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This is the second time in two years that we have written the Drug and Device Law Christmas blogpost. Last year, your dedicated blogger posted on Christmas Day a nice little piece on innovator liability that we are sure you all read while listening to Andy Williams, drinking egg nog, and roasting chestnuts on an open fire (note: If you would rather not light an open fire, a gas grill is a very capable substitute for roasting chestnuts, if that is your thing.) If you did not read our post last year, we forgive you.  And whether you read us regularly or just pop in from time to time to read about preemption, please accept our holiday greetings and our undying gratitude.  To all our readers, Happy Holidays from the DDLB!

Our gift to you on this Friday, December 23, 2016, is a blogpost discussing a topic on which we have not written a lot—alter ego personal jurisdiction.  That is when a court takes jurisdiction over a corporation based on the forum contacts of a corporate subsidiary.  We wrote about a district court rejecting alter ego jurisdiction here, but there is not much else discussing the subject in detail in the archive. That could be because successful examples of alter ego jurisdiction are exceedingly rare.  The most common scenario is where plaintiffs sue an alleged corporate wrongdoer and try to hale into court not only the alleged wrongdoer, but also its out-of-state corporate parent.  Their motivation is not a mystery:  Plaintiffs want more defendants, larger balance sheets, and deeper pockets to reach into.  And if the corporate parent has a recognizable “big” name, that’s all the better.

Unfortunately for plaintiffs and fortunately for the defense, this transparent ploy rarely works, and it did not work in a recent hip replacement case, Goldthrip v. Johnson & Johnson, No. 15-00651-KD-B, 2016 U.S. Dist. LEXIS 170801 (S.D. Ala. Dec. 8, 2016).  In Goldthrip, the plaintiffs sued not only the company that made and sold the hip implant, but also its corporate parent.  There were, however, two problems:  First, the plaintiffs sued in Alabama, but the parent corporation was a New Jersey company.  Second, the parent corporation neither made nor sold products; it was a holding company, as parent companies often tend to be. Id. at **2-4.

The issue was whether the district court could assert personal jurisdiction over the parent, and the answer was that it could not. Following Bauman, the district court quickly rejected the argument that the New Jersey parent was “at home” in Alabama, which put an end to general jurisdiction. Id. at *9.  The court also lacked specific jurisdiction over the New Jersey parent because the company did not engage in any “suit-related conduct” that created a “substantial connection with the forum state.” Id. at **12-13.  The plaintiffs therefore urged the court to find personal jurisdiction over the parent based on the subsidiary’s forum contacts because the companies “were so intermingled and joined,” i.e., that one was the alter ego of the other. Id. at *14.

“Alter ego” jurisdiction is a form of vicarious jurisdiction, and the concept probably survives Bauman.  The same cannot be said for a lesser form of vicarious jurisdiction—agency jurisdiction.  Applied mainly in the Ninth Circuit, agency jurisdiction allowed courts to take jurisdiction over foreign parent corporations where the local subsidiary “performs services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation’s own officials would undertake to perform substantially similar services.” Daimler AG v. Bauman, 134 S. Ct. 746, 758-59 (2014) (citations omitted).  In other words, a court could take “agency” jurisdiction over a foreign corporation whenever its local subsidiary did something “important” to the business. Id. at 759.

Bauman put a stake through the heart of agency jurisdiction, in a portion of the opinion that we think is underappreciated. The obvious problem with agency jurisdiction is that it is both overly broad and unhinged from any measure of due process.  The Supreme Court agreed, holding that the “agency theory thus appears to subject foreign corporations to general jurisdiction whenever they have an in-state subsidiary or affiliate, an outcome that would sweep beyond even the ‘sprawling view of general jurisdiction’ we rejected in Goodyear.” Id. at 759-60.  There you have it—agency jurisdiction is dead.  The next time someone rolls out agency jurisdiction in opposition to your motion to dismiss, pull the Bauman arrow out of your quiver.  It should strike home.

Back then to alter ego jurisdiction and the Goldthrip case.  The New Jersey parent moved to dismiss the case, and the key to winning was the affidavit it submitted in support of the motion.  In fact, if you are looking for a roadmap showing how to push back on claims of alter ego jurisdiction, the district court’s order in Goldthrip is a pretty good place to start.  The affidavit stated the New Jersey parent was a holding company; that it did not make or sell the devices; that it does not do business under the subsidiary’s name; that the two corporations maintain their own officers and directors, are separate legal entities, maintain their own records and by-laws, own/operate their own facilities, are fully capitalized and responsible for their own businesses; and that both corporations maintain their own accounts and keep their hands out of the others’ assets. Id. at **17-18.  We did some paraphrasing there, but you get the idea.

What did the plaintiffs say in response? They argued that the New Jersey parent was involved in lawsuits against the subsidiary and that each company displayed the other’s logo on its website.  That was not nearly enough.  As the district court observed, federal courts have “consistently acknowledged that it is compatible with due process for a court to exercise personal jurisdiction over [a corporation] that would not ordinarily be subject to personal jurisdiction in that court when the . . . corporation is an alter ego . . . of a corporation that would be subject to personal jurisdiction in that court.” Id. at *14 (citations omitted).

However, “[p]iercing the corporate veil is not a power that is exercised lightly.” Id. Mere “dominion and control” do not suffice, because any wholly owned subsidiary is under the dominion and control of its parent. Id. at **14-15.  If that were the test, there would be no jurisdictional distinction between parent and child.  Applying Alabama law, the district court held that the plaintiff had to show (1) that the parent had complete control over the subsidiary such that the subsidiary had “no separate mind, will or existence of its own”; (2) that the parent “misused” the control; and (3) the misuse of the corporation caused the harm complained of. Id. at *15.

Applying this rule to the facts, the district court had no difficulty ruling that “the evidence presented by [the New Jersey parent] clearly shows that [the two companies] are separate corporations.” Id. at *18.  This is the correct result under the law, but it is also eminently fair.  There was no showing, or even suggestion, that the subsidiary was incapable of answering for itself or that the parent’s presence in the lawsuit was at all necessary for the sake of justice.  We are tempted to wish the New Jersey parent a “Merry Christmas,” but that would imply that this order was a gift.  It was not.  It was a well-deserved solution to a lawsuit that never should have been filed against it.