January 2017

Lady JusticeEver since the United States Supreme Court’s 2014 decision in Daimler A.G. v. Bauman, 134 S. Ct. 746 (2014), in which the Court held that general personal jurisdiction exists over a corporation only where the corporation is fairly regarded as “at home,” many plaintiffs and state courts have attempted to distinguish Daimler in an effort to expand the boundaries of a court’s exercise of personal jurisdiction. It should come as no surprise then that the U.S. Supreme Court, with five personal jurisdiction cases before it and its Daimler decision seemingly under attack, ultimately decided to grant review of two such cases in 2017: BNSF Railway Co. v. Tyrrell, and Bristol-Myers Squibb Co. v. The Superior Court of San Francisco County, which attack the Daimler holding from very different perspectives.

As you may recall from your first year law school basics, personal jurisdiction requires, among other things, that the “the defendant’s conduct and connection with the forum state are such that he should reasonably anticipate being haled into court there.” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980).  This can be established through either specific jurisdiction, where the defendant has sufficient contacts with the forum state which directly relate to the underlying controversy, or general jurisdiction, where “the [ defendant’s] affiliations with the [forum s]tate are so ‘continuous and systematic’ as to render them essentially at home in the forum [s]tate.” Daimler, 134 S. Ct. at 748-49, 760.

BNSF Railway, begs the question as to whether a state court may decline to follow the Supreme Court’s decision in Daimler, as The Montana Supreme Court directly challenged the limitations on general personal jurisdiction established by the Daimler Court. It did so by holding that the Federal Employers Liability Act (“FELA”) essentially creates an exception to the “at home” requirements of Daimler.  The plaintiffs in BNSF Railway are two employees who seek damages from the company pursuant to FELA, which provides railroad employees with a federal cause of action for personal injuries caused by their employer’s negligence. Neither plaintiff resides in Montana, nor did the injuries occur in Montana. Yet, plaintiffs brought suit in Montana. Under Daimler, BNSF should not have been considered “at home” in Montana, as it is incorporated in Delaware and has its principal place of business in Texas. Despite these facts, the Montana Supreme Court held that Montana courts could exercise general jurisdiction over BNSF.  The Montana Supreme Court reasoned that Section 56 of FELA allows a plaintiff to bring suit in any federal district court in which the defendant does business, and also confers concurrent jurisdiction over FELA suits to state courts. As such, the Court reasoned that state courts should have general jurisdiction in FELA matters over defendants in any state in which the defendant did business.  Tyrrell v. BNSF Ry. Co., 373 P.3d 1 (Mont. 2016).

As previously reported, in Bristol-Myers Squibb the California Supreme Court took a different approach to challenging the limits of the exercise of personal jurisdiction.  Instead of directly attacking Daimler’s holding concerning the limits of general personal jurisdiction, the California Supreme Court used specific personal jurisdiction as a tool to enlarge the Court’s power to exercise personal jurisdiction over a foreign corporation.  In Bristol-Myers Squibb, the California Supreme Court expressly held, consistent with Daimler, that Bristol-Myers Squibb was not subject to general personal jurisdiction in California, as its contacts with the state were not substantial enough to render it “at home” in the jurisdiction. It held, however, that specific personal jurisdiction existed over Bristol-Myers Squibb in California—even for plaintiffs who were not injured in California—based on its “purposeful availment” of the benefits and privileges of the laws of the State of California as a result of its “nationwide marketing, promotion and distribution [that] created a substantial nexus between the non-resident plaintiffs’ claims and the company’s contacts in California . . . .” Bristol-Myers Squibb Co. v. Superior Court, No. S221038, 2016 WL 4506107(Cal. Aug. 29, 2016).

Of the two decisions, Bristol-Myers Squibb may be the most troublesome for defendants, particularly product manufacturers. That is because the California Supreme Court’s “purposeful availment” test essentially guts Daimler and effectively would subject product manufacturers to personal jurisdiction in every state in which they sell their products. Accordingly, 2017 could be a game changer when it comes to personal jurisdiction, including the impact it has on a corporation’s ability to be sued, and potential forum shopping by plaintiffs. We should note, however, that in 2010 the U.S. Supreme Court expressed the need for clear jurisdictional rules in order to allow businesses predictability as to where they are subject to suits. The Hertz Corp., v. Friend, 130 S. Ct. 1181 (2010). Given the impact of both BNSF Railway and Bristol-Myers Squibb, the Court may take this opportunity to do just that in terms of both general and specific personal jurisdiction. Stay tuned…

architecture-22039_960_720“Veil piercing” is an equitable remedy that allows a plaintiff with a claim against an entity to obtain relief from the entity’s owners, in spite of laws providing for limited liability.  When the owners provide personal guarantees or otherwise contract around liability protections, or when the owners are sued in their own right based on their own conduct, it is not necessary to pierce a veil of limited liability.  True veil piercing – where the owners are asked to stand in for acts of the entity – is an extraordinary remedy to be reserved for the most extreme cases.

Courts generally have reviewed several factors, with varying degrees of emphasis, when determining whether to pierce the veil of a corporation.  These have included the existence of fraud, adherence to “corporate formalities” such as holding and documenting meetings, the level of capitalization, whether a dominant stockholder siphoned funds from the corporation, and whether investors are so active in the management of the corporation that the corporation is their “alter ego” or “instrumentality.”  Fraud may, depending on the circumstances, provide an independent basis for the liability of stockholders and others on the grounds that individuals are being found liable based on their own conduct.  Other factors supporting veil piercing also often stand in as proxies for fraud, or reasons to suspect fraudulent behavior.

As has become increasingly clear, Delaware “alternative entities” such as limited partnerships and limited liability companies are not the same thing as corporations.  While many of the same fiduciary principles applicable to corporate fiduciaries may apply under certain circumstances to the fiduciaries of an alternative entity, courts must remain sensitive to distinctions in entity law.  In the context of veil piercing, these distinctions suggest that a Delaware LLC should not be subject to true veil piercing at all, as opposed to the imposition of liability under standard concepts of fraud, fraudulent conveyance, etc.; and that assuming the LLC’s veil may be pierced, any piercing should be subject to different standards than those applicable to piercing the corporate veil.

Section 102(b)(6) of the Delaware General Corporation Law (“DGCL”) states that a certificate of incorporation “may” contain “[a] provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation’s debts except as they may be liable by reason of their own conduct or acts.”  8 Del. C. § 102(b)(6).  Thus, under the DGCL, the default rule is that stockholders are not personally liable for corporate debts based on their ownership of stock, but may be liable as a result of their own conduct, and may also agree in the charter to be liable to a specified extent and upon specified conditions.

Section 18-303(a) of the Delaware Limited Liability Company Act (“DLCCA” or “Delaware LLC Act”) states that

Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company, and no member or manager of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company.

Section 18-303(b) of the DLCCA goes on to state that:

Notwithstanding the provisions of subsection (a) of this section, under a limited liability company agreement or under another agreement, a member or manager may agree to be obligated personally for any or all of the debts, obligations and liabilities of the limited liability company.

Thus, just as a stockholder may agree voluntarily in a charter provision to be liable for corporate debts to a certain extent under certain conditions, a member or manager of an LLC may agree voluntarily in the LLC agreement or another contract to be obligated personally for the LLC’s obligations.

Unlike section 102(b)(6) of the DGCL, section 18-303(a) does not contain the “except as they may be liable by reason of their own conduct or acts” proviso.  However, section 18-303(a) refers only to debts, obligations, and liabilities of the LLC, and also states that members and managers shall not be liable “solely” by reason of being a member or acting as a manager.  Courts have interpreted this language to mean that managers and members may continue to be liable for their own independent debts, obligations, and liabilities.  Again, when such a determination is made it is unclear that there is any “veil piercing” at all, as opposed to the plain vanilla application of tort and contract liability principles.

Other provisions of the Delaware LLC Act represent public policy choices that are inconsistent with the rote application of corporate veil piercing standards to an LLC.  For example, the policy of the DLLCA is “to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.”  6 Del. C. § 18-11011(b).  More specifically, the DLLCA contemplates that an LLC agreement may restrict or even eliminate all duties or liabilities of a member or manager other than for the implied contractual covenant of good faith and fair dealing.  6 Del. C. § 18-11011(c),(e).  Taken together, these provisions stand for the proposition that “contract is king” for the LLC.  The organizers of an LLC are permitted to borrow concepts from a corporation, but are not required to, and can organize themselves in potentially infinite ways.

Thus, Delaware LLCs lack “corporate formalities” by design.  Even in a corporation, “corporate formalities” exist for the protection of stockholders, not third parties, and are a relatively weak justification for veil piercing.  Corporate formalities may be relevant to veil piercing to the extent that they suggest a corporation is a sham entity that exists only to facilitate fraud or other inappropriate conduct.  However, evaluating LLC management with the same jaundiced eye is inconsistent with the fundamental principle that an LLC is not the same thing as a corporation and is to be operated however the parties choose in their LLC Agreement.

Even more significantly, section 18-1101(j) of the DLCCA provides that “[t]he provisions of this chapter shall apply whether a limited liability company has 1 member or more than 1 member.”  The statute expressly contemplates that many LLCs will have only one member, and provides that the same principles (which include maximum freedom of contract and limited liability) are to apply equally to those LLCs.  It is currently estimated that the vast majority of Delaware LLCs are not publicly traded and are closely held.  As with a lack of “corporate formalities,” then, LLCs are likely to have a “unity of interest” by design.  In a small start-up company formed as an LLC, the same person often will be the single member and manager of the LLC, and will make all decisions for the business.  If that is not an acceptable state of affairs, then the LLC cannot have limited liability in most circumstances, thus thwarting legislative policy.

Corporations and LLCs also are generally formed for different reasons.  The primary reason for forming a corporation is to amass large amounts of capital through the capital markets.  The primary reason for forming an LLC is to limit the liability of its members for decisions they make themselves.  Although one can debate the efficiency of conferring limited liability on single-member start-up companies, that is a decision best made by a legislature and not by judges on an ad hoc basis.

 

celldriveOn December 23, 2016 in Santa Clara, California, in Modisette v. Apple, Inc., 16CV304364, the family of a five-year-old girl killed in a car crash on Christmas Eve 2014 filed a lawsuit against Apple alleging that Apple’s FaceTime application distracted a driver and caused the death of Moriah Modisette.  Like the majority of distracted driver accidents, this one could have been prevented. On the one hand, the driver could have waited until he stopped driving before using the FaceTime application. On the other hand, Apple could have designed a lock-out feature or warned FaceTime users of the dangers of driving while FaceTiming.

In Modisette v. Apple, Inc., the court must decide whether a smartphone manufacturer like Apple has a duty to protect the public and FaceTime users by preventing the use of the application while driving. FaceTime is a factory-installed video communication service similar to Skype and Google Hangouts that allows Apple device users to conduct one-on-one video calls. Ultimately, this case raises an important question: Should a smartphone manufacturer be liable for injuries caused by distracted drivers using a phone application, and if so, are distracted drivers a superseding intervening cause?

Plaintiffs allege that Apple’s iPhone was defective because Apple failed to install and implement the safer alternative design for which it sought a patent in December 2008, which was later issued in April 2014. The alternative design would “lock out” a driver’s ability to FaceTime while driving. In addition, Plaintiffs allege that Apple failed to warn drivers that FaceTiming while driving was likely to be dangerous.  Plaintiffs further allege that the conduct of the driver is “inextricably intertwined” with Apple’s failure to implement the patented lock out feature, and as a result, Apple allegedly failed to exercise reasonable care.

This is not the first time Apple has been involved in a products liability lawsuit arising out of an accident caused by a distracted driver. In 2015, in Meador v. Apple, Inc. (2016) WL 4425527 (E.D.Tex.), Apple was sued for a 2013 crash involving a driver distracted by checking her text messages. The question raised in Meador is similar to the Modisette’s case: Does a smartphone manufacturer have a duty to prevent drivers from using the device while driving? On August 16, 2016, in a pretrial report and recommendation, United States Magistrate Judge K. Nicole Mitchell recommended that the case be dismissed with prejudice because a “real risk of injury did not materialize until [the driver] neglected her duty to safely operate her vehicle by diverting her attention to the roadway.” Meador v. Apple, Inc. (E.D. Tex., Aug. 16, 2016) WL 7665863, at 4. Thus, Judge Mitchell opined that Apple’s failure to lock out the driver did “nothing more than create the condition that made Plaintiffs’ injuries possible.” Id. As a result of Judge Mitchell’s recommendation, the Meador case has been stayed pending an order from the District Judge on Apple’s Motion to Dismiss.

In a similar case involving text messages against a network provider in Oklahoma, in Estate of Doyle v. Sprint/Nextel Corp., (Okla. Civ. App. 2010) 248 P.3d 947, the Oklahoma court of appeals affirmed the trial court’s granting of Sprint’s motion to dismiss.  The court held that “the purchase and use of a cellular phone or cellular service are not inherently dangerous acts, nor is it foreseeable that the sale and subsequent use of such a phone would cause an accident. Even if using a cell phone while driving is foreseeable, it is not necessarily foreseeable that it will cause a collision or unreasonably endanger a particular class of persons.[citation omitted] It is not reasonable to anticipate injury every time a person uses a cellular phone while driving.” Estate of Doyle v. Sprint/Nextel Corp., at 951.

Although the Modisette case was recently filed, the outcome will have rippling effects. The court will ultimately have to decide whether FaceTiming while driving was an inherent danger in the purchase of an iPhone that Apple should be responsible for. Should plaintiffs be successful, the case will likely invite waves of future lawsuits against application developers and manufacturers of cars, navigation systems, radios, and of any device that could have prevented a distracted driver, but failed to do so.

 

Court RulingThe United States Supreme Court declined a petition for certiorari on Monday, January 9, in the matter of Ascira Partners, LLC v. Daniel, dashing hopes that the Justices would resolve conflicting federal law on jurisdiction under the Class Action Fairness Act. The petition involved a massive medical malpractice action in Ohio which originated from medical care provided by a single doctor working at multiple medical care facilities. Originally, plaintiffs filed 226 individual lawsuits against the doctor and various medical providers in several different Ohio counties before the cases were consolidated before a single judge. At that point, the various plaintiffs requested that the court set all of the cases for one combined trial, or several smaller group trials. The court ultimately set four smaller trials and one large group trial which combined the claims of over 400 plaintiffs into a single case.

Following this consolidation, defendants sought to have the case removed from Ohio state court to federal court under 28 U.S.C. § 1332(d), otherwise known as the “Class Action Fairness Act.” Among other provisions, this statute gives federal courts jurisdiction over certain monetary relief claims of 100 or more persons so long as the plaintiffs’ claims involve common questions of law or fact. The Ohio state court, however, determined that the case should stay in state court, as the “100 plaintiff” element of the statute was not satisfied. Under the state court’s view, federal jurisdiction under the statute is proper only when a single complaint contains at least 100 plaintiffs, not when where multiple suits are combined for trial to encompass the claims of more than 100 plaintiffs. Defendants asked the federal Sixth Circuit Court of Appeals to review this interpretation, arguing that the Seventh, Eighth, and Ninth Circuits had all previously determined exactly the opposite, that the 100 plaintiff threshold was, in fact, satisfied when plaintiffs decide to combine multiple cases for trial. When the Sixth Circuit implicitly adopted the state court’s interpretation by declining to weigh in, defendants sought review from the United States Supreme Court.

These “Circuit splits”, where Circuit Courts disagree on the interpretation of the law, are not uncommon. And it is certainly not uncommon for the Supreme Court to deny a party’s petition for review. The Supreme Court receives approximately 7,000 petitions each year, and accepts roughly 80 for oral argument and review. The Supreme Court’s denial of review in Ascira Parnters is nevertheless significant for mass tort defendants across the country.

It is no secret that, in many instances, injured tort plaintiffs would prefer to file their cases in state court as opposed to federal court. One of the many reasons for this preference is that the Federal Rules of Civil Procedure place express limits on the amount of discovery available to both parties.  Further, the Federal Rules of Evidence tend to be more stringent, as are requirements for expert witnesses.  These, and the notion that federal courts tend to grant motions to dismiss and motions for summary judgment more frequently and award lower verdicts, means that plaintiffs would often rather file their cases in state court.

Part of the rationale behind the Class Action Fairness Act was to keep large, multi-state, multi-plaintiff cases, which are better suited for federal court, from being litigated in state courts, despite what some plaintiffs may prefer. The Sixth Circuit’s interpretation of the “100 plaintiff” threshold, however, essentially creates a loophole for large groups of plaintiffs to bring claims in state court that are subject to federal jurisdiction pursuant to the Act. As the Ascira Partners petitioners stated in their brief, this interpretation would seemingly allow a group of 100 plaintiffs to “artificially split a large lawsuit into smaller actions involving fewer than 100 plaintiffs but consolidate them for trial…all without triggering removal under the CAFA.” In other words, 100 plaintiffs who want the cost and strategic benefits of filing together in a single action but want to avoid federal court could theoretically agree to bring two 50-plaintiff suits in state court, and then consolidate them on the eve of trial. Under the Sixth Circuit’s interpretation, the defendants in this hypothetical case would have no grounds to remove to federal court, and would be forced to defend the case in a state court of the plaintiffs’ choosing.

While it is unknown what the long term effects of this Circuit split may be, it is not unreasonable to assume that mass tort plaintiffs will flock to the states that make up the Sixth Circuit (Michigan, Ohio, Kentucky and Tennessee) to file their claims. With a little clever pleading, they know that they can avoid the pitfalls of removal to federal court that they may face in the states that make up Seventh, Eighth, and Ninth Circuits. But until the Sixth Circuit changes course or the Supreme Court takes up a new petition, national mass tort defendants shouldn’t be surprised to find an uptick in complaints coming out of these four states.

louisiana-890549_960_720Causation opinions from plaintiff’s experts in asbestos exposure cases have undergone a puzzling evolution as they continue to face successful challenges. From “every exposure” to “every exposure above background” and “every significant exposure,” each iteration has attempted to make the same end run around the plaintiff’s burden of proof by stating that all exposures in a lifetime work together to cause disease. A recent federal decision, however, struck another blow to the “every exposure” theory, adding to the growing case law debunking it as nothing more than junk science.

Under the “every exposure” theory advanced by plaintiff’s attorneys in asbestos litigation, each defendant whose product plaintiff may have worked with or around, no matter how infrequently, is equally liable. The theory claims that each exposure contributes to the development of disease, without making any attempt to quantify the specific exposures from various products. This is particularly problematic when you consider that exposures to asbestos from certain products may be so low that, taken individually, may not have resulted in disease. The “every exposure” theory glosses over these de minimis exposures with the opinion “each and every exposure” to asbestos contributes to the causation of disease.

Recently, federal courts have begun to critically analyze this “every exposure” theory, and to demand a more stringent causation analysis. In Smith v. Ford Motor Co, a Utah federal court found held that the “each and every exposure theory is based on a lack of facts and data.” Smith involved a plaintiff’s expert who opined that the plaintiff’s mesothelioma was caused by his total and cumulative exposure, with all exposures playing a contributory role. The court excluded that testimony, finding that the “every exposure” theory “asks too much from too little evidence as far as the law is concerned. It seeks to avoid not only the rules of evidence but more importantly the burden of proof.” Likewise, in Yates v. Ford Motor Co., a case out of the Eastern District of North Carolina, the court excluded testimony of another well-known plaintiff’s expert, finding that his adherence to the “each and every exposure” theory lacked a basis in supporting facts or data.

And most recently, in Bell v. Foster Wheeler Energy Corp., the Eastern District of Louisiana referenced the growing line of exclusionary opinions and stated that the “deficiencies of the “each and every exposure” theory of causation in asbestos exposure cases have been extensively discussed.” The court held that the theory is not an acceptable theory of causation because it amounts to “nothing more than the ipse dixit of the expert.” Though some state and federal courts continue to permit the “every exposure” theory, cases like Smith, Yates, and Bell add to the growing number of jurisdictions requiring plaintiffs to meet their burden of proof.