Trial courts in Pennsylvania (particularly the United States District Court for the Eastern District of Pennsylvania) continue their organic development of the “gist of the action” doctrine in the absence of explicit guidance from the Pennsylvania Supreme Court.*

The latest comes from EDPA Judge Jan E. DuBois in Farmaceutisk Laboratorium Ferring A/S v. Shire United States, Inc., CA NO. 08-941 2009 U.S. Dist. LEXIS 30209 (April 8, 2009), who finds an interesting way to thread the needle between the gist of the action doctrine, the parol evidence rule, and the common sense acknowledgment that fraud can and does occur amongst the parties to a contract.

First, the gist of the action:

Pennsylvania’s gist of the action doctrine “bars claims for allegedly tortious conduct where the gist of the alleged conduct sounds in contract rather than tort.” Hospicomm, Inc. v. Fleet Bank, N.A., 338 F. Supp. 2d 578, 582 (E.D. Pa. 2004) (internal quotation marks & citations omitted). The purpose of the doctrine is to “preclude[] plaintiffs from re-casting ordinary breach of contract claims into tort claims.” eToll v. Elias/Savion Adver., Inc., 811 A.2d 10, 14 (Pa. Super. Ct. 2002) (citation omitted). Although a breach of contract can give rise to an actionable tort, “to be construed as in tort, . . . the wrong ascribed to defendant must be the gist of the action, the contract being collateral.” Bash v. Bell Tel. Co., 601 A.2d 825, 829 (Pa. Super. 1992) (internal quotation marks & citation omitted). “In other words, a claim should be limited to a contract claim when ‘the parties’ obligations are defined by the terms of the contracts, and not by the larger social policies  embodied by the law of torts.'” Bohler-Uddeholm Am., Inc. v. Ellwood Group, Inc., 247 F.3d 79, 104 (3d Cir. Pa. 2001) (citing Bash, 601 A.2d at 830).

Fraud in the inducement claims are not barred by the gist of the action doctrine where the fraud involves representations of fact independent of promises of performance made in the contract. See eToll, 811 A.2d at 17; TruePosition, Inc. v. Sunon, Inc., No. 05-CV-3023, 2006 WL 1451496, at *3 (E.D. Pa. May 25, 2006) (DuBois, J.); Air Prods. & Chems., Inc. v. Eaton Metal Prods. Co., 256 F. Supp. 2d 329, 341 (E.D. Pa. 2003). “[F]raud to induce a person to enter into a contract is generally collateral to (i.e., not interwoven with) the terms of the contract itself.” Air Prods., 256 F. Supp. 2d at 341 (citing eToll, 811 A.2d at 17) (internal quotation marks omitted). On the other hand, when fraud in the inducement is based on statements made with regard to performance of the contract, such claims are barred under that doctrine. In such circumstances a plaintiff’s remedy lies in contract. See Williams v. Hilton Group PLC, 93 F. App’x 384, 386-87 (3d Cir. 2004) (finding that fraud in the inducement claim that defendant had no intention of honoring [*25] the contract was barred by gist of the action doctrine). “Moreover, promises made to induce a party to enter into a contract that eventually become part of the contract itself cannot be the basis for a fraud-in-the-inducement claim under the gist of the action doctrine.” Freedom Props., L.P. v. Landsdale Warehouse Co., No. 06-CV-5469, 2007 WL 2254422, at *6 (E.D. Pa. Aug. 2, 2007) (citations omitted).

The Court notes that “caution should be exercised in determining the gist of an action at the motion to dismiss stage. Judicial caution is appropriate because often times, without further evidence presented during discovery, the court cannot determine whether the gist of the claim is in contract or tort.” Interwave Tech., Inc. v. Rockwell Automation, Inc., No. 05-CV-398, 2005 WL 3605272, at *13 (E.D. Pa. Dec. 30, 2005) (internal quotation marks & citations omitted).

And now the parole evidence rule:

Pennsylvania law concerning the application of the parol evidence rule to claims of fraudulent inducement is well established. The Pennsylvania Supreme Court has explained the law as follows:

Where the alleged prior or contemporaneous oral representations or agreements concern a subject which is specifically dealt with in the written contract, and the written contract covers or purports to cover the entire agreement of the parties, the law is now clearly and well settled that in the absence of fraud, accident or mistake the alleged oral representations or agreements are merged in or superseded by the subsequent written contract, and parol evidence to vary, modify or superseded the written contract is inadmissible in evidence.

HCB Contractors v. Liberty Place Hotel Assocs., 652 A.2d 1278, 1279 (Pa. 1995) (internal quotation marks and citations omitted). The exception to the parol evidence rule for fraud covers fraud in the execution, i.e., the oral representations were fraudulently omitted from the contract, not fraud in the inducement. Dayhoff, Inc. v. H.J. Heinz Co., 86 F.3d 1287, 1300 (3d Cir. 1996); Freedom Props., L.P. v. Landsdale Warehouse Co., No. 06-CV-5469, 2007 WL 2254422, at *3 (E.D. Pa. Aug. 2, 2007); Interwave Tech., Inc. v. Rockwell Automation, Inc., No. 05-CV-398, 2005 WL 3605272, at *16 (E.D. Pa. Dec. 30, 2005). Applying the parol evidence rule to bar claims of fraudulent inducement, as in Pennsylvania, is the minority rule. Regent Nat’l Bank v. Dealers Choice Auto. Planning, Inc., No. 96-CV-7930, 1997 WL 786468, at *6 (E.D. Pa. Nov. 26, 1997). Pennsylvania courts justify this position under the rationale that if the parties “relied on any understanding, promises, representations or agreements made prior to the execution of the written contract . . . , they should have protected themselves by incorporating into the written agreement the promises or representations upon which they now rely . . . .” 1726 Cherry St. P’ship v. Bell Atl. Props., Inc., 653 A.2d 663, 666 (Pa. Super. Ct. 1995) (internal quotation marks & citation omitted). Thus, where there is an integrated agreement and the asserted misrepresentations giving rise to fraud in the inducement are addressed by the agreement, the parol evidence rule bars extrinsic evidence of such a fraud claim.

To apply the HCB Contractors rule, courts must determine whether there is an integrated agreement and whether the asserted prior representations are specifically covered by the written agreement. Interwave Tech., 2005 WL 3605272, at *17; Quorum Health Res. v. Carbon-Schuylkill Cmty. Hosp., Inc., 49 F. Supp. 2d 430, 433 (E.D. Pa. 1999). One key factor in concluding whether an agreement is integrated is the presence or absence of an integration or merger clause in the written agreement. See HCB Contractors, 652 A.2d at 1280; Interwave Tech., 2005 WL 3605272, at *18; Quorum Health, 49 F. Supp. 2d at 433; G. Daniel Glass v. Singer Optical Group, Inc., No. 95-CV-308, 1995 WL 717411, at *3-4 (E.D. Pa. Dec. 1, 1995). To determine whether the written contract specifically addresses the subject of the oral representations, courts ask whether “they relate to the same subject matter and are so interrelated that both would be executed at the same time and in the same contract . . . .” Hershey Foods Corp. v. Ralph Chapek, Inc., 828 F.2d 989, 995 (3d Cir. 1987) [*31] (internal citation omitted).

In this case, the 2005 Settlement Agreement does not contain an integration or merger clause.  … The only section of the 2005 Settlement Agreement that possibly covers such a representation is section 2.4 As discussed in Part III.D, supra, the language of section 2.4 is ambiguous, particularly with respect to whether it requires defendant to market all new oral 5-ASA drugs as PENTASA(R). In light of this ambiguity, the Court cannot determine at this stage whether the written agreement specifically addresses the content of the alleged oral representations such that they would be barred by the parol evidence rule. “For the Pennsylvania parol evidence rule to bar a claim for fraudulent inducement, the contract must be written, unambiguous, and fully integrated.” Coram Healthcare Corp. v. Aetna U.S. Healthcare, Inc., 94 F. Supp. 2d 589, 594-95 (E.D. Pa. 1999). As the Court concludes that the 2005 Settlement Agreement is ambiguous and not fully integrated, it will not dismiss plaintiffs’ fraudulent inducement claim as barred by the parol evidence rule.

Defendant’s Motion for Judgment on the Pleadings was thus denied. I don’t agree with the whole approach here — I think Bell and eToll hold only that a plaintiff can’t simultaneously recover under negligence and breach of contract — but, importantly, Judge DuBois didn’t throw out half of plaintiff’s claims for failure to “prove” an issue that should be left to the jury. However phrased or theorized, the core ability to recover where one party may have defrauded the other in the context of a contract is preserved.

* I don’t mean to imply it’s necessarily wrong for the Pennsylvania Supreme Court to permit this organic development. The United States Supreme Court, for example, routinely denies cert on cases up until a general consensus has development among the Circuit Courts of Appeal.

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