Common Enterprise: Everything You Need to Know
Common enterprise, in relation to an investment contract, is a way for common objectives to be followed by two or more firms.3 min read
Common enterprise, in relation to an investment contract, is a way for common objectives to be followed by two or more firms. It is when the profits (or fortunes) of the investor are combined with and depend on the success of third parties that are hired or those offering or selling the investment. In some cases, a formal common enterprise does not exist, but it is implied based on the intent of the parties involved.
Examples of when common enterprise exists include:
- When employees and/or management are shared
- When profits and losses are shared
- When joint ownership occurs
Common enterprise is also presumed to exist when one or more parties give the impression of being one entity and outside parties are not aware and can be negatively impacted by this assumption.
Common Enterprise in Investment Contracts
The United States Supreme Court first defined the term "investment contract" in SEC v W.J. Howey Co. Howey explained a test designed to define investment contracts. Howey stated that three parts must exist. (1) Investment money in (2) a common enterprise that has (3) profits that depend solely on the efforts and influence of a third party is an investment contract. However, the circuit courts disagree on the common enterprise portion of the Howey test, and the Supreme Court has not resolved the issue.
The Supreme Court has a long history of applying the three-part test to confirm if a common enterprise exists. The three determinations are that:
- Employees must work on the same project.
- Employees must participate in a similar activity (or common activity).
- Employees are subject to the same or similar hazards.
Legal Precedence in Common Enterprise Cases
Despite the three-part test, there have been inconsistent results in district courts and courts of appeal. An example of a common enterprise case is Kelly v. Kraemer Construction, Inc., A15-1751 Case. In this case, the general contractor hired a subcontractor to install concrete culverts. During this task, an employee of the general contractor was electrocuted. This resulted in a workers' compensation payout to the deceased employee's family. The family then filed a wrongful-death action against the subcontractor.
The subcontractor then moved for summary judgment based on the Minnesota Workers' Compensation Act (MWCA) election of remedies provision. The Minn. Stat. § 176.061, subds. 1 & 4 provisions state that when a worker is injured “under circumstances which create a legal liability for damages on the part of a party other than the employer ... at the time of the injury,” and the third party carries proper workers' compensation insurance and was engaged in a “common enterprise” with the employer, the MWCA mandates an election of remedies.
The motion was denied by the district court but the decision was reversed by the court of appeals in a 2-1 decision. The decision was then confirmed by the Supreme Court with a 4-2 decision as it met the three parts of common-enterprise.
The first part of the same project was not in question, nor was the third part of similar or the same hazards. This resulted in a unanimous decision by the Supreme Court.
The second part which speaks to the same or similar activity did not have a unanimous decision. This resulted in a split decision based on the inability to complete the task at hand without the other crew - meaning the crews were interdependent on each other. It is important to note the court determined that despite the crews having distinct functions, the functions were interdependent and required constant coordination to complete the task of installing the concrete culverts.
The Supreme Courts' decision in Kelly v Kraemer Construction, Inc., A15-1751 Case helps set the precedence for the definition of common-enterprise doctrines and will impact future cases. While this will be beneficial to construction cases, it is important to remember that it doesn't guarantee the results of future cases.
It should also be noted that even when common enterprise exists, the employer may still seek a claim against the negligent third party as described in Minn. Stat. § 176.061, subd. 3.
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