Stop Blaming the Parents! – The Scope of Parental Liability for a Subsidiary’s Contract
February 29, 2024
Misbehaving children? Blame the parents, right? Not so in the corporate context, at least according to Manhattan Commercial Division Justice Robert R. Reed in a recent decision, Memorial Sloan Kettering Cancer Ctr., v. Bristol Myers Squibb Co., in which he found that parent corporations will not be automatically held liable for the contracts of their subsidiaries.
Background
Memorial Sloan Kettering Cancer Center and Eureka Therapeutics Inc. (“Plaintiffs”) teamed up to develop technology to assist with blood cancer treatment. To assist with the development of this technology, Plaintiffs partnered with Juno, a biopharmaceutical company. Specifically, Plaintiffs entered into an exclusive licensing agreement with Juno that incentivized Juno to use Plaintiffs’ technology for blood cancer treatment. The agreement provided that if Juno used and commercialized Plaintiffs’ technology, Plaintiffs would be entitled to certain royalties. After execution of the agreement, however, Juno was acquired by Celgene and Bristol Myers Squibb, Co (“BMS”). As part of the acquisition, Juno “assigned all its right and obligations under the licensing agreement to BMS,” and “BMS acquired and assumed Juno’s rights and obligations under the licensing agreement.”
Further complicating matters between the parties, BMS had a competing blood cancer drug treatment known as Abecma. Instead of promoting Plaintiffs’ blood cancer treatment, BMS started promoting Abecma. Plaintiffs thus alleged that “BMS purportedly abandoned its effort to pursue Plaintiffs’ technology, failed to obtain FDA approval of Plaintiffs’ technology, and failed to develop, manufacture, and commercialize any licensed product as required by. . . the license agreement.” This led to Plaintiffs bringing a single cause of action for breach of contract against all three parties – Juno, BMS, and Celgene. All three parties moved to dismiss.
Analysis
The crux of Justice Reed’s opinion dealt with whether the claims against BMS and Celgene, the parent companies of Juno, should be dismissed. Citing the First Department in World Wide Packaging, LLC v Cargo Cosms., LLC, Justice Reed noted that a “parent corporation generally cannot be held liable for the debts of its wholly owned subsidiary, nor can it be bound by the contract of that subsidiary.” Further relying on an earlier case from the Manhattan Commercial Division, Capricorn Invs. III, L.P. v. Coolbrands Int’l, Inc., Justice Reed explained that since parent and subsidiary entities are usually considered separate legal entities, “a contract of one does not bind the other.”
Turning again to First Department precedent in Horsehead Indus., Inc. v Metallgesellschaft AG, Justice Reed noted that there are limited circumstances that “a parent company can be held liable as a party to its subsidiary’s contract.” These circumstances exist when either “(1) the parent manifests an intent to be bound by the contract; or (2) if the elements of piercing the corporate veil are present.” Justice Reed explained that “intent is inferable if the parent participated in the negotiation of the contract, if the subsidiary is a dummy for the parent, or if the subsidiary is controlled by the parent for the parent’s own purpose.” Id.
After explaining the circumstances under which a parent company could be liable for a subsidiary’s contract, Justice Reed concluded that BMS and Celgene could not be held liable for the contractual obligations of Juno under the licensing agreement with Plaintiffs, reasoning that for parental liability to attach there must be more than “conclusory allegations of business overlap.” He further stressed that “facts must be alleged that establish an intent to be bound, which may be shown by contract negotiation, use of the subsidiary as a shell and use of the subsidiary.”
In this case, Plaintiffs set forth no such evidence in their complaint. Instead, Plaintiffs made bare allegations that BMS and Celgene “assumed” Juno’s contractual obligations and took “exclusive control of performing under the license agreement.” Justice Reed therefore found that there were “no facts plead to support the contention that BMS participated in the relevant contract negotiations, or that Juno was otherwise operated by BMS or Celgene as a dummy corporation.” Thus, Justice Reed dismissed the complaint against BMS and Celgene and severed and continued the action against Juno, individually.
Takeaway
When entering a business transaction with a subsidiary of a parent corporation, in order to successfully blame the parent, the contracting party must allege more than a simple business overlap to attach parental liability for the subsidiary’s contract. Bare allegations, such as the ones in Memorial Sloan Kettering Cancer Ctr., v. Bristol Myers Squibb Co., will result in dismissal of a complaint against parent corporations, leaving the plaintiffs out of luck. So, if you find yourself in a similar situation, it might be wise to ask whether the parents are really to blame?