In the March 9, 2023 edition of The Legal Intelligencer, Edward T. Kang wrote “Tort Claims Between 2 Contracting Parties May Overcome the Gist of Action Doctrine“

The gist of the action doctrine does not bar a viable tort claim between two parties related by a contract. Earlier last year, the U.S. Court of Appeals for the Third Circuit in SodexoMAGIC v. Drexel University made this law—that the gist of the action doctrine does not bar a viable tort claim between two parties just because the parties papered the social duty giving rise to a tort claim into a contract—abundantly clear. Yet, many courts in Pennsylvania continue to misapply the doctrine.

Pennsylvania courts have long used the gist of the action doctrine to dismiss tort claims where the disputing parties are contractually related. The goal of the doctrine is to maintain the integrity of contract and tort claims by keeping them separate. While the goal is laudable, the application of the doctrine sometimes had unintended consequences of dismissing meritorious tort claims and depriving aggrieved parties of their day in court. The doctrine bars tort claims where the “gist of the action” lies in an alleged breach of contract, rather than a breach of a broader social duty. Disagreements may arise during the parties’ contractual relationship that should be resolved within such capacity; however, this is no excuse to dismiss viable tort claims between the parties who are affiliated based on a contractual relationship.

The proper way to differentiate a breach of contract claim from a tort claim is to determine whether the claim arises from a broader societal duty such that the contract is simply collateral. Pennsylvania courts did not formally acknowledge the gist of the action doctrine until the 1992 case of Bash v. Bell Telephone, 601 A.2d 825 (Pa. Super. Ct. 1992). The Bash court adopted a duty-based differentiation between tort and contract actions. It emphasized that tort actions lie for breaches of duties imposed by law as a matter of social policy, whereas contract actions lie for breaches of duties imposed by mutual consensus among contracting individuals. The Superior Court in eToll v. Elias/Savion Advertising, 811 A.2d 10 (Pa. Super. Ct. 2002) added another factor to dispense with tort claims between contracting parties—whether they are “inextricably intertwined” with the contract. In other words, a tort claim that is based on a breach of social duty cannot be brought as a tort claim if the same obligations also arise from a duty imposed by a contract between the parties. For example, if a person who has a duty not to lie to another person (i.e., a societal duty) includes that duty to refrain from lying into a contract with the other person (i.e., a contractual duty), the duty is “inextricably intertwined” with the contract and can only be brought as a claim for breach of contract. Using this “inextricably intertwined” analysis, many state and federal courts in Pennsylvania have dismissed viable tort claims.

Since eToll, the Superior Court has issued many gist of the action doctrine decisions attempting to clarify the doctrine that often only caused further confusion and sometimes conflicted with past decisions. While Pennsylvania courts predicted that the Pennsylvania Supreme Court would eventually adopt the doctrine, the lack of clear guidance resulted in a split of authorities and misapplication.

In Williams v. Hilton Group, 93 Fed. Appx. 384 (3d Cir. 2004), the late Judge Edward Becker wrote a scathing dissent from the view that the gist of the action doctrine should bar virtually any tort claims between contracting parties that a number of courts had adopted. He discounted the majority’s interpretation and misapplication of Pennsylvania’s gist of the action jurisprudence, believing the law to be read far too broadly in instances where fraudulent intent is alleged with respect to a contractual promise. Becker felt that a party who made a promise with no intention to keep that promise at the time it was made should be liable for fraud even if that promise was later incorporated into a contract. Becker reasoned that the written agreement at issue in Williams was simply used as an instrument to perpetrate a larger fraudulent scheme. Therefore, he characterized barring tort claims under these circumstances as “an egregious fraud, papered over by a contract.” Where the parties’ obligations are defined by larger social policies, tort law should prevail. Becker believed, correctly, that a social duty does not disappear just because the parties incorporate that social duty into a written document.

In 2014, the Pennsylvania Supreme Court in Bruno v. Erie Insurance, 630 Pa. 79 (2014) finally adopted the gist of the action doctrine and the view expressed by Becker. In doing so, the court clarified how and when to apply the doctrine. In Bruno, both the trial court and Superior Court reiterated that tort claims were barred where there exists a similar breach of contract claim arising out of a parties’ contractual relationship. The Supreme Court disagreed. Instead, the court held that the plaintiff’s allegations facially concerned the defendant’s alleged breach of a general social duty prohibiting one from making false assurances negligently. In sum, the court ruled for the first time that the gist of the action doctrine may not bar tort claims arising from the negligent performance of contractual duties.

Despite this precedential ruling, many federal courts in Pennsylvania (and some Pennsylvania state courts) continued to use the gist of the action doctrine to improperly bar viable tort claims. In 2015, a year after the court issued its decision in Bruno, the Third Circuit issued a contradictory ruling in KBZ Communications v. CBE Technologies, 634 Fed. Appx. 908 (3d Cir. 2015). It concurred with the trial court and dismissed claims related to fraud and misrepresentation claiming that the plaintiff improperly used its contract with the defendant as the basis for its tort claim. The court felt there was no broader social duty that the defendant owed the plaintiff, but rather, that the defendant merely entered a contract and ultimately failed to fulfill its performance. The court did not appreciate that fraud in the inducement of a contract is a viable tort claim allowable under the gist of the action doctrine because such fraud is collateral to the contract itself. This is not the only instance where I believe a court misapplied the doctrine. Many courts continue to misapply the seminal case of Bruno, leaving viable tort claims dead in the water.

The opinions in both Malone v. Weiss, No. 17-1694 (E.D. Pa. 2018) and Wen v. Wills, 117 F.Supp.3d 673 (E.D. Pa. 2015), demonstrate this continued, incorrect reliance. The Malone court incorrectly barred a claim of fraudulent inducement, reasoning that permitting such a claim is improper because the only duty breached involved that of a duty enshrined in a purchase agreement. And, the court in Wen, despite recognizing the more recent Superior Court rulings that held that fraudulent inducement claims may be predicated on a party’s intent not to perform, reasoned that it was “wiser to follow the guidance of eToll.” These decisions were called “instructive” for future opinions despite the pre-existing Bruno precedent.

In January 2022, the gist of the action doctrine was again put to the test in SodexoMAGIC v. Drexel University, 24 F.4th 183 (3d Cir. 2022). SodexoMAGIC was negotiating with Drexel University to provide on-campus dining services for Drexel over a multi-year period. During these discussions, Drexel represented that it was seeking to increase its student enrollment. However, its actual, internal budgeting projected a smaller class size than the number represented to SodexoMAGIC. Based on the inflated numbers, the parties entered into a written contract for dining services that incorporated the false student enrollment projections. After learning of Drexel’s true reduced class size, Sodexo brought claims including fraudulent inducement and breach of contract. Sodexo claimed that, had they known of the false projection, they would not have bid for or negotiated a contract with Drexel. Again, despite the existing Bruno precedent, the trial court mistakenly held that the fraudulent inducement claim was based on Drexel’s violation of contractual commitments and, therefore, barred by the gist of the action doctrine under Pennsylvania law.

On appeal, the Third Circuit, correctly applying the Bruno court holding, held that Pennsylvania’s gist of the action doctrine did not apply with respect to a claim of fraudulent inducement. Any duty Drexel owed during negotiations (i.e., pre-contract) was grounded only in tort and the vendor’s tort-based fraud claim would exist with or without a later contract. Indeed, the court noted that although the false representations were later incorporated into the contract, at the time they were originally made, there was no contract, and, without a contract, any duty owed was “grounded only in tort.” The SodexoMAGIC decision mirrors the Bruno decision by acknowledging a societal duty arising out of a contractual relationship. Where a tort claim would exist “regardless of the contract,” it is not barred by the existence of a contract. To that end, the court stated that a pre-contractual duty not to deceive through misrepresentation or concealment exists independently of a later-created contract. The SodexoMAGIC decision mirrors Becker’s dissent in Williams that “a promise without an intention to perform may form the basis of a fraud claim.” That is, a viable tort claim exists even if the duty giving rise to the tort claim is also “papered over by a contract.”

Although the court in Sodexo effectively brought federal jurisprudence in line with state court cases and implicitly overruled federal district court cases that improperly barred fraudulent inducement claims under the gist of the action doctrine, the doctrine is still being misapplied from time to time. Despite both the Bruno and the SodexoMAGIC rulings, many courts are still relying on outdated and overruled authorities.

Some courts are following the Bruno and the SodexoMAGIC rulings carefully, however. Less than two months after the SodexoMAGIC decision in 2022, the same court in Malone and Wen reversed course in Southeastern Pennsylvania Transportation Authority v. Drummond Decatur and State Properties, No. 21-4212 (E.D. Pa. Mar. 15, 2022) and relied upon SodexoMAGIC to uphold a claim of negligent misrepresentation with respect to statements that later resulted in a lease being executed, instead of barring it with the gist of the action doctrine. In other words, recognizing the impact of SodexoMAGIC, the court in this case departed from earlier decisions upon which it had relied. Pennsylvania courts that continue to misapply the law should follow this lead to prevent contradictory and inconsistent decisions in the face of binding precedent. Much like the Bruno and SodexoMAGIC courts, Pennsylvania courts must exercise greater care during their analysis of tort claims before dismissing them based on an existing contractual relationship. To prevent further misapplications, courts should scrutinize the duties owed to each party and determine whether there is a broader societal duty despite a contractual relationship. If so, they must find that such a claim is not barred by the gist of the action doctrine. Rather than habitually following outdated and (implicitly) overruled authorities such as the “inextricably intertwined” analysis in the eToll decision, courts should follow the rulings from Bruno and SodexoMAGIC. As applied here, the Pennsylvania Supreme Court and the Third Circuit have well established that the gist of the action doctrine does not bar a viable tort claim between two parties related by a contract. Practitioners will need to distinguish their cases carefully and argue why the holdings of Bruno and SodexoMAGIC should apply, and not that of eToll.

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 March 9, 2023 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.

One of the primary benefits of organizing a business as a corporation (or similar entity) is limited liability protection. By establishing the corporation as a separate legal entity, its actions become distinct from the individuals running it. For the corporation’s shareholders, this provides downside certainty; the maximum liability exposure they face (in general) is the value of their investment. Since the losses stemming from personal liability are theoretically infinite, investors relish the corporate form’s ability to mitigate risk.

Because limited liability is highly desirable, however, some individuals use the corporate form for the sole purpose of avoiding liability, while knowingly carrying out business activities that create a high probability of liability. If the corporate form is strictly respected, this would leave plaintiffs with little or no way to recover for their injuries. This situation, where a corporation is created to defraud creditors or some other illegitimate purpose, is the basis behind the equitable doctrine of “piercing the corporate veil.” A distinct and often-conflated doctrine is the “participation theory” of corporate officer liability. Under this theory, a corporate officer or director can be held personally liable for the torts of the corporation that he participates in, and such liability is not predicated on a finding that the corporation is a sham or otherwise illegitimate. See Wicks v. Milzoco Builders, 470 A.2d 86, 89-90 (Pa. 1983). As such, corporate officers or shareholders can be held personally liable for their actions relating to the corporation, even if the corporation is an otherwise legitimate entity with sufficient capitalization.

Participation is a broad term with indefinite contours and boundaries, so the complexity of the participation theory lies within the question: What constitutes an officer or director’s participation in tortious conduct to hold him personally liable? There are two important factors that should be considered when pleading this doctrine against a corporate officer or director: the level of her participation in the tortious conduct, and the specific knowledge of the tortious conduct of the entity that she possessed.

The participation theory doctrine was first explicitly discussed in Pennsylvania by Chester-Cambridge Bank & Trust v. Rhodes, 31 A.2d 128 (Pa. 1943). While the court in Rhodes stated axiomatically “that a director or officer of a corporation may have personal liability for damages suffered by third persons when he knowingly participates in a wrongful act,” it held that the defendants in the case had not met this threshold. Distinguishing between malfeasance and nonfeasance, the court refused to attach individual liability where there was no evidence of the officer’s knowledge of the entity’s tortious conduct or “personal participation in the tortious act.”

After Rhodes, the Pennsylvania Supreme Court followed up in the ensuing few years with a pair of cases clarifying participation theory. In Sproul v. Stein, 35 A.2d 61 (Pa. 1944), the court rejected the use of circumstantial evidence to impose liability on the officer of a company accused of embezzlement. The following year, the court stated in McDonald v. First Nat’l Bank of McKeesport, 44 A.2d 265 (Pa. 1945) that the tortious misappropriation does not need to personally benefit the corporate agent to hold him personally liable; benefit to the corporation is enough. In the context of tort law, the core objective of which is to compensate injured parties, this makes sense. In most tort actions, benefit to the tortfeasor is irrelevant; compensating the injured plaintiff is what matters.

Participation theory and its implications percolated in state and lower courts for the next two decades, and the U.S. Court of Appeals for the Third Circuit eventually confronted the issue in Zubik v. Zubik, 384 F.2d 267 (3d Cir. 1967). In this case, as with most participation theory cases, plaintiffs first sought to pierce the corporate veil. In the alternative, they alleged that the individual defendant, an “old and infirm riverman,” participated in the company’s negligent mooring of a barge. Rejecting both theories, the Third Circuit relied upon the default assumption that corporate agents are entitled to immunity from the company’s liability and refused to impute upon the old man “the acts and knowledge of the various corporate agents who did participate” in the negligent act. The following decade in Donsco v. Casper, 587 F.2d 602 (3d Cir. 1978), the Third Circuit would again wrestle with the distinctions between corporate alter egos and participation theory. Finding that the corporate officer “authorized and approved the acts of unfair competition,” the court this time imposed personal liability based on participation theory. Donsco is often cited for its holding imposing liability solely based on participation theory, distinguished completely from any veil piercing theory.

The Pennsylvania Supreme Court’s opinion in Wicks, while finding participation theory adequately pleaded, has been interpreted as foreclosing the availability of this doctrine in cases of “mere nonfeasance.” See Village at Camelback Property Owners Association v. Carr, 538 A.2d 528, 533 (Pa. Super. 1988). In Wicks, the court examined the murky and ill-defined distinction between misfeasance and nonfeasance in a case arising from drainage problems in a residential development. It found that plaintiffs’ averments met the standard for pleading misfeasance, as the individual defendants were experts in the construction field and failed to order adequate soil testing that could have prevented the alleged injuries.

Participation theory under Pennsylvania case law requires more than ignorance or inactivity, and courts will typically not impose liability absent evidence that a corporate agent actively participated in the tortious behavior. This requirement, however, should not be confused as requiring intentional behavior in the tort sense. In Carr for example, the court allowed the suit to proceed when the defendant was alleged to have “personally participated in negligent acts.” This is the key contrast with Zubik, where negligent acts were alleged and even proven, but the defendant officer was simply uninvolved in them.

In the 21st Century, Pennsylvania courts have extended participation theory beyond just tort law, and corporate agents can now be held liable for their participation in statutory violations as well. In Corbett v. Manson, 903 A.2d 69 (Pa. Commw. Ct. 2006), the court applied participation theory to hold a CEO liable for his involvement in the corporation’s violations of consumer protection laws. In another statutory violation case, B&R Resources v. Department of Environmental Protection, 180 A.3d 812 (Pa. Commw. Ct. 2018), the court was confronted with the question of whether corporate actors can ever be held liable for inaction, as Wicks seemingly foreclosed on this possibility. Faced with clear evidence of the corporate officer’s “intentional and knowing refusal to” plug 47 abandoned oil wells, the court in B&R Resources chose to impose liability for this deliberate inaction.

B&R Resources stands for the principle that a corporate agent’s failure to act can be considered a type of malfeasance for the purposes of participation theory, arguably at odds with the holding in Wicks. The Commonwealth Court had previously confronted Wicks’s ostensible bar to inaction liability in another environmental law case, Kaites v. Commonwealth of Pennsylvania, Department of Environmental Resources, 529 A.2d 1148 (Pa. Commw. Ct. 1987). Unlike B&R Resources, the Kaites court found that despite failing to prevent pollutional discharges being “one of the most egregious” statutory violations, participation theory was unavailable absent some affirmative act.

Across jurisdictions, personal liability for intentional torts under participation theory is widely available, although the level of involvement necessary to trigger liability varies. The semantic distinction between malfeasance, misfeasance, and nonfeasance and its impact on pleading standards was discussed extensively in Skelton v. Chemical Leaman Tank Lines, 17 Conn. L. Rptr. 56 (Sup. Ct. 1996). There, the court came to criticize the “scholastic disputes about whether in a particular case we had malfeasance, misfeasance, or nonfeasance” and concluded that the true basis of liability should be analyzed under a traditional tort law duty of care standard.

In other jurisdictions, the distinction between malfeasance and nonfeasance still carries weight, like in Heronemus v. Ulrick, 1997 WL 524127 (Del. Super. Ct. July 9, 1997). There, the court granted a motion to dismiss because “allegations of nonfeasance are insufficient to maintain a claim under the personal participation doctrine.” This analytical framework was recently reindorsed by the Delaware Superior Court in Yavar Rzayev v. Roffman, 2015 WL 5167930 (Del. Super. Ct. 2015). There, the court cited Heronemus’ reasoning approvingly, but found that the allegations at issue in the case before it met the requirements for participation theory liability, as affirmative misfeasance was pleaded as opposed to mere nonfeasance. Overall, the more active and knowing an act is, the more likely courts are to impose personal liability under participation theory.

Savvy practitioners confronted with corporate misconduct should be aware of all available avenues of recovery. In cases where the corporation itself may not be vulnerable to any type of piercing theory, it is worth considering whether any of its agents have actively participated in the entity’s wrongful act. In cases where corporate agents have engaged in some affirmative act (such as having direct communications with the injured plaintiff), these corporate agents could be held individually liable for the corporation’s misconduct. In cases where negligence or failure to act is at issue, plaintiffs should place special emphasis on the corporate agent’s knowledge or expertise. If a director or officer is specifically responsible for preventing the type of injury that occurred, plaintiffs should allege that their inaction is a form of misfeasance, not “mere nonfeasance.”

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 June 24, 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.

The opioid epidemic was a perfect storm, caused by years of over-promotion, over-prescription and dangerous marketing campaigns. Integral to this “perfect storm” was not just the drug manufacturers’ conduct, but also third parties, such as private equity and consulting companies, who all played critical roles.

In the April 15, 2021 edition of The Legal Intelligencer Edward T. Kang, managing member of Kang Haggerty wrote “Holding Third Parties Liable for Their Role in Perpetuating the Opioid Crisis.“

While the country has been focused on the tragic losses and economic fallout from the coronavirus pandemic, another plague, a man-made one 20 years in the making, continues to quietly rage in the background: the opioid crisis. The opioid epidemic was a perfect storm, caused by years of over-promotion, over-prescription and dangerous marketing campaigns. Integral to this “perfect storm” was not just the drug manufacturers’ conduct, but also third parties, such as private equity and consulting companies, who all played critical roles. Unfortunately, this crisis has taken a turn for the worse. Authorities nationwide have reported upticks in opioid overdose deaths, which sadly have been exacerbated by social distancing measures and the reduction in critical government funds as attention is turned to fighting COVID-19. As multiple waves of opioid litigation have come and gone, from personal injury actions to class actions, to more recently, suits brought by state, city and local governments, the question remains, who does the responsibility of the opioid crisis rest with? Does it remain solely with the pharmaceutical manufacturers, or does justice also require holding other third parties, such as pharmacies, distributors, private equity firms, and consultants liable for their critical role in the crisis?

Learning from past public health tort litigation, the current wave of opioid litigation brought by government plaintiffs, who are armed with more robust resources, have had the most success. Typically, these actions are brought asserting state-based public nuisance, fraud, unjust enrichment, and other state law claims. See, City of Philadelphia v. Allergan, Philadelphia Court of Common Pleas, No. 180102718; City of San Francisco v. Purdue Pharma, Case No. 3:18-cv-07591-CRB (N.D. Cal. Sep. 30, 2020); State v. Purdue Pharma, C.A. No. N18C-01-223 MMJ CCLD (Del. Super. Ct. Feb. 4, 2019); and State v. Purdue Pharma, C.A. No. PC-2018-4555 (R.I. Super. Aug. 16, 2019). There have also been several ongoing lawsuits brought under the False Claims Act against drug manufacturers as well as specialty pharmacies for their role in the crisis (see, United States v. McKesson, No. 19-cv-02233-DMR, 2020 WL 4805034, (N.D. Cal. Aug. 18, 2020) and United States v. Insys Therapeutics, Case No. 1:19-cr-10191-RWZ (D. Mass)).

In addition to targeting drug manufacturers, governments have been looking to hold responsible others who played critical roles in the opioid crisis. Specifically, consulting firms played a major role in the overpromotion of certain drugs, often encouraging false and deceptive marketing and commercial activities, and, consequently, should not be allowed to walk away scot free. Unlike drug manufacturers, who should (in theory) have some incentive to self-regulate against selling harmful products, since if dangerous, consumer confidence, demand and profits will decrease, a consulting firm has none of the same incentives. Although litigation is not a substitute for regulatory action, to truly abate the opioid crisis and deter future illegal conduct, policy considerations dictate that all players be held accountable for their wrongdoing. A recent settlement with McKinsey highlights some of the bad tactics of consulting firms and reveals how third parties may be held accountable for their actions. In this column, I explore this settlement and under what legal theories a case can be made against other consulting firms.

The McKinsey Case and Settlement

By way of background, several states brought claims of civil aiding and abetting, civil conspiracy, and violations of state consumer protection acts against McKinsey & Co. for its involvement with drug manufacturer Purdue Pharma in perpetuating the opioid crisis. The states alleged McKinsey encouraged Purdue Pharma to focus its marketing efforts on doctors who already prescribed high levels of Oxycontin and encourage larger doses for preexisting patients to “turbocharge” drug sales. McKinsey’s aggressive marketing recommendations led to increased overdoses across the nation. McKinsey settled for nearly $600 million with 47 states, five territories, and the District of Columbia. Documents produced in the bankruptcy case for Purdue Pharma revealed McKinsey’s involvement, leading the states to pursue this action against the consulting firm and ultimately, settle. More documents will be made public as part of McKinsey’s settlement, which may reveal additional third-party players involved in this scheme.

Common Law Claims to Use Against Consulting Firms or Other Entities

When these other players come to light, it is likely new investigations will begin, leading to new litigation. But which legal theory should be used against these third parties to hold them accountable? There are numerous causes of action possible against, say, consulting firms, as evidenced by the recent McKinsey cases and settlement. A separate class action in West Virginia against McKinsey lists common law causes of action including negligence, fraud, civil conspiracy, and public nuisance. See, The County Commission of Mingo County v. McKinsey & Co., No. 2:21-cv-00079 (S.D.W. Va. Jan. 31, 2021). Out of these causes of action, the most promising theory against consulting firms are civil conspiracy and aiding and abetting claims. To prove civil conspiracy, there must be: two of more people who;  make an agreement to act together; with the intention to accomplish an unlawful goal with the purpose of harming another; that results in damages.

Three out of four of these elements are easiest to prove. Consulting firms work with their clients to better their business or reach some goal, which satisfies the first two elements. In the case of McKinsey and other consulting firms who worked in the opioid business, there were damages that resulted from their scheme—the loss of hundreds of thousands of lives caused by overdoses. However, the challenge lies in the third element, particularly whether there was a purpose to harm another. It is likely that the consulting firm would argue that their intent was only to help their client’s business. But, they reasonably should have known that their actions were unlawful or would have led to unlawful behavior that would harm others.

The other legal theory I suggest pursuing is a civil aiding and abetting claim. A plaintiff should be able to prove the three elements required for this theory: that one entity (like the manufacturer or pharmacy) breached a duty to plaintiff, which injured plaintiff; that defendant (the consulting firm) knowingly and substantially assisted the entity in breaching its duty; and that defendant was aware of its role in promoting the beach of duty. It can be alleged that opioid manufacturers, pharmacies, and all those involved in the opioid business owe a duty of care to the public, especially due to the dangerous nature of the business. Opioid manufacturers, including Purdue Pharma, have already pled or been found guilty of their role in perpetuating the crisis, thereby proving they breached their duty of care. In the case of McKinsey, the documentation Purdue Pharma provided showed McKinsey helped Purdue Pharma breach that duty by advising the company to falsely and deceptively market drugs, leading to over-prescription and overdoses. As noted above, McKinsey reasonably should have known that its tactics, with a goal of over prescription in mind, would lead to just that. And, with a substance as dangerous as opioids, they reasonably should have known of the negative consequences that would follow, which would breach the duty of care.

It is also possible to hold consulting firms responsible for their role via other state law. The suits of multiple states against McKinsey demonstrate that the best claim under state law would be the various consumer protection acts. In Pennsylvania’s case against McKinsey, for example, which settled as part of the $600 million settlement referenced earlier, the complaint alleges that McKinsey, through its aggressive marketing tactics and spread of misinformation in pursuit of those tactics, violated Sections 201-3 of the Consumer Protection Law, prohibiting fraudulent or deceptive conduct which creates a likelihood of misunderstanding as to the source, approval, benefits, quantities, etc. of goods and services.

Potential Claims Under Federal Law

Lawsuits against drug manufacturers and pharmacies involved in the opioid epidemic have stated claims under federal law as well, specifically, the False Claims Act (FCA). Consulting firms may also be liable under the FCA since this statute applies not only to those who submit a false claim, but also cause another to submit a false claim or knowingly make a false statement to get a false claim paid by the government. One could argue that McKinsey, for example, did cause Purdue Pharma to submit false claims by suggesting they aggressively market to certain target groups, leading to an increase in the number of prescriptions and off-label uses. McKinsey and Purdue Pharma also strategized to move patients to more potent doses of the drug, potentially in violation of the FDA-approved label and relevant regulations.

A claim is often made false if the claimant certifies that they have complied with the regulations which are a condition for payment, under express or implied false certification theories of FCA liability. McKinsey’s tactics led to the prescription and distribution of the drug, which could be argued to have caused the submission of false claims in violation of the relevant regulations and FDA-approved label. If another consulting firm suggested similar tactics, and false claims were submitted as a result, they too could be held liable under this theory. It is notable that Purdue Pharma, in a global resolution of civil FCA and criminal liability in 2020, admitted to its guilt in conspiracies to defraud the United States, violate the Food, Drug, and Cosmetic Act, and violate the Federal Anti-Kickback Statute.  It may be more fruitful to bring an FCA claim in this circumstance where the manufacturer or pharmacy partnered with the consulting firm has already been proven or admitted to violations of the FCA.

Conclusion

The McKinsey case opens the door and demonstrates how players that are one step further removed than drug manufacturers in the scheme can still be held accountable. Outside of consulting firms like McKinsey, practitioners should look to hold the wholesaler, pharmacies, private equity funds and other shareholders, as well as PBMS or accounting firms responsible for their involvement with the drug manufacturer. Once the names of these other entities are exposed, it will be their turn, like it was McKinsey’s, to face the music.

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 April 15, 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.

While recently gaining traction in both the public eye and the legal field, the claim of tortious interference with expectancy of inheritance is actually quite old and its interpretations vary among different jurisdictions, including in Pennsylvania.

Recently, a potential client came to me with the claim that his sibling was guilty of tortious interference with expectancy of inheritance. Although I decided not to take on the client for several reasons, his correspondence brought to my attention a twist in the traditional tortious interference claim. While recently gaining traction in both the public eye and the legal field, the claim of tortious interference with expectancy of inheritance is actually quite old and its interpretations vary among different jurisdictions, including in Pennsylvania.

The claim has especially rose in prominence due to the matter of Marshall v. Marshall, a case from the early 2000s. Vickie Lynn Marshall—better known as Anna Nicole Smith—raised this claim against her stepson, E. Pierce Marshall, for allegedly interfering with an expectancy from her late husband’s estate. Her husband, J. Howard Marshall II, died without providing for his wife in his will. Yet Smith claimed her husband had the intention of providing to her a “catch-all” trust. But her stepson, according to Smith, deliberately interfered with this gift by altering, destroying and falsifying documents that would have indicated J. Howard Marshall’s intent toward his wife, Smith, among other various deceptive actions that were done together with an attorney of Marshall’s. The case was complicated; decisions were reversed, and it ultimately ended up in the U.S. Supreme Court due to questions of jurisdiction. Eventually, after Smith had already passed away, the Supreme Court ruled that her estate was not entitled to the first, larger award it had been granted before.

Of course, most cases concerning tortious interference with expectancy of inheritance are not as high-profile as Marshall v. Marshall and its related suits. Yet, these cases do share a similar underlying intrigue—the belief that someone wrongfully interfered with one’s right to inherit from a deceased’s estate. It is not a stretch to say that being included in a will means one is close to the testator. Whether as a family member, close friend, or other loved one, inclusion in a will supports the testator’s desire to provide for that person in some capacity when they (the testator) passed on from this life. To prevent a testator’s dying wishes from being carried out is to wrong the beneficiary and disrespect the wishes of the testator. Yet, the defendant in these cases was also a beneficiary and thus close to the deceased. Unsurprisingly, these cases almost always involve the all too common and tragic story of family and other close relationships turning sour and deceitful.

Because of the alleged tortious conduct of one party in connection with a deceased testator’s estate, claims such as these can be taken to civil court or probate court. The procedures between the two are different just as much as the focus of the litigation would be. The civil court proceedings are similar to any other tort action, with the focus on the plaintiff and the defendant’s obstructive actions. Comparatively, the probate proceedings would more explicitly focus on the testator’s intent and ensure the proper distribution of the deceased’s assets.

The varied circumstances behind these types of claims, however, also color which legal remedies can practically be pursued for the person making the claim. For example, if someone claims they would have been written into the testator’s will were it not for another party’s interference, that person might not even have legal standing to take the claim to probate court depending on their relationship with the testator.

At the same time, not all state courts have explicitly recognized the claim of “tortious interference with expectancy of inheritance.” Some courts recognize only certain specific varieties of claimed “interference” (by recognition, meaning there is a published court opinion explicating the tort). The tort can be regarded as a last resort for those cases where the probate court cannot properly remedy the problem. But, consequently, many state courts do not recognize the claim due to the very reason that it upsets the established function of the probate court system. For those cases which involve parties in different locales, the forum could thus very well impact what course of action to take. A standard interpretation of the tort comes from the Restatement (Second) of Torts Section 774B (1979):

“One who by fraud, duress or other tortious means intentionally prevents another from receiving from a third person an inheritance or gift that he would otherwise have received is subject to liability to the other for loss of the inheritance or gift.”

In Pennsylvania, however, the tort has a state-specific formulation based on a 1904 Pennsylvania Supreme Court case (Marshall v. De Haven). The Pennsylvania-specific version of the tort exists only when the actions of the defendant prevented the execution of a will that would have been favorable toward the plaintiff. More details of this formulation can be found in Judge Zoran Popovich’s opinion in Cardenas v. Schober, 783 A.2d 317 (2001). Due to this opinion, the tort is substantially narrowed in Pennsylvania courts.

Attorneys licensed to practice in the states close to Pennsylvania may be curious as to the tort’s status elsewhere. New Jersey does appear to recognize the tort insofar there was a single case where that claim was made, but that case did not produce a published opinion which would have elaborated a state-specific interpretation of the tort. New York has explicitly declined to recognize the validity of this tort. In New York, instead, there is a well-established system of using constructive trusts as a “fix” for those who claim they have been wronged out of their inheritance. While Delaware courts have published a series of opinions that appear to not recognize the tort, the language of the opinions themselves seems to indicate that under a very specific set of circumstances the tort could be recognized (which appears not to have happened yet).

At first glance, it may seem that Pennsylvania-based lawyers ought not to care so much about the claim due to its restricted recognition in Pennsylvania and its tenuous recognition in nearby states. Yet, cases are not always between parties living in the same state. Significant connections to other states, especially those that may explicitly recognize the claim, could easily complicate the situation. Depending on the circumstances surrounding the location of the parties or the actions leading to the tort, a party living in a state that does not recognize the claim of tortious interference with expectancy of inheritance may very well consider the laws of a state that does, if applicable. Resultantly, it would be of great value to any practicing attorney in the civil courts to familiarize themselves with the claim of tortious interference with expectancy of inheritance not only in Pennsylvania, but far beyond—you never know what potential client may come your way.

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

Reprinted with permission from the October 17, 2019 edition of “The Legal Intelligencer” © 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

In its simplest form, the piercing of the corporate veil is an equitable remedy available to the creditors of corporate entities to request the court to hold their owners liable for the corporate debts. The underlying cause of action against the corporate entity could be a contract or tort action, none of which is attributable to its owners. For the creditors, the veil-piercing is desirable as their last resort to recover their damages while for the owners, it is detrimental as it exposes them to the type of liability that they wished to exonerate themselves from by forming a company in the first place. These two competing interests drive the forces behind the state laws on substantive elements and procedural requirements for veil-piercing: the more favorable the state policy is toward preserving limited liability, the harder it is under the state law for the court to disregard corporate entity, and the other way around. Pennsylvania law adopted a “strong presumption” against veil-piercing, see Stephen B. Presser, “Section 2:42.Pennsylvania, in Piercing the Corporate Veil,” (last updated July 2018).

Substantive Elements

Pennsylvania state and federal courts applying Pennsylvania law has long listed a vast set of factors that the court may consider in its decision to disregard the corporate shield, including, among others, using the corporate form as a sham to pursue fraudulent or illegal activities or to cause injustice, ignoring corporate formalities, undercapitalizing the company and exerting control to influence the corporate decisions and actions for personal interests. A combination of any number of these factors may convince the court that equity requires holding the owner personally liable for corporate debts, see, Good v. Holstein, 787 A.2d 426, 430 (Pa.Super. 2001); E. Minerals & Chemicals v. Mahan, 225 F.3d 330, 336 (3d Cir. 2000).
In its more complicated form, the creditors of a subsidiary in a corporate group may plead veil-piercing to hold the parent company liable for the debts of the subsidiary. This is especially helpful in cases where the subsidiary is undercapitalized while the parent company has sufficient resources to cover the contractual or tortious damages caused by the subsidiary. Many insurance companies have this business model. The Pennsylvania courts have applied the same factors to the corporate groups to determine if a parent company is liable for its subsidiary’s debts under the doctrine of piercing the corporate veil, as in Allegheny Energy Supply v. Wolf Run Minerals, 53 A.3d 53, 59 (Pa. Super. Ct. 2012).

Another use of the doctrine is reverse veil-piercing: the creditors of a shareholder request the court to disregard the separate entity of the corporation to enforce their judgment against the corporate asset. Applying Pennsylvania law, the federal courts have relied on the same factors as the elements of classic veil-piercing to decide whether reverse veil-piercing is warranted to hold that the corporation’s asset is available to its shareholder’s creditors, see In re DiLoreto, 266 F. App’x 140, 145 (3d Cir. 2008); In re Blatstein, 192 F.3d 88, 100 (3d Cir. 1999) (citing In re Mass, 178 B.R. 626, 631 (M.D. Pa. 1995)). Apparently, the state courts have not recognized reverse veil-piercing yet. Susquehanna Trust & Investment v. Ansar Group, Inc., No. 3442 EDA 2012 (Pa. Super. Ct. Nov. 19, 2013).

Procedural Requirements

The procedure to bring, litigate, and decide veil-piercing by the courts is not clearly determined in most jurisdictions, and states vary considerably in their procedural requirements. Sam F. Halabi, “Veil-Piercing’s Procedure,: 67 Rutgers U. L. Rev. 1001,1016-53 (2015). The main procedural issues that arise in a case when a party wishes to request veil-piercing include when and how to plead it, what the applicable law is, and whether the parties are entitled to a jury trial. Under Pennsylvania law, the piercing of the corporate veil is not an independent cause of action, but the plaintiff must plead the factors that she relies on and provide supporting evidence. See, e.g., In re Gigliotti, 507 B.R. 826, 840 (Bankr. E.D. Pa.). As long as the plaintiff pleads the factors and substantive elements of veil-piercing in her request, she does not necessarily identify her request as piercing the corporate veil to succeed, as in Calkins v. Wolk, (Pa. Super. Ct. June 26, 2018).

There are no procedural rules on when to plead veil-piercing. The case law shows that there are two variations. One option is that the plaintiff requests veil-piercing together with her underlying claims for the liability of the corporation in the same complaint. See, e.g., Triangle Home Invest v. Kaheel, (Pa.Com.Pl. Dec. 16, 2016)). In such a case, the plaintiff must name the shareholders that he wishes the court to hold liable for the corporate debts. The other option is that the plaintiff brings an action against the shareholder(s) who would be individually liable if the court pierces the corporate veil after she already litigated and received a judgment against the corporation in a separate case. See, e.g., Cutrona v. Leaser, (Pa.Com.Pl. Mar. 14, 2019).

Similarly, there is no strict rule on how to plead veil-piercing. The plaintiff may file a “motion for resolution of alter ego claims by the court sitting in equity.” See Advanced Telephone Systems v. Com-Net Professional Mobile Radio, 846 A.2d 1264, 1267 (2004). Alternatively, she might simply list the veil-piercing request among her claims in her complaint as a count, as in Christensen v. Ideal Motorcars, No. 2017-C-3883, (Pa.Com.Pl. Sep. 25, 2018).

Under Pennsylvania law, the law of the state of the place of incorporation is the applicable law regarding the substantive requirements of veil-piercing, as in Commonwealth v. Golden Gate National Senior Care, 158 A.3d 203 (Pa. Commw. Ct. 2017). Notably, the laws on veil-piercing in Pennsylvania, New Jersey, and Delaware are almost the same. The courts do not find it prejudicial to the parties if the court applied Pennsylvania law and the parties did not dispute the court’s application of Pennsylvania law or if the parties relied on Pennsylvania law instead of New Jersey or Delaware to determine the standards of veil-piercing, when the corporation is incorporated in either of these two states, see Pasternack v. Klein, (E.D. Pa. July 24, 2017), aff’d, 751 F. App’x 332 (3d Cir. 2018); Everitt v. Dover Downs Entertainment, (E.D. Pa. June 9, 1999).

There is no right to a jury trial for piercing the corporate veil in the state courts under Pennsylvania law. Similarly, the federal courts in the U.S. Court of Appeals for the Third Circuit sitting in diversity have not recognized the right to a jury trial regarding the request of piercing the corporate veil. In a recent case, the U.S. District Court for the Eastern District of Pennsylvania analyzed the issue stating that “There is no definitive Supreme Court or Third Circuit authority as to whether the question of piercing the corporate veil is one for the court or the finder of fact the jury,” see Clientron v. Devon IT, 154 F. Supp. 3d 132, 140–41 (E.D.Pa. 2015). Recognizing that some courts in the Third Circuit have submitted veil-piercing to the jury, the court held that “there is no Seventh Amendment right to a jury trial on piercing the corporate veil.” The court decided in that case, however, that under Federal Rule of Civil Procedure 39(c), it has “the discretion to try the issue of veil piercing with an advisory jury” and used this option.

Conclusion

The doctrine of the piercing of the corporate veil allows the creditors to request the court to disregard the separation of ownership that the principle of limited liability granted to corporations and their owners. It is only equitable to grant this extraordinary remedy under certain conditions: when there is enough evidence to show that the owners used the corporation as a sham to disguise their intention of furthering their personal agenda in the detriment of others. The presumption in favor of limited liability and the “strong presumption” against veil-piercing under Pennsylvania law render veil-piercing difficult even when the facts warrant veil-piercing. Practitioners should consider veil-piercing from the inception of a case and, if applicable, prepare their case to meet the veil-piercing both substantively and procedurally and develop the evidence to support the case.

Edward T. Kang is the managing member of Kang Haggerty LLC. He devotes the majority of his practice to business litigation and other litigation involving business entities. 

Reprinted with permission from the June 20, 2019 edition of “The Legal Intelligencer” © 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

Mathews is named to the list for his distinguished contributions to the practice area of commercial litigation. Commercial litigation involves any type of dispute that can arise in the business context, including breach of contract cases, SEC and NASD claims, class actions, business torts, civil RICO claims, breach of fiduciary duty allegations, and shareholder issues. Successful commercial litigators, such as Mathews, are able to assess the merits of a dispute and scale either a prosecution or defense that fits the legal and business needs of their clients.

Best Lawyers was founded in 1983 and is published in 70 countries and all 50 states. Its methodology employs a sophisticated, conscientious, rational, and transparent survey process designed to elicit meaningful and substantive evaluations of the quality of legal services. The 24th edition of The Best Lawyers in America highlights the top 5% of practicing attorneys in the United States, based on more than 7.4 million evaluations, recognizing attorneys in 140 practice areas.

In the case, Vizant Technologies, LLC, et al. v. Julie P. Whitechurch, et al., Vizant asserted claims for breach of contract, defamation, and tortious interference with existing and prospective business relationships.

A boutique financial services corporation based in Chadds Ford, PA, Vizant also has offices in cities that include Charlotte, Seattle, Toronto and London. They do business with companies in 20 other countries, with clients that include for-profit and and nonprofit entities, including a Fortune 100 company, Temple University, and the Franklin Institute in Philadelphia.

Vizant was represented by Kang Haggerty attorneys Edward T. Kang, Gregory H. Mathews and Jason E. Powell.

The decision is available here.

Griswold purchased an $8.4 million life insurance policy in January of 2006, establishing a Lincoln T. Griswold Irrevocable Trust for the “sole and exclusive purpose” of maintaining ownership of the policy. Shortly thereafter the formation of the Trust, Griswold formed a limited liability partnership in Georgia, Griswold LLP, as the sole beneficiary of the policy. Upon the receipt of the proceeds from the life insurance policy, this limited liability partnership would be dissolved, and the trustee would then liquidate the property, satisfy the claims of creditors, and distribute remaining property to the partners. At the completion of this task, the trustee would file a “Cancellation of the Election to Become a Limited Liability Partnership” to terminate the partnership.

Concurrently, in January of 2006, the Trust sought the assistance of Mid-Atlantic Financial to identify and select a life-settlement broker to assist in the sale of Griswold’s life insurance policy. Mid-Atlantic appointed Kevin McGarrey, who was the individual that procured the life insurance policy for Griswold.

In March 2008, McGarrey located Coventry First LLC in Pennsylvania and proceeded to try and sell the policy to Coventry. It was alleged that during this time, McGarrey formed a “Secret Agreement” with Coventry that promised to pay McGarrey an increased commission of $145,000, as opposed to the acceptable commission of $84,000, if McGarrey prevented the search of future bids and did not pursue competitive buyers.

Without any further bids due to this secret agreement, Griswold sold his policy for $1.675 million to Coventry, $1.53 million for Coventry and $145,000 for McGarrey’s commission, although the broker compensation was not disclosed to the Trust or Griswold. Thereafter, the Griswold LLP was dissolved.

In 2010, Griswold learned of Coventry’s fraud and sued, both in his individual capacity and as the former majority partner of Griswold LLP. Coventry sought to dismiss or to proceed to arbitration as per the arbitration clause included within the purchase agreement. Griswold argued the arbitration clause was not applicable to his claim, and the District Court agreed..

Coventry’s main argument stood on the basis of “equitable estoppel,” in that although Griswold was not a direct signatory of the purchase agreement, because he had “indirectly” benefited from the sale, he should be held bound by the terms of the agreement. Thus, Griswold should be forced into arbitration through the terms of the contract. The doctrine of equitable estoppel prevents a nonsignatory from “cherry-picking” the provisions of a contract, and restricts their ability to “turn their back” on provisions of a contract they would rather not accept.

Affirming the District Court’s decision, the Third Circuit held that, because the Secret McGarrey Agreement, which initiated the fraud in the first place, began before and separately from the execution of the purchase agreement, the arbitration clause contained in the purchase agreement could not be enforced against Griswold. The secret agreement had never been incorporated into the purchase agreement, and thus Defendants are restricted from compelling arbitration upon Plaintiffs.

This decision serves as a reminder that, while courts would generally uphold and enforce an arbitration clause, they will not hesitate from refusing to enforce such a clause when it is used unfairly to force a party into arbitration for a tort claim that arises independently from the document containing the arbitration clause.

To illustrate, if a property owner hires a contractor to build a wall, which subsequently collapses due to the contractor’s negligence in constructing the wall, the property owner cannot sue the contractor for negligence.  The property owner’s redress is confined to the terms of the contract.  Given that the wall collapsed, it is likely that the contractor breached the contract with the property owner, who presumably bargained for a wall that should not collapse.  Since nothing other than the wall was damaged, and no one was injured, however, the property owner’s relief is restricted to what was specifically bargained for – the wall.  Thus, the property owner will only be able to recover the cost of the wall, or the cost of repairing the wall (i.e., he should only get what he bargained for: a wall).

If, however, property other than the wall (i.e., “other property”) was damaged, or physical injury resulted from the wall’s collapse, the property owner could seek redress under a negligence claim.  Thus, if the wall collapsed on a customer who sustained injuries, the contractor could be sued for negligence.  Likewise, if the wall collapsed and damaged a nearby truck – i.e., property other than what was bargained for under the contract – the contractor could be sued for negligence.

Exceptions to the Economic Loss Doctrine

There are certain exceptions to the economic loss doctrine that allow a plaintiff to pursue a negligence claim against a defendant.  First, as discussed, damage to “other property” permits a plaintiff to sue a defendant for negligence, even though the plaintiff has only suffered economic damages.  See 2J Corp. v. Tice, 126 F.3d 539 (3d Cir. 1997) (holding that plaintiff was permitted to recover damages for the contents of the collapsed warehouse, where the construction of the warehouse was the subject of the contract).  Second, a plaintiff can also pursue a negligence action against a defendant if the property damage results in physical injury.

Third, the economic loss doctrine will not bar a claim for negligent misrepresentation by design professionals.  In Bilt-Rite, a school district contracted with an architecture firm (“TAS”) to prepare plans and specifications (“Design Documents”) for the construction of a new school, which TAS submitted to various contractors for the purpose of preparing bids for general construction of the school.  Bilt-Rite Contractors, Inc., v. The Architectural Studio, 866 A.2d 270 (Pa. 2005).  The project was awarded to Bilt-Rite based on its bid, which relied on the Design Documents.  Further, the contract between Bilt-Rite and the school district referred to and incorporated the Design Documents.

TAS had represented in the Design Documents that normal and reasonable construction means and methods could be used to complete certain aspects of the project.  Once construction commenced, however, the work could not be constructed using normal and reasonable construction methods, and instead required Bilt-Rite to employ special means, methods, and design tables, resulting in substantially increased construction costs.

Bilt-Rite sued TAS under a theory of negligent misrepresentation for recovery of the increased construction costs, citing Section 552 of the Restatement (Second) of Torts, which says that a party in the business of supplying information that it intends or knows will be relied upon by others owes a duty to those parties who use that information in their business activities.  The trial court dismissed the action, and the appellate court affirmed, based on the economic loss doctrine because Bilt-Rite’s losses were purely economic and because Bilt-Rite and TAS were not in privity of contract.

On appeal, the Pennsylvania Supreme Court reversed, holding that Bilt-Rite had a viable cause of action against TAS for negligent misrepresentation, and in doing so, adopted Section 552.  As a result, design professionals can be liable for negligently providing information when it is foreseeable that the information will be relied upon by third parties, even if the third parties have no direct contractual relationship with the design professional.  Because Section 552 does not have a privity requirement, the Court found that the absence of privity will not defeat a Section 552 claim.

In 2009, the Pennsylvania Supreme Court declined to extend the Bilt-Rite theory of liability to include negligent misrepresentation by non-professionals.  Excavation Technologies, Inc. v. Columbia Gas Co. of Pennsylvania, 985 A.2d 840 (Pa. 2009).  In Excavation Technologies, Inc., a contractor sustained purely economic loss as result of a utility’s failure to properly mark the location of underground gas lines.  The Court affirmed the appellate and trial court holdings that the contractor did not have a viable negligent misrepresentation claim against the utility because the contractor suffered purely economic loss and was not in privity of contract with the utility.  In other words, the Court rejected extending Section 552 claims to non-professionals such as utilities, reasoning that Bilt-Rite only carved out a narrow exception to the economic loss doctrine for design professionals.