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Alternate Theories of Liability

Car Accident Lawyer

When faced with a corporate defendant, plaintiffs will often look to sue under alternate theories of liability.  This happens frequently when the defendant responsible for the harm to the plaintiff does not have enough insurance or other available funds to cover the plaintiff’s expenses, such as in a car accident case. A car accident lawyer can speak further in depth to these theories but there are five (5) commonly used theories by plaintiffs when suing a corporate defendant: (i) agency, (ii) alter ego, (iii) enterprise, (iv) conspiracy, and (v) integrated enterprise.  The two most common theories are that of principal-agent relationship and alter ego. 

Principal-Agent Relationship

Agency relationships vary widely. In broad agency relationships, the principal must have a large degree of control over the agent in order to be potentially liable for the conduct of the agent.  The parent must veer into management by the exercise of control over the internal affairs of the subsidiary, and the determination of how the company will be operated on a day-to-day basis, such that the parent has moved beyond the establishment of general policy and direction for the subsidiary and in effect taken over performance of the subsidiary’s day-to-day operations in carrying out that policy. Specifically, for the parent corporation to be liable for its subsidiary’s acts under the agency theory, it must exercise control to the extent the subsidiary manifests no separate corporate interests of its own and functions solely to achieve the purposes of the dominant corporation.  

Alter Ego Theory

The alter ego theory allows plaintiffs to pierce the corporate veil to impute a subsidiary’s actions to the parent company by showing that the subsidiary and the parent are one and the same.  The rationale behind this theory is that the alter ego subsidiary is the same entity as its parent, and thus, the jurisdictional contacts of the subsidiary are also the jurisdictional contacts of the parent. Id.  The elements for an alter ego are: (1) the corporation must be influenced and governed by the person asserted to be its alter ego; (2) there must be such unity of interest and ownership that one is inseparable from the other; and (3) the facts must be such that adherence to the fiction of separate entity would, under the circumstances, sanction a fraud or promote injustice.

Principal-Agent Relationship and Alter Ego Theories in Practice

For example, imagine there is an international corporate company named “A” and a domestic subsidiary named “B.”  Imagine that A exerts control over B, including: managing the finances of B, controlling the labor environment including the hiring and firing of employees; outlines projects for B; and sets goals for B to meet at the end of each quarter.  In this scenario, A and B would be in an agency relationship because A would be acting as the principal and would likely have sufficient day-to-day control over B.  Additionally, B would also likely be the alter ego of A because their businesses are so intermixed, B is heavily governed and influenced by A, and to consider them separate would sanction fraud or promote injustice.  
Thanks to Eglet Adams for their insight on the principal-agent relationship and alter ego alternate theories of liability.