Court: District Court, E.D. Pennsylvania; December 11, 2011; Federal District Court
GlaxoSmithKline, LLC opposes plaintiffs’ motions to remand cases related to the drug Paxil, contesting the ruling in Brewer v. SmithKline Beacham Corp., which deemed LLC a Pennsylvania citizen, thereby preventing removal based on federal diversity jurisdiction. LLC claims a misapplication of the "nerve center" test from Hertz Corp. v. Friend and the citizenship test from Zambelli Fireworks Manufacturing Co. v. Wood, arguing that the operational decision-making nerve center should be identified as the non-operating holding company rather than LLC. Despite acknowledging the facts of Brewer, LLC disputes the inferences and legal conclusions derived from those facts, asserting that the decision was incorrect.
Upon reviewing the current record and supplemental materials, the court reaffirms the correctness of the Brewer ruling, determining that the core facts remain unchanged. LLC, which operates GlaxoSmithKline’s pharmaceutical business, has a sole member, GlaxoSmithKline Holdings (Americas) Inc., a Delaware holding company that does not control LLC's operations. Testimony and amended contracts presented by LLC do not alter the jurisdictional analysis, as the operational decisions continue to be made at the Philadelphia headquarters. The court notes that revisions to contracts and by-laws appeared to be post-litigation efforts to avoid jurisdictional issues, emphasizing that while the formation of LLC was not intended for jurisdictional manipulation, subsequent actions could be perceived as such. Ultimately, the court concludes that the jurisdictional status remains unchanged, leading to the decision to remand the cases.
LLC has not provided new evidence regarding Holdings’ delegation of operational decision-making to LLC’s directors and officers in Philadelphia. The supplemental record does not contradict Heslop’s testimony that LLC is a continuation of SKB, which has historically made its business decisions in Philadelphia. LLC emphasizes the characterization of its relationship with Holdings as “unique” and the circumstances surrounding the Hertz nerve center test as an “anomaly.” The court acknowledges potential ambiguity in its language but clarifies that holding companies and single-member LLCs are common. The relationship between an LLC and its sole member differs from those considered in Hertz and Zambelli, which did not address the intersection of the nerve center test and LLC citizenship. The court notes that it could have better articulated the interaction of the two tests, explaining that they intersect when a holding company is the sole member of an LLC with one operating company.
Under the Delaware Limited Liability Company Act, management can be vested in members or designated non-member managers as specified in the operating agreement. If silent, members manage the LLC. Holdings, initially the sole shareholder of SKB, converted SKB into an LLC, making Holdings the sole member of LLC. By choosing a manager-managed structure, Holdings relinquished its management authority and delegated operational decision-making to LLC’s officers and directors through the Operating Agreement. Consequently, Holdings does not manage LLC’s operations, which is a critical factor in applying the Hertz nerve center test.
LLC contends that Brewer misinterprets Holdings' role in operational decision-making, asserting that under its Operating Agreement, Holdings had no authority to delegate management responsibilities because LLC was established as a manager-managed entity. LLC argues that since the Operating Agreement designates appointed managers to oversee LLC, Holdings, as the sole member, could not manage the business directly. At the time of LLC's formation, Holdings possessed the original authority to manage LLC but chose to appoint others to do so. This choice aligns with the intent that LLC is a continuation of SKB, with the former SKB board of directors transitioning seamlessly to the board of managers for LLC.
The Operating Agreement explicitly allows the board of directors of SKB to serve as initial managers of LLC, thus maintaining continuity in management from SKB to LLC. Consequently, operational decisions are made by LLC's managers, not Holdings or its board, despite Holdings retaining membership status. The managers operate separately from LLC yet represent its interests, with their authority stemming from the LLC and potentially revocable by amending the Operating Agreement. LLC critiques Macey's interpretation of Delaware law, arguing that it overlooks the practical dynamics between Holdings and LLC in operational decision-making, which is critical for the "nerve center" test. LLC emphasizes the distinction between management authority transfer under 18-402 (at formation) versus 18-407 (post-formation), clarifying when such authority is vested according to Delaware law.
In a 18-402 delegation, members of an LLC cede management to a designated manager as outlined in the operating agreement. In contrast, a 18-407 delegation allows members or designated managers to transfer management authority to others, occurring after the LLC has begun operations. LLC seeks to initiate the delegation process post-formation, disregarding its initial authority held by Holdings prior to electing a manager-managed structure. Macey, LLC’s expert incorrectly asserts that the Board of Managers originally had management authority; in fact, it belonged to Holdings until a manager-managed election was made. GSK contends that Brewer's reliance on LLC's structure to establish a new rule for determining a limited liability company's principal place of business was erroneous, as Brewer did not find the structure unique but rather the application of the Hertz "nerve center" test to a single-member LLC with a non-controlling holding company as its sole member. Brewer's ruling is narrower than GSK claims, not universally applicable to all LLCs or manager-managed LLCs. It aligns with the Supreme Court's caution in Hertz, indicating that the nerve center test may not apply uniformly across situations, focusing instead on operational decision-making. The conclusion drawn is that LLC’s operations are managed from Philadelphia, making Holdings' principal place of business Pennsylvania, thus preventing removal of actions from Pennsylvania state court under 28 U.S.C. 1441(b). The details of Brewer's factual findings will not be reiterated. Additionally, the document references the distinction between member-managed and manager-managed LLCs, emphasizing their structural differences.
