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01/11/2017

Court Holds Asia-Based Pharma Company Cannot Be Sued in New Jersey Despite Presence of Subsidiary

Client Alert

Written by: Henry T. Chou, Esq. and Quinn K. Zhao, Esq.

An India-based pharmaceutical company, Dishman Pharmaceuticals and Chemicals, Inc. (“Dishman”), won a significant victory on December 29, 2016, when the Appellate Division of the New Jersey Superior Court held that Dishman could not be sued in state court even though one of its subsidiaries, Dishman USA, Inc., is located in New Jersey.

The litigation arose from the failed sale of a Chinese manufacturing facility owned by a Dishman subsidiary in China to FDASmart, Inc., a New York-based company. The Memorandum of Understanding (“MOU”) between Dishman and FDASmart provided that FDASmart would be paid certain consulting fees in connection with the transaction. It also stated that the deal was to governed by the laws of India, a non-disclosure agreement was to be signed in India, and fees were to be paid with applicable Indian taxes. When the deal fell through, FDASmart filed suit against Dishman and Dishman USA in the Law Division of the New Jersey Superior Court, alleging Dishman breached the MOU by failing to pay consulting fees to FDASmart.

After the Law Division initially found that it had general jurisdiction over the dispute due to the presence of Dishman’s subsidiary in New Jersey, the Appellate Division reversed, holding that Dishman lacked “continuous and systematic contacts” with New Jersey to justify it being “haled” into its courts. The Appellate Division refused to assert jurisdiction based solely on the technicality of ownership of the subsidiary by the parent company and held that FDASmart needed to demonstrate the “dominance” of Dishman USA by Dishman via other factors such as “common ownership, financial dependency, interference with a subsidiary’s selection of personnel, disregard of corporate formalities, and control over a subsidiary’s marketing and operational policies.” Since the evidence in the record showed Dishman USA operated independently of and was not financially dependent on Dishman, the Appellate Division determined that the New Jersey courts lacked general jurisdiction over Dishman and dismissed it as a defendant.

While this decision is generally favorable to foreign pharmaceutical companies with subsidiaries in New Jersey, it is a fact-specific outcome that may not be repeated in situations where parent-subsidiary operations are intertwined and subsidiaries are dependent on parent companies for decision-making and financial matters. Careful analysis and restructuring may be required to operate within the confines of the court’s decision and avoid imputation of liabilities upon the parent company.

Hill Wallack LLP represents over 20 companies in the life sciences sector, including biotechnology, therapeutic, diagnostic, pharmaceutical, biopharmaceutical, biomedical and biosynthesis companies. The firm assists these clients in connection with intellectual property, technology transfer, university spin-outs, venture capital and finance, employment, regulatory and mergers and acquisition issues.

This article is for informational purposes only and does not constitute legal advice or a legal opinion.