Schwartz v. Electronic Data Systems, Inc.

• Decision Date: 04 September 1990
• Docket Number: No. 88-1980,88-1980
• Citation: 913 F.2d 279
• Parties: Mark SCHWARTZ, Plaintiff-Appellant, v. ELECTRONIC DATA SYSTEMS, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 279

913 F.2d 279

59 USLW 2172

Mark SCHWARTZ, Plaintiff-Appellant, v. ELECTRONIC DATA SYSTEMS, INC., Defendant-Appellee.

No. 88-1980.

United States Court of Appeals, Sixth Circuit.

Argued May 22, 1989.

Decided Sept. 4, 1990.

Robert H. Fortunate (argued), Foster, Meadows & Ballard, Detroit, Mich., for plaintiff-appellant.

J.R. Wheatley, Clark, Hardy, Lewis, Pollard & Page, Birmingham, Mich., George Cherpelis, Timothy Salazar (argued), Cherpelis & Associates, Alburquerque, N.M., for defendant-appellee.

Before: MERRITT, Chief Judge, and NELSON, Circuit Judge, and LIVELY, Senior Circuit Judge.

LIVELY, Senior Circuit Judge.

In this diversity action a former employee of Electronic Data Systems, Inc. (EDS) seeks damages for alleged fraudulent misrepresentations concerning the content of a training program for which the plaintiff was hired. He also charges EDS with breach of his employment contract.

I.

The plaintiff, Mark Schwartz, is a citizen of Michigan. EDS, a Texas corporation with its principal place of business in Dallas, is a wholly-owned subsidiary of General Motors Corporation (GM), a Delaware corporation with its principal place of business in Michigan. Although some of the events leading to the plaintiff's employment took place in California, both parties rely on the substantive law of Michigan, and we agree that Michigan law controls.

A.

The plaintiff has a bachelor's degree in electrical engineering from the Massachusetts Institute of Technology and a doctorate in neuro-science from the University of California at Los Angeles. After completing his degree at UCLA, Schwartz stayed on for several years doing research under various grants. In the spring of 1985 the funding for his current research program was running out and he began looking for employment in industry. In the course of his search Schwartz answered an advertisement by EDS in the Los Angeles Times which described in general terms a new training program that EDS had created in which qualified individuals would receive "world class training ... specially designed for engineers who want to advance quickly in a computer technology environment that can only be described as state-of-the-art." The ad went on to state: "Your career will be at the leading edge of technology--in robotics, CAE [Computer Aided Engineering]/CAD [Computer Aided Design]/CAM [Computer Aided Manufacturing]/CIM [Computer Integrated Manufacturing], machine vision, manufacturing control systems, expert systems and simulation systems."

Although Schwartz had many years of computer training and had used computers extensively in research, he had no experience in manufacturing. He was particularly interested in robotics and "artificial intelligence." Schwartz met at least twice with an EDS recruiter, Becky Larkin, who described the Engineering Systems Development Program (the program) in broad terms and gave him some documents describing the program, and the two corporations, EDS and GM. She stated that the program was designed to gain maximum benefits for GM out of its recent "alliance" with EDS.

At the second meeting with Ms. Larkin, Schwartz submitted a formal application for employment by EDS. He had previously furnished a resume. Following that meeting Schwartz was contacted by EDS and invited to come to Detroit for a further interview. Following an interview with Howard Falls at the GM Technical Center near Detroit, Schwartz signed an employment agreement, and other documents, on July 9, 1985. EDS agreed to pay for Schwartz and his family to move to Michigan, and he was to begin work on September 30, 1985, at a salary of $29,000 per year. This was approximately $8,000 more than his stipend at UCLA.

B.

Ms. Larkin furnished a handwritten outline of the program at the first meeting. According to this outline, the program was divided into three phases, and was designed to last 20 to 24 months. Phase I involved learning the GM engineering/manufacturing environment, the computer tools used in that environment, and working on various simulation and modeling projects. At the conclusion of Phase I, the trainee would be assigned to an area of expertise such as CAD/CAM, artificial intelligence or process control. Phase II was to consist of 15 weeks of classroom instruction, including 8 weeks devoted to the trainee's specialty area. Phase III, which was projected to last 6 to 9 months, was to involve project analysis and programming in the area of the trainee's expertise. The purpose of the training was to apply the trainee's knowledge and experience to the manufacturing environment. According to Schwartz, Ms. Larkin told him that upon graduation a person would be a "full-fledged EDS systems engineer."

In addition to the handwritten summary, Ms. Larkin gave Schwartz a seven-page typed "overview" of the program. The description of the three phases of the program was largely written in the future tense and clearly indicated that changes might be made. ("The format of the ESD Program presently includes three phases.... As the format of the program becomes more clearly defined, revisions to this document will be provided.") Schwartz testified by deposition that he relied on the overview--that it "speaks for itself"--in addition to the newspaper advertisement and Ms. Larkin's oral description of the program and her handwritten summary.

C.

In October, 1985, about two weeks after Schwartz began working in Phase I of the program, an EDS manager, Reeves, called a meeting of about 100 trainees. He advised them that EDS had determined after further consideration to change Phase II of the program. Instead of 15 weeks of classroom work, the trainees would be given ten weeks of further EDS computer training, with an option for continuing education courses from a University of Michigan professor. Schwartz testified that he believed EDS was saying that its objectives for the program remained the same, but that "how they intended to achieve the objective [was] going to change." He testified that he felt some "disquietitude" about the program after the Reeves meeting, but felt that EDS would return to the original format. Nevertheless, when his supervisor offered him an opportunity in November 1985 to leave the program and become a systems engineer for EDS, Schwartz accepted. He continued to work as a systems engineer until he was terminated in early 1987.

II.

At oral argument the court raised a question concerning subject matter jurisdiction, and requested the parties to file supplemental briefs on this issue. Research and study of the jurisdictional issue has delayed our decision.

The plaintiff, Schwartz, is a citizen and resident of Michigan. While EDS is a Texas corporation, it is a wholly-owned subsidiary of GM, which has its principal place of business in Michigan. The diversity statute states that "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business...." 28 U.S.C. Sec. 1332(c)(1). Thus, for diversity purposes GM, the non-party corporate parent of the defendant, is a citizen of Michigan. The question posed is whether EDS should be treated as a separate entity for purposes of federal court jurisdiction, or whether it should be treated as an alter ego of its corporate parent, GM.

A.

In Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333, 45 S.Ct. 250, 69 L.Ed. 634 (1925), the Supreme Court was required to determine whether Cudahy, a Maine corporation, could be sued in a federal district court in North Carolina for breach of contract allegedly committed by Cudahy's subsidiary, an Alabama corporation. The parent corporation was not doing business in North Carolina; however, its subsidiary maintained an office in that state and distributed Cudahy products within North Carolina. The Court stated the question for decision as "whether the corporate separation carefully maintained must be ignored in determining the existence of jurisdiction." Id. at 336, 45 S.Ct. at 251.

In affirming the district court's dismissal of the action for lack of jurisdiction, the Court found that the separation of the two corporations, "though perhaps merely formal, was real. It was not pure fiction." Id. at 337, 45 S.Ct. at 251-52. Noting that Cudahy owned all the stock of its subsidiary, the Court stated: "But whatever might be other legal consequences of the concentration [of all the subsidiary's stock in one owner], we cannot say that for purposes of jurisdiction, the business of the Alabama corporation in North Carolina became the business of the defendant." Id. at 338, 45 S.Ct. at 252.

The Supreme Court was not concerned with diversity jurisdiction in Cannon. Nevertheless, the principle enunciated there should be applied in any case where federal court jurisdiction depends on the relationship between a corporate parent and its corporate subsidiary. That principle is: When formal separation is maintained between a corporate parent and its corporate subsidiary, federal court jurisdiction over the subsidiary is determined by that corporation's citizenship, not the citizenship of the parent. So far as we can determine, every court of appeals that has considered the question has reached this conclusion.

Topp v. CompAir Inc., 814 F.2d 830 (1st Cir.1987), quoted Moore's Federal Practice in applying the "general rule" that a "subsidiary corporation which is incorporated as a separate entity from its parent corporation is considered to have its own principal place of business." Id. at 835. This rule applies even where the parent owns all the stock of the subsidiary and exercises close control over its operations. Referring to its decision in Topp, the court stated in U.S.I. Properties Corp. v. M.D. Construction Co., 860 F.2d 1, 7 (1st Cir.1988), cert. denied, --- U.S. ----, 109 S.Ct. 2064, 104 L.Ed.2d 629 (1989), that "even if the parent corporation exerts a high degree of control through...