Contacts, Contracts, Indemnities.

Halyard Health v. Kimberly-Clark Corp., No. B294567 (D2d5 Jan. 2, 2020)

Back in the days before he represented Stormy Daniels, and before he got criminally charged with fraud, and long before he got arrested while in the process of getting disbarred, Michael Avenatti popped Kimberly-Clark Corp. and its spinoff Halyard with a $450 mm judgement for fraudulently representing the qualities of certain surgical gowns. The awards were later dialed way back to around $20 million, due to excessive punitive damages. The case is on appeal to the Ninth Circuit. 

This case, however, is a declaratory relief action about whether Halyard needs to indemnify Kimberly-Clark for its share of the punitive damages. That seems to be required under the terms of a “Distribution Agreement” spinning Halyard out as a separate company. But there’s questions about whether an indemnity for punis is valid. The court here doesn’t even reach the merits of that question, however, because the Court of Appeal finds that there isn’t personal jurisdiction over Kimberly-Clark.

There’s no question that personal jurisdiction here needs to be specific—i.e., the defendant’s contacts with the state need to be connected to the facts that give rise to the case. Generally, in California, that invokes a three part test: First, the defendant needs to have purposefully availed itself of California. Second, the controversy needs to arise out of the defendant’s contacts with the forum. Under the test applied in California, that means there needs to be a substantial relationship between the contacts and the claim. And third, the assertion of personal jurisdiction must “comport with fair play and substantial justice.”

The Court here finds that the analysis founders on the second point. It is true that Kimberly-Clark sells lots of stuff in California. (Which is how it got sued here.) But this case doesn’t really arise from those contacts—it arises instead from the general contractual indemnity from the Distribution Agreement, which was not California specific. Nor does the fact that California law might apply to the validity of the indemnity necessarily mean that the case arises from California contacts. The Court of Appeal ultimately holds that the fact that the obligation to be indemnified arose in California is insufficient to conclude that an action in contact over the enforceability of the indemnity agreement is substantially related to Kimberly-Clark's California contacts.

Justice Rubin dissents. His principal point of contention is that although the dispute arises out of the contract, it also arises out of the underlying obligation to be indemnified. As he sees it, “[g]iven the broad ‘substantial connection’ test used for the second prong in California, it is clear to me that a declaratory relief coverage action both arises out of, and relates to, more than the contract itself, but also to the underlying tortious activity.” He cites a number of declaratory relief cases in the insurance context in support.

Affirmed.