Tuesday, November 06, 2012

What is a Nerve Center?

            We’ve heard the term used often enough.  New York is the financial nerve center of our country.  A kitchen is the nerve center of a home.  It’s the title of show on the Science Channel.  There’s even the medical definition: a cluster of nerve cells governing a specific bodily process.  Perhaps it was actually that definition that the Supreme Court had in mind when it adopted the “nerve center” test for determining a company’s principal place of business.  According to the Supreme Court, a corporation’s principal place of business is “the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities.”  Hertz Corp. v Friend, 130 S.Ct. 1181, 1186 (2010).  But what does that mean and why is it important for us?
            The second question is easy – a lot of prescription drug/device litigation originates in state courts that defendants would prefer not to be in.  For instance, plaintiffs from all around the country have flocked to both Pennsylvania and New Jersey in an effort to avoid federal court.  That's because, over the years, a lot of large manufacturers have chosen to locate here for what we assume to be a host of good and legitimate business reasons.  But the litigation climate in both these states leaves quite a bit to be desired.  So, to get to federal court, you have to know (or be prepared to argue) where your client’s “nerve center” is.
            That was the one of the central questions in Moore v. Johnson & Johnson, No. 12-490, slip op. (E.D. Pa. Nov. 1, 2012).  It’s a Tylenol case and the Tylenol in question was produced by a subsidiary of Johnson & Johnson, McNeil-PPC, Inc. (also a defendant) at a Pennsylvania facility.  Plaintiff also sued two J&J executives and Costco (where plaintiff bought the Tylenol).  Plaintiff is from Washington state but brought her suit in Pennsylvania.  Defendants removed and plaintiffs filed a motion to remand arguing in part that McNeil-PPC is a citizen of Pennsylvania and therefore barred from removing a Pennsylvania state court action.  Slip op. at 2.  Plaintiff contended that McNeil’s “nerve center” was in Pennsylvania because three out of four of its highest-ranking officers are based in Pennsylvania.  Id. at 5.    
            Defendant, on the other hand, claimed McNeil’s principal place of business was in New Jersey.  The basis for this position is that McNeil’s Pennsylvania-based officers’ “actual management responsibilities are limited to that division.”  Id. at 6.  Meanwhile, defendants argued that
The bulk of the management functions for McNeil-PPC and other J&J subsidiaries . . . are carried out by executives associated with J&J’s Family of Consumer Companies (“FCC”). . . overseen by a Group Operating Committee (“GOC”) that exercises high-level direction for the corporate entities within its sector. 
Id.  And that the GOC and FCC are made of people who work in Skillman, New Jersey.  Id. at 6-7.   However, with the exception of one, “none of the senior executives running operations for the FCC are officers of McNeil-PPC, nor are they employees of that particular corporation.  They are employed by other J&J entities.”  Id. at 7.  So, to agree with defendants – which the court did -- it had to “consider activities of executives outside a party’s corporate structure.”  Id. at 17.  That sounds a lot like piercing the corporate veil – something corporate defendants usually vehemently oppose.  So, while defendants got the result they wanted in this case – remand denied -- we actually aren’t sure how to feel about this decision.
            Now, while neither Hertz nor any other Court of Appeals since has opined on whether a company’s “nerve center” can exist outside the corporation, the Moore court did find some pre-Hertz authority for concluding that it can.  We’ll direct you to that portion of the opinion at pages 18-20 if you are interested in those cases.  And while we admit to not having read or researched these decisions, the concept of being able to look beyond the corporate structure for purposes of pinpointing a principal place of business feels like a dent in our corporate veil shield.  For instance the Moore decision is based on findings such as:  “The by-laws may confer on [McNeil’s Pennsylvania-based president] authority to supervise all of McNeil-PPC’s business activities, but the evidence before the court show that she does not make full use of her corporate powers.” Slip op. at 22. Or:  “[T]hese official titles and powers do not reflect the reality of corporate control at McNeil-PPC.”  Id.  We can’t help but wring our hands a little over this type of discounting of established corporate structure.
Not to mention that just by looking at the number of depositions and affidavits cited in the opinion, the “nerve center” test seems to give lawyers one more thing to take excessive discovery about and run up huge tabs.  So, even though the good guys won this time, the “nerve center” test seems to be a bit of jurisprudential disaster.  We can’t help but think that a simple bright line test would be much preferable – not always a winner, but perhaps that’s OK in the long run.
The Moore opinion also contains a lengthy discussion regarding why both the J&J executives and Costco were fraudulently joined.  While the court opted to apply a Twiqbal-light standard, slip op. at 29, (see prior posts on standards to be applied in deciding if a party is fraudulently joined here and here) it reached a conclusion we can wholeheartedly endorse (fitting for a post on election day).  As to all three defendants, plaintiff failed to allege sufficient facts or plead a colorable claim and therefore they were fraudulently joined.  The decision contains a nice discussion of the law of Pennsylvania regarding suing corporate officers, slip op. at 31-35, and the law of Washington regarding distributor liability.  Id. at 35-56.
So, overall it’s a defense victory, but one that leaves us scratching our heads and frankly, our opening question still largely unanswered.   

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