The Legal Fiction That GlaxoSmithKline Is In Delaware

Let’s take a refresher course on 1L Civil Procedure. The federal courts have limited jurisdiction; they don’t exist to hear every case, they exist to hear cases that arise under federal law. Additionally, the federal courts have “diversity jurisdiction,” a narrow addition created “to provide a federal forum for important disputes where state courts might favor, or be perceived as favoring, home-state litigants.” Exxon Mobil Corp. v. Allapattah Services, Inc., 545 US 546, 553–554 (2005). Diversity jurisdiction is disfavored — the federal courts aren’t supposed to be hearing garden-variety state-law tort and contract lawsuits — and since the founding of the country federal courts have been instructed to avoid diversity jurisdiction unless there’s really an obvious risk of home-state favoritism.

 

For example, “In a case with multiple plaintiffs and multiple defendants, the presence in the action of a single plaintiff from the same State as a single defendant deprives the district court of original diversity jurisdiction over the entire action.” Id., citing Strawbridge v. Curtiss, 3 Cranch 267 (1806). The Founders didn’t waste time clogging the federal courts with state-law tort cases, and would deny diversity jurisdiction to corporate defendants if even a single shareholder was in the same state as the plaintiff. See Bank of United States v. Deveaux, 5 Cranch 91–92 (1809)(“In conformity with the spirit of the constitution, the federal courts have always inquired after the real parties. Although the nominal parties are really persons competent to sue in those courts, yet they will inquire into the character of the real litigants, and if they find them unable to sue there, they will dismiss the suit. They will allow no fiction to give jurisdiction to the court where the substance is wanting.”) Applying the same rule today would preclude large publicly-owned corporations from forum shopping for federal court, and rightly so: does anyone really believe that, e.g., Wal-Mart needs the protection of the federal courts because it can’t get a fair trial outside of Arkansas?

 

In Glenda Johnson v. SmithKline Beecham Corp, decided last Friday by the Third Circuit Court of Appeals, a woman from Louisiana and a man from Pennsylvania born with birth defects caused by their mothers‘ use of thalidomide (more about thalidomide here) during pregnancy filed a state-law negligence and strict liability suit in Pennsylvania state court against several corporations, including GlaxoSmithKline LLC. The defendants removed the case to federal court.

 

As was undisputed, GlaxoSmithKline LLC is “a large pharmaceutical company that is responsible for operating the U.S. division of GlaxoSmithKline PLC, the British entity that is the ‘global head’ of the GlaxoSmithKline group of companies.” As the Court continued, “[GlaxoSmithKline LLC’s] headquarters is still in Philadelphia, Pennsylvania, where it occupies 650,000 square feet of office space and employs 1,800 people. Its management is substantively intact. .. [GlaxoSmithKline LLC’s] managers operate from … three [offices] in Philadelphia and a fourth in North Carolina.”

 

It’s an easy case, no? It’s a state-law tort lawsuit filed in Pennsylvania. One of the plaintiffs is from Pennsylvania. One of the defendants plainly has its “nerve center” in Pennsylvania, and so, under the “principal place of business” test established by the Supreme Court’s 2010 Hertz v. Friend decision, “the majority of [GlaxoSmithKline LLC’s] executive and administrative functions are performed” in Pennsylvania, and thus GlaxoSmithKline LLC is plainly a citizen of Pennsylvania.

 

The case was thus remanded back to state court, right? 

 

Not quite. In a triumph of form over function, the Third Circuit held that GlaxoSmithKline LLC’s is actually a citizen of Delaware, because the sole member of GlaxoSmithKline LLC is GlaxoSmithKline Holdings, a Delaware entity that exists for the sole purpose of ratifying in Delaware all the decisions made in London (where GlaxoSmithKline PLC is based) or Philadelphia (where GlaxoSmithKline LLC). Thus, the case stays in federal court.

 

To reach that conclusion, the Third Circuit had to make two separate holdings.

 

The first holding was that, when it comes to limited liability companies, we should pretend that they don’t exist at all for purposes of jurisdiction, and determine citizenship solely by the citizenship of their members. This holding is plainly nonsensical: the whole purpose of diversity jurisdiction is, as the Supreme Court reiterated for the hundredth time back in 2005, “to provide a federal forum for important disputes where state courts might favor, or be perceived as favoring, home-state litigants,” Exxon Mobil Corp. It’s absurd to claim that an LLC with its headquarters in Philadelphia, Pennsylvania is somehow at a disadvantage when it is sued in the Pennsylvania state court.

 

The Third Circuit defended that holding by referring to Carden v. Arkoma Assocs., 494 U.S. 185 (1990), in which the Supreme Court held that for purposes of diversity of citizenship, a limited partnership is a citizen of each state in which any of its partners, limited or general, are citizens, and Zambelli Fireworks Mfg. Co., Inc. v. Wood, 592 F.3d 412, 419 (3d Cir. 2010), in which the Third Circuit itself extended that ruling to LLCs (because it is an unincorporated association, like a partnership). Neither of those cases really considered the possibility that an LLC would operate in a different state from which its members were citizens, and neither said courts should feel free to ignore the state in which the partnership or LLC is actually doing business, but there’s some support for the overall argument that the place of business doesn’t matter in old cases like United Steelworkers of America v. R.H. Bouligny, Inc., 382 U.S. 145 (1965)(finding that a union isn’t a citizen of the state in which it is based). It’s a silly rule, but one for which the Supreme Court is arguably responsible, even though the Supreme Court itself has never actually held that specifically.

 

Judge Ambro notes in his concurrence that the distinction between “corporations” and “unincorporated associations” in terms of jurisdiction has been widely criticized, and suggests Congress revisit it. But here’s the kicker: Congress already abrogated this rule, but it did so solely in the context of the Class Action Fairness Act, and thus did so solely to benefit defendants. See 28 U.S.C. § 1332(d)(10) (“[f]or the purpose of this subsection . . . an unincorporated association shall be deemed to be a citizen of the State where it has its principal place of business”).

 

To summarize: when it comes to manufacturing federal court jurisdiction to aid a defendant in a class action, an unincorporated association shall be deemed to be a citizen of the State where it has its principal place of business; when it comes to manufacturing federal court jurisdiction to aid a defendant in an individual lawsuit, an unincorporated association’s principal place of business is irrelevant. Heads defendants win, tails plaintiffs lose.

 

The second holding was that GlaxoSmithKline Holdings’ subleased ten-by-ten office that is rarely occupied is a “nerve center” where the “executive and administrative functions” of a 125-billion-dollar company are performed four times a year at meetings that last less than 30 minutes each, rather than a nominal entity with a single employee who works there 20 hours a year filing paperwork that has no business other than the ownership of GlaxoSmithKline LLC. Two of the three members didn’t even bother to show up for those quarterly meetings, they would literally phone it in.

 

The plaintiffs argued that, because GlaxoSmithKline Holdings exists for the sole purpose of holding ownership over GlaxoSmithKline LLC, the holding company’s principal place of business is actually Pennsylvania — after all, if the company exists solely to “hold” something, shouldn’t we look to the location of that something? Moreover, Pennsylvania is where all the real decision-making for the entity took place. The Third Circuit admitted that the plaintiff’s argument that had “logical appeal,” but, alas, logic has no particular sway in the law, and so the Third Circuit consciously avoided grappling with the issue by claiming its powers on appeal were restricted to reviewing the District Court’s factual findings for “clear error.”

 

Thus, the Third Circuit didn’t quite hold for sure that GlaxoSmithKline Holdings’ principal place of business was Delaware, but it did hold that the District Court’s holding of the same was “not clearly erroneous.” The ruling thus isn’t plainly applicable as res judicata to future courts willing to take a more realistic view of the company’s operations, but it is a blow to the two plaintiffs, and anyone with with a principled view of federal jurisdiction.

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