This post comes only from the Dechert side of the blog since Reed Smith was involved in the appeal that is the subject of the post.
Usually plaintiffs’ lawyers have the simpler story to tell. They’ll tell you that they drive on the highway while defense lawyers wander about on side roads. If this is true, however, it’s usually because the defense is responding to accusations tossed out by plaintiffs, and responding is rarely simple. But the roles were reversed in the diversity jurisdiction dispute addressed by the Third Circuit in Johnson v. SmithKline Beecham Corporation, Slip Op.(3d Cir. June 7, 2013). The defense had the much simpler argument, an argument that won at the district court level (before two judges, losing before one other) and, as we discuss below, just won before the Third Circuit.
The plaintiffs originally filed suit in the Philadelphia Court of Common Pleas, naming a number of defendants, including GlaxoSmithKline’s operating company, GlaxoSmithKline LLC (“GSK LLC”) and GSK LLC’s sole member, GlaxoSmithKline Holdings (“GSK Holdings”). The defendants believed that there was complete diversity and removed the lawsuit to federal court. Plaintiffs believed otherwise, and moved to remand. The key issue was the citizenship of the operating company, GSK LLC. Plaintiffs argued, among other things, that GSK LLC was a citizen of Pennsylvania, the forum state, and was not diverse from one of the plaintiffs, a Pennsylvania citizen. The defense argued that GSK LLC was a Delaware citizen, making the case removable.
The defense’s argument was simple. GSK LLC is a limited liability company, and such non-corporate business organizations are citizens of the state or states in which each of their members are citizens. Slip. Op. at 21 (citing Carden v. Arkoma Assocs., 494 U.S. 185, 195-96 (1990)). GSK LLC had only one member: GSK Holding, a corporation. So what was its citizenship? By statute (21 USC 1332 (c)), a corporation is a citizen of both the state in which it’s incorporated and the state in which it has its principal place of business. In both instances, that’s Delaware for GSK Holdings. Accordingly, GSK Holdings is a Delaware citizen and so is GSK LLC. Done. Fairly simple. There’s diversity.
Plaintiffs’ argument took a more complicated path. Like the defense, they knew that GSK LLC’s citizenship would turn on that of its sole member, GSK Holdings. They wanted GSK Holdings to be a Pennsylvania citizen to destroy diversity. But they also knew that GSK Holdings was incorporated in Delaware. So they were left to argue that, in addition to being a Delaware citizen, GSK Holdings was also a Pennsylvania citizen because that’s where it had its principal place of business. And, to determine a corporation’s principal place of business under Supreme Court precedent, courts must look for the “nerve center” or “brain” of the corporation.
The problem for Plaintiffs, though, was that GSK Holding’s only business, for the most part, was to own GSK LLC. It is after all a holding company. And the “nerve center” from which GSK Holdings accomplished that was Delaware, not Pennsylvania. See Slip. Op. at 33-41. It had its office, albeit a small one, in Delaware, and it held its board meetings in Delaware. It didn’t conduct a lot of business, but it did what was needed and it did it in Delaware.
So here’s where plaintiff made it complicated – way too complicated. They came up with an argument that the court shouldn’t look to GSK Holding’s ownership activities to determine its citizenship. They wanted the court instead to look back at the management activities of GSK LLC. Why? Because GSK Holdings could have had the power under Delaware law to manage GSK LLC’s everyday business but chose from the start to transfer those management duties to GSK LLC itself. Plaintiffs argued that this transfer somehow wasn’t fair. They wanted the court to pretend that GSK Holdings was more than a holding company and was managing GSK LLC’s business. And since GSK LLC was doing that managing in Philadelphia, plaintiffs wanted the court to pretend that GSK Holdings was doing it there instead. That would shift GSK Holdings’ principal place of business to Pennsylvania and make it, along with GSK LLC, a Pennsylvania citizen, destroying diversity.
To recap, plaintiffs argued that the citizenship of the operating company, GSK LLC, should be determined by the citizenship of its sole member, GSK Holding, whose citizenship should be determined by looking back at the location of GSK LLC’s management activities, which would then establish the citizenship of GSK Holdings and, by imputation, establish GSK LLC as a Pennsylvania citizen. Got it?
Believe it or not, that argument lost.
The Third Circuit described this argument a number of ways, including an “inverted approach,” “reversing the . . . analysis entirely,” and “a novel delegation theory.” See Slip Op. at 25, 27-28. The Supreme Court wants to keep jurisdictional determinations simple, particularly determinations of a corporation’s principal place of business. It has “placed primary weight upon the need for judicial administration of a jurisdictional statute to remain as simple as possible.” Slip Op. at 20-21 (quoting Hertz Corp. v. Friend, 130 S. Ct. 1181, 1186 (2010)). Jurisdictional questions shouldn’t be more complicated than the litigations themselves. And so plaintiffs lost.
The plaintiffs’ chief complaint seems to have rested on the fact that the operating company that preceded GSK LLC was a corporation that was a Pennsylvania citizen and that – unfairly in plaintiffs’ minds – when GSK changed that corporation to GSK LLC, its citizenship moved to Delaware while GSK’s business operations remained in the same place, Pennsylvania. See Slip op. at 31. But changes in business structures have real meaning under the law. They are done for many legitimate purposes. The mere fact that a company changes its structure to accomplish a particular outcome or goals does not make the change unfair or nefarious. It simply means that the company is working within the law.
Keeping it simple doesn’t only mean making the simple argument. It means that courts should respect the way in which business organization and jurisdictional laws treat organizational structures. Adopting an all-out, eye-of-the-beholder, fairness analysis would not only ignore those laws but result in complicated, inconsistent decisions.
Now, parties are not without remedy if they believe that a business organization is engaging in jurisdictional manipulation. The Third Circuit stated that, if it finds that a structural change was done for purposes of “jurisdictional manipulation,” it could look behind the change and find the true principal place of business. See Slip op. at 42-44. But that wasn’t the case with GSK. Both the district court and Third Circuit found that the structural change was done for legitimate tax purposes, not jurisdictional manipulation.
Plaintiffs shouldn’t feel singled out. Being on the wrong end of a jurisdictional determination related to a business organization is nothing new, and it’s not unique to product liability plaintiffs. We’ve experience it and would venture to guess that many of our readers have too. Partnerships, for instance, can have one member who, by virtue of her citizenship, destroys diversity and takes a case out of federal court. That outcome doesn’t change solely because that particular partner has little to no actual involvement in running the partnership’s business and there are many other partners who are actively involved. The application of jurisdictional and business organization law doesn’t change just because one side in a particular litigation finds it unfair. As the Third Circuit wrote, “as troubling as those like Plaintiff may find it, form matters for purposes of establishing jurisdiction, and the distinction between a corporation and an unincorporated entity has tremendous jurisdictional significance.” See Slip op. at 32.
The Third Circuit had a lot more to say on jurisdictional issues than we’ve addressed here. If you’re interested, it’s a long but informative read.