always subject to personal jurisdiction in the state it is chartered. To conduct business in some states, out-of-state corporations have to sign agreements stating that they agree they are subject to personal jurisdiction. Other states require corporations to at least have an agent within the state to receive legal papers if a lawsuit should be filed against them. The general rule is that if a corporation wants the privilege of conducting business in a state, then it must accept responsibilities as well. Sometimes only a single contact made by a corporation within a state, such as a telephone call or letter can be sufficient contact to come under a state's personal jurisdiction. State laws establishing personal jurisdiction over out-of-state corporations are referred to as "long-arm statutes" for extending jurisdiction out long distances beyond state boundaries.
International Shoe appealed the decision to the state supreme court which affirmed the lower court's decision. The company then appealed to the U.S. Supreme Court which accepted the case.
How Much Contact Is Enough Contact?
The Court was left to decide how much "contact" in a state is enough for a citizen, hence a corporation, to fall under that state's jurisdiction. Justice Harlan F. Stone wrote the Court's opinion in the unanimous 8-0 opinion. In finding in favor of Washington, Stone reasoned that by maintaining a sales staff and selling shows International Shoe had established enough contact with the state to require it to be subject to Washington laws for the activities it conducted in the state. These "minimum contacts" were sufficient whenever a corporation had "sufficient contacts or ties with the state . . . to make it reasonable and just, according to our traditional conception of fair play and substantial justice." Stone held that if a corporation enjoys the privilege of conducting business in a state, then it must also meet the obligations of doing business within the state. Also, if a company employs labor in a state, it should be expected to contribute taxes to the unemployment program.
A Major Precedent
The ruling set a major precedent (principles set by earlier court decisions) for determining personal jurisdiction matters. International Shoe made it significantly easier for states to seek jurisdiction over out-of-state corporations. Following the decision, states passed numerous laws defining state jurisdiction over out-of-state businesses. These laws have normally received favorable review in the courts, which strengthens state powers in this area. However, the issue of just what constitutes "minimum contact" was left for courts to explore further in future cases.
The growth of the Internet in the 1990s raised more complex questions concerning what qualifies as corporate contact in a state. The application of state sales taxes to electronic commerce in cyberspace became a major issue among state governments. This question and other new ones in an era of rapid developments in telecommunications pose new problems concerning state regulation of out-of-state businesses.
Suggestions for further reading
Dawson, Paul A. American Government: Institutions, Policies, and Politics. Glenview, IL: Scott, Foresman, 1987.
Ferguson, John H., and Dean E. McHenry. The American Federal Government. New York: McGraw-Hill Book Company, 1977.
Weissberg, Robert. Understanding American Government. New York: Rinehart and Winston, 1980.