Yesterday the California Supreme Court denied review in Asahi Pharma Corp. v. Actelion. Pacific Legal Foundation had submitted a brief urging the Court to review and overturn the Court of Appeal’s decision—which resulted in one of the biggest punitive damages awards in California history.
Asahi had sued Actelion for cancelling its subsidiary’s contract with Asahi. Companies cancel contracts all the time for perfectly legitimate business reasons, and under California law, the breaching party has to pay the promisee damages in contract. But Asahi sought tort damages in addition to contract damages under the theory of tortious interference with contract. According to that theory, a party is liable in tort whenever it induces another a party to breach a contract. Asahi claimed that Actelion could be liable for inducing its subsidiary—CoTherix—to breach.
But not just anybody can be held liable for tortious interference. The California Supreme Court has held that only “strangers” or “interlopers” to a contract can be held liable for interfering with that contract. The question thus arises, is a parent company a “stranger” to its subsidiary’s contract?
The Court of Appeal said yes, and imposed a whopping $30 million dollar punitive damages award on Actelion. In our brief, we urged the Supreme Court to review that decision and hold that parent companies do not qualify as strangers to their subsidaries’ contracts. We noted that extending tort remedies to what are violations of contract laws can have harmful effects on the California economy. Because—unlike contract damages—tort damages are so unpredictable, allowing tort recovery for contract breaches makes it difficult for parties to estimate their risk of entering into contracts in advance, and thus deters them from entering into beneficial, wealth-creating, economically efficient contracts. In the context of parent-subsidiary relationships, holding parents liable for tortiously interfering with their subsidiaries’ contracts may discourage socially advantageous corporate acquisitions—as parents will not be able to determine their potential tort liability for choosing to alter, cancel, or renegotiate their subsidiaries’ inefficient contracts.
Further, holding parent companies liable for cancelling their subsidiaries’ contracts turns normal, competitive business behavior into a tort. Under the appellate court’s broad conception of “stranger,” the company that now controls CoTherix and that acts in its best interest faces tort liability for inducing it to breach. This interpretation of the tort of interference jeopardizes companies’ ability to discontinue what are essentially their own contracts once they become unprofitable. More broadly speaking, where anyone but the parties to the contract themselves are immune from liability for tortious interference, businesses may be threatened with liability for merely soliciting business, offering better prices, or counseling a company to breach.
Several other Courts of Appeal have rejected that reasoning, and held that entities with a direct economic interest in the contract (like parent companies) cannot be held liable for tortious interference with that contract. We can only hope that in time, the California Supreme Court will resolve this circuit split in a way that is best for the California economy.