District Court Dismisses Defamation Suit Because Subsidiary Not Shown To Be "Alter Ego" of Parent

The World in U.S. Courts: Fall 2015 - Personal Jurisdiction/Forum Non Conveniens | July.30.2015

Payoda, Inc. v. Photon Infotech, Inc. et. al., U.S. District Court for the Northern District of California, July 30, 2015

Payoda, an IT service provider based in India, asserted claims against Photon U.S. in connection with three allegedly false and defamatory letters sent to some of Payoda's customers by a lawyer for both Photon U.S. and its parent, Photon India. Photon U.S. moved to dismiss on the ground that Payoda failed to adequately allege that Photon U.S. was an "alter ego" of Photon India, which if true would mean that the U.S. sub could be sued for actions taken by its parent. The District Court for the Northern District of California dismissed the case, concluding that Payoda's pleadings were insufficient.

The Court explained that the law of the forum state, not federal law, applies in determining whether alter ego liability applies. Under California law, two conditions must be met for the doctrine to apply: there must be (1) a unity of interest and ownership between the corporation and its equitable owner, and (2) an inequitable result if the acts in question are treated as those of the corporation alone. Among the most important factors generally used to assess these requirements are commingling of assets or use of the same offices and employees.

The Court explained that the "unity of interest" prong requires a showing that the parent controls the subsidiary to such a degree as to render it the mere instrumentality of the parent, and that facts had not been alleged showing this to be the case. At least as late as March 2012, Photon U.S. was considered a subsidiary of Photon India, but the parent-subsidiary relationship did not itself suggest that the subsidiary was not independent. Nor was Payoda's allegation that Photon U.S. and Photon India share common leadership and office space, as well as elements of their finances, contact information, employees, and customers, sufficient to establish that there was a unity of interest between them. The Court also explained that having a common website presence does not carry any weight in establishing a unity of interest.

Additionally, Payoda alleged that defendants intentionally sought to confuse and mislead members of the public as to the appropriate entity against which to seek legal or equitable relief.  It argued that this was sufficient under federal law to establish "alter ego" liability on the premise that the two companies had purposefully sought to evade criminal and civil liability. However, the Court stated that the law of the forum state, not federal law, applies. Applying California law, the Court found that the alter ego doctrine does not afford protection when creditors merely have difficulty in enforcing a judgment or collecting a debt. Rather, it applies where some conduct amounting to bad faith makes it inequitable for the corporate owner to hide behind the corporate form. The Court found that standard not to have been satisfied.

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