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Judge Helps Define Corporate Citizenship in Pharma Suit
The Legal Intelligencer
Finding the pulse of McNeil pharmaceuticals within the corporate structure of Johnson & Johnson required a federal judge to look beyond the U.S. Supreme Court's "nerve center" test in order to fulfill the high court's directive that corporate citizenship should be determined by where its principal place of business is located, rather than where it declares that place to be.
Because McNeil, a wholly owned subsidiary of Johnson & Johnson that is the maker of allegedly defective children's Tylenol that killed a 2-year-old boy in Washington, is run primarily by executives of its parent company in New Jersey, the company is a citizen of that state, not Pennsylvania, where the medicine was produced, U.S. District Judge Mary A. McLaughlin of the Eastern District of Pennsylvania ruled.
"The threshold question in determining McNeil-PPC's principal place of business is whether the 'nerve center' test permits this court to consider activities of executives outside a party's corporate structure," McLaughlin said, referring to the test that the U.S. Supreme Court established in Hertz v. Friend in 2010 in order to unify the circuits, which had been weighing varied factors to determine where companies were located for jurisdictional purposes.
"Hertz itself did not directly address that question," McLaughlin said, since the facts in that case were clear as to the location of company leadership. "The Supreme Court was not called on to determine the composition of Hertz's 'leadership' or resolve who, for citizenship purposes, may participate in a corporation's 'nerve center,' more generally. For that reason, this court does not read Hertz to set forth a hard-and-fast rule mandating that 'nerve center' control must emanate from a company's own officers."
Most of McNeil's titled executives including the president, vice president, chief financial officer and secretary were based at the company's Fort Washington, Pa., facility, but McLaughlin sided with the defendants, who argued that "these official titles and powers do not reflect the reality of corporate control at McNeil-PPC."
Daniel and Katy Moore had filed suit in the Philadelphia Court of Common Pleas after their son, River, died of liver failure the day after he took a dose of children's Tylenol, according to the opinion. In July 2010, River had awoken in the night with a 101-degree fever and his mother treated him with Tylenol. Half-an-hour later, he began spitting up blood and went into shock, according to the opinion.
"J&J and McNeil-PPC have a history of quality control problems dating back at least 10 years," McLaughlin said, since they began cost-cutting measures that included the dismissal of experienced quality-control agents who were replaced with inexperienced contractors.
In April 2010, McNeil recalled 40 kinds of children's medicines, the biggest recall of its kind, "due to 'filth and contamination' at the Fort Washington, Pa., production facility," according to the opinion. Johnson & Johnson and McNeil then shut down the plant and became the subject of two congressional hearings, McLaughlin said.
That recall was one of several issued over the course of a year, according to the opinion, with the first official recall of Motrin IB following a "stealth" recall conducted earlier. "McNeil-PPC tried to remove the defective Motrin IB from the market through a 'phantom' or 'stealth' recall, in which it hired third-party contractors to purchase the drug from retailers' shelves," McLaughlin said.
Johnson & Johnson, along with more than a dozen other defendants, removed the case to federal court and the Moores then moved to have it remanded to the state court. Among their arguments, the Moores claim that McNeil is a corporate citizen of Pennsylvania, which would mean that the case couldn't be removed to federal court on the basis of diversity of citizenship.
However, McLaughlin found that McNeil's "nerve center" is in Skillman, N.J., where the executives for Johnson & Johnson's "family of consumer companies," a group that oversees McNeil and the company's other subsidiaries, are located. It is not centered in Fort Washington, Pa., where the lower-level executives who are exclusive to McNeil were based, she found.
"The overall concern of Hertz's corporate citizenship analysis is locating the 'actual' center of corporate control and coordination," McLaughlin said. "To limit the 'nerve center' inquiry solely to the activities of the corporate officers listed on paper seems unduly restrictive for the same reason a court should not be required to reflexively accept as the corporate 'nerve center' the 'principal executive office' listed on a company's Form 10-K or a headquarters that is nothing more than an office where the corporation holds its board meetings."
McLaughlin looked to a pre-Hertz opinion from the U.S. Court of Appeals for the Third Circuit in 1998 called Mennen v. Atlantic, in which the court held that a company's headquarters were located in New Jersey because that is where the bulk of the people making decisions for its U.S. operations were located.
Although that one and similar opinions from the Fifth Circuit have been displaced by Hertz, McLaughlin found that they still "retain vitality."
"This court concludes that the principal place of business inquiry may peer beyond a party's corporate form and look to the activities of individuals who actually control and direct the corporation from distinct, but related, corporate identities," McLaughlin said.
The plaintiffs plan to ask the judge for certification to appeal the decision to the Third Circuit, said Irene McLafferty, a Philadelphia attorney who is representing the Moores.
The "Supreme Court test was meant to simplify," she said, and this opinion doesn't follow it. Because the opinion can't be appealed as of right, the plaintiffs will ask the judge to certify it for an appeal.
David Abernethy of Drinker Biddle & Reath in Philadelphia represented Johnson & Johnson and couldn't be reached for comment.
(Copies of the 57-page opinion in Moore v. Johnson & Johnson, PICS No. 12-2148, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.)
This article originally appeared in The Legal Intelligencer.