Tuesday, March 29, 2011

Putting Our Economy at Risk

We've already commented a couple of times on GSK's reorganizing of its corporate structure to move its corporate nerve center from Pennsylvania to Delaware - and that was before ATRA named GSK's earstwhile local court, our own Philadelphia Court of Common Pleas, the number 1 "Hellhole Jurisdiction" in the country.  It seems that GSK reconstituted itself as a Delaware LLC with only Delaware members.  This had been enough, under prevailing law to move GSK's corporate "nerve center" to Delaware.  See Hoch v. Eli Lilly & Co., 736 F.Supp.2d 219, 222-23 (D.D.C. 2010); White v. SmithKline Beecham Corp., 2010 WL 3119926, at *4 (E.D. Pa. Aug. 5, 2010).

Not so fast.  Nothing is ever easy - not here in Philly, anyway.  Now comes plaintiff to take a great deal of intrusive jurisdictional discovery in order to get a court to second-guess whether GSK actually moved enough of its corporate decision making structure out of the City of Brotherly Litigation.  Oppose enough removal petitions, and eventually some plaintiff will get lucky and find an indulgent federal judge.

Last week that happened to GSK.  In Brewer v. SmithKline Beacham Corp., 2011 WL 1103627 (E.D. Pa., Mar. 24, 2011), one of our local federal judges concluded that GSK had failed to jump through enough corporate hoops to move its "nerve center" to Delaware, and thus create the diversity jurisdiction that would allow GSK to escape the Philadelphia Court of Common Pleas.  Specifically, the court ruled that GSK:
  • Hadn't moved its corporate books and records from Philadelphia to Delaware fast enough.  Id. at *8.
  • Didn't move its listed business address from Philadelphia to Delaware fast enough.  Id.
  • Hadn't done enough to move its dealings with the federal government Philadelphia to Delaware.  Id.
  • Not enough of the GSK's executives had moved their offices from Philadelphia to Delaware.  Id.
  • GSK's office in Wilmington didn't have enough furniture.  Id. at *9.
  • GSK's Delaware office still forwarded too many telephone calls to Philadelphia.  Id.
  • GSK held its Delaware board meetings, not at its office, but at a local Wilmington bank.  Id.
  • GSK's Delaware board meetings weren't long enough or substantive enough.  Id.
  • GSK's directors spent more time preparing "outside of Delaware" (we assume, in Philly) than they did actually attending the Delaware board meetings.  Id.
  • The agendas for GSK's Delaware board meetings were prepared in Philadelphia.  Id.
  • GSK's Delaware office generally wasn't big enough.  Id.
  • GSK's Delaware office still forwarded too much of its mail to Philadelphia.  Id.
Having thus second-guessed a Delaware corporation's conformity with Delaware corporate law, the Pennsylvania court concluded that GSK's "nerve center" remained in Philadelphia - and therefore it had been served in its "home" court (nothing like home, sweet home) - and therefore the action had to be remanded to Philadelphia:
Because the decisions affecting the business operations and activities of LLC are made in Philadelphia, Pennsylvania by its officers and directors there and Holdings has delegated its operational decision-making related to LLC's business to LLC, we conclude that the defendant's principal place of business is Philadelphia.  Additionally, the defendant has not satisfied its burden to show that the place of actual direction and control of Holdings's investment functions is any place other than in Pennsylvania.
Brewer, 2011 WL 1103627, at *10.  And these kind of decisions aren't appealable.

Why is this post so factual?

Because each and every one of these bullet points can be corrected.  For a company that has already changed its fundamental corporate structure because it no longer wanted to be sued in Philadelphia hundreds of times over by forum-shopping plaintiffs from all around the country, adding more space in Delaware and moving more executive offices and functions to Delaware isn't much additional effort.

If the courts are going to, in effect, order corporations to move their jobs out of Philadelphia in order to escape its court system, then unfortunately that's probably what they'll do - if they've already jumped through a bunch of corporate hoops, to escape Pennsylvania's First Judicial District, what are a few more?

We like Philadelphia.  We live here.  We pay taxes here.  But let's face it, reverse bifurcation (in most cases), multi-plaintiff trials, supine gatekeepers, and other Philadelphia CPisms we can do without.  And even when our trial judges do the right thing, which is more often than ATRA suggests, they're as likely as not to get reversed by Pennsylvania's increasingly radical pro-plaintiff Superior Court.

So if asked by a Philly pharma (or other) company that's finally had enough of its home-court disadvantage, we'll have to tell them that they can create diversity if they shift some of their operations - what percentage depends on what decisions like Brewer say is required (and a comfort zone, too) - to Delaware or some other more congenial state.  Zealous representation and all that.  But still we don't have to like it.  We'd much rather that the jobs, tax revenue, etc. stay in our home town.  We'd much rather somebody, be it the governor, the legislature, or our Supreme Court step in and fix the problems that drove GSK's decision in the first place.

2 comments:

Anonymous said...

Wow - sounds like a Defense lawyer who doesn't know how to litigate in PA courts! The judge used the CFO's own deposition - for which he seemed ill-prepared - to demonstrate what a complete sham the LLC was. Hertz demands that the court look past such machinations for jurisdictional purporses. Poor lawyering leads to poor results. Don't blame the federal or state judges, loser.

Lindasy Rosenwald said...

Lindsay Rosenwald http://www.nytimes.com/1988/12/14/business/business-people-dh-blair-picks-doctor-as-director-of-finance.html Rosenwald, 33, specializes in finding and underwriting promising medical and biotechnology companies