Sins of a Subsidiary Corporation Visited Upon Parent
By Andrew J. Kennedy, Litigation News Contributing Editor – March 21, 2014

In a decision that places a premium on the strict observation of corporate formalities, the California Court of Appeal held that a parent corporation and its executives could be liable to a third party for interfering with a subsidiary’s contract.  Upholding a $30 million punitive damage verdict, the appellate court also held that executives of the parent could be held personally liable in connection with the subsidiary’s breach of contract.  Asahi Kasei Pharma Corp. v. Actelion, Ltd. [PDF].

Background of the Dispute
In 2006, Asahi Kasei Pharma Corporation entered into a licensing agreement with  CoTherix, located in California, to secure the FDA’s approval for a drug called Fasudil. Asahi sought to market Fasudil for pulmonary arterial hypertension. At that time, rival Actelion, Ltd. held the dominant share of that market. 

 Soon after learning of the licensing agreement, Actelion began exploring the option of acquiring CoTherix. In November 2006, CoTherix announced a plan of merger with an Actelion subsidiary.  Following that announcement, Asahi sought reassurances from both Actelion and CoTherix that CoTherix would nevertheless continue to develop Fasudil.  On January 3, 2007, after conferring with Actelion, CoTherix assured Asashi that “we continue to honor our agreement to move [F]asudil forward.” Six days later, Actelion acquired all of the stock of CoTherix and notified Asashi that it was discontinuing development of Fasudil, breaching the licensing agreement.

Asahi’s Claims Against CoTherix and Actelion
Asahi sued CoTherix in the International Court of Arbitration for breach of contract. The arbitrators awarded Asahi over $91 million, and CoTherix paid the award. But that did not end the dispute. Asahi also sued Actelion and three of its executives in California state court for intentional interference with contract. 

At trial, Asahi argued that Actelion acquired CoTherix to kill Fasudil as a competitive product.  The jury found that Actelion and its executives had intentionally interfered with the licensing agreement, awarding Asahi $546,875,000 in compensatory damages. The jury also found that the defendants had acted with “malice, oppression, or fraud” and awarded $30 million in punitive damages against three Actelion executives. 

After the jury verdict, the trial court reduced the compensatory damage award to take into account the contract damages that Asahi had received in the arbitration. The trial court, however, upheld the jury’s punitive damage award against the executives.

Court of Appeal Rejects Defenses
On appeal, Actelion, as the parent corporation, argued that it could not be liable for tortious interference with contract because the duty to not interfere falls only on strangers to a contract who have no legitimate interest in the contract’s performance. Actelion argued that it could not be a stranger because, as owner of CoTherix, it had an economic interest in the licensing agreement. Similarly, it argued that Actelion’s high-level executives “were responsible for determining how Actelion, standing in the shoes of CoTherix, would deal with that agreement.”  So, it reasoned, neither Actelion nor its executives could be liable.

The court of appeal sharply disagreed, holding that, “Actelion, by virtue of its ownership interest, is not automatically immune from tortious interference with the License Agreement.”  Moreover, while the defendants presented evidence that the interference was justified, the jury rejected it.  Having found the jury was properly instructed, the appellate court found no reason to upset the jury’s verdict.

The court rejected the executives’ defenses for analogous reasons.  First, the court reasoned that all persons who participate in an intentional tort are liable for the full amount of damages. Then the court rejected the executives’ defense of the “manager’s privilege,” which can allow a corporation’s manger or agent to induce the corporation to breach its contract without fear of individual liability. But here, Actelion was not a party to the contract—its subsidiary CoTherix was. That was enough for the court, which reasoned that since the executives were neither employees of nor agents of the subsidiary, they were third parties who could be liable for intentionally interfering with the licensing agreement.

Corporate Formalities Dictate Result
This case highlights strict observance of corporate lines. “If you are going to limit your liability exposure up the corporate chain by using separate corporations, then you have to look carefully at exposure for what you do down the chain,” observes Heath J. Szymczak, Buffalo, NY, cochair of the Tortious Interference Subcommittee of the ABA Section of Litigation’s Business Torts & Unfair Competition Committee. 

Yet some question whether the fine distinctions made by the court are sustainable. “Here, an employee of a parent company is held liable in tort for allegedly inducing a subsidiary to breach, whereas if the same employee had worked for the subsidiary, it does not appear he would be liable,” says Jeffrey A. Hage, Dallas, TX, cochair of the Tortious Interference Subcommittee of the Section of Litigation’s Business Torts and Unfair Competition Committee. “It seems odd,” Hage says.

Hage also suggests that the anti-competitive nature of the case was the key for the court. “I wonder if the court was looking to a tort remedy because it dismissed the plaintiff’s antitrust claim under California’s antitrust law. The court specifically referred to market dominance and defendant’s alleged efforts eliminate a competitive product,” he adds.

Certainly, the jury was outraged by the defendant’s conduct. “It is clear that they were misrepresenting what they were doing, and the entire transaction was to get a competitor out of the market,” says Elizabeth S. Fenton, Philadelphia, PA, cochair of the Section’s Business Torts and Unfair Competition Committee.  “The jury is saying this is a line you cannot cross.”

The case may expand potential liability for executives, but Szymczak suggests that the holding may be limited.  “While it may be a disheartening precedent if you are defending executives, it may also be a highly distinguishable case,” he says. “The product touched upon potentially significant public health issues and apparently had a very tight profitability life cycle. Disruption of a product like this presented a unique confluence of damages, liability, and public policy issues.”

Keywords: tortious interference, contract, parent corporation, subsidiary, manager's privilege

 
Related Resources

Beware of Conflicts in Joint Representation
Attorney-Client Privilege Passes to Acquiring Company in Merger