State ex rel. Miller v. Internal Energy Management Corp.

• Decision Date: 29 September 1982
• Docket Number: No. 66390,66390
• Citation: 324 N.W.2d 707
• Parties: STATE of Iowa ex rel. Thomas J. MILLER, Attorney General of Iowa, Appellant, v. INTERNAL ENERGY MANAGEMENT CORPORATION, Carl Wolff, and Carlos R. Sotelo, Appellees.
• Court: Iowa Supreme Court

Page 707

324 N.W.2d 707

STATE of Iowa ex rel. Thomas J. MILLER, Attorney General of Iowa, Appellant, v. INTERNAL ENERGY MANAGEMENT CORPORATION, Carl Wolff, and Carlos R. Sotelo, Appellees.

No. 66390.

Supreme Court of Iowa.

Sept. 29, 1982.

Douglas R. Carlson, Asst. Atty. Gen., for appellant.

Nick Critelli of Critelli & Foxhoven, Des Moines, and Thomas J. McCann, Student Legal Intern, for appellees.

Considered by REYNOLDSON, C. J., and LeGRAND, UHLENHOPP, McGIVERIN, and CARTER, JJ.

UHLENHOPP, Justice.

The question in this appeal is whether Iowa courts can exercise personal jurisdiction over a nonresident corporate agent in his individual capacity on the basis of his activities undertaken on behalf of a foreign corporation which itself is amenable to suit under the long-arm statute. Iowa Code § 617.3 (1979).

On February 27, 1980, the Attorney General commenced this consumer fraud action in equity alleging the following facts. See Iowa Code § 714.16(7) (1979) (Consumer Fraud Act). Defendants Carl Wolff and Carlos R. Sotelo are the directors and officers of defendant Internal Energy Management Corp. (IEM), a business incorporated in Texas. IEM manufactures and merchandises on a national scale an alleged fuel-saving device known as the "moleculetor fuel energizer unit" (moleculetor). The moleculetor is designed to be installed in the fuel supply line of a motor vehicle and consists simply of a ten-inch long solid aluminum cylinder with a hole drilled through the center. It has no moving parts and contains no wires, filters, or material other than aluminum.

IEM claims that installation of the moleculetor will increase fuel mileage from 14 to 32 percent and explains the principle of operation as follows:

The moleculetor T. M. fuel energizer unit has a force field of energy that increases the motion of fuel molecules. Fuel molecules in their normal state are held together by forces. When passing through the moleculetor T. M. energizer the motion of fuel molecules are increased, causing a reduction of the forces holding them together. In this state during the combustion process the molecules burn more completely. This can be seen very easily in the lower emissions which is unburnt and unburnable particles of fuel, e.g. hydro-carbons, carbon monoxide, etc.

To advertise the moleculetor, IEM produced several brochures containing representations of increased fuel mileage and explaining the operation of the moleculetor. IEM also produced several technical reports and a number of alleged user testimonials to support its claim of increased fuel efficiency. These materials were circulated throughout a network of regional distributorships set up by IEM. One such distributorship was established in Omaha, Nebraska, under the name of Midwest Moleculetor Sales (Midwest).

In July 1979, an investigator for the Attorney General's consumer protection division contacted Midwest and ordered by mail one moleculetor unit at a price of $89.95. Upon receiving the moleculetor, the investigator sent it to the Department of Mechanical Engineering at Iowa State University for testing its validity. The engineers at the department concluded that "the moleculetor is utterly incapable of increasing the fuel economy of the gasoline or diesel engine."

On the basis of the test results, the Attorney General commenced the present action in the Iowa District Court against defendants IEM, Wolff, and Sotelo, alleging that they had engaged in false and misleading advertising in their efforts to merchandise the moleculetor in the state of Iowa. The Attorney General asked that defendants be permanently enjoined from the use of any deceptive advertising practices in connection with their sales of the moleculetor, that the court consider entry of a permanent injunction prohibiting defendants from doing any business whatsoever in the state, and that defendants be ordered to reimburse any person who was defrauded through the purchase of a moleculetor. Jurisdiction was predicated on the long-arm statute and on the allegation that defendants had committed a tort within the state through use of deceptive and misleading sales practices. See Iowa Code § 617.3 (1979).

The action originally included eight additional defendants who were also involved in manufacturing, distributing, or selling the moleculetor. The proceedings against those defendants have been completed, either by dismissal or by entry of a permanent injunction enjoining them from further sales activities of the moleculetor.

IEM, Wolff, and Sotelo filed special appearances, supported by affidavit, challenging the jurisdiction of Iowa courts over them. See Iowa R.Civ.P. 66. The district court overruled IEM's special appearance, finding that the corporation had established sufficient minimum contacts with Iowa through its sales activities conducted within the state. IEM did not appeal from that ruling.

Wolff and Sotelo, on the other hand, based their jurisdictional challenge on the fiduciary shield doctrine which holds that jurisdiction over a corporate agent individually cannot be based solely on jurisdiction over the corporate employer. Both defendants executed affidavits stating that neither had ever visited Iowa or transacted business here, either for personal reasons or on behalf of IEM. They asserted that the only basis alleged in the petition for asserting jurisdiction over them was that they were officers and directors of IEM. They argued that under the fiduciary shield doctrine, those allegations were insufficient to confer jurisdiction over them. The district court sustained their special appearance ruling that (1) neither of those defendants had engaged in activities in the state in their individual capacity that would satisfy the minimum contacts test, and (2) the Attorney General failed to allege sufficient facts to permit the court to disregard the "fiduciary shield" of the corporation and obtain personal jurisdiction over defendants for their activities undertaken on behalf of IEM.

The State appealed from sustension of the special appearances of Wolff and Sotelo. Since the order did not dispose of the claim against IEM and could not be considered a final adjudication, we treated the appeal as an application for interlocutory review, Iowa R.App.P. 1(c ), and granted it.

I. Procedural principles. In appeals from rulings on special appearances, we accept as true the allegations of the petition and the contents of uncontroverted affidavits. E & M Machine Tool Corp. v. Continental Machine Products, Inc., 316 N.W.2d 900, 904 (Iowa 1982); Svendsen v. Questor Corp., 304 N.W.2d 428, 429 (Iowa 1981); Hovey v. Elson, 303 N.W.2d 132, 135 (Iowa 1981); Creative Communication Consultants, Inc. v. Byers Transportation Co., Inc., 229 N.W.2d 266, 268 (Iowa 1975). The plaintiff has the burden to sustain the requisite jurisdiction, but when he establishes a prima facie case the defendant has the burden of producing evidence to rebut that showing. Larsen v. Scholl, 296 N.W.2d 785, 787 (Iowa 1980); Berkley International Co. v. Devine, 289 N.W.2d 600, 602 (Iowa 1980); Kagin's Numismatic Auctions, Inc. v. Criswell, 284 N.W.2d 224, 225 (Iowa 1979). The trial court's findings of fact have the effect of a jury verdict and are subject to challenge only if not supported by substantial evidence in the record; we are not bound, however, by the trial court's application of legal principles or its conclusions of law. Svendsen, 304 N.W.2d at 429; Hovey, 303 N.W.2d at 135; Larsen, 296 N.W.2d at 787; Berkley International, 289 N.W.2d at 602.

In Larsen we adopted a two-step test for analyzing the validity of a special appearance: (1) does a statute or rule authorize the exercise of jurisdiction? (2) does the exercise of jurisdiction offend the due process principles embodied in the United States Constitution? 296 N.W.2d at 787. See Svendsen, 304 N.W.2d at 429-30.

II. Long-arm statute. The Attorney General relies on section 617.3 of the Iowa Code to satisfy the first step of the Larsen test requiring that the exercise of jurisdiction be authorized by rule or statute. That section provides in relevant part:

If a nonresident person makes a contract with a resident of Iowa to be performed in whole or in part by either party in Iowa, or if such person commits a tort in whole or in part in Iowa against a resident of Iowa, such acts shall be deemed to be doing business in Iowa by such person for the purpose of service of process of original notice on such person under this section, and shall be deemed to constitute the appointment of the secretary of state of the state of Iowa to be the true and lawful attorney of such person upon whom may be served all lawful process or original notice in actions or proceedings arising from or growing out of such contract or tort.

Iowa Code § 617.3 (1979) (emphasis added).

In his petition the Attorney General alleges that Wolff and Sotelo employed deceptive and misleading advertising in an attempt to sell moleculetors to Iowa residents. He also alleges that Iowa residents relied on that advertising in purchasing several of the devices. Based on those contentions he alleges that defendants have committed a tort against Iowa residents. See Iowa Code § 714.16 (1979). Under the rule that we accept the allegations of the petition as true, we conclude that the Attorney General has carried his burden of showing that the exercise of jurisdiction over Wolff and Sotelo is authorized by the long-arm statute. See E & M Machine Tool, 316 N.W.2d at 904 (allegations of false advertising in Iowa and misrepresentations in telephone calls to state are sufficient to show alleged tort for purposes of long-arm statute).

III. Due process--the fiduciary shield doctrine. Turning to the second step of the Larsen test, we inquire whether the exercise of jurisdiction over Wolff and Sotelo would "offend traditional notions of fair play and substantial justice." World-Wide Volkswagen Corp. v. Woodson,...