In the September 11, 2025 edition of The Legal Intelligencer, Edward Kang writes, “No End-Run Piercing: Lessons from ‘Mortimer’ and ‘Dewberry.’“

Pennsylvania law is not settled on the matter of piercing the corporate veil—particularly with regard to horizontal or “enterprise” liability. While the Pennsylvania Supreme Court recognized the possibility of holding sister corporations jointly liable in Mortimer v. McCool, 255 A.3d 261 (Pa. 2021), it ultimately declined to apply that theory on the facts. The U.S. Supreme Court has since weighed in, albeit under the Lanham Act context, to remind lower courts nationwide that corporate separateness is to be respected absent a properly pleaded and proven veil-piercing theory. See Dewberry Group v. Dewberry Engineers, 604 U.S. 321 (2025).

In this column in September 2021, I discussed Mortimer, the enterprise theory of liability generally, and the common sequencing decisions plaintiffs need to make when bringing a veil piercing claim in “Enterprise Liability and When to Seek Piercing the Corporate Veil.”

Taken together, Mortimer and Dewberry define both opportunity and constraint. They confirm that Pennsylvania trial courts may develop an enterprise liability doctrine but also underscore that no amount of judicial sympathy can justify collapsing corporate distinctions without rigorous analysis. For practitioners on both sides of the “v.”—whether trying to collect against shell entities or defend against overreach—these cases chart the terrain for the next decade of veil-piercing litigation.

In Mortimer, the injured plaintiff secured a multimillion-dollar judgment against the entity, whose only asset was a liquor license, insufficient to satisfy the judgment. As such, the plaintiff sought to hold a related real estate entity owned by the same family liable as part of a unitary enterprise. The Pennsylvania Supreme Court acknowledged that “sister corporations” might, under some circumstances, be held jointly liable for each other’s debts. But it emphasized that the liquor-license entity was adequately capitalized, and that the two companies operated distinctly. The court noted a single purpose entity, such as the liquor-license entity, need not be capitalized any more than it had based on Pennsylvania’s common practice of using a single purpose entity for holding liquor licenses. The court invited lower courts to apply enterprise liability when the equities demanded but declined to do so itself in that case.

Fast-forward to Dewberry, the U.S. Supreme Court analyzed the enterprise liability theory within the Lanham Act context. The Lanham Act allows prevailing plaintiffs in trademark cases to recover the “defendant’s profits” as part of remedies under the act. See 15 U.S.C. Section 1117(a). The plaintiff sought to sweep in the profits of affiliates of the corporate defendant, Dewberry Group, even though those affiliates had not been named as parties. The lower courts—both the district court and the U.S. Court of Appeals for the Fourth Circuit—agreed, reasoning that all those companies should be “treated as a single corporate entity,” and that the affiliates’ earnings were so intertwined with the defendant’s that they could be treated as part of the same profit pool.

The Supreme Court unanimously reversed. The court emphasized the statutory text: the “defendant’s profits” means exactly that, the profits of the named defendant, not those of affiliates or related entities. The court acknowledged that the lower courts’ reasoning was based on the “economic reality” of how the defendant and its affiliate entities operated and acknowledged the lower courts’ concern that strict adherence to corporate formalities would let infringing conduct escape penalty. However, the court held that ignoring the distinction between the corporate defendant and its separately incorporated affiliates improperly swept nondefendants’ profits into the award and went further than the Lanham Act allows.

But the court’s ruling went beyond simple textualist interpretation of a federal statute to reaffirm one of the bedrock principles of American corporate law: corporate separateness. Its language was unambiguous: “The courts below were wrong to treat Dewberry Group and its affiliates as a single entity in calculating the ‘defendant’s profits.’ Dewberry Group is the sole defendant here, and under that language only its own profits are recoverable.”

Notably, the opinion pointedly declined to address whether traditional veil-piercing might be available on remand. Neither did the court decide when courts may look behind accounting records to examine the “economic realities” of a transaction, nor how far the Lanham Act’s “just sum” provision might extend in cases where corporate structures are used to disguise true profits.

In a separate opinion, Justice Sonia Sotomayor highlighted these open questions and underscored that corporate separateness is not absolute: courts are not required to ignore economic reality or accept “clever accounting” designed to disguise a defendant’s true financial gain through affiliate arrangements. She offered concrete examples, such as when a defendant provides infringing services to an affiliate at artificially low rates, thereby shifting profits on paper while retaining the economic benefit. In such cases, she explained, a court’s equitable powers may allow it to treat the affiliate’s revenues as part of the defendant’s profits. Her concurrence concluded by directing the lower courts on remand to “explore that important issue and consider reopening the record if appropriate.”

Implications for Veil Piercing Claims

The immediate holding of Dewberry is narrow and limited to the Lanham Act’s calculation of a “defendant’s profits,” but its implications extend much further. At bottom, the court reaffirmed that related companies cannot be treated as interchangeable absent a properly proven veil-piercing theory. It also underscored the plaintiff’s burden to identify and join the parties whose assets are at stake, rather than relying on judicial willingness to collapse affiliates into a single enterprise. Where Mortimer invited Pennsylvania courts to explore enterprise liability in appropriate cases, Dewberry reminded all courts of the doctrinal limitations on doing so: end-runs are not permitted.

For plaintiffs, the combined lesson of Mortimer and Dewberry is that veil-piercing remains possible but will require precision. Pleadings must be carefully drafted to bring in all relevant entities, since courts will not read “defendant” to include affiliates not before them. Discovery must be used carefully and strategically to develop facts showing undercapitalization, asset-shuffling, and systemic commingling. Courts are most receptive when the record tells a story of exploitation or injustice—for instance, when a defendant has hollowed out one entity while leaving a creditor with no meaningful recourse, or when affiliates are used as conduits to dodge liability. Plaintiffs who can frame their cases in these terms are more likely to persuade a court that veil-piercing is warranted.

For defendants, Dewberry is a reassuring reminder that corporate separateness is still the rule. Sympathy for injured plaintiffs is not a license for courts to disregard the form of incorporation. But the decision also highlights the importance of corporate hygiene. Each entity must maintain its own records, hold meetings and file required documents. Finances must be kept distinct, with no commingling or undocumented inter-company loans. Entities should be sufficiently capitalized for their intended purposes and insured (for operating entities) so they cannot be portrayed as judgment-proof shells. Even public-facing materials matter: branding that blurs the lines between affiliates may be used as evidence of a “single enterprise” in future litigation. In both internal governance and outward presentation, the safest course is to respect boundaries consistently.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Reprinted with permission from the September 11, 2025 edition of “The Legal Intelligencer” © 2025 ALM Global, LLC. All rights reserved. Further duplication without permission is prohibited. Request academic re-use from www.copyright.com. All other uses, submit a request to asset-and-logo-licensing@alm.com. For more information visit Asset & Logo Licensing.

The webinar offered in-depth guidance for corporate counsel on navigating veil-piercing claims under the single business enterprise theory. Kang and Gomez examined the evolving legal landscape following the landmark 2021 decision in Mortimer v. McCool, highlighting expanded liability risks for affiliated entities and the shifting judicial approach to disregarding the corporate form.

Both Kang and Gomez are active members of the Legal Netlink Alliance (LNA), a global network of independent law firms committed to collaborative excellence. Kang Haggerty will host the upcoming LNA Fall Meeting in Philadelphia, while EPGD Business Law will welcome members to Miami for the Spring Meeting in 2026.

In the August 30, 2024 Edition of The Legal Intelligencer, Edward Kang writes, “Going It Alone: Can Whistleblowers Seek Corporate Veil-Piercing in Declined Cases?“

Recently, I received an email from a national public interest organization dedicated to whistleblower advocacy. The message asked whether a relator (i.e., a whistleblower), while not a victim of fraud, has standing to seek corporate veil-piercing in a False Claims Act case where the government declined to intervene. It is an interesting question, and no one seems to know the answer. Having litigated complex veil-piercing cases and complex declined whistleblower cases, I wanted to dig a little deeper.

That answer requires some background. The False Claims Act (FCA), originally enacted in 1863, allows either the Attorney General or a private party to bring a civil lawsuit against anyone who knowingly submits a false claim to the government for payment. See 31 U.S.C. Section 3730(a), (b). In 2023, the government and whistleblowers initiated more than 1,200 new FCA cases, a record-high number, and the DOJ recovered approximately $2.7 billion through settlements and judgments. When an individual files a lawsuit on behalf of the government, it’s known as a qui tam action, and the private plaintiff is referred to as the relator.

When the relator files an FCA case, the suit is filed under seal for at least sixty days to allow the government to review the complaint and decide whether it will intervene. See Section 3730(b)(2), (4). If the government does choose to intervene, it takes the lead in prosecuting the case and is not bound by the relator’s actions. See Section 3730(c)(1). Even if the government does not intervene in the case, it still maintains a role and holds specific legal rights in the case, such as the right to intervene later for good cause (Section 3730(c)(3)) and to block a relator’s attempt to voluntarily dismiss the case (Section 3730(b)(1)).

The “corporate veil” refers to the legal separation between a corporation and its shareholders, which generally protects shareholders from liability for corporate debts. When the corporate entity is used as a sham to advance illegitimate purposes, however, courts may disregard the general rule and “pierce the corporate veil” to make the shareholders and their personal assets liable for corporate debts. Piercing the corporate veil is an equitable remedy and a theory of liability, and the standard of veil-piercing differs from jurisdiction to jurisdiction.

Now, back to the question of whether a relator has the standing to seek corporate veil piercing in False Claims Act cases where the government has declined to intervene. As an initial matter, the government’s refusal to intervene in an FCA action does not strip a relator of his Article III standing in bringing an FCA action when the relator does not suffer an injury in fact. Qui tam actions present a “well-established exception” to the traditional Article III analysis. See Spokeo v. Robins, 578 U.S. 330, 346 n.* (Thomas, J., concurring). In an FCA action, standing for an uninjured relator flows from an assignment theory. A qui tam relator is suing “as a partial assignee of the United States.” See Vermont Agency of Natural Resources v. Stevens, 529 U.S. 765, 774 fn. 4 (2000). The qui tam action is for a redress of the government’s injury, and “it is the government’s injury that confers standing upon the private person.” See Stalley v. Methodist Healthcare, 517 F.3d 911, 917 (6th Cir. 2008). Thus, an uninjured relator has standing when “the FCA can reasonably be regarded as effecting a partial assignment of the government’s damages claim.”

The standard for piercing the corporate veil as a theory of FCA liability is governed by the federal common law. See Dekort v. Integrated Coast Guard Systems, 705 F. Supp. 2d 519 (N.D. Tex. 2010) (“Federal common law (rather than the law of the state where a corporation is incorporated), governs the veil-piercing question in a FCA case.”); see also United States v. Pisani, 646 F.2d 83 (3d Cir.1981) (“Federal law governs questions involving the rights of the United States arising under nationwide federal programs.”) (quoting United States v. Kimbell Foods. 440 U.S. 715 (1979)). The federal common law standard is generally articulated in broad terms and requires a fact-specific analysis of the circumstances in each given case to determine the propriety of veil-piercing. See Exter Shipping v. Kilakos, 310 F. Supp. 2d 1301 (N.D. Ga. 2004) (“Under federal common law, no uniform standard exists for determining when a corporation is the alter ego of its owners; each case must be decided based upon the totality of the circumstances.”) The essential legal test for veil-piercing in all jurisdictions is whether it would be “equitable to look behind the corporate form” under the circumstances presented. See United States v. Emor, 850 F. Supp. 2d 176 (D.D.C. 2012). In FCA cases, courts have held that courts can “pierce the corporate veil to prevent circumvention of a statute or avoidance of a clear legislative purpose.”

Courts have analyzed piercing the corporate veil as a theory of FCA liability in cases where the government declined to intervene. For example, in United States ex rel. Jenkins v. Sanford Capital, 2020 WL 5440551 (D.D.C. Sept. 10, 2020), the plaintiff tenant advanced an alter ego theory to hold the sole principal of the corporate landlord liable for FCA violations when the company deceptively took only superficial steps to remedy regulatory violations in the apartment building while continuing to take Section 8 voucher funds that depended on the building’s compliance with those regulations. The court analyzed and dismissed the veil-piercing liability theory, reasoning that the plaintiff’s allegations regarding the relationship between the principal and company were threadbare and conclusory. In another declined case, Scollick v. Narula, 215 F. Supp. 3d 26 (D.D.C. 2016), the court found that the relator failed to allege that defendant companies’ shareholders were individually liable under the FCA in connection with a purported fraudulent scheme to obtain set-aside government contracts, reasoning that the relator did not allege any fact showing that an inequitable result would follow if the corporate veil remained unpierced. Specifically, the court found that the relator failed to allege that corporations were undercapitalized or that he would be unable to recover damages from them if he succeeded in the action.

Some courts have found that relators sufficiently alleged FCA liability under a veil-piercing theory in declined cases. In Scharber v. Golden Gate National Senior Care, 35 F. Supp. 3d 944 (D. Minn. 2015), former nursing home employees brought a claim against the nursing home’s parent company under the veil-piercing theory for FCA violations arising out of the nursing home’s submission of fraudulent claims for Medicare and Medicaid reimbursement. Denying the defendant’s motion to dismiss the veil-piercing theory of liability, the court found that the relators made sufficient allegations against the parent company. Specifically, the court found that the relators had alleged a level of control by the parent company over the culture, policies, and decision-making at the nursing home sufficient for the parent company to be held liable under a veil-piercing theory. Similarly, in United States v. Kindred Healthcare, 469 F. Supp. 3d 431 (E.D. Pa. 2020), the court found the relator’s allegations of undercapitalization and siphoning of funds were sufficient to allege FCA violations under the alter ego theory between nursing home operators and their nursing facilities. Specifically, the court noted that failing to hold nursing home operators liable for facility conduct “would circumvent the statute by preventing full recovery” because the facilities were grossly undercapitalized and entirely dependent on the operators.

When the government declines to intervene in a relator’s case, it doesn’t necessarily mean that the case is weak or unwinnable. The whistleblower can still pursue the case independently. The decision not to intervene may simply reflect the government’s priorities or limited resources, rather than a judgment on the case’s merits. Whistleblowers and their attorneys can still proceed with the case, bring wrongdoing to light, and recover damages. Piercing the corporate veil provides yet another powerful tool for whistleblowers and their attorneys to fight fraud under the False Claims Act.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Reprinted with permission from the August 30, 2024 edition of “The Legal Intelligencer” © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

You can access the on-demand webcast of Piercing (and protecting) the Corporate Veil, on the Federal Bar Association’s website here. This CLE was co-sponsored by myLawCLE.

In the May 12, 2022 edition of The Legal Intelligencer, Edward T. Kang of Kang Haggerty co-authored “Enterprise Liability and When to Seek Piercing the Corporate Veil, Part II.“

Most practitioners are familiar with the concept of piercing the corporate veil, but the nuances of this area of law can still mystify even the most seasoned litigators. Because veil piercing is a highly fact-intensive inquiry, it can be difficult to predict in advance when a court will grant such a remedy. This is because, in addition to the multi-factor analysis that often goes into the decision of whether to pierce, there are also a variety of different forms that veil piercing can take. One form in particular, the enterprise theory of liability, is a relatively recent development to Pennsylvania law in this area. See our recent column on this topic.

The enterprise, or “single entity,” theory of liability is a means of imposing liability on quasi-affiliated companies with common ownership engaged in a shared commercial endeavor. While recognized in many jurisdictions, until Mortimer v. McCool, 255 A.3d 261 (Pa. 2021), it was debated as to whether Pennsylvania recognized this form of veil piercing. And while the Pennsylvania Supreme Court’s decision in Mortimer answered the question of whether this doctrine is available, it left unanswered the specifics of how it would be applied. This column discusses the enterprise theory of liability generally, Mortimer, and a recent federal court decision analyzing its holding.

Mortimer dealt with a dram shop action where the plaintiff was seriously injured by an intoxicated driver that had recently been served by the defendant-restaurant. The management and ownership structure of the restaurant was an intricate web of related parties and single-purpose entities, and a total of 10 defendants were named in the original action. After trial, a jury awarded a $6.8 million verdict against these defendants. Even after taking possession of the restaurant’s liquor license and auctioning it off, however, the vast majority of the judgment amount remained unsatisfied.

To remedy this deficiency, Ryan Mortimer filed actions seeking to impose liability on the individual owners and their property management company, which she believed could be held liable under an enterprise theory of liability. Both the trial and Superior Court refused to grant this relief, principally because the Supreme Court had never endorsed such a theory. The plaintiff appealed, and the Supreme Court granted review solely on whether the enterprise theory of liability is available in Pennsylvania.

On appeal, the Supreme Court stated that its past silence on the issue “did not reflect any discernible disfavor” and that the court simply did not have the opportunity to review the issue until Mortimer. And while the court clarified that the enterprise theory of liability is available in Pennsylvania, it declined to apply it in the case before it. The key fact precluding its application in Mortimer was that the entities did not share substantially the same ownership, and that veil piercing is only available where the rights of innocent parties will not be prejudiced. The court also noted that while the entity holding the liquor license did not carry insurance, it was not required to by law, and that this was a common practice in the restaurant industry.

In addition to declining to pierce the corporate veil in Mortimer, the court also declined to provide a specific framework to determine when such a remedy would be warranted. While it specifically identified commonality of ownership as a key factor in the enterprise theory of liability analysis, it also refused to adopt a “perfect identity of ownership” requirement. The court recognized the ambiguity in its opinion and concluded with “but it remains for the lower courts in future cases to consider [the doctrine’s] application consistently with the approach described above, in harmony with prior case law, mindful of the salutary public benefits of limited liability, and with an eye always toward the interests of justice.”

Mortimer is a momentous, albeit somewhat murky, decision that adds Pennsylvania to a growing list of states that recognize the enterprise theory of liability. This is a welcome development. As business organizations and commercial transactions have grown increasingly complex, the law must adapt as well to impose liability where it is warranted. And while Mortimer left many questions unanswered, U.S. District Judge Stephanie Haines of the Western District of Pennsylvania recently discussed its application at length in Seven Springs Mountain Resort v. HHHess, (W.D. Pa. Apr. 4, 2022).

Seven Springs dealt with a $77 million townhome project in Somerset County and the widespread leakage problems found in many of these units. The homeowners association brought suit against the builder and, after agreeing to arbitration, was ultimately awarded a $14 million judgment. The defendant-builder then refused to satisfy the plaintiff’s judgment and filed for bankruptcy after the plaintiff’s attempts to execute on the judgment. The plaintiff then sought leave of court to file an action in recovery on behalf of the trustee, which was granted.

When it filed its action in the Western District, the plaintiff also included the building company’s owner and two of his other companies unrelated to the original project. The plaintiff claimed that these entities should be liable by virtue of their common ownership and relationship with the judgment debtor. Key factual allegations made by the plaintiff were that all the defendant companies shared owners, office space, equipment, and employees, and that funds were regularly commingled. According to the plaintiff, it could proceed against these entities under the enterprise theory of liability. The defendants moved to dismiss for failure to state a claim.

In their briefing, all parties agreed that Mortimer governed the court’s review, although both sides had a different view of its application in the case at hand. The court began by chiding the defendants for ignoring the procedural posture of Mortimer and other veil-piercing cases, namely, that the vast majority of these cases involved fully developed evidentiary records. Where the plaintiff “has alleged numerous, detailed factual allegations in support of its veil-piercing claims,” a court should allow these allegations to be proven or refuted through the discovery process.

The Seven Springs court next discussed the absence of any definitive test in the Supreme Court’s Mortimer opinion. It noted that the court had “recognized” the five-factor test originally announced in Miners v. Alpine Equipment, 722 A.2d 691 (Pa. Super. 1998), which had been the most in-depth opinion on the enterprise theory of liability before Mortimer. Miners dealt with attempts by a judgment creditor to execute on its judgment against alleged sister corporations, a novel strategy in Pennsylvania at the time. The court, in assessing this “quite distinct” method of piercing the corporate veil, outlined five factors which it considered relevant to the inquiry: identity of ownership, unified administrative control, similar or supplementary business functions, involuntary creditors, and insolvency of the corporation against which the claim lies. The Seven Springs court found that the plaintiff had alleged sufficient facts to meet most of these factors, given the substantially overlapping control and ownership of the defendant companies.

The fourth prong of the Miners test, requiring that the plaintiff be an involuntary creditor, was discussed at length in both Mortimer and Seven Springs. On its face, there appears to be a key distinction between the tort victim in Mortimer and the breach of contract claims at issue in Seven Springs. The Seven Springs defendants argued that to the extent the enterprise theory of liability is available, Mortimer and Miners limit it to involuntary creditors. The Supreme Court in Mortimer was somewhat opaque on this, noting the “theoretical distinction between the two classes of creditors” but stating that “nor is it obvious that only involuntary creditors like tort plaintiffs should have the benefit of the doctrine while voluntary contractual creditors like commercial lenders should not, even if the equities in a given case may vary accordingly.”

Likewise, the Seven Springs court left this theoretical distinction unresolved at the motion to dismiss stage. The court noted not only the absence of any clear guidance on the issue, but also that there was a factual and legal dispute in the case before it as to whether the plaintiff was a voluntary or involuntary creditor. The plaintiff in Seven Springs was at least nominally the assignee of the homeowners’ claims under Pennsylvania’s Unfair Trade Practice and Consumer Protection Law, which it claimed caused it to inherit their involuntary creditor status. Additionally, plaintiff emphasized that it was not able to discover the defendant’s insolvency until after the arbitration and judgment, let alone contract for protective provisions relating to this in the original agreement. In any event, the Seven Springs court declined to rule on this issue at the early stage of the case.

Ultimately, the plaintiff’s claims survived the motion to dismiss in Seven Springs, including its enterprise theory of liability claims. And while the Seven Springs court did not outline a definitive test for when such a remedy is warranted, it is the most in-depth post-Mortimer opinion to date. Savvy practitioners should follow this case closely to remain apprised as this doctrine continues to develop. While Seven Springs may be the first case to analyze Mortimer’s enigmatic holding in detail, it will certainly not be the last.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Kang Haggerty associate Ryan Kirk served as co-author of this article.

Reprinted with permission from the May 12, 2022 edition of “The Legal Intelligencer” © 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

Panelists are Kang Haggerty managing member Edward T. Kang, Oscar A. Gomez, and Anneke Cronje.

Piercing the Corporate Veil: Single Business Enterprise Theory After the Mortimer Decision is presented by Strafford Publications. The webinar will take place on Thursday, November 18th from 1:00 – 2:30 PM EST.

This article will discuss briefly the history of qui tam litigation, its interplay with piercing theories and the particular utility of these types of suits in the health care context.

In the November 4, 2021 edition of of The Legal Intelligencer, Edward T. Kang of Kang Haggerty co-authored “Qui Tam Suits and Veil Piercing: A Powerful Combo for Combating Health Care Fraud.”

In 2019, the United States federal government spent $1.1 trillion, or approximately 25% of the overall federal budget, on just four government health care programs; Medicare, Medicaid, the Children’s Health Insurance Program (CHIP) and the Affordable Care Act (ACA). In addition to these well-known programs, the Department of Defense spends tens of billions of dollars every year providing health care to service members, veterans and their families through programs like TRICARE. Likewise, all states administer their own Medicaid programs and typically match the funding provided by the federal government, pumping even more public money into this sector.

Unfortunately, not all of these expenditures go toward the intended recipients, and some individuals prey on this largesse. While academics and commentators debate the exact proportion of improperly diverted government expenditures, the fact that such diversion exists is noncontroversial. For its part, the Centers for Medicare and Medicaid Services (CMS) estimated that around 7% of Medicare spending in 2019 was improperly reimbursed. See “2020 Estimated Improper Payment Rates for Centers for Medicare & Medicaid Services (CMS) Programs” (Nov. 16, 2020). The problem is even worse for Medicaid and CHIP, with CMS estimating that around 15% of this spending was improperly reimbursed in 2019.

Of course, fraud is not limited to the health care context, nor is this a novel dilemma. To combat this longstanding problem, the federal government has long relied on the False Claims Act (FCA) and the qui tam suits it authorizes to detect and deter fraud. In the modern era, FCA suits often operate in conjunction with veil piercing theories, as fraudulent behavior typically underlies both. This article will discuss briefly the history of qui tam litigation, its interplay with piercing theories and the particular utility of these types of suits in the health care context.

Like many doctrines that developed at common law in England, qui tam is a truncation of a longer Latin phrase. The original “qui tam pro domino rege quam pro se ipso in hac parte sequitur,” translates to “he who brings an action for the king as well as for himself.” While the United States soon soured on having a king, qui tam suits survived, and proto-versions of the FCA can be found in Colonial America. The idea behind qui tam actions has remained fairly consistent over time; to incentivize whistleblowers to come forward, they are given a portion of any amount that the government recovers based on their claim.

Up until the Civil War, qui tam suits in America were typically brought under state or common law. But with the outbreak of this conflict, and the massive wartime spending that ensued, federal contracts were increasingly viewed as easy targets for racketeering and fraud. In an effort to crack down on this abuse, Congress enacted the original False Claims Act of 1863, which was then signed into law by President Abraham Lincoln.

In the century-and-a-half since, Congress has tweaked the FCA on several occasions. The most recent amendments to the statute were specifically promulgated to combat health care fraud, as such cases have become the lion’s share of qui tam actions. For instance, the Fraud Enforcement and Recovery Act of 2009 amended the FCA to impose liability on those who knowingly receive or conceal evidence of overpayments, not just on those who directly submit the false claims. In the health care context, where funds flow freely between pharmacies, hospitals, patients and physicians, these amendments help impose liability on members of that chain that turn a blind eye to obvious wrongdoing to keep the stream of payments unbroken.

The following year, the FCA was further amended as part of the ACA. Suspecting that the increased public funds flowing into the health care industry would also present a greater risk of diversion, Congress amended the FCA to make it easier for whistleblowers to bring suit. Specifically these whistleblowers, or “relators” as they are called in qui tam actions, no longer had to have direct and independent knowledge of the transactions at issue. Instead, relators only need to have knowledge that is independent and “materially adds” to the government’s past understanding of the allegations. See 31 U.S.C. Section 3730(e)(4)(B).

When a relator does bring an action under the FCA, the complaint is first filed under seal and served upon the government. The government then investigates the allegations and decides whether or not to intervene. If it chooses to intervene, the government then prosecutes the suit under the FCA, as well as any other applicable statutes. The factual scenarios underlying FCA suits will often also involve violations of the Anti-Kickback Statute and Stark Law, which prohibit corrupt referral practices in the health care industry.

If the government opts not to intervene, relators can still proceed with the suit on behalf of the United States, but the government retains the ability to intervene later on. If successful, the defendants will be liable for treble the amount of false claims submitted, as well as statutory penalties and attorney fees. The relator’s portion of this recovery will be between 15% to 30%, depending on whether the government intervened and the relator’s level of participation in the fraud. As evidenced by its long history, the FCA has proved fairly effective at deterring and detecting fraud.

With the increasing corporatization of the health care industry, however, the scale and complexity of fraudulent schemes has also grown tremendously. This trend is particularly evident in the pharmaceutical sector, where violations of the FCA have forced corporate behemoths like GlaxoSmithKline and Pfizer into billion-dollar settlements. In addition to the sheer size of the entities that operate in the health care industry, their ownership structures have also become significantly more elaborate. The health care industry is no longer limited to doctors and hospitals, but a veritable thicket of holding companies, LLCs, and private equity firms. Despite this, the typical relator has not changed all that much; they are still often just individuals operating within these organization that grow suspicious of improprieties and decide to take action.

Because of this increasing corporate complexity, piercing the corporate veil in qui tam actions serves an important public function. FCA suits involve some type of malfeasance by definition, and the corporate form is often used to further this fraud. Culpable actors engaged in wrongdoing know the consequences of their actions if discovered, and will seek to minimize any liability they will face. To this end, they will often attempt to take advantage of the corporate form and the limited liability it offers. Courts should be especially skeptical of this use of the corporate form in the qui tam context, as the ultimate victims of these unscrupulous practices will be the public at large.

While the specific criteria for piercing the corporate veil varies by jurisdiction, there are many commonly agreed-upon elements. For instance, in Pennsylvania, the Supreme Court has endorsed the use of the eponymous Lumax factors to determine when to pierce the corporate veil. Lumax Industries v. Aultman, 669 A.2d 893 (Pa. 1995). These factors have been cited by federal courts throughout the U.S. Court of Appeals for the Third Circuit, along with many other iterations of such a list. Despite some variation across jurisdictions, there is broad agreement among courts on one key factor: veil piercing is appropriate when the corporate form is used to perpetrate a fraud. Given the inherent nature of FCA suits, these circumstances arise quite frequently.

The veil piercing analysis in FCA suits is similar to other contexts, although courts often also consider the specific equitable consequences of the misappropriation of public funds. For instance, in United States v. Dynamic Visions, 971 F.3d 330 (D.C. Cir. 2020), the government brought suit against a home health care provider after a routine audit revealed it was unable to substantiate any of the Medicaid reimbursement claims it submitted. After finding against the defendant, the trial court also pierced the corporate veil to impose liability on the corporation’s sole owner, reasoning that he failed to follow corporate formalities and that it would be grossly inequitable to let him keep these illicitly obtained funds. On appeal, the D.C. Circuit agreed and held “that it would be unjust to allow [the owner] to retain funds wrongfully taken from, and now owed to, the government.”

In another FCA suit, this time brought by a relator, the court in Stepe v. RS Compounding, 325 F.R.D. 699 (M.D. Fla. 2017) confronted a scheme to defraud TRICARE’s reimbursement of compound drugs. The government sought to pierce the corporate veil, but the company’s owner argued that there was insufficient evidence to support this remedy. Rejecting his motion to dismiss, the court held that the government had pled fraud with sufficient particularity, and that the owner had “at least deliberately ignored or recklessly disregarded the fraudulent practices.” Like in Dynamic Visions, the court also credited the government’s argument that it would be inequitable for the company’s owner to retain these ill-gotten gains and escape liability.

Steeped in history, the FCA and qui tam suits are still as relevant as ever. The public-private cooperation cultivated by statutes like this is one of the most effective tools at our disposal to prevent fraud, waste and abuse. This is especially true in the health care context, given the sheer volume of public funds involved and the complexity of the transactions at issue. These countermeasures would be impotent, however, if nefarious actors can evade liability through corporate trickery. Courts should not be afraid to pierce the corporate veil when it comes to qui tam litigation, as the ultimate victim of this chicanery is society as a whole.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Kang Haggerty associate Ryan Kirk served as co-author of this article.

Reprinted with permission from the November 4, 2021 edition of “The Legal Intelligencer” © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

In the September 9, 2021 edition of The Legal Intelligencer, Edward T. Kang of Kang Haggerty co-authored “Enterprise Liability and When to Seek Piercing the Corporate Veil.“

Piercing the corporate veil, a simultaneously ubiquitous and arcane doctrine, has been the subject of extensive commentary and critique. While the Pennsylvania Supreme Court admitted that this is already “among the most confusing” areas of corporate law, its recent decision Mortimer v. McCool, Nos. 37 MAP 2020, 38 MAP 2020 (Pa. July 21, 2021) adds yet another layer of intricacy to this knotty enigma. With Mortimer, Pennsylvania has joined a growing number of jurisdictions that explicitly allows for the so-called enterprise theory of liability.

Sometimes described as a “single-entity” theory of liability, enterprise theory of liability is conceptualized as a “horizontal” form of veil piercing. This contrasts with the traditional “vertical” form, where a corporation’s owner may be held liable for judgments against it when equity requires. Enterprise liability, as described by the Supreme Court, allows an analogous form of veil piercing for “affiliated or sister corporations—corporations with common ownership, engaged in a unitary commercial endeavor.” In this column, we discuss Mortimer, the enterprise theory of liability generally, and the common sequencing decisions plaintiffs need to make when bringing a veil piercing claim.

Before Mortimer, the most in-depth discussion of enterprise liability in Pennsylvania was Miners v. Alpine Equipment, 722 A.2d 691 (Pa. Super. Ct. 1998). There, the plaintiff obtained a default judgment against a defendant and sought to pierce the corporate veil against a corporation with the same controlling shareholder under an alter ego theory of liability. Importantly, while the two corporations had the same controlling shareholder, they had different minority shareholders. The trial court allowed the corporate veil piercing, and defendants appealed.

On appeal, the Superior Court recognized that the case was not an alter ego case, but the “quite distinct” single entity theory of liability. Noting that the theory had yet to be adopted in Pennsylvania, the court nevertheless enunciated five factors that it considered as threshold requirements before the imposition of liability under this theory. Because the first of these requirements, a total identity of ownership, was not met, the Superior Court rejected plaintiff’s arguments without a further analysis of the remaining factors.

Between Miners and Mortimer, federal courts applying Pennsylvania law were split on whether the enterprise theory was an available remedy in Pennsylvania, and the Supreme Court’s silence was levied in support of both positions. Proponents asserted that because the enterprise theory had not been explicitly foreclosed, the theory was available, while opponents pointed to the absence of express authority to use the doctrine. This was the uncertain and unsettled state of the law that provided the backdrop for Mortimer.

The underlying suit in Mortimer arose when the plaintiff was seriously injured by an intoxicated driver, recently served by the defendant restaurant. The management and ownership structure of the restaurant was an intricate web of related parties and single purpose entities, and a total of ten defendants were named in the original dram shop action. After trial, a jury awarded a $6.8 million verdict against these defendants.

While Mortimer took possession of the defendant’s liquor license, and sold it for $415,000, the bulk of her judgment remained unsatisfied. To remedy this deficiency, Mortimer filed actions seeking to impose liability on the individual owners and their property management company, which she believed could be held liable under an enterprise theory of liability. Both the trial court and Superior Court refused to grant the requested relief, interpreting the Supreme Court’s past silence on the issue as a tacit rejection of its availability.

The Supreme Court on appeal engaged in an extensive analysis of enterprise liability case law in this commonwealth and beyond. After this review, the Supreme Court announced the black letter law on this issue; the enterprise theory of liability is available in Pennsylvania where equity demands. While the Supreme Court refused to adopt the same five-factor analysis outlined in Miners, it seemingly endorsed the identity of ownership prong by stating “enterprise liability requires that the affiliates that the enterprise comprises have common owners and/or an administrative nexus above the sister corporations.” As opposed to Miners’ itemized analysis, the Supreme Court adopted a more flexible standard, as a “rigidly formalistic approach” would only subvert the underlying goal of achieving equity.

Ultimately, while recognizing enterprise liability as a valid remedy in Pennsylvania, the Supreme Court declined to apply it in the case. As a threshold matter, the enterprise theory could not be used because one of the owners of the alleged affiliate entity was completely uninvolved in any wrongful conduct. In rejecting the imposition of liability on this ground, the Supreme Court noted that “piercing may occur only when the rights of innocent parties are not prejudiced thereby.”

Mortimer is a promising and noteworthy decision, as it provides plaintiffs with another avenue of recompense for injuries sustained at the hands of defendants abusing the corporate form. The specific contours of this decision will surely be developed by trial courts across the commonwealth, and savvy practitioners will help shape its further evolution. But the procedural history of Mortimer is also worth discussing, as it demonstrates a typical conundrum faced by plaintiffs in these types of actions: when to bring a veil piercing claim. In Mortimer, the plaintiff brought her veil piercing action after she had already prevailed in the underlying action, as opposed to simultaneously litigating a veil piercing claim in the underlying. When a plaintiff could bring a veil piercing action is not always clear, and courts are split on this issue.

To understand why there is some confusion in this regard, many courts note that piercing the corporate veil is not an independent cause of action, but an equitable remedy used to impose liability when the corporate form has been abused. See Siematic Mobelwerke GmbH & Co. KG v. Siematic, 643 F.Supp.2d 675, 694 (E.D. Pa. 2009). Often, plaintiffs bring veil piercing claims in their complaint concurrent with other causes of actions in the underlying action, and courts review these claims simultaneously. Sometimes, however, plaintiffs could bring such claims after obtaining judgement in the underlying action first, seeking to pierce the corporate veil as part of their post-judgment collection efforts. See Presidential Facility v. Campbell, 2015 WL 1208261 (E.D. Pa. March 16, 2015). Presidential Facility demonstrates the risks plaintiffs face when they bring a piercing claim post-judgment, as the court expressed disapproval with plaintiffs for bringing the veil piercing action two years after judgement, despite continuous efforts by plaintiff during that period to execute on the judgment.

With the widespread adoption of single purpose entities, the corporate form has become increasingly complex. These entities operate as individual components in an overall gestalt that is engaged in commercial activity. This cabining complexity is principally designed to prevent liability. To allow such unchecked sequestration could frustrate the central goal of tort law, making plaintiffs whole. Due to the complex use of the corporate form to shield from corporate liability, attempts to pierce the corporate veil are as popular as ever.

A plaintiff’s decision about when to bring its piercing action involves both economic and strategic considerations. In many cases, it is economically efficient for such matters to be litigated simultaneously with the underlying suit, as similar discovery may be relevant for both issues. Comprehensive discovery can also provide the accurate picture as to whether veil piercing is even warranted. Strategically, plaintiffs should consider bringing the piercing the corporate veil claim in the underlying action when the liability of the owner of the defendant entity is clear—e.g., the owner forms an entity in a jurisdiction to carry out activities that are legal in that jurisdiction but knowingly conducts those activities in another jurisdiction where such conduct is illegal. This is not to say that piercing actions should always be brought simultaneously, as it is possible for post-judgment piercing to be more efficient in some instances.

If the evidence required to prevail on a veil-piercing claim is sufficiently different from the evidence required to prevail in the underlying suit, then it makes economic sense for plaintiffs to wait until a judgment has been rendered before filing a veil piercing action. In such cases, plaintiffs could save the additional cost of litigating the veil piercing issues in the underlying case. Waiting until first obtaining a judgement makes economic sense, especially in a case where obtaining a judgement is far from highly probable. Strategically, plaintiff should consider placing the defendant of notice of its intent to bring a veil piercing action post-judgment against the defendant in a case where the probability of success for veil piercing is high, which should encourage the defendant (and its owner) to settle the case early.

Mortimer’s adoption of the enterprise theory of liability significantly broadens Pennsylvania’s piercing doctrine. In adopting this remedy, yet refusing to apply a rigid standard for when it is available, the Supreme Court has signaled that it favors a broad piercing power where equity requires. This preference for breadth should also be applied to plaintiffs’ decision about when to bring a veil piercing action, as this will further efficiency, strategy, and, most importantly, equity. Practitioners should keep in mind that veil piercing is still a rare exception to the norm.  Courts are reluctant in allowing veil piercing in most cases, as they should be. Plaintiffs should avoid bringing a veil piercing claim solely based on the inability to collect from the defendant entity without more facts. With the adoption of the enterprise theory, however, plaintiffs have another tool that can be used to remedy abuses of the corporate form.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Kang Haggerty associate Ryan Kirk served as co-author of this article.

Reprinted with permission from the September 9, 2021 edition of “The Legal Intelligencer” © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

In the November 5, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of Kang Haggerty wrote “Pa. Supreme Court to Review Veil-Piercing Appeal Based on Enterprise Theory.”

In June, the Pennsylvania Supreme Court granted an appeal that could radically alter existing state law on corporate liability based on the veil-piercing theory. The case, arising from a dram shop tort action, is poised to test Pennsylvania law’s “strong presumption” against piercing the corporate veil. Hoping to recover damages from an affiliated corporation that was not a defendant at trial, the plaintiff in Mortimer v. McCool, was granted an appeal on the basis of the so-called “single business enterprise” or “single entity” theory. See Mortimer v. McCool, Nos. 20 MAL 2020, (Pa. June 22, 2020). Not currently adopted in Pennsylvania, the theory may be applied to allow a plaintiff to reach the assets of one or more affiliated corporations of the debtor when those “corporations share common ownership and are, in reality, operating as a corporate combine.” See Miners v. Alpine Equipment, 722 A.2d 691,695 (Pa. Super. 1998). Courts discussing or adopting the enterprise theory have found its rightful target to be corporate entities that have integrated business ownership and assets to achieve a common business purpose. Thus, in an important sense, by operating what is essentially a “single business enterprise” split into multiple affiliated entities (often purely for the sake of avoiding liability), owners of such enterprises open the door for the courts to impose shared liability. In the past, I have written about veil-piercing in Pennsylvania generally, as well as in specific regard to LLCs and the “alter ego” theory. This column addresses the implications of the Mortimer appeal and the “enterprise” theory for Pennsylvania corporate liability law.

Piercing the veil of limited liability companies (LLCs) allows a court to disregard the separate corporate personality of the company and its member(s) to reach the assets of the members and hold them liable for all or part of the LLC’s debts under Pennsylvania law.

In the September 3, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of Kang Haggerty wrote “Piercing the Corporate Veil of LLCs Under Pennsylvania Law.”

Piercing the veil of limited liability companies (LLCs) allows a court to disregard the separate corporate personality of the company and its member(s) to reach the assets of the members and hold them liable for all or part of the LLC’s debts under Pennsylvania law. Previously, I’ve written on the general substantive and procedural requirements of piercing the corporate veil of an entity and alter ego jurisdiction over corporate groups. This column addresses the Pennsylvania law on the doctrine of piercing the corporate veil as applied to LLCs.