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One of the leading defendants in massive federal litigation over possible toxic effects of latex gloves on hospital workers has lost its bid to be dismissed from all cases against it except those that were filed in either Illinois or Delaware — the states where it is headquartered and incorporated. Senior federal Judge Edmund V. Ludwig of the U.S. District Court for the Eastern District of Pennsylvania — who is presiding over pretrial proceedings in about 500 cases — has ruled that the court can exercise jurisdiction over Allegiance Corp. due to the control it exercises over its subsidiaries. Allegiance Corp.’s lawyers argued that the 50-employee company in McGaw Park, Ill., does not have sufficient contacts with 48 states that would allow it to be haled into any of their courts. But Ludwig found that AC exerts an unusual level of control over two subsidiaries — Allegiance Healthcare Corp. (AHC) and Allegiance Healthcare International Inc. (AHII). “Given the overwhelming evidence of what characterizes identity of the Allegiance corporate family and, looked at from the standpoint of AC’s reasonable expectations as to suability, the inclusion of AC within the ambit of personal jurisdiction to the fullest extent of due process is constitutionally well justified,” Ludwig wrote. In 1996, AC was incorporated under Delaware law as a subsidiary of Baxter International Inc., a developer of medical technologies and manufacturer of health care products. Later that year, Baxter reorganized and transferred its health care products assets to AC, including manufacturing and selling of latex gloves. Following the spin-off, AC was a publicly held company until 1999, when it was acquired by Cardinal Health Inc. Although it is qualified to do business only in Illinois and Delaware, AC also owns 100 percent of the stock of AHC and AHII. Subsidiaries of AHC and AHII manufacture latex gloves and sell them to AHC for marketing and distribution in the United States. AHC, which owns 50 distribution centers in the United States, did not challenge personal jurisdiction. Ludwig found that many of the managerial functions of all three companies are performed in a central office located in McGaw Park. AC’s board of directors meets frequently and acts on financial projects of its subsidiaries, including making loans from AC’s lines of credit and buying or selling assets for a subsidiary. The boards of directors of AHC and AHII each consist of the same three members who work together regularly. While AC has just 50 employees, its subsidiaries employ nearly 20,000, Ludwig found, and AC and AHC share a payroll department, which uses separate bank accounts. AHII has more than 35 subsidiaries around the world, including a Malaysian corporation that owns its plant and purchases the necessary raw materials to manufacture latex gloves. As the judge presiding over lawsuits from around the country, Ludwig said his task was to apply the states’ “long-arm” statutes, many of which “authorize jurisdiction to the fullest extent allowable by constitutional due process.” The burden for establishing jurisdiction falls on the plaintiffs, Ludwig found. Plaintiffs’ attorneys Ralph I. Knowles Jr. and Leslie J. Bryan of Doffermyre Shields Canfield Knowles & Devine in Atlanta, along with lead plaintiffs’ attorney David S. Shrager of Shrager Spivey Sachs & Weinstock in Philadelphia, argued that the relationship between AC and AHC confers general jurisdiction under alter-ego principles. They also argued that AC’s business activities conducted over the Internet establish both general and specific jurisdiction. Ludwig found that for the plaintiffs to win on that theory, they would have to demonstrate that the “degree of control exercised by the parent is greater than normally associated with common ownership and directorship.” “The question should be examined in terms of the legal interrelationship of the entities, the authority to control and the actual exercise of control, the administrative chains of command and organizational structure, the performance of functions, and the public’s perception,” Ludwig wrote. “In this sense, the inquiry should not be limited to traditional alter-ego jurisprudence but should encompass whether or not there is a single functional and organic identity.” Ludwig applied the 10-factor test announced by the Eastern District of Pennsylvania in the 1979 decision in Superior Coal Co. v. Ruhrkohle. Nearly all the factors pointed to finding that AC exercises a high degree of control over its subsidiaries. AC owns all the stock of its subsidiaries, Ludwig noted, and while that fact alone does not prove an alter-ego relationship, it “may be relevant to a finding of alter-ego or functional identity.” The three companies also share common directors and officers, Ludwig said, and “the nearly complete congruence of the entities shows that AC can exercise control over its subsidiaries.” Looking to the structure of the companies’ decision-making processes, Ludwig concluded that “the degree of authority utilized by AC as compared to that of its subsidiaries — and, more importantly, the functional identity shared by AC and its subsidiaries — suggests that AC actually does exert such control.” MARKETING IMAGE AC and its subsidiaries also “project a unified marketing image as a single company,” Ludwig found, citing a notice in The Wall Street Journal announcing AC’s spin-off from Baxter that said: “One great company just became two. … Allegiance Corp. just became America’s largest supplier of health care products and cost-management services for hospitals and other health care providers.” The announcement also included a statement that seemed to treat all three companies as one: “We are Allegiance Corp. We just became an independent public company — one with a lot of experience. In fact our history goes back almost 75 years. Today, we’re 22,000 employees around the world, creating sales of about $4.5 billion a year.” Ludwig found that the same “single marketing image” is also presented on the AC Internet Web site. The evidence, Ludwig said, “shows that AC and its subsidiaries “hold themselves out to the public as a single entity that is conveniently departmentalized either nationally or worldwide.” And the fact that all three companies use the same corporate logo, he said, “tends to support a finding of both alter-ego and functional and organic identity.” INTERCHANGEABLE EMPLOYEES AC and its subsidiaries also use the same employees interchangeably, Ludwig found, and the “organizational structure” of the Allegiance companies “reflects an integrated sales and product development system.” Taken separately, Ludwig found that none of the individual Superior Coal factors would require a finding of jurisdiction under alter-ego principles, but that together they painted a picture of inordinate corporate control of subsidiaries. “While severally these factors could be regarded as legally inadequate straws in the wind, when added and bound together they depict a far greater degree of control than exists in the usual interlocking ownership or directorship,” Ludwig wrote. “No doubt defendants can say it ‘would be virtually impossible’ for the 50 employees of AC, as a holding company, to ‘control the day-to-day operations of its numerous subsidiaries.’ But that line of defense disregards the virtually total interrelationship of the corporate family and the pyramidal absolute control of the holding company — all of which is presented to the public as one and the same entity,” Ludwig wrote. Allegiance Corp. was represented by attorneys Paul F. Donahue, Alan L. Unikel and Daniel M. Blouin of Seyfarth Shaw in Chicago.

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