The 100-square-foot room in Wilmington, Del., that is subleased by GSK Holdings — the owner of the American arm of British-based pharma giant GlaxoSmithKline — qualifies it as a Delaware corporate citizen, the U.S. Court of Appeals for the Third Circuit has held.

The ruling resolves a split in the district courts about how they are to determine the citizenship of holding companies versus operating companies.

The appeals court upheld an Eastern District ruling that diversity jurisdiction is appropriate in a case that was brought by "thalidomide babies," one of whom is a Pennsylvania citizen. The plaintiffs had tried to defeat diversity jurisdiction and remand the case back to the Philadelphia Court of Common Pleas by arguing that GSK LLC, the American operating division of GlaxoSmithKline, with its 650,000-square-foot office headquarters and 1,800 employees in Philadelphia, would qualify as the "nerve center" of the company, including its owner, GSK Holdings.

A holding company doesn’t make anything or do any research, explained Third Circuit Judge Kent A. Jordan, who wrote the opinion on behalf of the three-judge appeals court panel.

"All holding companies do is ‘hold,’" Jordan quoted from U.S. District Judge Paul Diamond of the Eastern District of Pennsylvania’s opinion in the case.

Therefore, unlike operating companies that can have complex functions and management, holding companies don’t require an elaborate infrastructure, and a small office with one employee who works 20 hours a year, as is the case with GSK Holdings, is sufficient to establish citizenship, he said.

The citizenship of limited liability companies is established by their members and, in this case, GSK LLC’s sole member is GSK Holdings, according to the opinion.

In 2010, the U.S. Supreme Court settled confusion over Congress’ intended meaning for the term "principal place of business" in the statute defining a corporation’s state of citizenship by endorsing in Hertz v. Friend the "nerve center" test, which finds the geographic location of the company’s brain. That location establishes the company’s state of citizenship.

The plaintiffs argued that the district court’s ruling for GSK, finding that it’s single Wilmington office establishes Delaware citizenship, flies in the face of Hertz.

Hertz "warned courts to guard against jurisdictional manipulation by ensuring that a corporation’s headquarters is actually its center of direction, ‘not simply an office where the corporation holds its board meetings,’" Jordan said, quoting from the Supreme Court’s opinion.

"GSK Holdings’ 10-by-10-foot office in Wilmington closely fits that description, and plaintiffs contend that the evidence demonstrates that no substantive decision-making could have occurred there," Jordan said.

That argument is compelling, but fatally flawed, he said. The context of the company and its function are key.

The Hertz decision centered on a large-scale operating company with 11,230 employees in 44 states, Jordan said, contrasting that to the much simpler structure of a holding company.

"For a holding company such as GSK Holdings, relatively short, quarterly board meetings may well be all that is required to direct and control the company’s limited work," Jordan said.

The plaintiffs had also made the novel argument that the "nerve center" of GSK LLC should determine the citizenship of its owner, GSK Holdings, rather than the other way around. The court called it the delegation theory.

Because GSK Holdings had delegated its authority to manage GSK LLC to GSK LLC’s Philadelphia-based managers, the plaintiffs argued that the LLC’s nerve center in Philadelphia should prevail.

Jordan quickly noted that the record doesn’t support that description of the relationship, and GSK Holdings has always functioned solely as the owner of GSK LLC.

"To determine the citizenship of a limited liability company using the plaintiffs’ approach, we must look to its member, but then, if that member is a holding company, we must immediately look back to the limited liability company, reversing the Zambelli analysis entirely," Jordan said, referring to the Third Circuit’s 2010 opinion in Zambelli Fireworks Manufacturing v. Wood. In that opinion, the appeals court ruled similarly to its sister circuits and held that the citizenship of a limited liability company is determined by the citizenship of its members.

The court declined to take that path.

"The appeal court’s holding confirms GSK LLC’s position that it is a Delaware citizen. In future cases, this will help ensure that litigation affecting the company will take place in appropriate legal venues," said Kevin Colgan, spokesman for GlaxoSmithKline, in a prepared statement.

On the panel with Jordan were Judges Thomas L. Ambro and Thomas I. Vanaskie.

Craig Spiegel, of Hagens Berman Sobol Shapiro in Seattle, Wash., argued on behalf of the plaintiffs and couldn’t be reached for comment.

Lisa Blatt, of Arnold & Porter in Washington, D.C., represented GSK and couldn’t be reached for comment.

Saranac Hale Spencer can be contacted at 215-557-2449 or Follow her on Twitter @SSpencerTLI.

(Copies of the 50-page opinion in Johnson v. SmithKline Beecham, PICS No. 13-1277, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •