Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—3d Cir.: Gist of the action doctrine topples conference equipment seller’s tort claims , (Dec 9, 2015)

By Greg Hammond, J.D.

A company that sells video conference equipment and related services could not overturn an order dismissing a dealer’s individual president and managers, in an action claiming breach of contract, fraud and negligent misrepresentations, and civil conspiracy. In affirming the lower court’s decision, the U.S. Court of Appeals concluded that the tort claims against the individual defendants are prohibited by the gist of the action doctrine because they arise solely from the alleged underlying breach of contract (KBZ Communications Inc. v. CBE Technologies LLC, December 8, 2015, Jordan, K.).

KBZ Communications Inc., a business that sells video conference equipment and services, entered into a Dealer Agreement with CBE Technologies, LLC. KBZ alleges that it delivered goods and services pursuant to the contract, but CBE failed to pay for them. In addition, KBZ purportedly continued to sell products and services to CBE based on representations, statements and assurances of the individual defendants—including CBE’s president, purchasing manager, and other managers. Unpaid invoices totaled nearly $1 million when KBZ filed suit. The district court dismissed the fraud and negligent misrepresentation claims because the case was “at its core” an action for breach of contract. The civil conspiracy count was also dismissed because breach of contract cannot support such a claim.

The appellate court affirmed the lower court’s dismissal of the individual defendants. In particular, it found that the tort claims arose solely from the alleged underlying breach of contract and that the claims were therefore prohibited by the gist of the action doctrine.

The individual defendants argued that the tort claims must survive the motion to dismiss because KBZ did not have a contract with the individual defendants and that the doctrine is categorically inapplicable to fraud in the inducement claims. The court, however, rejected both arguments, finding: (1) the gist of the action doctrine bars tort claims against individual officer-defendants where, as in this case, the duties purportedly breached were created between the plaintiff and the defendants’ company; and (2) the individual defendants failed to properly plead a fraudulent inducement claim because the vague allegations did not meet the heightened pleading standards and did not demonstrate that any of the individual defendants’ actions “induced” KBZ to enter into a contract.

The case is No. 14-3526.

Attorneys: Stephen C. Goldblum (Semanoff Ormsby Greenberg & Torchia, LLC) for KBZ Communications Inc. Michael Eidel (Fox Rothschild LLP) for CBE Technologies LLC.

Companies: KBZ Communications Inc.; CBE Technologies LLC

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