Saturday, June 8, 2013

Third Circuit Holds GlaxoSmithKline Companies Delaware Citizens for Diversity Purposes

In an absurdly lengthy opinion, which I must admit to only skimming, the Third Circuit has held that a ten-by-ten foot subleased office makes Delaware the principal place of business of a GlaxoSmithKline holding company, and thus upheld diversity jurisdiction over a personal injury action involving thalilomide.  (Yes, thalilomide, the anti-nausea-in-pregnancy drug from the late 50's and early 60's that caused birth defects.)  Plaintiffs claim to have discovered new evidence showing that defendants were aware of the drug's defects while marketing it.  Johnson v. SmithKline Beecham Corp., No. 12-2561 (3d Cir. June 7, 2013.)

The plaintiffs are Pennsylvania citizens and they claimed that four defendants were also Pennsylvania citizens. So when defendants removed the action from Pennsylvania state court, plaintiffs moved to remand. That motion was denied and the issue certified for interlocutory appeal. Apparently the issue of these companies' citizenship for diversity purposes has come up in several other cases and the district court rulings have conflicted.

As a naive law student, I concluded that any corporate structure that I could not understand was up to no good, and I have found no reason to change my mind about this well into middle age.  Three of the four defendants that plaintiffs claimed were Pennsylvania citizens are entities affiliated with GlaxoSmithKline plc, the British entity that is the "global head" of the GlaxoSmithKline group of companies.  Defendant SmithKline Beecham Corp. was once a Pennsylvania corporation, but it converted in 2009 to a Delaware LLC.  As far as I understood, the purpose of the conversion was to avoid "unnecessary tax liability."  (Wish I could convert myself to a Delaware LLC!)  SmithKline Beecham then dissolved.  The court thus held that SmithKline Beecham was not a Pennsylvania citizen because it had converted itself into a new entity, defendant GSK LLC.

GSK LLC operates the US division of GlaxoSmithKline plc.  Its headquarters is still in Philadelphia, "where it occupies 650,000 square feet of office space and employs 1,800 people" – the same as when it was still SmithKline Beecham.  SmithKline Beecham's board of directors became GSK LLC's "board of managers."  Does that mean GSK LLC's principal place of business is still Pennsylvania? 

No.  As an LLC, GSK LLC's citizenship for diversity purposes is derivative of its owner's (or "member's") citizenship.  Its sole member is GSK Holdings, a Delaware corporation with its principal place of business in (according to the Third Circuit) Delaware.  GSK Holdings subleases a ten-by-ten foot office in Delaware.  It has one employee who works about 20 hours per year.  Its three directors hold quarterly 15-30 minute meetings in Delaware (at least one of the directors is usually physically present at the meetings) to discuss GSK Holdings' investments.   

As for the fourth defendant at issue, Avantor, it evidently moved its principal place of business to Pennsylvania five days after the removal, so the court held that it was still a New Jersey citizen at the time of removal.  


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