of Sony Music PP2-8 (hereinafter "Romano Aff.").
Each affiliate maintains its own offices, bank accounts, and financial records. See Affiliate Affs. P7. Defendants state that each affiliate makes independent business decisions about the recordings it will produce and the manufacture of those recordings, as well as most personnel decisions. Id. However, each affiliate must seek approval from Sony Music for major financial decisions, including artist advances, and for the "hiring and personnel decisions regarding locally well-compensated employees." See id. at P9. Sony Music has guaranteed the obligations of at least one foreign affiliate. See Bondell Dep. at 55-56. Sony Music monitors the performance and reviews the budget of each affiliate, and the affiliates provide financial and management reports regularly. See Affiliate Affs. P9; Bondell Dep. at 47-48. Sony Music management and the management of the affiliates meet "quasi-regularly." See Bondell Dep. at 47, 50.
Standard of Review
The burden of establishing personal jurisdiction over a defendant ultimately is upon the plaintiff. Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 904 (2d Cir. 1981): Hvide Marine Int'l Inc. v. Employers Ins. of Wausau, 724 F. Supp. 180, 182 (S.D.N.Y. 1989). If jurisdiction is challenged prior to discovery, the plaintiff may defeat the motion by a good faith pleading of legally sufficient allegations of jurisdiction. Ball v. Metallurgie Hoboken-Overpelt, S.A., 902 F.2d 194, 197 (2d Cir.), cert. denied, 112 L. Ed. 2d 116, 111 S. Ct. 150 (1990). At this stage, the plaintiff may make a prima facie showing solely by allegations. Id. Where a motion testing jurisdiction is made after discovery, the plaintiff may still defeat the motion by making a prima facie showing, but this must include "an averment of facts that, if credited by the trier, would suffice to establish jurisdiction over the defendant." Id.; United Bank of Kuwait, PLC v. James M. Bridges, Ltd., 766 F. Supp. 113, 115 (S.D.N.Y. 1991). If the defendant challenges plaintiff's factual allegations essential to establish jurisdiction, a hearing is required at which the plaintiff must establish personal jurisdiction by a preponderance of the evidence. Ball, 902 F.2d at 197; Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120 (2d Cir. 1984).
Here the parties have had the opportunity to conduct jurisdictional discovery. While the moving defendants have contested some of plaintiff's factual allegations, their motion is directed to a challenge of the sufficiency, not the credibility of those allegations. Upon examining the record, we determine that the jurisdictional issue can be resolved on the basis of undisputed facts.
New York CPLR § 301 and "Doing Business"
In a diversity action, a federal court must look to the law of the forum state to determine whether personal jurisdiction exists over a nonresident defendant. Savin v. Ranier, 898 F.2d 304, 306 (2d Cir. 1990) (citing Arrowsmith v. United Press Int'l, 320 F.2d 219, 222-25 (2d Cir. 1963)). If the applicable statute of the forum state allows the court to exercise jurisdiction, the court must then consider whether the exercise of jurisdiction meets constitutional standards of due process. See Savin, 898 F.2d at 306; Darby v. Compagnie National Air France, 735 F. Supp. 555, 559 (S.D.N.Y. 1990).
Plaintiff asserts jurisdiction over the moving defendants on the basis of New York Civil Practice Law & Rules § 301. See Plaintiff's Mem. of Law at 11. Section 301 provides that "[a] court may exercise jurisdiction over person, property, or status as might have been exercised heretofore." N.Y.C.P.L.R. § 301. Section 301 incorporates the caselaw prior to its enactment which provided that a corporation may be subject to jurisdiction in New York for any cause of action even if unrelated to contacts in New York if it is "doing business" and therefore "present" in New York. Hoffritz for Cutlery, Inc. v. Amajac, Ltd., 763 F.2d 55, 57-58 (2d Cir. 1985). The New York courts have construed this standard so that a foreign corporation must do business in New York "not occasionally or casually, but with a fair measure of permanence and continuity." Tauza v. Susquehanna Coal Co., 220 N.Y. 259, 267, 115 N.E. 915, 917, (1917); accord Laufer v. Ostrow, 55 N.Y.2d 305, 310, 434 N.E.2d 692, 694, 449 N.Y.S.2d 456, 458 (1982). The New York courts have termed this test for doing business a "simple and pragmatic one," Bryant v. Finnish National Airline, 15 N.Y.2d 426, 432, 208 N.E.2d 439, 441, 260 N.Y.S.2d 625, 628-29 (1965), in which the court determines if the foreign corporation's activities in New York are "continuous and systematic." Frummer v. Hilton Hotels Int'l, Inc., 19 N.Y.2d 533, 536, 227 N.E.2d 851, 853, 281 N.Y.S.2d 41, 43, cert. denied, 389 U.S. 923, 19 L. Ed. 2d 266, 88 S. Ct. 241 (1967). However, the caselaw demonstrates that evaluation of jurisdiction under this "doing business" standard requires close consideration of the facts and circumstances in each case, because no single factor is dispositive. See H. Heller & Co., Inc. v. Novacor Chemicals Ltd., 726 F. Supp. 49, 52 (S.D.N.Y. 1988); Top Form Mills v. Sociedad Nationale Ind., Etc., 428 F. Supp. 1237, 1242 (S.D.N.Y. 1977); Sunrise Toyota, Ltd. v. Toyota Motor Co., 55 F.R.D. 519, 523 (S.D.N.Y. 1972).
Plaintiff does not contend that the moving defendants have sufficient direct contacts with New York to meet the "doing business" standard. Rather, plaintiff argues that the moving defendants satisfy two tests under which a foreign corporation may be found to be "doing business" in New York based solely on a relationship with another entity that is "present" in New York. The presence of a local corporation does not necessarily create jurisdiction over a related foreign company. See Delagi v. Volkswagenwerk AG of Wolfsburg, 29 N.Y.2d 426, 432, 278 N.E.2d 895, 897, 328 N.Y.S.2d 653, 657 (1972). However, under New York law, jurisdiction may be obtained over a foreign company if it is a "mere department" of an entity that is present in New York, or if the relationship between the foreign corporation and the local one gives rise to the valid inference of an agency relationship. See Saraceno v. S.C. Johnson & Son, Inc., 83 F.R.D. 65, 67 (S.D.N.Y. 1979); Sunrise Toyota, Inc., 55 F.R.D. at 528. Plaintiff asserts that each of the moving defendants is a mere department of Sony Music, and that Sony Music acts as the de facto agent of each defendant so that they are all subject to the jurisdiction of this Court. See Plaintiff's Mem. of Law at 1-2.
A corporate entity will be considered a "mere department" of its parent only if the foreign parent's control is "pervasive enough that the corporate separation is more formal than real." H. Heller & Co. v. Novacor Chemicals Ltd., 726 F. Supp. 49, 54 (S.D.N.Y. 1988) (citing Taca Int'l Airlines, S.A. v. Rolls-Royce of England, Ltd., 15 N.Y.2d 97, 204 N.E.2d 329, 256 N.Y.S.2d 129 (1965)). To achieve jurisdiction, "the control over the subsidiary's activities . . . must be so complete that the subsidiary is, in fact, merely a department of the parent." Delagi v. Volkswagenwerk AG of Wolfsburg, 29 N.Y.2d at 432, 278 N.E.2d at 897, 328 N.Y.S.2d at 657. This basis for jurisdiction is quite narrowly applied. In Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120-22 (2d Cir. 1984), the Second Circuit delineated four factors to aid in determining whether one entity is a "mere department" of another for jurisdictional purposes.
Common ownership is the "essential" factor, while the three others are important: financial dependency of the subsidiary on the parent; degree to which the parent interferes in the selection and assignment of the subsidiary's executive personnel and fails to observe corporate formalities; and, the degree of the parent's control over the subsidiary's marketing and operational policies. Beech Aircraft, 751 F.2d at 120-22; Morse Typewriter Co., Inc. v. Samanda Office Communications Ltd., 629 F. Supp. 1150, 1153 (S.D.N.Y. 1986) (Weinfeld, J.).
While not all of the moving defendants are owned directly by Sony Music, they all share with Sony Music the ultimate ownership by Sony Corp. Thus, the first and essential element of the Beech test, common ownership, is satisfied here. There is no question that Sony Music exercises some control over the activities of the moving defendants. As discussed supra, Sony Music does require approval of major financial decisions of the moving defendants, reviews their budgets and is provided with regular financial reports by them. Sony Music has on occasion guaranteed at least one of the affiliates' financial obligations. See Bondell Dep. at 55-56. Sony Music also approves key personnel decisions, and assists the affiliates in strategy for negotiations with artists, and in formulating various business policies.
However, we find that this level of involvement by Sony Music does not make the moving defendants "mere departments" under the New York standard. The moving defendants are not "wholly dependent upon [the related entity's] financial support to stay in business." Beech Aircraft, 751 F.2d at 121. Each defendant maintains its own books, records, and bank accounts and functions independently financially in its day-to-day operations. Each defendant makes most personnel decisions and decides independently which artist to sign and which records to release within its territory.
This relationship is far less intimate than that which existed in one of the leading New York cases finding jurisdiction on the basis of "mere department" status. In Taca Int'l Airlines, the foreign parent company, owned through an intermediary all of the stock of a New York subsidiary, whose sole business was to sell and service products manufactured by the parent company. Taca Int'l Airlines, S.A. v. Rolls-Royce of England, Ltd., 15 N.Y.2d 97, 100-01, 204 N.E.2d 329, 330, 256 N.Y.S.2d 129, 131 (1965). Key executive personnel were former executives of either the parent or the intermediary, and they were assigned by the parent. Executives of the three companies met frequently to set the policies of the subsidiary. The subsidiary's employees were given technical training by the parent company, and all sales literature used by the subsidiary was written and published by the parent. Id. at 100-01, 204 N.E.2d at 330, 256 N.Y.S.2d at 131.
Further, the subsidiary owned no cars, their product, but ordered them from the parent only when a sale was made to a customer. The price paid by the subsidiary was lower than that ultimately charged to the customer, and the warranty was issued directly from the parent to the customer. The parent paid the subsidiary a fixed annual fee to service the cars under these warranties. Id. at 101, 204 N.E.2d at 330, 256 N.Y.S.2d at 131. The net income of the New York subsidiary was sent to the intermediary and appeared in that company's balance sheet, and ultimately appeared in the parent company's balance sheet. Id. On these facts, the New York Court of Appeals found that the New York subsidiary was a mere department of the foreign parent. Id. at 102, 204 N.E.2d at 331, 256 N.Y.S.2d at 132; see also Public Administrator v. Royal Bank of Canada, 19 N.Y.2d 127, 132, 224 N.E.2d 877, 879, 278 N.Y.S.2d 378, 381 (1967) (finding jurisdiction on "mere department" basis when relationship between parent and subsidiary was so intimate that "Royal Bank of Canada (France) is not merely a subsidiary of the Royal Bank of Canada but is, in fact, if not in name, the Royal Bank of Canada itself").
Cases in this Circuit also demonstrate that a closer level of corporate intimacy than that which exists in this case must be present in order to find jurisdiction on a "mere department" basis. In applying its four factor test, the Second Circuit in Beech found that East, a New York subsidiary was a "mere department" of Beech Aircraft Corp. under New York Law. Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120 (2d Cir. 1984). East was wholly owned by Beech, and was its complete financial dependent. Id. at 120-21. Several Beech officers held the same positions at East, though their entire salaries were paid by Beech. Id. at 121. The subsidiary reported to a Beech executive at regular marketing meetings, and no evidence demonstrates that East held any directors' meeting of its own. Finally, the Court found that Beech "tightly controlled" the marketing operations of its subsidiary, including prescribing minimum inventory levels, accounting systems, advertising campaigns, and training of salespeople. Id. at 122. The relationship of the affiliates in the present case to Sony Music clearly does not reach the level of intimacy which existed in Beech.
In Titu-Serban Ionescu v. E.F. Hutton & Co., 434 F. Supp. 80 (S.D.N.Y. 1977), aff'd without opinion, 636 F.2d 1202 (2d Cir. 1980), Hutton (France) was a foreign corporation which was wholly owned by a wholly owned subsidiary of E.F. Hutton, a corporation subject to jurisdiction in New York. Id. at 81. Hutton (France) was incorporated by five officers of E.F. Hutton, another wholly owned subsidiary, and an individual formerly associated with a third wholly owned subsidiary. Id. at 82. Hutton (France) was capitalized at approximately $ 20,000 and paid no dividends. It was operated as a "guaranteed corporate subsidiary" of E.F. Hutton pursuant to Rule 322 of the New York Stock Exchange which provided that all its obligations and liabilities would be assumed or guaranteed by the member organization (E.F. Hutton) which "shall be fully responsible for all acts of such subsidiary." Id. at 82 (quoting NYSE Rule 322). Hutton (France) was principally a brokerage house which transmitted orders from its customers to E.F. Hutton for execution. More than half of its income and all of its American business was done through E.F. Hutton. E.F. Hutton apparently charged the subsidiary less or at least on a somewhat different basis than it charged unaffiliated brokers for clearing transactions. Id. In annual reports, pamphlets and other public documents, E.F. Hutton referred to Hutton (France) as a branch office or international division of the parent company. Id. The Court noted that this was not simply a case where a parent corporation provided services in New York for a foreign subsidiary. Id. Although the two entities were separately incorporated, "only one commonly-owned enterprise exists which relies on the joint endeavors of each constituent part and each corporation functions as an integral part of a united endeavor." Id.
In Morse Typewriter v. Samanda Office Communications Ltd., 629 F. Supp. 1150 (S.D.N.Y. 1986), a New York subsidiary, NTI, had received two substantial loans from its foreign parent NTL and paid a percentage of its revenues to NTL as part of a research and development cost sharing agreement. Id. at 1153. NTI had to obtain NTL's approval for major expenditures, and NTI's board of directors was controlled by NTL officers. Id. at 1153-54. However, the Court found that NTI was basically financially and operationally independent; "in sum, it appears that NTI exercises substantial discretion and independence within broad parameters established by its parent." Id. at 1154. Judge Weinfeld concluded that such a relationship did not make a subsidiary a mere department of its parent. Id. As this Court has stated:
Under New York law a parent of a multinational corporate enterprise may make broad policy decisions for its subsidiaries. Such control is inherent in the parent-subsidiary relationship and does not justify labeling a subsidiary a 'mere department' of the parent.
Saraceno v. S.C. Johnson and Son, Inc., 83 F.R.D. 65, 71 (S.D.N.Y. 1979).
Most important, in all three Southern District cases which have involved the predecessors of the companies concerned here, the courts have held that the affiliates are not subject to jurisdiction in New York as "mere departments" of the related company doing business in New York. In Larball Pub. Co., Inc. v. CBS Inc., 664 F. Supp. 704 (S.D.N.Y. 1987), Judge Duffy provided the most complete description of the relationship between CBS, Inc. and its various affiliates. This relationship appears substantially similar to that between Sony Music and its affiliates, the successors to the CBS entities. Judge Duffy found that although CBS exercised "significant control" over the affiliates, "it does not rise to such a level as to make the subsidiaries mere departments of CBS." Id. at 707. Judge Duffy said:
Importantly, there is no evidence that CBS' subsidiaries are financially dependent on CBS. They are separately incorporated and keep their own books, records, and bank accounts. The subsidiaries' profits are their own and are not counted by CBS on its books. CBS does file a consolidated financial statement with the Securities and Exchange Commission and in its Annual Report to its shareholders. For the most part, the subsidiaries select their own employees, except that key personnel, such as the subsidiaries' managing directors and others who report directly to them, must be approved by CBS.
The evidence further suggests that the subsidiaries generally make their own independent decisions about signing artists within their territories and which songs to release. Major expenditures, however, including artist advances, must be approved by CBS.