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.
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.