Recently, I wrote about the Court of Appeal’s holding in Asahi Kasei Pharma Corp. v. Actelion Ltd., 2013 Cal. App. LEXIS 1017 (Cal. App. 1st Dist. Dec. 18, 2013).  Because it was the holidays, I’m not sure that the case received the attention that it deserves.  In a nutshell, the Court held that managers of a parent corporation could be held liable in tort for tortious interference with the contract of a subsidiary. Why is this case so alarming?

First, it illustrates an avenue for tort claims in breach of contract suits.  Typically, when one party breaches a contract, it can be sued for breach of contract and liable for contract damages.  These damages are basically intended to put the non-breaching party in the same position that it would have been in had the contract been performed.  In California, the breaching party generally can’t be held liable for a tort of interfering with the contract.  Strangers to the contract, however, can be held liable.  In Asahi Kasei Pharma, the Court of Appeal upheld a verdict holding an acquiring company liable for interfering with a contract between the acquired company and a third party.  While this case arose in the M&A context, the Court relied on earlier precedents:

But the California courts have not recognized a corporate owner’s absolute privilege to interfere with its subsidiary’s contract. (Woods, supra, 129 Cal.App.4th at pp. 353, 355;Collins v. Vickter Manor, Inc. (1957) 47 Cal.2d 875, 883,[306 P.2d 783] [whether corporation owners are “privileged to cause the corporation to discontinue its relations with plaintiffs, in the belief that such a course of action was in the best interests of the corporation, is a matter of defense, to be decided by a resolution of the factual issues presumptively involved”]; Sade Shoe Co. v. Oschin & Snyder (1984) 162 Cal.App.3d 1174, 1181 [209 Cal. Rptr. 124] [an actor with “ ‘a financial interest in the business of another is privileged purposely to cause him not to enter into or continue a relation with a third person in that business if the actor [¶] (a) does not employ improper means, and [¶] (b) acts to protect his interest from being prejudiced by the relation’ ”]; Culcal Stylco, Inc. v. Vornado, Inc. (1972) 26 Cal.App.3d 879, 882–883 [103 Cal. Rptr. 419] [being a parent corporation of a subsidiary business does not “without more,” make “intentional interference with a contract of the business privileged as a matter of law—that is, privileged ‘under all conceivable circumstances’ ”]; Kozlowsky v. Westminster Nat. Bank(1970) 6 Cal.App.3d 593, 600 [86 Cal. Rptr. 52] [court could not “say, as a matter of law, that, by virtue of Caspers' position as majority stockholder and director, his interference with the business relationships of the Bank would be, under all conceivable circumstances, privileged”].)

Second, and even more discomfiting, is the fact that the plaintiff successfully sued the individual executives of the parent company and was awarded punitive damages.  These individuals claimed the so-called managers’ privilege, but the Court of Appeal refused to extend the privilege to managers of a non-contracting, albeit parent, company:

And, under the manager’s privilege, a company’s manager may not be liable to a third party for inducing his or her company to breach its contract with the third party. (Klein v. Oakland Raiders, Ltd. (1989) 211 Cal.App.3d 67, 80 [259 Cal. Rptr. 149].)  The manager’s privilege does not exempt a manager from liability when he or she tortiously interferes with a contract or relationship between third parties. (Ibid.)

The net effect of the Court of Appeal’s holding is to place a very high premium on observing corporate lines.  It also creates the opportunity for windfalls, converting an ordinary breach of contract suit into a punitive damages Eldorado.  As Oliver Wendell Holmes famously observed:  “‘The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it—and nothing else.”  The Path of the Law, 10 Harv. L. Rev. 457, 462 (1897).  By creating the possibility of tort claims, it could in some cases abrogate the possibility of an efficient breach.  If a breach is truly efficient, why should those who induce what is in society’s interest be punished when the non-breaching party can sue to recover its full expectation (i.e., contract damages)?

As I routinely remind my readers, this blog covers legal news and ideas for the sake of discussion only.  It is not legal advice and should not be relied upon as such.