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A quality controller serving two automotive parts suppliers is knee-deep in a legal battle with the suppliers’ own sister subsidiary, a parts manufacturer.
The lawsuit, filed in federal court, detoured Thursday when the Indiana Supreme Court brought the two parties in to answer two certified questions:
Can one entity sue another for interfering in its relationships if the business partners and the offending company are subsidiaries of the same corporate parent? If so, how far can the claims go, and what should the court take into account when deciding liability?
The disagreement goes back five years.
Fight over on-site work
In its brief, Diamond Quality describes itself as an Indiana-based manufacturing quality inspector — “often on site at the suppliers’ customers’ facilities” — that helps clients identify the causes of manufacturing defects.
Since the company’s founding in 2014, two Mexico-based suppliers have been among its largest clients, according to the brief. The suppliers are both subsidiaries of Ohio-based holding corporation Dana Inc.
So is Dana Light Axle Products, which operates out of Fort Wayne. That company gets shipments from the Mexican suppliers. Diamond Quality alleged when the Fort Wayne subsidiary rejected flawed parts from the Mexican suppliers, the suppliers would ask a third party, Diamond Quality, to inspect the parts.
If Diamond Quality found that the suppliers were at fault, the suppliers would credit the Fort Wayne subsidiary for the cost of the parts. But sometimes, according to the brief, flaws stemmed from the Fort Wayne subsidiary’s own machining work, so that company would be responsible for part costs.
Diamond Quality alleged that it was kicked out of the Fort Wayne subsidiary in June 2019, citing service costs, but was able to come back for future jobs. It returned “only a few times” because the Fort Wayne subsidiary often pushed the suppliers to use a different company.
But in March 2020, the Fort Wayne subsidiary banned Diamond Quality from its facility, according to the brief. In its own brief, however, the Fort Wayne subsidiary said its parent company sought to eliminate third-party sorting services — which meant cutting ties with Diamond Quality.
That brief describes how the Fort Wayne subsidiary notified one of the Mexican suppliers that a February 2020 shipment had defects and required sorting. It used an industrial sorting company that was “already on site” for another job, dismissing the supplier’s days-late suggestion of using Diamond Quality.
In March 2020, the other Mexican supplier asked Diamond Quality to sort product in Fort Wayne, but the subsidiary said “it could not onboard new visitors” because of pandemic restrictions, according to the brief.
The Fort Wayne subsidiary alleged that Diamond Quality’s owner entered the facility anyway to confront a quality manager. The manager said Diamond Quality wasn’t approved to be on site.
Answering federal asks
Diamond Quality hasn’t been back since.
Counsel told Indiana justices that as a result, the company “lost most of the business from its most loyal clients.” But the Fort Wayne subsidiary, in its brief, accused the company of “demanding access to a manufacturing facility that no longer needs or wants its services.”
Both sides offered Indiana justices their answers to the federal court’s questions.
Diamond Quality held that subsidiaries are separate legal entities and should be treated as such. It noted that the subsidiaries in Fort Wayne and Mexico disagreed on who to use for inspections, and weren’t unified in interest.
Counsel asserted that a decision against Diamond Quality would force businesses to investigate their sister companies to “avoid an interloper who is immune from consequences for its tortious interference.”
The Fort Wayne subsidiary, however, said that it works together with its sister subsidiaries and that all three entities report to the same operations management in Ohio.
The defendant said claims of interference require intervention by a third party — and that there’s none when the parties are part of the same company.
“The weight of authority indicates wholly-owned subsidiaries are not third parties to each other’s business and contractual relationships,” the Fort Wayne subsidiary argued in its brief.
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