Key Takeaways

  • A common enterprise exists when the fortunes of multiple parties are tied together, often through shared profits, management, or risk exposure.
  • In securities law, the concept is central to the Howey Test, which defines what constitutes an “investment contract.”
  • Courts disagree on how to interpret the common enterprise element, leading to inconsistent case outcomes.
  • Modern applications extend beyond securities—such as enterprise liability in tort law, where accident costs are spread among those who profit from an activity.
  • Scholars suggest applying a common enterprise liability theory to new fields like clinical AI systems, where responsibility is shared among doctors, hospitals, and AI developers.
  • The doctrine highlights issues of fairness and risk allocation, ensuring accident costs are not unfairly imposed on individuals but distributed among benefiting enterprises.

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.

Common Enterprise Beyond Securities Law

While common enterprise is most often discussed in the context of securities regulation, the doctrine also influences other areas of law. In tort law, courts and scholars have used the concept to justify enterprise liability—the idea that businesses engaging in potentially risky activities should bear the accident costs that flow from those risks. Instead of leaving losses to random victims, the costs are shared among those who benefit economically from the activity. This reflects a fairness principle: burdens and benefits should be distributed justly across the enterprise, rather than concentrated on injured individuals.

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.

Modern Applications of Common Enterprise Liability

Recent scholarship has argued for applying the common enterprise framework to complex, technology-driven industries. For example, in the field of clinical artificial intelligence (AI), liability for patient harm is difficult to assign because physicians, hospitals, and AI developers all play interconnected roles. By treating these actors as part of a common enterprise, courts could fairly distribute liability across the entire chain of participants. This approach addresses what some call the “responsibility gap” in emerging technologies, ensuring patients are not left without remedies and encouraging all parties to adopt higher safety standards.

Criticisms and Challenges

Despite its appeal, the common enterprise doctrine is not without criticism. Opponents argue that expanding enterprise liability too broadly risks blurring lines of individual responsibility. Businesses may face unpredictable costs if liability is imposed collectively, even when fault cannot be clearly attributed. Additionally, courts still lack a consistent definition of what constitutes a common enterprise. These challenges make judicial outcomes unpredictable, particularly in cutting-edge contexts like AI, biotechnology, or large-scale joint ventures.

Frequently Asked Questions

  1. What does common enterprise mean in securities law?
    It refers to a situation where investors’ fortunes are tied to each other or to the success of a promoter, as part of the Howey Test for investment contracts.
  2. How is common enterprise applied in tort law?
    Courts use it to support enterprise liability, meaning businesses must bear the accident costs of their activities instead of shifting them to victims.
  3. Why is common enterprise important in emerging technologies like AI?
    It helps distribute liability fairly among doctors, hospitals, and AI developers, preventing gaps in responsibility when harm occurs.
  4. Do all courts agree on what constitutes a common enterprise?
    No. Federal circuits disagree on whether “horizontal commonality” (investor pooling) or “vertical commonality” (investor tied to promoter’s fortunes) is required.
  5. What are the main criticisms of common enterprise liability?
    Critics argue it can create unpredictability, blur individual responsibility, and impose unfair costs on enterprises where fault is unclear.

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