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Corporate Veil Piercing in the Product Liability Suit

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Corporate Veil Piercing in the Product Liability Suit PRODUCT LIABILITY Adiós Alter Ego Corporate Veil Piercing in By Christopher T. Sheean the Product and Edward J. Keating Liability Suit Properly establishing Product manufacturers in today’s market face many and maintaining a obstacles to remain profitable, viable entities. Competition multilevel corporate from abroad, regulation from state and federal agencies, structure will hinder and attacks from the plaintiffs’ bar have severely damaged manufacturers’ and resellers’ ability to Dating back to English common law, plaintiff attempts to remain in business. One way that com- courts have recognized that a legally panies have responded to these ongoing formed corporation constitutes a separate pierce the corporate veil. threats is through consolidation and acqui- entity from its founders or owners. Courts sition, resulting in the formation of corpo- have done this to encourage business rate families. Adopting a tiered, corporate investment. However, abuses by corporate structure has allowed product sellers and owners who fail to operate the corpora- manufacturers to economize many cor- tion in good faith by undercapitalizing it, porate functions such as shipping, human or by draining its resources for their own resources, legal, accounting, and market- gain, have eroded public faith in the corpo- ing. A multilevel corporate system has rate structure, and courts have responded many benefits, but it also comes with risk. by allowing creditors to pursue actions If not properly established and maintained, directly against the officers or sharehold- adopting a corporate family approach may ers in extreme cases. Courts have devel- create unintended exposure for the share- oped a series of factors to recognize when holders and parent companies of product that legal separation should be maintained, manufacturers and sellers. and when it should be pierced. ■ Christopher T. Sheean is a partner at Swanson Martin and Bell LLP in the Chicago office and is chair of the firm’s class action practice group. He is national trial counsel of products liability claims for a sporting goods manufacturer and represents national and international corporations in various types of commercial, product liability, and intellectual property litigation throughout the United States. His intellectual property practice in- volves issues of trademark and trade secret misappropriation, copyright infringement, unfair competition, and advertising injury claims. Mr. Sheean is also an adjunct faculty member, teaching trial advocacy at the North- western University Pritzker School of Law. Edward J. Keating is an associate at Swanson Martin and Bell’s Chi- cago office and concentrates his practice in commercial litigation and business disputes, as well as product liability. He also has experience in the areas of construction litigation, real estate litigation, and insurance. In law school, Mr. Keating worked as a judicial extern for the Honorable Christoper E. Lawler and John P. Kirby, Circuit Court Judges of Cook County, Illinois. He earned a CALI Excellence for the Future Award in Property. 56 ■ For The Defense ■ November 2019 © 2019 DRI. All rights reserved. The Doctrine of Piercing the corporation and the individual no lon- In Simeone ex rel. Estate of Albert Fran- the Corporate Veil ger exist, and (2) an inequitable result will cis Simeone, Jr. v. Bombardier- Rotax GmbH, A corporation is a legal entity that exists follow if the acts are treated as those of only 360 F. Supp. 2d 665, 675–676 (E.D. Pa. separate and distinct from its sharehold- the corporation. Yoder v. Honeywell Inc., 104 2005), a product liability action based ers, officers, and directors, who are not F.3d 1215, 1221 (10th Cir. 1997). The first -el on an allegedly defective aircraft engine, generally liable for the corporation’s obli- ement is sometimes referred to as the “al- the court held the following factors were gations, debts, or liabilities. In re Wolf, 595 ter ego” situation and may be established a “non- exclusive guide” to determine B.R. 735, 765 (Bankr. N.D. Ill. 2018); Curci by showing domination over and control of whether a subsidiary will be considered Investments, LLC v. Baldwin, 14 Cal. App. the corporation, which usually occurs in the the alter ego of its parent: 5th 214, 220 (Cal. Ct. App. 2017); Helton v. context of a parent–subsidiary relationship (1) ownership of all or most of the stock of U.S. Restoration & Remodeling, Inc., 2016- or a closely held corporation. Here, the court the subsidiary; (2) common officers and Ohio-1232, ¶ 88, 61 N.E.3d 808, 828, appeal must essentially determine that the subsid- directors; (3) a common marketing im- not allowed, 2016-Ohio-5585, ¶ 88; State v. iary is being used as a mere instrumental- age; (4) common use of a trademark or Chase, 407 P.3d 1178, 1182 (Wash. Ct. App. ity of the parent corporation or individual logo; (5) common use of employees; (6) an 2017), review denied, 190 Wash. 2d 1024, charged. The second element is often satis- integrated sales system; (7) interchange of 418 P.3d 802 (2018); Stevenson v. Delaware fied when the corporate form is misused, managerial and supervisory personnel; Dep’t of Nat. Res. & Envtl. Control, 2016 WL when a corporation is undercapitalized so (8) performance of business functions by 4473145, at *4 (Del. Super. Ct. Aug. 19, 2016). that it cannot meet debts that are reason- the subsidiary which the principal corpo- In fact, it is perfectly legal to incorporate ably expected to arise in the normal course ration would normally conduct through for the express purpose of limiting the lia- of business, or when a plaintiff is misled by its own agents or departments; (9) mar- bility of the corporation’s owners. Stephen the corporate structure of an enterprise. keting by the subsidiary on behalf of the B. Presser, Limited Liability and the Doctrine Whether these elements are satisfied principal corporation, or as the princi- of Piercing the Veil, Piercing the Corp. Veil is a question of fact that depends on the pal’s exclusive distributor; and (10) re- §1:1 (July 2018 update). However, under both circumstances of each case. In Yoder, the ceipt by the officers of the subsidiary state and federal common law, abuse of the court applied Colorado law in a product lia- corporation of instruction from the prin- corporate form allows courts to employ the bility action based on an allegedly defective cipal corporation. equitable tool known as veil piercing, which computer keyboard, and held: In Patterson v. Home Depot, USA, Inc., refers to a court’s disregard of an entity’s cor- whether a subsidiary is an instrumental- 684 F. Supp. 2d 1170, 1178 (D. Ariz. 2010), porate structure. Thomas v. Khrawesh, 272 F. ity of the parent is based on evaluating the court, applying Arizona law in a prod- Supp. 3d 995, 1000 (E.D. Mich. 2017); Portfo- these elements: (1) The parent corporation uct liability action where a ladder allegedly lio Fin. Servicing Co. ex rel. Jacom Computer owns all or majority of the capital stock of malfunctioned and collapsed, analyzed the Servs. v. Sharemax.com, Inc., 334 F. Supp. 2d the subsidiary. (2) The parent and subsid- following factors in determining whether a 620, 626 (D. N.J. 2004); Cohen v. Meyers, 175 iary corporations have common directors parent and subsidiary demonstrate a “unity Conn. App. 519, 540 (Conn. App. Ct. 2017). or officers. (3) The parent corporation- fi of control” necessary to pierce the corporate Piercing the corporate veil occurs regu- nances the subsidiary. (4) The parent cor- veil: stock ownership by the parent; com- larly and is one of the most litigated issues poration subscribes to all the capital stock mon officers or directors; financing of the in corporate law. Robert B. Thompson, of the subsidiary or otherwise causes its subsidiary by the parent; payment of sala- Piercing the Corporate Veil: An Empiri- incorporation. (5) The subsidiary has ries and other expenses of the subsidiary cal Study, 76 Cornell L. Rev. 1036 (1991). grossly inadequate capital. (6) The parent by the parent; failure of the subsidiary to This doctrine, in certain circumstances, corporation pays the salaries or expenses maintain formalities of separate corporate imposes personal liability on otherwise or losses of the subsidiary. (7) The subsid- existence; similarity of logo; and the plain- protected corporate officers, directors, and iary has substantially no business except tiff’s lack of knowledge of the subsidiary’s shareholders for a company’s wrongful with the parent corporation or no assets separate corporate existence. acts. Wandering Trails, LLC v. Big Bite except those conveyed to it by the parent In Seasword v. Hilti, Inc., 449 Mich. Excavation, Inc., 156 Idaho 586, 594, 329 corporation. (8) In the papers of the par- 542, 548 n.10 (Mich. 1995), the Michi- P.3d 368, 376 (Idaho 2014). The underlying ent corporation, and in the statements of gan Supreme Court rejected the plain- rationale holds that if the parent, share- its officers, “the subsidiary” is referred to tiff’s argument that the parent corporation holder, officer, or director disregards the as such or as a department or division. could be liable in a product liability action corporate structure, then courts will also (9) The directors or executives of the sub- alleging the negligent design of a power disregard it as far as necessary to protect sidiary do not act independently in the in- drill, absent a showing that the individual and corporate creditors. terest of the subsidiary but take direction subsidiary is a “mere instrumentality” of Although the precise parameters of the from the parent corporation. (10) The for- its parent [by proof that] the parent and doctrine vary by jurisdiction, piercing the mal legal requirements of the subsidiary subsidiary shared principal offices, or had veil usually requires the proponent to show as a separate and independent corpora- interlocking boards of directors or fre- that (1) there is such unity of interest and tion are not observed.
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