United States: Personal Jurisdiction Through Alter Ego Fails In Illinois

Last Updated: July 5 2018
Article by John Sullivan

This post comes only from the Cozen O'Connor side of the blog.

Plaintiffs' lawyers wanted to file a class action premised on the recovery of costs spent monitoring and replacing allegedly defective defibrillators manufactured by St. Jude Medical LLC. And they wanted to file it in Illinois. So they recruited a putative class representative, a union health benefits trust, and they filed their complaint, ASEA/AFSCME Local Health 52 Health Benefits Trust v. St. Jude Medical LLC, in Illinois federal court. But they then ran into a problem. St. Jude is not from Illinois. It is a Delaware LLC with Minnesota headquarters. In the post-Bauman personal jurisdiction world, St. Jude is considered to be at "home" only in those two states, not Illinois. So the Illinois court did not have general jurisdiction over St. Jude. Nor did it have specific jurisdiction. The health benefits trust plaintiff, ASEA, didn't buy the St. Jude defibrillators in Illinois, nor did its beneficiaries have them implanted there. It didn't matter that St. Jude marketed and sold defibrillators in Illinois. That fact doesn't create the connection needed for specific jurisdiction. 2018 WL 3022670, at *4 (N.D. Ill. June 18, 2018). So the Illinois court could not exert personal jurisdiction over St. Jude.

But the plaintiffs' lawyers thought they had a way around that. St. Jude had been recently acquired by Abbott Laboratories. And Abbott is at "home" in Illinois. It is incorporated and headquartered there. So the plaintiffs' lawyers asked the court to look to St. Jude's parent, not St. Jude itself, in determining personal jurisdiction. The problem with that approach, however, was that St. Jude is a limited liability company. The very name of that type of business entity—"limited liability company"—tells you how our legal system treats it. Holders of membership interests in a limited liability company are shielded from liability for the company's debts and judgments. The only way around that general rule is to successfully assert an "alter ego" theory, generally known as piercing the corporate veil. If ASEA could do that, the court could then ignore St. Jude's independent existence as a company and treat Abbott as the real defendant, thus presumably creating personal jurisdiction. And, while that approach might sound promising for the plaintiffs' lawyers, the Illinois court very quickly reminded them of how hard—how very, very hard—it is to succeed on an "alter ego" claim.

Since St. Jude Medical LLC was formed in Delaware, Delaware law applied to the "alter ego" analysis. And Delaware law does not lightly lift the corporate veil. It requires an intensive inquiry into whether the company is in fact a sham that is rife with serious financial improprieties and management manipulation intended to defraud the people with which the company does business. It is only found in rare cases:

Under Delaware law, courts disregard the corporate form only in exceptional cases. Determining whether to do so requires an intensive inquiry which takes into consideration (1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the controlling shareholder siphoned company funds; and (5) whether the company functioned as a façade for the controlling shareholder. In addition to these factors, Delaware's courts have required an element of fraud or similar injustice in order to pierce the corporate veil.

Id. at *3 (citations omitted). And because an alter ego claim is generally based in fraud, courts often apply a heightened pleading standard.

So pleading an "alter ego" claim is extraordinarily difficult. ASEA did not come close. Rather than plead particulars of a sham financial structure and non-existent management, ASEA pointed to surface level actions and statements by St. Jude's parent, Abbott, all of which are the types of actions ordinarily seen in the workaday world of a corporate holding structure.

For instance, plaintiff alleged that Abbott itself claimed responsibility for the recall of the defibrillators, issued updates on the recall using the Abbot name, communicated with the FDA using the Abbott name, took over the defibrillator manufacturing facility, advertised that "St. Jude Medical is now Abbott," shared officers, managers and facilities with St. Jude, and even stated that St. Jude's operations are controlled by Abbott. Id. These allegations are based on the faulty premise that Abbott's "control" of St. Jude creates an alter ego claim. It does not. Abbott owns St. Jude. It is expected to control it. "Controlling shareholder" is presumed in the very Delaware test quoted above. And so exertion of control does not satisfy the alter ego inquiry. The real test is whether St. Jude was operated, or controlled, as a sham entity with inadequate capitalization and make-believe management for the purpose of defrauding others. And, as the court held, the plaintiff's allegations addressed none of this:

These allegations do not call into question St. Jude's capitalization, solvency, or recognition of corporate formalities. Cf. City of Greenville, Ill. v. Syngenta Crop Prot., Inc., 830 F. Supp. 2d 550, 563 (S.D. Ill. 2011) (piercing the corporate veil where evidence showed that the subsidiary company's board unanimously rubber-stamped the parent company's recommendations on a regular basis without discussion and where the subsidiaries employees were sometimes directly managed by employees of the parent company). Nor do they suggest that Abbott was siphoning or diverting funds from St. Jude. At most, the allegations in the complaint suggest that Abbott sometimes spoke on behalf of St. Jude or sometimes represented that it had succeeded St. Jude. See LaSalle Nat. Bank v. Vitro, Sociedad Anonima, 85 F. Supp. 2d 857, 865 (N.D. Ill. 2000) (Nordberg, J.) ("Personal jurisdiction is based on actual evidence of control ... rather than on a corporation's general descriptions. Promotional statements made on a public website do not precisely convey the operative corporate structure."). Absent more, however, the allegations do not suggest that unfairness or injustice has resulted from the relationship between St. Jude and Abbott, as would be necessary to justify piercing the corporate veil under Delaware law. Doberstein v. G-P Indus., Inc., No. CV 9995-VCP, 2015 WL 6606484, at *4 (Del. Ch. 2015).

Id.

With the plaintiff unable to pierce the corporate (really, LLC) veil, the Illinois court was back to where it started, which is with no personal jurisdiction over St. Jude: "Accordingly, this Court does not have general jurisdiction over St. Jude because it is not "at home" in the state of Illinois." Id. It dismissed the action for lack of personal jurisdiction.

We expect this to be the ordinary outcome in attempts by plaintiffs' lawyers to establish personal jurisdiction through an alter ego theory in drug and device cases. Not only is such a claim extraordinarily hard to plead and harder to prove, but drug and device cases usually involve large pharmaceutical and medical device companies with well-established, well-advised corporate structures. Under those circumstances, it will be rare that plaintiffs' lawyers will be able to piece together the type of extraordinary facts necessary to successfully plead and prove an alter ego claim.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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