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Removal jurisdiction and corporate headquarters

Forum-shopping annals: New York citizens sue a pharmaceutical company in state court in Philadelphia; defendants remove to federal court based on diversity jurisdiction.

In the case of Monroe v. Smithkline Beechem Corp., the district court erroneously ordered remand back to state court on June 25 because it decided the citizenship of a limited liability corporation using the legal standard for regular corporations. LLCs are treated like partnerships for purposes of determining citizenship, and the sole owner of the LLC in question is in Delaware. The LLC headquarters are in Pennsylvania, however, and, using the Hertz Co. v. Friend "nerve center" test for corporate citizenship rather than the test for LLCs, the district court remanded; a defendant may not remove a case on diversity jurisdiction grounds when it is brought in the defendant's home state. (The Legal Intelligencer story mentions this issue, but is too polite to note how badly the judge screwed up, and how frivolous the Kline & Specter claim to the contrary was.) This isn't a case where the removal was sloppy, either: I looked up the removal papers, and they plainly set out the GSK corporate structure and the standard for determining citizenship; at worst they can be faulted for not adding a legal citation to that standard, but they shouldn't need the belt-and-suspenders approach (though I bet those attorneys will use it in the future). Remands of removals are not appealable (except in the limited circumstances of Class Action Fairness Act jurisdiction), so unless Judge J. Curtis Joyner decides to correct his appalling legal error on the motion to reconsider, GSK is out of luck.

The Hertz decision raises interesting issues of "voting with one's feet." GSK is based in Philadelphia, where the state courts are notoriously plaintiff-friendly. It seems to hope to avoid removal jurisdiction problems by restructuring as an LLC based in Delaware, and that should work when courts apply the correct legal standards. If LLCs are eventually held to the "nerve center" test, corporations should give serious consideration to whether they should be based in states where the legal systems value the interests of trial lawyers over the public good. One problem tort reform advocates always have is the difficulty of demonstrating benefits from reform. While trial lawyers can always parade telegenic victims (even when, like Lilly Ledbetter, they're not actually victims), it's harder for reform advocates to point to the lives not saved, the drugs not developed, the jobs not created from the expenses of litigation abuse. Business needs to do a better job of publicly tying its decisions to the public-policy considerations involved. Pennsylvania might be much more inclined to rein in its abuses if it knew that thousands of jobs at GSK headquarters were about to decamp to Houston. If the issue of tort reform isn't significant enough to entice a company to vote with its feet, why should legislators care?

(Earlier on the issue of erroneous remands.)

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.