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In a unanimous Nov. 14 decision, the Texas Supreme Court slammed the door on using the single-business enterprise theory to impose one corporation's liability on an affiliated corporation.
The high court also held in SSP Partners and Metro Novelties Inc. v. Gladstrong Investments (USA) Corp. that the seller of a defective product is not entitled either by statute or common law to indemnity from a supplier higher up the marketing chain without proving that the upstream supplier was at fault. [See the court's opinion.]
William V. "Bill" Dorsaneo III, a professor at Southern Methodist University Dedman School of Law who teaches and writes on Texas civil litigation, says the Supreme Court's rejection of the single-business enterprise theory will impact all kinds of claims, not just those raised in products liability cases.
Michael A. Choyke, an attorney representing Gladstrong USA and a partner in Houston's Wright Brown & Close, says that while some intermediate appellate courts in Texas have articulated a single-business enterprise theory for liability, no one has known under what circumstances that theory could be used.
"I think the Supreme Court in this opinion has shut it off," Choyke says of the theory.
Rick Rogers, SSP's attorney and a shareholder in Porter, Rogers, Dahlman & Gordon in Corpus Christi, says the opinion will make it more difficult for Texas businesses successfully to claim indemnity from foreign corporations' U.S. affiliates that distribute products their parent corporations manufacture overseas.
"What bothers me about the case, and what should bother the court . . . is so many products are produced overseas," Rogers says.
Roger Hughes, Metro's attorney and a partner in Adams & Graham in Harlingen, says under the SSP ruling, if a manufacturer of a defective product is outside Texas or in bankruptcy, the Texas business that sold the product will have to pay for the harm to the plaintiff, with no hope that it will be made whole. Hughes says a Texas business can buy insurance to cover such losses. "But the cost of insurance will go up," he says.
Purpose of the Act
The case arose from a January 2001 house fire that caused the death of a 5-year-old boy and injured two of his siblings. Hughes says the parents of the children filed a products liability suit, Castillo, et al. v. SSP Partners, et al., in Hidalgo County's 332nd District Court in September 2001.
The Supreme Court's opinion in SSP, written by Justice Nathan Hecht,provides the following background on the products liability suit and the indemnity action: The children's parents alleged in Castillo that a lighter with a defective child-resistant mechanism started the fire. They further alleged that SSP sold the WAX lighter through one of its Circle K convenience stores and that Gladstrong USA designed, manufactured and marketed the lighter. SSP filed a third-party suit against Metro, which supplied the lighters to SSP. Then, SSP and Metro sought indemnity from Gladstrong USA. Gladstrong Investments Limited of Hong Kong, the parent company of Gladstrong USA, had designed and patented the WAX lighters' safety wheels and instructed another Chinese company, Tianjin Sico Lighters Co. Limited, on how to construct the lighters. However, the 332nd District Court denied the plaintiffs' motion to join Gladstrong Hong Kong in Castillo.
In 2002, the Castillo plaintiffs settled with Gladstrong USA and SSP for $1.6 million each, and SSP settled its indemnity claim against Metro for $800,000. Gladstrong USA moved for summary judgment on indemnity claims brought by SSP and Metro. SSP and Metro argued that Gladstrong USA was a producer of the lighters and therefore met the definition of a "manufacturer" in Chapter 82 of the Texas Civil Practice & Remedies Code. The statute provides that only a manufacturer owes statutory indemnity to a seller and lists "producer" as one of the definitions of a manufacturer. After the trial court granted Gladstrong USA's no-evidence summary judgment motion on the indemnity claims, SSP and Metro appealed to Corpus Christi's 13th Court of Appeals.
In 2005, the 13th Court reversed in part the trial court's summary judgment. The 13th Court rejected claims that Gladstrong USA was the manufacturer of the lighter. Instead, the 13th Court held that an apparent manufacturer — which the appeals court defined as "one who puts out, as its own product, chattel manufactured by another" — could be liable for common-law indemnity and remanded the case to the trial court for further proceedings.
"More than a scintilla of evidence exists to suggest that Gladstrong USA 'appeared' to be the manufacturer," then-Justice Errlinda Castillo wrote for the 13th Court. Justice Linda Yanez and then-Justice Federico Hinojosa joined in the opinion.
Gladstrong USA petitioned the Supreme Court to review the case. SSP and Metro joined together to file a petition for review. Because their positions are aligned in the petition, the Supreme Court identified SSP and Metro collectively as SSP in its opinion.
Like the 13th Court, the Supreme Court disagreed with SSP's argument that because Gladstrong USA imports the lighters from Gladstrong Hong Kong, the American affiliate "produces" the lighters and thus is a manufacturer. According to the Supreme Court's opinion, Chapter 82's definition of the word "producer" is confined by the words that surround it in the statute: "designer, formulator, constructor, rebuilder, fabricator, producer, compounder, processor, or assembler" of a product. In other words, the statute defines a producer as someone involved in making a product.
"Gladstrong USA imports lighters; it has nothing to do with making them," Hecht wrote for the high court.
The Supreme Court also rejected SSP's argument that the Federal Consumer Products Act, 15 U.S.C. §2052(a)(11), defines a "manufacturer" to include an importer, reflecting a common commercial understanding of the word, and §82.001(4) of the Texas Civil Practice & Remedies Code should do the same. Hecht wrote that the purpose of the federal act is to protect consumer safety, not to adjust liabilities among distributors.
Choyke says the Supreme Court upheld the language in Chapter 82. "Since the Legislature defined 'manufacturer' in a certain way, to reach out and define it in a different way is not something the court should do," he says.
According to the Supreme Court's opinion, SSP had argued that even if Gladstrong USA was not a manufacturer of the lighters the corporation is liable for statutory indemnity because it and Gladstrong Hong Kong operated as a single-business enterprise. As Hecht noted in the opinion, SSP relies on the single-business enterprise liability theory that Houston's 14th Court of Appeals set out in 1986's Paramount Petroleum Corp. v. Taylor Rental Center.
Claims for Indemnity
Corpus Christi solo Russell H. "Rusty" McMains, who represents plaintiffs, defendants and, in some cases, insurance companies in indemnity disputes but who is not involved in SSP, says the Supreme Court has been indicating for some time that it did not recognize the single-business enterprise theory. "Now they have just outright rejected it," McMains says.
As Hecht noted in SSP , the single-business enterprise liability theory is "fundamentally inconsistent" with the approach that the Texas Legislature took in Texas Business Corporation Act Article 2.21 — recodified in 2003 as Business Organizations Code §2.223 and §§21.224-225.
Dorsaneo says under Article 2.21, corporate owners or shareholders have no obligation with respect to claims arising out of the corporation's contractual obligations, unless they perpetrated an actual fraud. The statute also provides that owners and shareholders have no obligation for torts and other claims against the corporation if corporate formalities — such as electing officers and operating as a separate entity under a policy set by the corporation's own board of directors — were ignored, he says.
"The single-business enterprise doctrine had promise as a way to get at the money," Dorsaneo says. "Now it's history."
Also in SSP, the Supreme Court considered SSP's common-law claims for indemnity. Hecht wrote that SSP argues that Gladstrong USA, as the importer of a defective product, is at fault for facilitating entry of that product into this country.
"But even if we assume this is true, any such fault is not the kind of actionable wrongdoing on which common law indemnity is predicated," Hecht wrote.
The Supreme Court found that SSP is not entitled to common-law indemnity without proof that Gladstrong USA was responsible for the defective condition of the WAX lighters. Hecht noted in the opinion that Gladstrong USA argued the lighter at issue either was a counterfeit or was imported by someone else. However, Gladstrong USA did not move for summary judgment on the ground that there is no evidence it sold the lighter that caused the fire, Hecht wrote. The court remanded the caseto the 332nd District Court for further consideration of that issue.
McMains says the Supreme Court is saying that the common-law theory might be OK, but SSP and Metro have not proven that the lighter that Gladstrong USA put out is the lighter that caused the fire. They have an opportunity to prove that Gladstrong USA made the lighter, but that will be hard, he says.
But the case may remain at the Supreme Court for a while. Notes Rogers: "Our plan is to file a motion for rehearing."
