Phillips v. Cooper Laboratories

• Decision Date: 29 November 1989
• Docket Number: No. A038932,A038932
• Citation: 264 Cal.Rptr. 311,215 Cal.App.3d 1648
• Court: California Court of Appeals Court of Appeals
• Parties: , Prod.Liab.Rep. (CCH) P 12,376 Sandra PHILLIPS, et al., Plaintiffs and Appellants, v. COOPER LABORATORIES, INC., Defendant and Appellant; Nestle-LeMur Company, Inc., Defendant and Respondent.

Page 311

264 Cal.Rptr. 311

215 Cal.App.3d 1648, Prod.Liab.Rep. (CCH) P 12,376

Sandra PHILLIPS, et al., Plaintiffs and Appellants, v. COOPER LABORATORIES, INC., Defendant and Appellant;

Nestle-LeMur Company, Inc., Defendant and Respondent.

No. A038932.

Court of Appeal, First District, Division 2, California.

Nov. 29, 1989.

Duane W. Grummer, Robert S. Niemann, William A. Bogdan, Lynch, Loofbourrow, Helmenstine, Gilardi & Grummer, San Francisco, for defendant/appellant/cross-respondent Cooper Laboratories, Inc.

Nelson C. Barry, James D. Taylor, Bishop, Barry, Howe, Haney & Ryder, San Francisco, for defendant/cross-respondent Nestle-LeMur Co., Inc.

LeRoy Hersh, Dan Bolton, Hersh & Hersh, San Francisco, for plaintiffs/respondents/cross-appellants Sandra Phillips, et al.

PETERSON, Associate Justice.

This case involves questions of corporate successor liability. Appellant Cooper Laboratories, Inc. (Cooper) appeals from an order of the San Francisco Superior Court holding it potentially responsible, as successor in interest, for all damages allegedly incurred by Sandra and Michael Phillips (Phillips) as the result of Sandra's exposure to diethylstilbestrol (DES) in utero. The Phillips cross-appeal from the court's order holding that another corporation, the Nestle-LeMur Company, Inc. (Nestle), was not responsible, as successor in interest, for the damages they allegedly sustained. We reverse the trial court's order holding Cooper potentially liable for the Phillips' injuries. We affirm the trial court's order exonerating Nestle.

I. FACTUAL AND PROCEDURAL BACKGROUND

The Phillips' complaint filed November 1982 named over 150 defendants, apparently based upon the market share theory of liability enunciated in iSindell v. Abbott Laboratories (1980) 26 Cal.3d 588, 163 Cal.Rptr. 132, 607 P.2d 924. The complaint's alleged causes of action were for negligence, "products liability," "negligent manufacture," breach of express warranty, fraud, "conscious disregard of others' safety," and loss of consortium.

By order of November 1984 on motion for summary adjudication of issues, the trial court found, inter alia, that Sandra was born May 23, 1959; and that her mother, during her pregnancy with Sandra, had received by prescription of her physician a drug trade named Milestrol, which was DES manufactured by E.S. Miller Laboratories, Inc. (Miller). Miller did not exist as a corporate entity at the date of said order.

Following this order, Nestle and Cooper remained potentially liable as successors in interest to the liabilities of Miller; and in June 1986, Cooper successfully moved to bifurcate trial of the separate issue of successor liability from the remaining issues of the case. In November 1986, the successor liability issue was tried before the San Francisco Superior Court. At trial, the following facts were established.

Miller was incorporated in California in 1926. It manufactured and sold ethical pharmaceuticals, i.e. drugs for which a doctor's prescription is required. Between 1942 and 1958, Miller marketed Milestrol.

In 1958, Nestle acquired three corporations which were involved in the manufacture and distribution of pharmaceuticals: the Carroll Dunham Smith Pharmacal Company (Smith), Miller, and the E.L. Patch Company (Patch). Each of these corporations was obtained through Nestle's acquisition of all or substantially all of the stock of the acquired corporation.

Shortly after these acquisitions in 1958, Nestle formed a fourth corporation in the state of New York, Smith, Miller & Patch, Inc. (SMP-NY). The purpose of SMP-NY was to market the pharmaceutical products of the three newly acquired corporations.

Nestle, in 1958, began reorganization and consolidation of the functions of the various corporations which it had acquired. The raw materials and components in Miller's laboratories and its product manufacturing functions were transferred to Smith; Smith thereafter produced Milestrol under another trade name. Miller's product manufacture was, thus, transferred to Smith; Miller's marketing and sales assets, including its good will, name, trademark "Milestrol," sales force, retail lists for marketing purposes and old inventories of Milestrol were transferred to SMP-NY for an adequate consideration. By January 1959, Miller had ceased all production of Milestrol. From this point until its corporate existence ceased, Miller became solely a warehouse operation for the products developed and marketed by Smith, Patch, SMP-NY and Nestle. During this period, Miller was more profitable as a warehouse than it had been as a pharmaceutical operation.

In 1964, Patch was dissolved as a corporation. In 1968, Miller was also dissolved pursuant to a vote of its sole shareholder Nestle. ¹

In 1970, Nestle created a second corporation called Smith, Miller & Patch in the state of New Jersey (SMP-NJ). Immediately after its creation, SMP-NJ acquired SMP-NY and Smith by exchanging all of its stock for all of the stock of those corporations which had been owned previously by Nestle. As part of this transaction, SMP-NJ expressly assumed all debts and liabilities of SMP-NY. Immediately after this transaction, SMP-NY dissolved. In March 1972, SMP-NJ merged into Cooper.

Based upon these facts, the court order held that Cooper was potentially liable to the Phillips for their injuries as successor in interest to Miller. The court exonerated Nestle from any potential liability to the Phillips. Cooper now appeals from the trial court's order holding it potentially liable for the Phillips' injuries; the Phillips cross-appeal from that portion of the trial court's order exonerating Nestle.

II. DISCUSSION

A. Cooper Appeal

In finding Cooper potentially liable to the Phillips, the trial court relied on the doctrines of corporate successor liability discussed by our Supreme Court in Ray v. Alad Corp., supra, 19 Cal.3d 22, 136 Cal.Rptr. 574, 560 P.2d 3. In Ray, the Alad Corporation (Alad I) manufactured ladders. The business was acquired by a second corporation, Alad II, through an asset purchase. Alad II continued the same manufacturing operation under the name "Alad Corporation," using the same equipment, designs, and personnel; soliciting Alad I's customers with the same sales representatives; and showing no outward indication of a change in ownership. The plaintiff in Ray was injured in a fall from a defective ladder manufactured by Alad I before the transfer of the business. Thus, the plaintiff sued Alad II under a products liability theory.

In Ray, the Supreme Court first discussed the rules ordinarily applied to the determination of whether a corporation purchasing the principal assets of another corporation assumes the purchased corporation's liabilities. Thereunder, the purchaser does not assume the seller's liabilities unless (1) there is an express or implied agreement of assumption, (2) the transaction amounts to a merger or consolidation of the two corporations, (3) the purchasing corporation is a mere continuation of the seller, or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller's debts. (Id. at p. 28, 136 Cal.Rptr. 574, 560 P.2d 3.)

After determining that Alad II could not be held responsible for the plaintiff's injuries under the rules ordinarily applied, the court further announced an exception to the traditional rules of corporate successor liability, referred to by some subsequent courts as the "product line theory" or the "product line continuation theory": "Justification for imposing strict liability upon a successor to a manufacturer under the circumstances here presented rests upon (1) the virtual destruction of the plaintiff's remedies against the original manufacturer caused by the successor's acquisition of the business, (2) the successor's ability to assume the original manufacturer's risk-spreading role, and (3) the fairness of requiring the successor to assume a responsibility for defective products that was a burden necessarily attached to the original manufacturer's good will being enjoyed by the successor in the continued operation of the business." (Id. at p. 31, 136 Cal.Rptr. 574, 560 P.2d 3, single underlined emphasis in original, double underlined emphasis added.)

Applying this three-pronged test to the facts before it, the Supreme Court first concluded that the plaintiff's remedies against the original ladder manufacturer had been virtually destroyed by the corporate takeover. The plaintiff's claim was not in existence at the time of Alad I's dissolution, and was not included in claims paid during liquidation. The plaintiff was, thus, left with only the "formidable and probably insuperable obstacles" (Id. at p. 32, 136 Cal.Rptr. 574, 560 P.2d 3) of attempting to satisfy a judgment against the former stockholders and directors. Because of such barriers to suit against the predecessor corporation, the Supreme Court concluded that successor liability was necessary to prevent a complete denial of redress against the manufacturer of a defective product.

Second, Alad II had the same ability to spread the risk of defective products as did Alad I. The successor continued to manufacture the same product line with the same plant and equipment and with the same personnel as the original manufacturer. Under those circumstances, Alad II had the same ability to estimate risks and meet them by providing insurance, as well as the ability to spread the cost of compensation among its customers.

Third, it was fair and equitable to impose successor liability upon Alad II because it had marketed the same product under the same name with the use of its predecessor's good will.

The trial court here, in determining the potential liability of Cooper to the Phillips, relied on a combination of the traditional rules of corporate successor liability and the exception stated in Ray. The court first noted that the merger between Cooper and SMP-NJ in 1972...