Our first stint in a law firm was on the transactional side.  Yes, it sounds crazy even to us, but we spent our first 18 months in the profession pulling all-nighters on triple-tier financings of leveraged buyouts, doing clueless due diligence in far-flung back-offices, drafting trust indentures, ‘slugging’ at the printers, and collecting acrylic cubes as gaudy monuments to all those 23 billable hour days.  There was one problem: we labored in pure, unadulterated idiocy.  We would negotiate incessantly over boilerplate whilst the truly important issues crept by us without our paying the slightest attention to them.  Eventually, we were visited by Feedback, that process law students think they want from their future employers but maybe really shouldn’t.  There is something to that ignorance-is-bliss business.  But we were not completely ignorant; we suspected that we were doing a rotten job.  It turns out that we were not alone in that assessment.  Our supervisor gently sat us down and reported that we were becoming widely known as the Deal Doofus.   Every hour we devoted to a matter required two or three hours from a senior associate to remedy.  Our transactional sojourn simply was not working out for anyone.  But we didn’t need to box up our personal belongings, hand in our key-card, and head for the exit just yet.  There was an alternative: get thee to the Litigation Department.  And so we did. 

It is possible we learned nothing from our brief duncitude in the Corporate Department save a little bit of humility.  Then again, we might have learned this: if you acquire a corporation via merger or stock sale, you also acquire that corporation’s tort liabilities.  By contrast, if you acquire the corporation’s assets, you probably don’t acquire the tort liabilities.  As a product liability litigator, we have come to know this as the issue of successor liability.  That issue enjoys its own mention in this blog’s index, which you can find to the lower-right side of this post.  Perhaps we do not bloviate over that topic nearly so much as preemption, but it can be important.  It can be a get-out-of-jail card, a way of extricating a client from a case before the hyper-expensive merits-discovery machine gets rolling.

Shortly before the end of 2017, we wrote a post entitled “EDNY Rejects Successor Liability in Hip Implant Case.”  That case involved product liability claims against a hip implant manufactured by Portland, an Australian company, that had sold its assets before the plaintiffs filed their action.  One of the parties sued by the plaintiffs was Portland, but that went nowhere because it was apparently judgment proof.  The plaintiffs also sued the company that acquired the assets, including the hip implant business.  Applying both New York law (because it governed) and Pennsylvania law (because it was fun),  the court held that there was no successor liability because the acquirer had not expressly assumed liability, there was no continuity of ownership or management, it was not a mere continuation of the business, and the acquisition was not a fraudulent effort to evade liability.  The court also looked at whether the product line exception – available under Pennsylvania but not New York law – might save the case for the plaintiffs.  The answer was “No” because the acquisition did not cause the former company’s insolvency, and the acquirer did not purchase the predecessor’s good will.  Part of the rationale of the product line exception is that a company should not profit from the predecessor’s good will whilst also dodging responsibility.  But that did not happen the in the EDNY case.

It also did not happen in the case we discuss today, Gentle v. Portland Orthopaedics Ltd., 2018 WL 771333 (E.D. Wash. Feb. 7, 2018).  That case applied Washington state law and also concluded that successor liability, whether viewed through traditional principles or the dreaded product line exception, did not apply to the product liability claims.  The claims were similar to the EDNY case. The defendants were similar.  The analyses were similar.  So were the results.  Perhaps we have an area of drug and device liability law that is pretty well resolved.   

In Gentle, the plaintiffs argued that the defendants were liable as manufacturers/sellers under the doctrines of successor liability, acting in concert, agency, and vicarious liability.  The actual manufacturer (Portland, just as in the EDNY case we blogged about last December) went bankrupt.  The moving defendants acquired substantially all the assets associated with the hip implant product line.  Standard successor liability would not work here, because we have none of the following:  (1) the purchaser expressly or impliedly agrees to assume the obligations of the predecessor; (2) the transaction amounts to a consolidation or merger; (3) the purchasing corporation is merely a continuation of the predecessor; or (4) the transaction is fraudulent and intended to escape liability.  But the Washington Supreme Court adopted the product line liability rule, so we’re not done yet. 

The theory behind the product line liability rule is that the “benefit of being able to take over a going concern manufacturing a specific product line is necessarily burdened with potential product liability linked to the product line.” To prove product line liability under Washington law, a plaintiff must show that the product line transferee: has acquired virtually all of the transferor’s assets; holds itself out as a continuation of the transferor by producing the same product line under a similar name; and benefits from the transferor’s goodwill.  Washington law also limits the product line liability rule to cases where the predecessor corporation must be unavailable as a source for the plaintiff’s remedy and the successor corporation must have contributed to the predecessor’s unavailability.  The plaintiff argued that that last requirement of causation was not truly part of the test, but lost, and that’s too bad for the plaintiff because the court concluded that the successor companies “did not cause the destruction of Plaintiffs’ remedy against Portland Ortho.”  Further, the plaintiffs did not demonstrate that the defendants had acquired substantially all of Portland’s assets.  For instance, they did not acquire assets related to the manufacture and distribution of the hip implant product line outside the United States, nor did they acquire accounts receivable, cash, contracts, or goodwill.  Just as in the EDNY case, the failure to acquire goodwill was a key point in the court’s reasoning:  “Under Washington law, product line liability contemplates the benefits derived from the goodwill of the corporation, not a single product line.”  Indeed, the plaintiffs conceded that the original manufacturer had no goodwill at the time of the asset purchase.  Thus, the Gentle court had no problem granting summary judgment to the plaintiff.

So if any of you litigators have to play transactional lawyer sometime in the future, or if you are merely rendering advice to colleagues working on an acquisition, do not be shy about advising them to choose an asset purchase over a stock purchase if possible, to find some assets to exclude from the deal, and no-way-no-how buy the goodwill.  Maybe the result is that you’ll have one less litigation to handle down the road, or maybe such litigation will be way easier to win.  Either way, your client will likely be happier.

 

 

Happy birthday, Christopher Plummer.   The great Canadian actor turns 88 today, and seems as vibrant as ever.  What a marvelous career Plummer has had.  He is a preeminent Shakespearean actor.  We saw him play Iago to James Earl Jones’s Othello on Broadway 35 years ago.  Of course, most people remember Plummer as Captain Von Trapp in The Sound of Music (1965), a film for which Plummer reserves enormous contempt, referring to it (if at all) as “The Sound of Mucus.” Much more recently, we enjoyed Plummer’s flinty interpretation of Ebenezer Scrooge in The Man Who Invented Christmas.  And there has been abundant publicity over Plummer’s replacement of Kevin Spacey in House of Cards.  It seems a thankless task to succeed someone in such scandalous circumstances.  But we’ll thank Plummer, if only because he supplied a (strained) segue into today’s post, which is about successor liability.

 

More specifically, we have a pro-defense decision on successor liability with respect to a bankrupt medical device manufacturer. The court holds that there is no liability for design and manufacturing claims under either NY or PA law – including PA’s peculiar product line liability theory. The court concludes as a matter of law that product line liability applies only to manufacturers, not to distributors. But there is a fly in the ointment: the court’s conclusion on the failure to warn claim is rather muddled – to the point where that cause of action is not concluded at all.

 

In Deluca v. Portland Orthopaedics Ltd., et al., 2017 U.S. Dist. LEXIS 198962 (E.D.N.Y. Dec. 2, 2017), a husband and wife sued for injuries relating to a failed hip implant. The husband and wife lived in New York. That is where the 2009 implant operation took place. That is also where the injury – the 2012 failure of the implant – took place. The implant was manufactured by Portland, an Australian company that had entered into receivership shortly before the plaintiff’s implant operation and that had sold off its assets before the implant failed three years later. The plaintiffs sued Portland, as well as the Singapore successor company and its manufacturing and distributing affiliates, which were incorporated in Pennsylvania (not something we’d ever recommend doing). The complaint included claims for strict liability (failure to warn, manufacturing defect, and design defect), negligence, and breach of warranty – the usual. Portland never appeared on the case and was dismissed. One presumes it would be judgment-proof. The remaining defendants moved for summary judgment, and their arguments centered around successor liability – or, to be precise, absence of successor liability. The court sensibly held that New York law governs because that is where the injury occurred, but the court also treats us to an analysis under Pennsylvania law, where it arrives at the same destination, albeit via a slightly more complicated route.

 

The successor corporation purchased certain assets of Portland. There was no purchase of stock or any formal merger. Under those circumstances, the successor typically does not acquire prior tort liabilities. That is the law in both New York and Pennsylvania. There are some exceptions to this general rule, but none applies here.

 

New York recognizes four possible exceptions, none of which saved the plaintiffs’ design or manufacturing defect claims:

 

First, the successor did not expressly or impliedly assume prior liabilities. In fact, those liabilities were expressly excluded.

Second, the de facto merger exception does not apply. There was no continuity of ownership, management, or physical locations. In addition, the seller continued to exist, even if only in gossamer form.

Third, the “mere continuation” exception does not apply. Again, the seller lingered, and there was no hint of overlapping owners or managers.

Fourth, there is no evidence that the asset sale was a fraudulent effort to evade liability.

 

Pennsylvania adds another factor – whether the transfer was made without adequate consideration and without provisions for creditors of the selling corporation. That factor also does not apply here. More significantly, or problematically, some Pennsylvania courts have announced a “product line” exception, an extreme pro-plaintiff doctrine left over from the 1980s. The Deluca court is not persuaded that this exception has been endorsed by the Pennsylvania Supreme Court. And remember that the Deluca court has chosen New York law to govern this case. Nevertheless, just in case some appellate court might get dodgy, the Deluca court goes through the motions of measuring the evidence in the case against the product line exception and concludes that it does not help the plaintiffs here. The factors animating the product line exception are pretty fuzzy: (1) whether the purchase of the product line caused the “virtual destruction of the plaintiff’s remedies against the original manufacturer,” (2) does the successor have the ability to assume the original manufacturer’s “risk-spreading role,” and (3) the fairness of requiring the successor to assume responsibility insofar as the successor was enjoying the original manufacturer’s good will.

 

The Deluca court easily dispensed with these factors by pointing to some important facts:

 

  1. Portland’s insolvency preceded the asset sale, and was certainly not caused by it.
  2. The asset sale was not prompted by any scheme to evade product liability claims. At the time of the sale, the problem of implant failures was not on the radar screen.
  3. The purchase agreement explicitly excluded goodwill as well as related liabilities.

 

Further, the Deluca court held that the product line exception could not be used against the defendants who were never involved in manufacturing. Thus, even if someone wanted to shape the gooey product line factors so as to preserve claims against a successor, the distributor defendants would still be off the hook.

 

The plaintiffs requested additional discovery on the successor liability question. The Deluca court refused that request on both procedural and substantive grounds. The procedural problem for the plaintiffs was that they failed to submit a Rule 56(d) affidavit documenting what discovery would be sought and why it wasn’t obtained earlier. The substantive ground was futility. Even from the face of the plaintiff’s’ arguments, it was clear to the court that the request was a mere fishing expedition, with no justification for the delay and no expectation that anything reeled in would make a difference.

 

So far so good for the defense. But the court also kept the failure to warn claim alive, at least for now. New York law recognizes that successor corporations sometimes have an independent duty to warn. That duty arises not from succession of the prior manufacturer’s duties, but from the successors’ relationship with customers. Here, the plaintiffs alleged that a sales representative working for one of the defendants was in a position to provide additional warnings to the treating doctor. We do not know what those warnings would be, and are not sure how they would fit into the chronology of the case. The defendants pointed to the Instructions for Use as containing ample warnings. The Deluca court responded that it is unclear whether the physician received the IFU or whether the warnings were in fact adequate.

 

To our eyes, those questions should not be enough to stave off summary judgment. How could the doctor not have access to the IFU? Is there any suggestion that the defendants did something to make the IFU unavailable? Seems unlikely. How is the adequacy of the warning not an issue of law? And is there any open issue of warning causation? That is, did the plaintiffs proffer any evidence that a different warning – whatever that might be – would have changed the doctor’s mind in such a way as to avoid the alleged injury? On these points, the court’s reasoning is full of holes.  We suspect that the plaintiffs will ultimately be unable to fill those holes with evidence.  Then the defendants will be in a position to borrow a title from the Bard: all’s well that ends well.