When nonresident members of a corporate group, usually the parent company, should expect to be subjected to the jurisdiction of Pennsylvania courts when one of the entities, usually the subsidiary, is based or does business in the state.
In the June 18, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of KHF wrote “Piercing the Corporate Veil of Corporate Groups to Establish Alter Ego Jurisdiction.”
Last June, in this space, I authored a column about Pennsylvania law on substantive and procedural aspects of piercing the corporate veil of companies to reach the assets of their shareholders or the assets of a parent company in corporate groups. In early January 2020, I wrote a column about the development of Pennsylvania law on establishing personal jurisdiction over registered nonresident businesses since the Supreme Court’s decisions in. In this case, I address the intersection of those two related columns in cases involving corporate groups. That is, when nonresident members of a corporate group, usually the parent company, should expect to be subjected to the jurisdiction of Pennsylvania courts when one of the entities, usually the subsidiary, is based or does business in the state.
The courts in Pennsylvania subject a nonresident parent corporation to their jurisdiction if they find that the Pennsylvania subsidiary is the “alter ego” of the parent. The alter ego theory is one of the theories of piercing the corporate veil under which control is the key in foregoing the separate legal entity in a group. Under the alter ego theory, the courts evaluate the level of control asserted by the parent company in their considerations of whether to pierce the corporate veil of the corporate group. See Miners v. Alpine Equipment, 722 A.2d 691, 695 (Pa.Super. 1998). In jurisdictional matters, the alter ego theory imputes the personal jurisdiction of the court over the subsidiary to its parent or the other way around. Alter ego jurisdiction is especially important for litigators because it enables them to bring their cases against the large out-of-state corporations, which use Pennsylvania-based subsidiaries as a mere instrument of doing their business in Pennsylvania to limit their liability.
In determining alter ego jurisdiction, the court starts with establishing its jurisdiction over the Pennsylvania subsidiary and then examines whether the subsidiary is the “alter ego” of the nonresident parent. For registered nonresident parent companies, the court must take an extra step of analyzing Pennsylvania’s jurisdiction-by-consent under 42 Pa.C.S. Section 5301. Compare Reynolds v. Turning Point Holding, (E.D. Pa. Feb. 26, 2020) (refusing to exercise personal jurisdiction over the out-of-state members of a corporate group, including the registered nonresident parent, after finding that the Pennsylvania subsidiary is not the alter ego of the out-of-state entities and that Pennsylvania’s jurisdiction-by-consent violates the due process clause) with Atlantic Pier Associates v. Boardakan Restaurant Partners, (E.D. Pa. Aug. 2, 2010) (finding that registering to do business in Pennsylvania at a time was sufficient to subject the parent company subject to the court’s jurisdiction).
The district courts have adopted a nonexclusive ten-factor test to establish the alter ego jurisdiction, perhaps to avoid the problems associated with the abstractness of “control.” The courts consider the ownership structure and the commonality of officers and directors, marketing image, trademark or logo, employees, sales systems used, and managers between the parent and its subsidiary. The courts also examine the functions of departments of the parent company, the role of the subsidiary in marketing the activities of the parent company, and the level of instructions that the officers of the subsidiary receive from the parent company. See Lutz v. Rakuten, 376 F. Supp. 3d 455, 470–71 (E.D. Pa. 2019). Such an extensive analysis to establish the alter ego jurisdiction is in line with the strong presumption that exists against piercing the corporate veil in Pennsylvania.
The entirety of the facts must justify the alter ego jurisdiction: using the 10-factor test as a guide, plaintiffs must plead sufficient factual allegations to show an extensive level of control. See In re Enterprise Rent-A-Car Wage & Hour Employment Practices Litigation, 735 F. Supp. 2d 277 (W.D. Pa. 2010), aff’d, 683 F.3d 462 (3d Cir. 2012) (holding that the common marketing image, the joint use of trademarked logos, and the use of an integrated sales system are not enough as “they do not show a high-level of operational control over the operating subsidiaries.”); In re Chocolate Confectionary Antitrust Litigation, 602 F. Supp. 2d 538 (M.D. Pa. 2009) (holding that the parents’ ownership of all the stock of the subsidiaries, maintaining a unified image, and unified standards for product quality were not enough to establish the alter ego jurisdiction in the absence of further evidence of the parent’s managerial or supervisory control over its subsidiary’s budget and growth.) Therefore, the plaintiff bears a heightened burden of providing evidence to support the existence of as many factors as possible to establish the alter ego relationship between the two entities.
Further, the control must be at a level that the parent company can be found to be controlling “the day-to-day operation” of its subsidiary and the degree of control exercised over the subsidiary “must be greater than normally associated with common ownership and directorship” to a degree which indicates the subsidiary functions as a department of the parent. Savin v. Heritage Copy Products, 661 F. Supp. 463 (M.D. Pa. 1987) (quotation omitted). This is a strict threshold to fulfill. Compare Simeone ex rel. Estate of Albert Francis Simeone Jr. v. Bombardier-Rotax GmbH, 360 F. Supp. 2d 665 (E.D. Pa. 2005) (exercising alter ego jurisdiction because, among others, the parent owned all of the subsidiary’s stock, the parent’s shareholders had the power to hire the subsidiary’s CEO, and the parent’s corporate office made the subsidiary’s major decisions) with Clark v. Matsushita Electric Industrial, 811 F. Supp. 1061 (M.D. Pa. 1993) (dismissing the Japan-based parent company for lack of personal jurisdiction because the court found that parent’s ownership of all subsidiary’s stocks and the subsidiary’s chairman’s membership of the parent’s Board of Directors were insufficient evidence. The court further rejected that a showing of subsidiary’s function as an exclusive distributor of parent’s products in Pennsylvania would make the Pennsylvania subsidiary the parent’s alter ego in the absence of any evidence that the entities disregarded their corporate independence) and Action Manufacturing v. Simon Wrecking, 375 F. Supp. 2d 411, 422–25 (E.D. Pa. 2005) (same).
In addition to establishing alter ego jurisdiction, a finding of an alter ego relationship between a foreign parent company and its domestic subsidiary would allow the plaintiff to affect the service of process on the parent company by serving the subsidiary or the other way around. See Mirrow v. Club Med,118 F.R.D. 418, 419 (E.D. Pa. 1986) (holding that, after given the opportunity to engage in discovery on the degree of control of the U.K.-registered parent company over its U.S.-based subsidiary, the plaintiff has provided enough evidence to show the control of the parent company over its subsidiary “such that service upon the subsidiary was reasonably calculated to give actual notice to the parent corporation of the proceedings against it.”). Considering the difficulties that may arise in serving a foreign entity, this principle facilitates commencing actions against entities that use domestic entities as their alter ego.
Admittedly, pleading enough facts to establish an alter ego jurisdiction is a challenge. The Third Circuit recognized this challenge and held that the plaintiffs may engage in limited jurisdictional discovery of all contacts of the out-of-state entity with Pennsylvania to obtain evidence to establish the factors of alter ego theory. See Shuker v. Smith & Nephew, 885 F.3d 760 (3d Cir. 2018) (finding that the plaintiffs pleaded enough facts to establish “a prima facie showing of personal jurisdiction” and were entitled to limited jurisdictional discovery. Plaintiffs pleaded, among others, the integration of the decision-making process between the two entities, the parent’s authority over the subsidiary’s strategic business decisions, and the parent’s payment for the development of subsidiary’s products). Still, the plaintiffs must plead enough facts to be able to persuade the court to order discovery on the issue of alter ego relationship between the entities rather than dismissing the case against the out-of-state entity for lack of jurisdiction.
At times, establishing the alter ego jurisdiction may save the business litigation attorneys from obtaining an unenforceable judgment. In other times, especially in cases with punitive damages, the court’s exercise of alter ego jurisdiction may lead to a judgment of a few million dollars as opposed to a few thousand dollars. Plaintiffs attorneys must be familiar with the option of suing a nonresident parent company in Pennsylvania and be wary of the necessary factual pleading to show a prima facie case to persuade the court to authorize a limited jurisdictional discovery. Pleading an abundance of evidence to establish the factors of alter ego theory is indispensable. As such, the practitioners should develop and gather evidence in support of the alter ego nature of the subsidiary in the early stages of their strategic planning for litigation.
Edward T. Kang is the managing member of Kang Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at firstname.lastname@example.org.
Reprinted with permission from the June 18, 2020 edition of “The Legal Intelligencer” © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or email@example.com.