CHAPTER § 6.03 Direct Parent Liability
| Jurisdiction | United States |
§ 6.03 Direct Parent Liability
There are other ways a plaintiff may seek to hold a pharmaceutical company liable for a product manufactured by a company with which it is affiliated, whether through a parent-subsidiary relationship, agency, a joint venture, or some other agreement involving research, marketing, branding, or distribution of products. Unlike a veil-piercing theory, in which plaintiffs assert that one company is the alter ego of another, direct liability can arise when one company undertakes some action on behalf of the manufacturer. Attempts to assert these theories have met with mixed success in tort actions generally and pharmaceutical claims in particular.
[1] Negligent Performance of an Undertaking
A pharmaceutical company may be subject to liability for physical injuries to a third party if it undertakes to render services to another when it should recognize that those services are necessary for the protection or safety of that third party but does not exercise reasonable care when rendering those services. Examples include: (1) the pharmaceutical company fails to exercise reasonable care in the face of the foreseeable harm; (2) it undertakes a duty owed to the third party by another entity; or (3) the third party's reliance on the undertaking caused the harm.110 Such liability may attach whether the services are rendered gratuitously or for consideration.111
The undertaking must be one that relates to the safety of a third party. A parent company may be liable when it controls health and safety matters at a subsidiary,112 when a subsidiary relies only on health or safety research conducted by the parent on behalf of the subsidiary,113 and possibly even when the parent promotes its involvement in the product manufactured by the subsidiary.114 To successfully assert liability under this theory against a parent, a plaintiff must present evidence that the parent was aware of the risk of harm that could arise from its undertaking and the subsidiary failed to take reasonable steps to ensure the safety of the third party.115
[2] Direct Participation
A parent corporation may also be subject to direct liability for the actions of a subsidiary where the parent actively participated in the decision to commit the relevant wrong and where the parent's participation was direct and outside the normal channels of corporate decision-making.116 This is distinct from indirect liability by veil piercing because, rather than focusing on the degree of control exercised by the parent over the subsidiary in general, this theory is asserted when it can be shown that the parent exercised specific control over the allegedly tortious act or omission itself.117 A parent can be directly liable for actions of its subsidiary under a direct-participation theory when the parent's control and participation are exercised through channels outside recognized norms of parental oversight, rather than through proper corporate channels consistent with the parent's status as an investor in the subsidiary (such as monitoring performance, supervising financial decisions, or articulating general policies or procedures).118 In short, the exercise of control must be through "improper means."119 Such control also may be through a joint venture between the parent and subsidiary, through direction of a subsidiary's actions via an agent of the parent, or through a director or officer of both entities acting in the interests of the parent when purportedly acting on behalf of the subsidiary.120
[3] Agency Liability
A parent may also be directly liable for products manufactured by its subsidiary where the subsidiary had express or implied authority to act on behalf of the parent.121 Unlike veil-piercing, in which the focus is on the parent's general control over the subsidiary, direct liability on an agency theory is based on the parent's control over the subsidiary specific to the tortious act or omission alleged.122 Because of this, a plaintiff must demonstrate that any actual or apparent authority by the subsidiary to act on behalf of the parent must relate directly to the cause of action.123 Direct liability through agency may also arise where a subsidiary exists to perform functions on behalf of a foreign parent in the United States or in a particular state.124
[4] Apparent-Manufacturer Doctrine
Direct liability may also be alleged with respect to a company that puts out a product manufactured by another as its own.125 Direct liability under this theory, however, requires more than a mere packaging of a subsidiary's product under the trademark of a parent.126 For a parent to be directly liable for injuries caused by a product manufactured by a subsidiary, the parent must sell the subsidiary's products as though it manufactured them itself.127 A licensing agreement or other formal pact in which one company allows the other the use of its name and trademark in exchange for control over, or involvement in, the manufacture of a product may subject the non-manufacturing party to liability under the apparent-manufacturer doctrine.128
[5] Joint Venture
Under the theories of joint venture or concerted action, a company may be subject to joint and several liability if it and the manufacturer had an understanding, express or tacit, to participate in a common plan or design to commit a tortious act or omission.129 Unlike civil conspiracy, which requires an agreement by at least two parties and an overt act by just one co-conspirator in furtherance of the conspiracy, joint-venture liability requires a tortious act by each defendant, not merely substantial assistance and encouragement to the allegedly tortious manufacturer.130 Accordingly, it is not sufficient that a parent company expects to share profits from a product131 or the licensing of a parent's trademarks for use in marketing the subsidiary's products132 to be subject to direct liability. Indeed, a parent must intend to share its subsidiary's debt and losses as well as profits to constitute a joint venture.133
[6] Duty to Control Subsidiary
Plaintiffs have asserted that when a "special relationship"134 exists between a parent and subsidiary (or between two otherwise-affiliated corporate entities), a parent may have a duty to control or supervise the subsidiary's conduct to prevent physical harm to a third party.135 Specifically in litigation involving medical devices, plaintiffs have argued that parent corporations inadequately supervised their subsidiaries' manufacture of silicone breast implants.136 The court in that case, however, found that there was no "special relationship" between the parent and subsidiary to trigger imposition of such a duty.137 Indeed, courts have generally rejected a duty to control or supervise a subsidiary in a mass-tort context.138
[7] Aiding and Abetting
A parent can be subject to liability for aiding and abetting its subsidiary in the commission of a tort if the parent knowingly and substantially assists or encourages the subsidiary and is generally aware of the subsidiary's role in tortious activity at the time it provides the assistance.139 To determine if assistance is sufficiently knowing and substantial for direct liability to be imposed, courts typically consider six factors: (1) the nature of the act aided or encouraged; (2) the amount and type of assistance provided; (3) the presence or absence of the parent at the time the tortious act is committed; (4) the parent's relationship to the subsidiary; (5) the state of mind of the parent; and (6) the duration of the assistance provided.140
The bar for imposing liability on a parent for aiding and abetting a subsidiary can be high. It is not enough that the two corporations share personnel or facilities at the time of the tort.141 Nor does the provision of support typical of that provided to a subsidiary by a parent amount to the "substantial assistance" required to impose direct liability.142
[8] Conspiracy
A parent may be liable under a cause of action for conspiracy if it is established that there is an agreement between the parent and at least one other entity to accomplish an unlawful purpose—or a lawful purpose by unlawful means—causing an injury, so long as one co-conspirator performs an overt act in furtherance of the conspiracy.143 Without an allegation of an underlying tort, a plaintiff cannot state a claim for conspiracy.144 While such claims have been raised successfully in some products-liability litigation,145 to properly assert a conspiracy claim in a parent-subsidiary context, a plaintiff must establish both sufficient knowledge and agreement on the part of the parent to impose direct liability for the subsidiary's actions.146
[9] Respondeat Superior
When a parent lends or provides employees to a subsidiary, it may be jointly or solely liable for any torts committed by that employee in the scope of his employment under the doctrine of respondeat superior.147 The key factor in determining which corporation is liable for the torts committed by the employer is whether the original employer has released its authority to control and direct the manner and method of the work to be performed for the time required to perform the subsidiary's work.148 It is possible that both parent and subsidiary could be liable under this doctrine.149 A court may be more likely to impose liability pursuant to respondeat superior if the provision of senior management personnel is part of a general assertion of control of a subsidiary by a parent.150 But this theory may be foreclosed in some jurisdictions as a matter of law.151
[10] Statutory Liability
A plaintiff may also seek to impose direct liability on a parent corporation under a statutory basis.152 For example, under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), any entity that "operates" a facility that generates hazardous waste may be liable for the costs of cleaning up that waste.153 All that need be established for the...
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