Third Circuit Set To Clarify Method for Determining Corporate Citizenship of Holding Companies for Purposes of Removal

There is a split of authority among the district courts in the Third Circuit concerning how to determine the corporate citizenship of a Limited Liability Company (‘LLC”) in the context of evaluating removal jurisdiction. The U.S. Court of Appeals for the Third Circuit is set to resolve the issue with a case now before the court. This issue arises from multiple cases alleging birth defects related to thalidomide – a drug developed, produced and distributed by defendant GlaxoSmithKline, LLC (“GSK”).

As experienced product liability practitioners know, the ability to remove a case to federal court can dramatically change a defendant’s chances of success on the merits. Factors such as the stricter expert admissibility standards, realistic chances of prevailing on meritorious summary judgment motions, and the moderating impact of a unanimous verdict generally make federal courts a more attractive venue for most product liability defendants compared to state courts.

As experienced practitioners also know, for removal based on diversity jurisdiction purposes, a corporate defendant is considered a citizen of two states: the state of incorporation and the state of its principal place of business.  In Hertz Corp. v. Friend, 559 U.S. 77 (2010), the U.S. Supreme Court held that a corporation’s “principal place of business” is its “nerve center” where its officers conduct the corporation’s “important business” – i.e., where the officers “direct, control, and coordinate the corporation’s activities.”

An LLC, however, is not a pure corporation and is treated differently for removal purposes. An LLC is a hybrid entity created by state law that combines the limited liability function of a corporate form, with the ability to have “pass-through” treatment of income similar to partnerships.  Just as in the case of pure partnerships, for removal purposes, the citizenship of an LLC “is determined by the citizenship of its members.”  Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 420 (3d Cir. 2010).  Often times, however, the “member” of the LLC is merely a “holding company” (as opposed to an “operating company” that actually runs the business).  The question before the Third Circuit is how should the court apply the “nerve center” test to an LLC like GSK, where the “important business” of the holding company (i.e., the sole member of the LLC) is to meet several times per year for 15 minutes in a 10’ by 10’ rented room in order to ratify decisions already made by the operating company in Philadelphia?   

The District Courts in the Third Circuit have had multiple opportunities to consider this issue. In Johnson v. Smithkline Beecham Corp., 853 F. Supp. 2d 487 (E.D. Pa. 2012), U.S. District Judge Paul S. Diamond held that the “nerve center” of GSK’s holding company is located in Delaware because that is where its ownership decisions are made.  In contrast, U.S. District Judge Timothy J. Savage considered the exact same facts in Brewer v. SmithKline Beecham Corp., 774 F. Supp. 2d 721 (E.D. Pa. 2011), and held that because the holding company chose to delegate most of its decision-making to the operating company, which directed, controlled and coordinated GSK’s business affairs from Philadelphia, the holding company’s “nerve center” was located in Pennsylvania. Other cases have similarly come out both against and in favor of GSK on this issue.  Compare Patton v. SmithKline Beecham Corp., 2011 U.S. Dist. LEXIS 143724 (E.D. Pa. Dec. 14, 2011) (GSK holding company’s “nerve center” located in Pennsylvania), and Maldonado v. SmithKline Beecham Corp., 841 F. Supp. 2d 890 (E.D. Pa. 2011) (same), with White v. SmithKline Beecham Corp., 2010 U.S. Dist. LEXIS 79520 (E.D. Pa. Aug. 5, 2010) (GSK holding company’s “nerve center” located in Delaware).

Until the Third Circuit settles this issue, defendants removing a case to federal court need to pay special attention to instances involving LLC entities.

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