source: Caselaw Access Project

author: MCINERNEY, J,

license: Public Domain

text:
    Source Healthcare Analytics, Inc. v. SDI Health LLC

      Howard D. Scher, Richard M. Simins and David A. Schumacher, for plaintiffs.

      Barbara W. Mather, Barak A. Bassmart, Sara B. Rickman, Jeffrey L. Vagle, William Liess and Michael E. Baughman, for defendants.
    January 14, 2014-
   MCINERNEY, J,

FINDINGS OF FACT AND CONCLUSIONS OF LAW

I.Parties

1. Plaintiff Source Healthcare Analytics, Inc. (“SHA”), Defendant SDI Health LLC (“SDI”) and defendant IMS Health, Inc. (“IMS”) were competitors in the healthcare informatics industry at all times relevant herein. N.T. 9/23/13 a.m. p. 13-14 (Satin).

2. SHA was a provider of information services. N.T. 9/23/13 a.m.p. 12 (Satin). SHAbought data from pharmacy chains, other retailers and insurance providers, analyzed that data and created products which it sold to various customers primarily in the pharmaceutical industry. Id. p. 14-15.

3. In 2006, SHA was acquired by plaintiff WK Pharma for approximately $400 million. Id. p. 13.

4. WK Pharma is a subsidiary of WK US and a sister entity of WK Health. Id. p. 12.

5. Elizabeth Satin (“Satin”) is the head of Mergers and Acquisition for WK U.S. at all times relevant hereto. N.T. 9/23/13 a.m. p. 4(Satin).

6. Robert Becker (“Becker”) is the CEO of WK Health at all times relevant hereto. N.T. 9/24/13 a.m. p. 4 (Becker).

7. Defendant SDI Holdings, Inc. was a private company also in the health care analytics industry.

8. Andrew Kress (“Kress”) is the founder and president and CEO of SDI at all times relevant hereto. N.T. 9/24/13 am. p. 28 (Kress); D-395-100000011.

9. SDI Holdings Inc. was a wholly-owned subsidiary of SDI Health Holdings LLC. N.T. 9/26/13 pm. p. 87 (Spaniel).

10. SDI Health Holdings LLC is owned by SDI Holdings Inc., LLR Equity Partners II, LLR Equity Partners III and Tailwind. N.T. 9/25/13 am. p. 38-39 (Kress).

11. Howard Ross (“Ross”) and David Reuter (“Reuter”) are principals at LLR Equity Partners Inc. at all times relevant hereto.

12. In 2008, SDI acquired Verispan, a competitor in the industry. N.T. 9/18/13 p. 114-115 (Reuter).

13. Defendant IMS was another competitor in the healthcare informatics industry at all times relevant hereto.

II. SDI expressed no interest in SHA prior to January 2010.

14. In 2009, WK began to explore ways to make SHA a stronger player in the market to better compete with IMS. N.T. 9 /23/13 am. p. 20-22 (Satin).

15. In October 2009, Satin, head of Mergers and Acquisition for WK US, and Becker, CEO of WK Health, arranged a meeting with Kress, CEO of Defendant SDI, and Ross and Reuter, principals at LLR Partners, Inc., to explore whether SDI was interested in doing any kind of deal that might enable SHA and SDI to better compete against IMS. N.T. 9/23/13 a.m. p. 30, 39 (Satin).

16. At the meeting, Becker made a presentation about SHA’s business. Becker explained that SHA had been struggling for several years and was a “challenged investment” largely due to the loss of its biggest client, Pfizer, which had accounted for approximately $30 million of its annual revenue. N.T. 9/23/13 a.m. p. 18-19, 31 (Satin).

17. Becker also explained that outside forces affected SHA’s profitability, including the consolidation of companies within the pharmaceutical industry and the “patent cliff’, the phenomenon occurring at the time in which more drugs were going off patent than coming on patent. N.T. 9/23/13 a.m. p. 18-19, 31 (Satin).

18. After the meeting, Kress, Ross and Reuter made it clear to WK that they had no interest in doing a transaction with WK. N.T. 9/23/13 a.m. p. 32 (Satin).

19. On November 25, 2009, Ross was invited to a breakfast meeting with William Nelligan, the President of the Americas of IMS. Nelligan requested the meeting to keep the lines of communication open between IMS and the SDI defendants. PX 2. At the breakfast, Nelligan warned Ross that if SDI and SHA “ever team up” antitrust rules would preclude an eventual marriage between SDI and IMS. Id. Later, Ross reported to Kress and Reuter as follows: “I’m sure Bill will ask for these breakfasts every 6 months so he can position IMS to acquire SDI if and when we are ready.” Id.

III. Rumors of SHA sale.

20. WK engaged William Blair & Company, LLC, (“Blair”), an investment banking firm, to run a limited auction process. N.T. 9/23/13 a.m. p. 22-23 (Satin).

21. In January 2010, Blair generated a list of thirty potential financial investors for SHA. This list did not include SDI. D-0036 at SHA003953; N.T. 9/23/13 a.m. p. 23-25, 30 (Satin).

22. After consulting with WK, Blair narrowed the list of potential investors down to six. The list included, Symphony Technology Group as a potential investor. N.T. 9/23/13 a.m. p. 25-30 (Satin).

23. Rumors about WK shopping the SHA asset surfaced in the industry. N.T. 9/18/13 a.m. p. 102-106 (Reuter); N.T. 9/19/13 p.m. p. 14-15 (Reuter); N.T. 9/25/13 p.m. p. 41-44 (Kress).

24. As a result of the rumors, Kress prepared a Power Point slide presentation for the SDI Board entitled “Project Hadron.” Project Hadron was SDI code for a potential SHA/SDI combination. One of the benefits of combination with SHA identified by Kress on the power point slide was a long term IMS/TPG reaction. PX 4-LR02048; N.T. 9/25/13 p.m. p. 140-41 (Kress).

25. Even though SDI stated they were not interested in any kind of transaction with SHA in October 2009, on January 20,2010, Reuter wrote to Satin to express interest in a potential SHA/SDI merger stating: “We’ve heard rumors” that SHA “might be up for sale,” and then went on to state, “I wanted to check in to see if there was any truth to that and express our interest in doing something one-off if you were interested in parting with it.” D-0003 5.

26. Satin responded by leaving Reuter a voicemail, “saying there was nothing going on — was just rumors as usual.” PX005 at SHA0027755; D-0035; N.T 9/23/13 a.m. p. 34 (Satin).

27. The rumors continued. N.T. 9/19/13 p.m. p. 14-15 (Reuter).

28. On March 4, 2010, Reuter called Satin and again expressed interest in doing a deal as a standalone private equity firm or together with SDI. Satin asked: “what was the difference now vs. when we talked face to face a few months back.” PX-5- SHA0027755. Reuter responded, “We had a chance to really think about it and thought it made a lot of sense.” Id.

29. On March 30,2010, Reuter emphasized the potential synergies of a combined SDI/SHA.

30. On April 26, 2010, Reuter and Satin spoke once again and reiterated his interest in a deal with SHA wherein he described his vision for the potential deal structure with SHA. Satin later relayed SDI’s interest to her SHA team ■ and Reuter’s suggestions to exchange information that would allay SHA’s concerns about SDI. PX-5; PX-6.

31. On May 6, 2010, SDI, WK and LLR executed a confidentiality agreement. The parties agreed to furnish information to each other, subject to the terms of the letter agreement, to assist the other in making an evaluation with regard to a possible transaction between the parties and to keep all information of the other party in confidence and not disclose it and use it solely for the purposes of evaluation. PX011.

32. The confidentiality agreement also prohibited the parties from disclosing to any person any information with respect to “the fact, nature or status of any discussions among the parties, or any other facts or information with respect to the nature, terms or status of any transaction among the parties.” PX-11 par. 3(d)(ii) (iii).

33. Upon the termination of the evaluation or the discontinuation of any discussions among the parties or at the other party’s request, each party will, at its election, return or destroy other Party’s information. PX- 11 par 5.

34. The confidentiality agreement contained an exception for any portions of information “which are or become generally available to the public through no direct or indirect act or omission by the receiving party or any of its representatives,” “are already known by, or are or become lawfully available to, the receiving party from a source, other than the disclosing party or its representatives who are not prohibited from disclosing such portions to the receiving party...” or was “independently developed by it or its representatives without any use of or reliance on any information.” Id. at par 6 (a)-(b).

35. Once the confidentiality agreement was executed, the parties exchanged preliminary financial due diligence. WK sent SDI a “Summary Business Plan,” which included various financial projections for SHA. WK projected that SHA would have $158 million in revenue and negative $2.8 million in EBITDA in 2010. PX-12.

36. SDI also sent WK financial projections for SDI. SDI projected $145 million in revenue and $24 million in EBITDA in 2010. PX 13.

IV. Plaintiffs receive two offers in August 3-6, 2010

37. On August 3, 2010, SDI submitted a preliminary non binding indication of interest to acquire SHA. PX-16.

38. The offer from SDI valued SHA at $110 million and was subject to the completion of due diligence. PX-16; N.T. 9/23/13 a.m. p. 78 (Satin).

39. On August 6, 2010, WK received an offer from Symphony Technology Group (“Symphony”), a private equity company, of $120 million. PX 17-STG 000286; N.T. 9/23/13 a.m. p. 77 (Satin).

40. Symphony proposed to buy 51% of the business which translated to $61.2 million, $40 million in cash and $21.2 million in the form of a subordinated note. Id.

41. Although the Symphony offer was very attractive, WK chose the SDI offer because it proposed a combination of SHA and SDI to create a new company that would be able to better compete against IMS. N.T. 9/23/13 a.m. p. 80-81 (Satin).

42. WK and SDI agreed to a higher purchase price than noted in SDI’s initial indication of interest, which would be incorporated into a nonbinding letter of intent. D-0395 at WBSDI00000007.

V. SHA and SDI enter into Exclusivity Agreement

43. On September 17, 2010, the parties executed a Letter of Intent (LOI) containing a non-binding term sheet outlining the terms of the deal. No obligation existed with respect to any transaction unless and until there was execution of definitive and ancillary documents typical for transactions of this type. PX-23; N.T. 9/23/1.3 a.m. p. 82 (Satin).

44. The parties acknowledged and agreed the transaction was subject to satisfactory completion by each party of a due diligence review. Id

45. The LOI contained an exclusivity provision. Upon execution, the parties agreed to immediately cease any discussions or negotiations with any third party that may be ongoing with respect to a “Potential Transaction”. Id.

46. The parties also agreed for a period of forty five (45) days not to:

(a) initiate, solicit or knowingly encourage any inquires or the making of any proposal regarding any potential transaction; (b) engage in, continue or otherwise participate in any discussions or negotiations regarding, or provide any information or data to any third party relating to any potential transaction; (c) enter into any agreement or agreement in principle with respect to an proposed transaction; or (d) otherwise facilitate any effort or attempt to consummate a potential transaction.. .PX023.

47. The forty five (45) day exclusivity period ran from, September 18, 2010 through and including November 1, 2010. In accordance with the agreement, the exclusivity period could be extended for an additional thirty days, through and including December 1,2010, “if the definitive documentation for the transaction” had not yet been executed and “the parties are continuing to proceed with the negotiation of such definitive documentation in good faith.” PX-23.

48. The exclusivity agreement also contained a notice provision, which stated:

During the exclusivity period, each of the company parties and the SDI Parties shall advise the other of any inquiries by any third party with respect to any potential transaction and shall provide the material terms (excluding the identity of such third party) of any proposal received, in each case within one (1) business day thereof. Id.

49. The agreement also incorporated by reference the May 6, 2010 confidentiality agreement as follows:

The contents of this letter and the existence of any discussions between the SDI Parties and the company parties shall constitute information as such term is defined in that certain mutual nondisclosure letter agreement, dated as of May 6, 2010, by and among Wo Iters Kluwer U.S. Corporation, SDI and LLR Partners, which such agreement shall govern this letter and the actions of the SDI Parties and the company parties pursuant hereto. Id.

VI. Events after Exclusivity Agreement signed

50. After the exclusivity agreement was signed, full due diligence began. N.T. 9/23/13 a.m. p. 89 (Satin).

51. The purpose of the due diligence was to determine whether the projected synergies between SHA and SDI “were real and realizable” and whether the proposed terms of the deal were “appropriate.” Id. p. 92.

52. Procedures were put in place to keep the data agreements as protected as possible. The agreements were placed in an electronic clean room and certain individuals were provided with access to the other’s data agreements. N.T. 9/23/12 a.m. p. 94-95 (Satin). SDI’s designee was Kress and WK’s designee was Michelle Wolker. N.T. 9/23/13 a.m. p. 94-95 (Satin).

53. On October 15, 2010, SDI provided WK with revised financial projections for SDI which were “dramatically” different from what they had originally presented a few months prior. N.T. 9/23/13 a.m. p. 98 (Satin). When questioned by Satin, Reuter responded that the original numbers upon which the terms of the deal had been negotiated were SDI’s “stretched target numbers” and that SDI’s “actual numbers” were the ones being disclosed now. Id. at 99.

54. Despite the numbers, WK continued to be interested in the deal because of the potential for value to be created through synergies and because they believed in the combination and its potential for competing better against IMS. N.T. 9/23/13 a.m. p. 103 (Satin).

55. WK was lead to believe that SDI was interested in the deal on the basis of continued positive feedback they were receiving from SDI throughout the due diligence period. N.T. 9/23/13 a.m. p. lOl(Satin).

56. On October 20, 2010, after SDI finished with their financial due diligence review of SHA, Reuter called Satin and stated that SDI believed the “strategic fit” was equal or better than they hoped. PX34.

57. WK told SDI that they needed to dig deeper into SDI’s numbers before going to the WK Board to seek final approval based on the lowered projections and to date the fact that not much digging had been done. N.T. 9/23/13 a.m. p. 104 (Satin). In response, Reuter told Satin “if you want to do more digging on us, we’re going to require more digging on you.” Id. N.T. 9/23/13 a.m. p. 103-104 (Satin).

58. On October 23 and 24,2010, Kress received access to SHA’s confidential data agreements. N.T. 9/23/13 a.m. p. 104-105 (Satin).

59. On October 26, 2010, Kress met with Becker to hear from him how due diligence was going. PX-40. The dinner was “fine and friendly” and Kress did not raise any “troubling revelations from his review” of the data agreements. Id.

60. The following morning, Kress emailed Becker to thank him for dinner and to advise that he would like to finish due diligence by the end of that week. PX-44.

61. Satin was surprised by the response since WK was still waiting for more financial due diligence from SDI. Satin emailed Becker: “Well its odd given that we don’t have their stuff in data room yet.” Id. Becker replied, “He is just saying let’s just be done with all this and do the deal!”M

VII. IMS and SDI Contacts

62. IMS was interested in SDI because of its strength in the anonymized patient longitudinal data (APLD) market and the significant cost synergies a combined IMS/SDI would offer. N.T. 9/26/13 p. 81, 106 (Linn).

63. In 2005, IMS made an offer to acquire SDI, prior to its Verispan acquisition, but the two companies could not agree on a price. N.T. 9/26/13 a.m. p. 28-30 (Linn).

64. After LLR’s investment in SDI, Bill Nelligan, President of IMS America, approached Howard Ross, a partner at LLR, to establish a professional relationship and to discuss the LLR portfolio companies that IMS might be interested in acquiring if an opportunity arose. N.T. 9/19/13 p.m. p. 90-93 (Ross).

65. In February 2010, IMS, a formerly public company was taken private with TPG a private equity group, purchasing the largest stake of the company.

66. After taking IMS private, TPG recruited and hired Ari Bousbid from another industry. Bousbid took the position of CEO on September 1, 2010.

67. Bousbid, new to the health care industry reached out to Bob.Becker, CEO of Wolters Kluwer Health in October 2010. N.T. 10/1/13 a.m. p. 10 (Bousbid).

68. In September and October 2010, IMS heard rumors of SHA/SDI negotiations through several sources including Cafe Pharma. N.T. 9/26/13 a.m. 55-65 (Linn); D-0275.

69. By October 27, 2010, the rumors intensified, reaching Europe. Stefan Linn, Senior Vice President of Strategy for IMS and a former TPG employee emailed two of his former colleagues at TPG, Jeff Rhodes and Todd Sisitsky: “There are persistent rumors that SDI is acquiring the WK assets. Have you heard anything? That would not be good for us. It would create a pretty good solution in the market place with better assets than IMS in the growth markets...” PX-45. N.T. 9/26/13 a.m. p. 66 (Linn).

70. Linn also forwarded his query to Bryan Taylor, another IMS board member. Taylor stated he had not heard the rumors but he was having dinner that evening with a former senior executive at WK. After his dinner, Taylor sent a follow up email to Mr. Linn stating the rumor was confirmed at his dinner and that the structure of the SHA/SDI transaction was a joint venture. This email was forwarded to Bousbid. D-0298, D-0309.

71. Sisitsky responded to Linn at 7:06 p.m. that evening and added Sharad Mansukani, a board member of IMS and employee of TPG Capital the private equity firm that principally owns IMS, to the email: “I have heard nothing to that effect but not sure I would. I was under the impression that dave [sic] had a dialogue with wk folks. Shard may also know sdi folks (sharad?). PX-45.

72. “Dave” referred to David Carlucci, the former CEO of IMS, who had in fact contacted Becker a few weeks earlier “to fish for information.” PX-41.

73. The same day that Linn emailed Rhodes and Sisitsky, October 27, 2010, Kress reached out to Mansukani and invited him to dinner, “So, dinner again soon?” PX-42. Mansukani responded at 5:08 p.m, “Luv too [sic]...will get u dates.” PX-43.

74. Mansukani had dinner with Kress on prior occasions. On July 22, 2010 for instance, Kress told Mansukani that he would be “ready to contemplate a sale” of SDI in the future and that he saw IMS as a “logical buyer”. PX-15. Mansukani “told him to give [IMS] a buzz” if any “specific opportunities” presented themselves. Id.

75. On October 27, 2010 at 7:17 p.m., Mansukani responded to Sisitsky’s email, with a copy to Linn and others: “I had not heard anything either-however+ironically 3 hrs ago-the ceo at SDI (andrew kress) shot me an email and asked me when I was free for dinner...have not seen/ heard from for last 3 mos.” PX-45.

76. At 7:31 p.m., Mansukani sent a new email to Kress: “So my old philly friend-rumors abound about you and an impending acquisition...Good for you-clearly you want to make we [sic] work to grow our latest acquisition.” PX-50.

77. At 7:45, Kress replied: “Should I take that as a yes you’ll have dinner next week?” PX-50.

78. Mansukani responded to Kress two minutes later, at 7:47 p.m., “Lol-know [sic] I know why I like you. That’s a yes.” Id. Mansukani then immediately forwarded this exchange to Linn and stated: “FYI-oh [sic] sounds like our concerns are well founded.” PX-47.

79. At 8:31 p.m. on October 27, Linn forwarded the Mansukani/Kress exchange to Bousbid. PX-47. Linn wrote to Bousbid, “FYI-there seems to be some credence to the WK/SDI rumor...Let me think more about what this means.” Id.

80. Linn emailed his staff at 8:58 P.M. that evening: “I have it from a pretty good source that there is something to the rumor. Can we do an assessment of this asap.” PX-48.

81. At or about the same time, a member of TPG and a former unidentified executive of WK confirmed the rumor of a SHA/SDI combination.

82. In the meantime, Kress forwarded the email exchange with Mansukani to Ross. PX-46. Ross responded “thanks, I guess I will not need to make the “the window is closing comment.” PX-46.

83. In response to Kress email, Ross replied, “Apparently not. I’m having dinner w him [Mansukani] next week in any case.” Id.

84. Mansukani’s email prompted Kress to email Becker on October 28, 2010 and alert him that SHA/SDI negotiations were now public knowledge. Becker did not respond to Kress until November 3,2010. PX098; PX087.

85. While the various email transactions were occurring, on October 27, 2010, IMS put together an analysis of the potential SHA/SDI combination. At 11:21 p.m., Hossam/Sadek of IMS circulated “an assessment of the combined data assets” of a SHA/SDI entity and how it would compare to IMS. PX-51. Sadek wrote: “As you can see the combination is [a] more powerful full line competitor offering a complete set of offering [s] under the same roof.” Id.

86. On October 28, 2010, IMS presented a hurriedly prepared slide deck at its boardmeeting, entitled “Overview of SDI and WK combination.” PX-53; PX-134.

VIII. Events of October 29, 2010-SDI encourages interest from IMS

87. Mansukani emailed Kress to suggest Kress meet with IMS’s new CEO, Bousbib. PX056. Kress agreed to meet Bousbib, and the two subsequently scheduled a meeting for November 2. PX071; 10/1/13 a.m. 22:8-13 (Bousbib). Mansukani suggested that the two would have a great deal to talk about. PX-57.

88. At 8:24 a.m. Masukani emailed Ross and wrote, “Expect some traffic from IMS folks.” Ross forwarded same to Kress and Reuter, commenting: “Interesting....” PX 58.

89. At 8:55, a.m., Nelligan emailed Ross to move up their breakfast from November 10 to November 2, 2010. Nelligan once again stated he thought IMS was a natural landing spot for SDI and wanted to speak to him about this. PX 63. Nelligan also informed Ross that Bousbid would also be in town and was interested in meeting with Ross. Id.

90. Ross forwarded the Nelligan email to Kress and Reuter saying, “More interesting...they clearly know what is up...I will meet with them on 11/2. Id.

91. Ross’ email exchange with Nelligan violated the exclusivity agreement since SDI was knowingly encouraging inquiries into a potential transaction with IMS.

92. Kress also wanted to schedule a meeting with Bousbid for the same day as the Ross meeting. PX-71.

93. Kress’ agreement to meet with Bousbid was also a violation of the exclusivity agreement for knowingly encouraging a potential transaction with IMS.

94. While the email exchanges were occurring between SDI and IMS, SDI and WK extended the exclusivity period from November 2 to December 1. PX-62.

95. Edward Spaniel, SDI’s general counsel, testified SDI was concerned that if the exclusivity period was not extended, SHA may re-engage negotiations with Symphony. N.T. 9/27/13 p. 38-40 (Spaniel).

96. SDI’s extension of the exclusivity period was self-serving.

97. On October 30, 2010, Reuter responded to Ross’ “more interesting” email and said, “I think you know the story line. Good luck.” PX-67.

XI. November 2, 2010 Meetings and Breaches of the Exclusivity Agreement

98. IMS made an indication of interest on November 2,2010. N.T. 9/24/13 p.m. p. 137; PX-134-IMS-0028169.

99. Ross disclosed to Bousbid that SDI was under a period of exclusivity with WK until December 1, and therefore they were unable to openly negotiate until the exclusivity period was over. N.T. 9/20/12 a.m. p. 28-29 (Ross); PX-134-IMS-0028169.

100. During the Kress/Bousbid meeting, Kress informed Bousbid that SDI was going to continue to grow and become a major force in the industry. N.T. 10/1/13 a.m. p. 24 (Bousbid).

101. After the meetings on November 2,2010, Bousbid reiterated IMS’s interest in acquiring SDI. PX 75; N.T. 9/24/13 p.m. p. 112 (Kress).

X. SDI discloses IMS interest to SHA

102. On the evening of November 2, 2010, Edward Spaniel, general counsel for SDI, convened an unscheduled meeting with the board of SDI. PX-79. At this meeting, Spaniel advised the board of two options, one was to ask WK for relief from exclusivity and pursue the IMS deal now and second was to delay the negotiations with WK through November and then validate the IMS deal as soon as exclusivity expires. N.T. 9/20/13 a.m. p. 46, 47 (Ross). The board chose the second option; validate the IMS inquiry as soon as exclusivity expired. N.T. 9/20/13 a.m. p. 47, 50 (Ross); N.T. 9/24/13 p.m. p. 148 (Kress).

103. On November 3, 2010, SDI delivered verbal and written notice of a third party’s interest to WK. PX085, PX087. Reuter called Satin to explain that SDI received an unsolicited expression of interest by phone call. He further explained that SDI was not pursuing the inquiry. PX 85; N.T. 9/19/13 p.m. p. 48:2-17 (Reuter); N.T. 9/23/13 a.m. p. 111:7-18,114:16-115:2 (Satin).

104. Spaniel also left Deidra Gold, general counsel for WK North America, a voicemail about the inquiry and subsequently sent her a letter in which he informed her that “[n]o proposal was made by the third party nor were any terms or conditions of the potential transaction discussed.” PX 87.

105. On November 3, 2010, Kress called Becker and made similar representations. N.T. 9/24/13 a.m. p. 27 (Becker). Kress told Becker not to worry about the inquiry SDI received because SDI had no interest in it and wanted to get the deal done with WK. Id. at 28.

106. The third party referenced by SDI to WK was IMS.

107. Reuter also informed Satin that they were not interested in pursuing the expression of interest by the third party and was simply a phone call expressing interest. PX 86.

108. SDI statements of noninterest were false since SDI was considering a combination of an IMS and SDI combination and desired more time to consider the benefits of same.

109. WK believed SDI and continued pursing the SHA/ SDI merger. N.T. 9/23/13 a.m. p. 115 (Satin); N.T. 9/24/13 a.m. p. 28 (Becker).

110. In the meantime, SDI slowed its movements on the SHA deal and began preparing to work towards a deal with IMS upon expiration of the exclusivity agreement.

111. On November 2, 2010, one day after extending exclusivity, SDI’s CFO Ellen Purdy prepared at Ross’ direction a one page detailed spreadsheet of SDI’s financial figures to be provided to IMS. PX-104, PX-105.

112. Satin testified that if plaintiffs knew the truth, they would have immediately terminated negotiations with SDI and returned to Symphony to pursue that alternative. N.T. 9/23/13 a.m. p. 117 (Satin).

113. On November 3, 2010, Kress acknowledges the necessity to keep WK engaged in the transaction until the end of the month. PX 84, PX 85.

114. On November 4, 2010, Kress left Mansukani a voice message. Before responding to Kress, Mansukani reached out to Bousbid to determine the best way to respond to Kress’ voice message. PX-91.

115. On November 15, 2013, WK received word from their outside counsel that SDI was delaying revisions to legal documents. Satin emailed Reuter and questioned him about the delay. Satin asked if the delay was intentional. Reuter responded, he did not think there was a delay but they were coming up for air now on diligence and customer and data contracts. N.T. 9/23/13 a.m. p. 120 (Satin); PX-100.

116. Reuter’s response deliberately caused Satin to believe the SDI was still interested in a deal with SHA.

117. On November 19, 2010, Spaniel sent an email stating that SDI would revisit with IMS at the end of the month. PX103.

118. During the week of November 22, 2010 and November 29, 2013, spreadsheets were reviewed and edited by Kress, Reuter, Ross and another owner of SDI. PX 104, 105.

119. On November 29, 2010, Spaniel sent another email explaining that WK was making it tough to “slow roll” the deal. PX 110.

XI. WK working toward a deal with SDI; SDI working toward a deal with IMS

120. After SDI provided WK with notice of the IMS inquiry, WK continued to work on both financial diligence and legal documentation. N.T. 9/26/13 p.m. p. 74:7-76:4 (Spaniel); N.T. 9/24/13 a.m. p. 29:14-30:21; 38:19-23 (Becker); D-0718.

121. After completing its due diligence on SDI and receiving a quality of earnings report from PWC (“Price Waterhouse Coopers”), WK concluded that it was comfortable enough with SDI to proceed with a deal as outlined in the LOI.

122. On November 19, 2010, WK management presented its findings to its executive board. D-0409.

123. On November 29, 2010, Ann Riposanu of WK, a former corporate lawyer with extensive deal experience, wondered if SDI was “having second thoughts” and “getting cold feet” with SHA’s compensation and targeting business due to the fact that SDI had received an inquiry from a third party. D-0437; N.T. 9/24/13 a.m. p. 121:9-23 (Becker).

XII. December 1, 2010- Exclusivity with IMS

124. On November 30, 2010, SDI declined to extend exclusivity with WK, leaving exclusivity to expire December 1, 2010. N.T. 9/25/13 a.m. p. 38:10-41:8 (Kress); N.T. 9/26/13 p.m. p. 66:16-68:8 (Spaniel).

125. On December 1, 2010, an SDI board member, Walter Malcolm emailed Kress, “It is Dec 1st...I believe the ‘no shop’ with WK has now expired. Any word from IMS?” PX-115.

126. On December 1,2010, Nelligan called Ross. Ross told Nelligan there was a short window of opportunity to come up with an offer before SDI re-engaged WK. PX-134-IMS0028169. Nelligan told Ross they need to get a non-disclosure agreement in place before price could be negotiated. N.T. 9/20/13 a.m. p. 78 (Ross).

127. Ross called Spaniel and asked for a non-disclosure agreement to be sent to Nelligan. Spaniel informed Ross the exclusivity with WK ran through midnight December 1, 2010. N.T. 9/20/13 a.m. p. 79 (Ross).

128. On December 1, 2010, Kress told Becker that he was quite nervous about SHA’s 2011 revenue numbers. N.T. 9/24/13 a.m. p. 96:9-97:13 (Becker). Kress feared that SHA was facing up to $27 million in operating losses and expressed this to Becker. Becker was “planning for the event that this deal doesn’t happen.” D-0442. However, he asked to have a meeting to go through due diligence and get an update on the forecast on December 7, 2010. N.T. 9/24/13 a.m. p. 32-34 (Becker).

129. Satin interpreted SDI’s decision not to extend exclusivity to be a deal tactic. N.T. 9/23/13 a.m. p. 121 (Satin).

130. Spaniel waited until midnight on December 1, 2010 to begin preparing a non-disclosure agreement (“NDA”) to send to IMS. N.T. 9/27/13 p. 60. Spaniel sent a signed copy to Ross and Kress at 12:38 a.m. on December 2, 2010. PX-119. At 6:02 a.m., Ross responded that he received it. Id. Ross then forwarded the NDA to Nelligan. PX 121.

131. Ross attached to the fully executed NDA a one page financial summary and synergy analysis which had been prepared in November to Nelligan. N.T. 9/20/13 a.m. p. 105 (Ross).

132. In the meantime, SDI continued to string SHA along. On December 7, 2010, SHA and SDI met to discuss concerns raised in the KPMG report. At that meeting, plaintiffs provided SDI with an update on SHA’s confidential budget projections for 2011, an update on SHA’s confidential negotiations with data suppliers and even information about SHA’s strategic plans to compete with IMS. N.T. 9/24/13 a.m. p. 36-37 (Becker).

133. Becker reported on the December 7 meeting, stating that Kress “remain[ed] somewhat skeptical” of SHA’s revenue forecast, “[u]ntil the [data supply] contracts are concluded, they will remain an uncertainty to Kress”; and Kress expressed concern that a combined SDI/SHA entity “might have to fund as much as $20-25 million in negative cash flow in the first half of the year” and that they may not be able to get sufficient bank funding for this. PX131.

134. At the conclusion of the meeting, Kress stated they would need a few days to digest the information provided and would get back to WK early next week regarding a go/no go decision. PX 138.

135. At no time did Kress and Purdy reveal to Becker that SDI had re-engaged with the party who had made the unsolicited inquiry on November 2 and were hoping those contracts would result in a substantial offer. N.T. 9/25/13 a.m. p.43-44 (Kress).

XIII. Consummation of the Deal with IMS

136. At the December 9, 2010 IMS board meeting, the IMS Board authorized Bousbid to pay $340 million to acquire SDI. N.T. 9/26/13 a.m. p. 75 (Linn). The board was willing to give Bousbid authority up to 400 million. Id.

137. That evening, IMS opened negotiations with an offer of $275 million. N.T. 9/20/13 a.m. p. 109 (Ross).

138. Bousbid and Ross discussed the offer at about 6:30 p.m. Ross rejected the offer. PX 136.

139. Ross informed Bousbid that SDI had a great deal on the table, referring to SHA, and he thought they could grow the EBITDA at least three times. N.T. 9/20/10 a.m. p. 112 (Ross).

140. Later that evening, Ross contacted Bousbid and stated that the $275 million was a non-starter. SDI was now in the 9th inning with the other party; Ross felt as though they were acquiring a good but poorly managed asset at a very good value and they would take it to completion.

141. On December 10, 2010, Linn emailed Bousbid in response to SDI threats about the other deal. Linn stated a deal between SHA and SDI was not good for IMS.

142. On December 10,2010, IMS increased the offer to $340 million. PX-138.

143. On December 13, 2010, Colucci emailed Kress regarding the $340 million price and wrote, “Of course they have wind of WK...to suggest anything different is ludicrous!” PX-152. Colucci also responded that this was a great deal no matter what. Id.

144. On December 17, 2010, Kress called Becker and said SDI would like to “put the pencils down for a few weeks and then revisit again in the New Year.” Becker responded, “if we didn’t proceed now, it would not happen and [he] wanted to make sure that [sdi] board understood that.” PX-165.

145. On December 21, 2010, Kress called Becker and informed him that they could not do the deal unless WK would consider providing a working capital loan. PX-170. Becker responded that WK was willing to consider the idea in principle, depending on the parameters that Kress had in mind. N.T. 9/24/13 a.m. p.64 (Becker).

146. Kress indicated he would check with the board and get back to Becker. Id. at 65.

147. In the meantime, IMS and SDI worked to complete the deal.

148. On January 1, 2011, Ross sent an email to his colleague regarding the purchase price. Ross explained that they would never see this high a valuation again and the deal needed to happen. PX-195.

149. On January 3, 2011, Becker emailed Kress on the status of the working capital loan idea. PX-197.

150. Kress forwarded the email to the SDI board and again asked them for advice on what he should say to Becker. PX 196.

151. After receiving input from the SDI board, Kress responded to Becker on January 4, 2011 stating he apologized for the delay but indicated it would likely take another week to speak to the board to obtain a definitive answer, even though Kress was corresponding with the board about the IMS deal. PX-197.

152. On January 7, 2011, after not having received a response, Satin emailed Reuter and asked for an update. PX202.

153. On January 9, 2011, the IMS “media statement” announcing IMS’s acquisition of SDI had already been prepared and circulated between IMS and SDI. PX-205. Kress never contacted SHA to say the deal was off. N.T. 9/25/13 p.m. p. 16-18 (Kress).

154. On January 10,2011, Becker sent an email advising Kress that WK will be sending formal termination notice regarding the deal discussions. PX-206.

155. On January 13, 2011, IMS and SDI signed an asset purchase agreement, in which IMS agreed to pay the agreed purchase price to SDI Health Holdings in exchange for its equity interests in SDI Health. See PX217, PX216.

156. The asset purchase agreement provided for two escrow amounts, $30 million for general indemnity, and $20 million for the divestiture required by the FTC. Both escrow funds have been distributed. IMS is not holding any portion of the purchase price. PX-217; 9/19/13 AM N.T. at 4:18-9:13 (Reuter).

XIV. SDI/IMS merger effects on SHA

157. The IMS/SDI acquisition caused a large impact on SFIA’s marketability and it became almost impossible for SFIA to compete in the small healthcare analytics market space. N.T. 9/24/13 a.m. p. 71 (Becker).

158. SHA would have moved forward with the Symphony offer but for the SDI deal. N.T. 9/23/13 a.m. p. 81 (Satin).

159. WK sold SHA to Symphony in 2012, eighteen months later, for a net value of $37.5 million. N.T. 9/23/13 p.m. p. 5 (Satin). The deal involved no cash only stock. N.T. 0/24/13 a.m. p. 72-73 (Becker).

XV. Procedural History

160. On February 28, 2011, plaintiffs instituted the instant action against defendants by writ of summons.

161. On March 1, 2011, plaintiffs filed a complaint against defendants SDI Health LLC, SDI Health Holdings, LLC, SDI Holdings Inc., LLR Partners Inc. and Andrew Kress.

162. The complaint alleged causes of action for breach of the confidentiality agreement, breach of the exclusivity agreement, actual and threatened misappropriations of trade secrets pursuant to 12 Pa. C. S. A. section 5301-5308, improper procurement of information pursuant to Restatement (First) of Torts section 759, fraud, negligent misrepresentation and common law unfair competition.

163. On April 25, 2011, defendants filed preliminary objections to the complaint.

164. On June 15, 2011, the preliminary objections filed by the LLR defendant were sustained and LLR was dismissed as a defendant. Additionally, the preliminary objections filed by defendant Kress and SDI were overruled.

165. On July 7, 2011, plaintiffs filed an amended complaint. All the defendants remained the same except defendant SDI Health Holdings, LLC was dismissed as a defendant.

166. The amended complaint alleged claims for breach of an exclusivity agreement, breach of the confidentiality agreement, fraud, negligent misrepresentation, actual and threatened misappropriation of trade secrets, improper procurement of information, and unfair competition against all defendants.

167. On November 29, 2011, the court granted IMS’ petition to intervene by stipulation.

168. On Januaiy 13, 2012, the court granted a motion to stay proceedings pending mediation.

169. On June 18,2012, the stay was lifted and a revised case management order was issued.

170. On April 12, 2013, defendants’ motion for summary judgment was granted in part and denied in part. The court granted the motion as it pertained to the measure of damages sought by plaintiffs, specifically $180 million only and denied the motion as to the claim for damages for $62.9 million and $32.4 million.

171. The case proceeded to a non-jury trial from September 18, 2013 until October 2, 2013.

172. On October 25, 2013, the parties submitted their findings of fact and conclusions of law.

173. On November 6, 2013, the court heard the parties’ closing arguments.

DISCUSSION

A. SDI breached the confidentiality and the exclusivity agreements.

In count I and II of the amended complaint, plaintiffs allege breaches of the exclusivity agreement and the confidentiality agreement. Upon review of the record, the court finds that SDI did breach these agreements and plaintiffs are entitled to an award of damages as a result of same.

The exclusivity agreement entered into between plaintiffs and SDI specifically prohibited defendants from engaging in any of the following conduct during the designated exclusivity period:

“(a) initiate, solicit or knowingly encourage any inquiries or the making of any proposal regarding any Potential Transaction; (b) engage in, continue or otherwise participate in any discussions or negotiations regarding, or provide any information or data to any third party relating to, any potential transaction; (c) enter into any agreement or agreement in principle with respect to any [potential] transaction; or (d) otherwise knowingly facilitate any effort or attempt to consummate a Potential Transaction. PX-23.

SDI’s conduct from October 29, 2010 to December 1, 2010 was in direct violation of the exclusivity agreement’s prohibitory terms. Specifically, Ross’ acceptance of an invitation to meet IMS CEO, Bousbid on November 2, 2010, and his attendance at the actual meeting constituted a breach. Ross knew at the time the invitation was accepted that IMS was interested in acquiring SDI. In fact, the email inviting Ross to meet expressed unequivocally IMS’ longtime desire to acquire SDI and designated IMS as the “natural landing spot for SDI.” PX-64. Accepting the invitation and attending the meeting with the knowledge that IMS had a desire to acquire SDI, was a violation of the exclusivity agreement by knowingly encouraging IMS to propose a transaction between SDI and IMS. Indeed, IMS asked to acquire SDI during the November 2,2010 meeting, N.T. 9/20/13 a.m. p. 25-26 (Ross), which constitutes another breach of the agreement.

Additionally, Kress’ acceptance on October 31, 2010 of an invitation to meet with Bousbid independent of Ross also constitutes a breach of the exclusivity agreement. PX-71. Like Ross, Kress was well aware of IMS’ desire to acquire SDI and therefore, Kress’ acceptance of the invitation to meet encouraged IMS to propose a transaction between SDI and IMS. Predictably, during the meeting with Bousbid a proposition was made to acquire SDI which SDI agreed to consider once exclusivity with WK expired. PX-134-IMS0028169. SDI, not only breached the exclusivity agreement by accepting an invitation to meet with IMS and attend the meeting, but SDI also breached the confidentiality provision contained within the exclusivity agreement by disclosing that they were in an exclusivity period with WK and that the exclusivity period ran until December 1. Id.

In addition to breaching the exclusivity agreement, SDI also breached the May 6, 2010 confidentiality agreement. The confidentiality agreement prohibited SDI from disclosing the fact, nature or status of any discussions among the parties or any other facts or information with respect to the nature, terms or status of any transaction among the parties. PX-11 par 3 (d). SDI disclosed to IMS that they were in a period of exclusivity with SHA until December 1, PX134 and that they had a great deal on the table with SHA that was in the “9th inning” with SHA. Said disclosures constituted a breach.

Lastly, SDI breached the implied duty of good faith and fair dealing in the exclusivity agreement and the confidentiality agreement. Every contract in Pennsylvania imposes on each party a duty of good faith and fair dealing in its performance and its enforcement. Good faith has been defined as “honesty in fact in the conduct or transaction concerned.” SDI breached the duty of good faith and fair dealing by renewing the exclusivity agreement solely to effectuate the engagement, validation and completion of a deal with IMS. SDI’s conduct from November 1,2010, the first extension of the exclusivity agreement, until January 13, 2011, the date IMS and SDI signed the asset purchase agreement, was in bad faith and for the sole purpose of creating leverage in IMS’ negotiations. SDI’s conduct is a prime paradigm of evasion of the spirit of the bargain.

Having found that SDI breached the exclusivity agreement and the confidentiality agreement, the court must address the issue of damages. Under Pennsylvania law and Illinois law, the party alleging a breach of contract has the burden of proving damages resulting from the breach. Damages must be established with “reasonable certainty” and may not be recovered if they are too speculative, vague or contingent. Proof of the exact amount of loss or a precise calculation of damages, however, is not required as long as the evidence “with a fair degree of probability” establishes a basis for the assessment of damages.

As damages, plaintiffs seek disgorgement of all profits generated by SDI from its merger with IMS and characterize same as restitution damages. Restitution damages are one of three distinct theories of damages to remedy a breach of contract. Expectation damages are the preferred basis for contract damages and seek to give the injured party the benefit of its bargain by attempting to place the aggrieved in as good a position as it would have been, had the contract been performed. These damages are measured by the losses caused and gains prevented by defendant’s breach, less any savings or other benefits from the defendant’s non-performance. Alternatively, an injured party may seek reliance and restitution damages when recovery based on traditional notions of expectation damages is clouded because of uncertainty in measuring the loss in value to the aggrieved contracting party. Reliance damages seek to put the injured party in the position that it would have had, if the contract had never been made and are usually measured by the expenditures made in performance of the contract. Restitution damages, in contrast, seek to prevent one party from being unjustly enriched and are measured by the benefit received by the party subject to restitution. The purpose of restitution damages, like that of reliance damages is to return the plaintiff to the position it held before the parties’ contract.

Plaintiffs claim SDI received a benefit from plaintiffs when they unwittingly acted as a stalking horse in the SDI and IMS negotiations. Plaintiffs’ expert Dr. Hohan Rao of Navigant Economics opined that SDI was unjustly enriched as a result of their wrongful conduct by, at a minimum, $62.9 million. Using a “but for” analysis, Rao compared the amount of SDI’s unjust gains, to what Rao determined was the preemption premium SDI received, using general economic bargaining analysis. After making the various adjustments, Rao took the difference between the actual price and the “but for” price and concluded it was at a minimum $62.9 million. According to plaintiffs this is the amount to be disgorged.

This court is constrained to find that restitution does not apply in this particular situation. First, plaintiffs are unable to direct this court to any precedent, nor could this court find any precedent, which permits the award of restitution damages to a party to a contract to negotiate, when the negotiation does not result in a deal. If existing as a competitor in the negotiation process could be considered a “benefit” then in the context of every letter of intent with a disappointed bidder, the disappointed bidder would be able to recover damages for a deal to which the parties never agreed. Awarding such damages on a breach of an exclusive agreement to negotiate would be basing damages on prospective terms of a nonexistent contract which could result in the rejection of the contract itself. As such, restitution damages are inappropriate.

Moreover, the court is not persuaded that § 39 of the Restatement of Law 3d, Restitution and Unjust Enrichment (2011) applies to the case at hand. Section 39 discusses restitution damages based on profits from opportunistic breach. According to this section, if a deliberate breach of contract results in profits to the defaulting promisor and the available damage remedy affords inadequate protection to the promisee’s contractual entitlement, the promisee has a claim to restitution of the profit realized by the promisor as a result of the breach. Section 39 defines a breach of contract as profitable when it results in gains to the defendant greater than the defendant would have realized from performance of the contract. Profits from the breach include saved expenditure and consequential gains that the defendant would not have realized but for the breach. Section 39 profits are profits realized by the defaulting party as a result of the breach. Notably, § 39 of the Restatement has not been adopted or applied by any Pennsylvania or Illinois court, consequently, this court is not prepared to apply this section here without an expression of adoption from a higher court.

Plaintiffs are however entitled to reliance damages. Reliance damages will put plaintiffs in the position they would have had, if the agreements had never been made; that is repayment of the expenditures made in performance of the contract. Any other form of damages would provide plaintiffs with a windfall and penalize SDI, neither of which serves the purpose of contract damages. According to the record, plaintiffs expended $1.1 million dollars in attorney fees and preparation of documents in performance of the agreements and hence are entitled to same as damages for SDI’s breach of contract. The court finds SDI’s post November 1, 2010 conduct deliberately underhanded; even more troubling was the repeated lack of credibility in several witnesses’ trial testimony. The court, nonetheless, is limited in the amount of damages it can award based upon the evidence admitted. The court may award either $1.1 million or $62.9 million. Having found the amount of $62.9 million inappropriate for the reasons stated supra, the court is left with the sum of $1.1 million for damages which may be insufficient to make plaintiffs whole as a result of defendants conduct.

B. The claims for fraud and negligent misrepresentation are barred by the gist of the action doctrine.

Plaintiffs argue that SDI committed fraud and made negligent misrepresentations to plaintiffs. As it pertains to fraud, the essential elements require a misrepresentation, a fraudulent utterance thereof, an intention to induce action thereby, justifiable reliance thereon and damage as a proximate result. To be actionable, a misrepresentation need not be in the form of a positive assertion but is any artifice by which a person is deceived to his disadvantage and may be accomplished by false or misleading allegations or by concealment of that which should have been disclosed, but which deceives or is intended to deceive another to act upon it to his detriment.

The elements of negligent misrepresentation are: 1) a misrepresentation of a material fact; (2) made under circumstances in which the misrepresenter ought to have known its falsity; (3) with an intent to induce another to act on it; and (4) which results in injury to a party acting in justifiable reliance on the misrepresentation.

Here, the claims for fraud and negligent misrepresentation are barred by the gist of the action doctrine. The gist of the action doctrine is designed to maintain the conceptual distinction between breach of contract claims and tort claims. As a practical matter, the doctrine precludes plaintiffs from re-casting ordinary breach of contract claims into tort claims. Although mere non-performance of a contract does not constitute a fraud, it is possible that a breach of contract also gives rise to an actionable tort. To be construed as in tort, however, the wrong ascribed to defendant must be the gist of the action, the contract being collateral. “In other words, a claim should be limited to a contract claim when ‘the parties’ obligations are defined by the terms of the contracts, and not by the larger social policies embodied by the law of torts.”

Here, the dispute between the parties is based on the exclusivity agreement and the confidentiality agreement. The parties’ obligations are deeply intertwined with the obligations imposed by the contracts themselves. As such, the claims for fraud and negligent misrepresentation are redundant and duplicate the claim for breach of contract. Consequently, the claims for fraud and negligent misrepresentation are barred by the gist of the action doctrine and are dismissed.

C. Plaintiffs failed to prove their claim for improper procurement of confidential information.

Plaintiffs assert a claim for improper procurement of confidential information under the Restatement of Torts § 759 which provides that one who advances “a rival business interest” by procuring through “improper means information about another’s business is liable to the other for the harm caused by his possession, disclosure or use of the information.” SDI did not procure plaintiffs’ information through improper means. Plaintiffs’ information was voluntarily given to plaintiffs. Plaintiffs failed to produce any evidence that any information procured by SDI was improperly procured and used to cause plaintiffs harm. As such, plaintiffs’ claim for improper procurement is dismissed.

D. Plaintiffs failed to prove their claim for improper competition.

Plaintiffs assert a claim for unfair competition. A cause of action for unfair competition exists where the defendant unfairly competes against the plaintiff in a manner that is tortious. Pennsylvania courts “have recognized a cause of action for the common law tort of unfair competition where there is evidence of, among other things....misrepresentation...and unlawful use of confidential information.” Plaintiffs failed to present any evidence to support a claim for improper competition. Any information procured was received by SDI with plaintiffs’ knowledge and no evidence was received to support such claim. As such, the claim is dismissed.

CONCLUSIONS OF LAW

1. SDI breached the exclusivity agreement and the confidentiality agreement by knowingly encouraging inquiries by IMS, by engaging and continuing to participate in discussion with IMS and disclosing the existence of the exclusivity period with SHA and the date of expiration.

2. SDI breached their implied duty of good faith and fair dealing within the exclusivity agreement and the confidentiality agreement by knowingly extending the exclusivity period with SHA while engaging and participating in discussions with IMS and utilizing the existence of a potential SHA potential transaction as leverage against IMS.

3. Plaintiffs are entitled to reliance damages for said breaches in the amount of $ 1.1 million dollars for attorney fees and document preparation.

4. Plaintiffs’ claims for fraud and negligent misrepresentation are barred by the gist of the action doctrine.

5. Plaintiffs’ failed to prove their claim for misappropriation of trade secrets and improper procurement of confidential information.

6. Plaintiffs’ are not entitled to punitive damages on a breach of contract claim.

FINDING

And now, this 14th day of January 2014, after a non jury trial in this matter, this court finds in favor of plaintiffs Source Healthcare Analytics, Inc., Wolters Kluwer U.S. Corporation, Wolters Kluwer Pharma Solutions, Inc. and Wolters Kluwer Health, Inc. and against defendants on the claims for breach of the exclusivity agreement and confidentiality agreement in the amount of $1.1 million and defendants are ordered to return to plaintiffs any and all confidential and proprietary information that belongs to the plaintiffs immediately.

As for the claims for fraud, negligent misrepresentation, improper procurement of information and unfair competition, the court finds in favor of defendants and against plaintiffs as such these claims are dismissed.

      . The parties agreed that the confidentiality agreement would be governed by the laws of the State of Illinois. PX-11 par. 12(c).

      . Information was defined by the confidentiality agreement as “All information that is confidential, proprietary or generally not available to the public and that is provided or made available...in connection with the evaluation or negotiation of a potential transaction, whether furnished before or after the date of this letter agreement, whether or not labeled or otherwise identified as confidential regardless of the form or format of the information...” PX-1 1 par. 2.

      . “Potential Transaction” is defined by the agreement as any merger, joint venture, partnership, consolidation, dissolution, liquidation, recapitalization, reorganization, stock or asset sale, exchange or contribution, business combination, financing or similar transaction outside the ordinary course of business. Id.

      . Reuter admitted that he kept notebooks of conversations and meetings during the relevant period but that he destroyed them even though SDI anticipated being sued by WK. N.T. 9/19/13 a.m. p. 104-106 (Reuter).

      . On December 1, 2010, Ross breached the exclusivity agreement by contacting Nelligan and informing him that a “small window of opportunity” existed for IMS to come up with a compelling offer. PX-134.

      . Additionally, Kress’ attempt to contact Mansukani on November 4, 2010 also constituted a breach of the exclusivity agreement. Kress acknowledged that his attempt to contact Mansukani on November 4, 2010 was a “bad idea.” N.T. 9/24/13 a.m. p. 138 (Kress).

      . The email exchange that occurred between the parties on October 27,2010 does not constitute a breach of exclusivity agreement. The court is not convinced that the exchange between Mansukani and Kress was a “nod and wink” confirming the existence of a potential transaction between SHA and SDI. Evidence exists that rumors existed in the industry that such a transaction was occurring. As such, the court can not conclusively determine if the email exchange confirmed the existence before the rumors were confirmed.

      . Plaintiffs also argue that the email exchange of October 27,2010 constitutes a breach of the confidentiality agreement. For the reasons discussed in footnote 7, the court can not conclusively determine if the email exchange confirmed the existence before the rumors were confirmed.

      . Kaplan v. Cablevision of Pa., Inc., 448 Pa. Super. 306, 671 A.2d 716, 722 (1996), appeal denied, 546 Pa. 645, 683 A.2d 883 (1996), citing, inter alia, Somers v. Somers, 418 Pa. Super. 131, 613 A.2d 1211, 1213 (1992), appeal denied, 533 Pa. 652, 624 A.2d 111 (1993); Capitol v. Antaal, 972 N.E. 2d 1238, 1246 (III. App. Ct. 2012).

      . Kaplan, 671 A.2d at 722.

      . Spang & Co. v. U.S. Steel Corp., 519 Pa. 14, 545 A.2d 861, 866 (Pa. 1988).

      . Id.

      . Id. quoting Aiken Indus., Ind. v. Estate of Wilson, 477 Pa. 34, 383 A.2d 808, 812 (Pa. 1978).

      . Trosky v. Civil Service Comm’n, 539 Pa. 356, 652 A.2d 813 (Pa. 1995). MC Baldwin Fin. Co. v. DiMaggio, Rosario & Veraja, LLC, 364 III. App. 3d 6, 14, 845 N.E.2d 22,30 (III. App. Ct. 2006)(A party injured by another’s breach or repudiation of a contract usually seeks recovery in the form of damages based on his “expectation interest,” which involves obtaining the “benefit of the bargain,” or his “reliance interest,” which involves reimbursement for loss caused by reliance on a contract. Restatement (Second) of Contracts § 344 (1981). However, where a defendant has committed a total breach or a repudiation of a contract, a plaintiff may alternatively seek restitution. Restatement (Second) of Contracts § 373 (1981)).

      . Id.

        . Id.

      . See, Goodstein Constr. Corp. v. New York, 604 N.E. 2d 1356, 1360-61 (N.Y. 1992).

      . Restatement §39 comment f exceptional nature of the claim.

      . See Heritage Surveyors & Engineers, Inc. v. Nat’l Penn Bank, 2002 Pa. Super. 194, *P13, 801 A.2d 1248, 1252 (2002).

      . eToll, Inc. v. Elias/Savion Adver., Inc., 2002 PA Super 347, 811 A.2d 10, 14 (Pa. Super. Ct. 2002).

      . eToll, Inc. v. Elias/Savion Adven, Inc., 2002 PA Super 347, 811 A.2d 10, 14 (Pa. Super. Ct. 2002); Bash, 601 A.2d at 829, citing, Closed Circuit Corp. v. Jerrold Electronics Corp., 426 F.Supp. 361, 364 (E.D.Pa.1977).

      . Bohler-Uddeholm Am., Inc. v. Ellwood Group, Inc., 247 F.3d 79, 104 (3rd Cir.Pa.2001), cert. denied, 534 U.S. 1162, 122 S.Ct. 1173, 152 L.Ed.2d 116 (2002), quoting, Bash, 601 A.2d at 830. eToll, Inc. v. Elias/ Savion Adver., Inc., 2002 PA Super 347, 811 A.2d 10, 14-15 (Pa. Super. Ct. 2002).

      . Pestco, Inc. v. Associated Prods., 880 A.2d 700, 708-709 (Pa. Super. 2005).

      . Philadelphia v. Trs. of the Univ. of Pa., 2012 WL 1274334 (Pa. Ct. Com. Pl. March 30, 2012); Restatement (Third) of Unfair Competition, section 1 comment g (1995).

      . Synthes (U.S.A.) v. Globus Med. Inc., No. Civ. A. 04-CV-1235 WL 2233441 (E.D. Pa. Sept. 14, 2005).

      . Standard Pipeline Coating Co., Inc. v. Solomon & Teslovich, Inc., 344 Pa. Super. 367, 375, 496 A.2d 840, 844 (1985)( It has been held that punitive damages will not be assessed for a mere breach of contractual duties, where no recognized trespass cause of action, pleaded by the plaintiff, arose out of the same transaction.); Mijatovich v. Columbia Sav. & Loan Ass’n, 168 III. App. 3d 313, 315, 522N.E.2d 728, 730 (1988)(Punitive damages are generally not recoverable for breach of contract except when the conduct causing the breach is also a tort for which punitive damages are recoverable and there are proper allegations of malice, wantonness or oppression.


author: WETTICK, J.,

text:
    The North River Insurance Co. v. Mine Safety Appliances Co.

      AlanS. Miller, Henry M. Sneath, BridgetM. Gillespie and Dennis O. Brown, for plaintiff.

      George L. Stewart, II, Brian T. Himmel, Michael H. Sampson, and Robert Nicholas, for defendant Mine Safely Appliances Co.

      Louis C. Long and Stefano Calogero, for defendant Allstate Insurance Co.
    February 13, 2014
   WETTICK, J.,

— The subject of this opinion and order of court is Mine Safety Appliances Company’s (“MSA”) motion for partial summary judgment concerning trigger of coverage for mesothelioma and asbestos-related lung-cancer claims. MSA seeks a ruling that “the continuous trigger adopted in J.H. France Refractories Co. v. Allstate Ins. Co., 534 Pa. 29, 626 A.2d 502 (1993), determines which insurance policy(ies) apply to bodily injury claims (including death resulting therefrom) involving, or allegedly involving, mesothelioma or asbestos-related lung cancer arising out of exposure to asbestos.”

The North River Insurance Company (“North River”) contends that the continuous-trigger approach adopted in J.H. France is based on science describing the disease process that has now been rejected by the scientific community studying asbestos. Thus, J.H. France is no longer good law.

There is no Pennsylvania case law that has addressed this issue.

Background

Since at least the 1980s, MSA has been sued in numerous personal injury lawsuits in jurisdictions across the United States, in these lawsuits, the plaintiffs allege that they developed mesothelioma or asbestos-related lung cancer from exposure to MSA products containing asbestos.

There are three North River policies from which MSA seeks coverage for cancer claims arising out of exposure to asbestos: the earliest policy covers the period from April 1, 1980 to April 1, 1981; the second policy covers the period from April 1, 1981 to April 1, 1982; and the third policy covers the period from April 1, 1982 to April 1, 1983. Each policy is a comprehensive CGL insurance policy which provides that the insurer will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages on account of “personal injuries.” “Personal injuries” means bodily injury, sickness, or disease caused by an occurrence during the policy period. An “occurrence” means an accident, including continuous or repeated exposure to conditions, which results in personal injury.

Under the policy language described above, the North River policies provide coverage only for personal injuries during the policy period. Thus, the dispute raised by MSA’s motion for partial summary judgment is over when an injury, a sickness, and/or a disease is deemed to have occurred.

In asbestos cases, there is not an obvious answer as to when an injury, sickness, or disease occurs because several decades may pass between the initial exposure to asbestos and the development of a detectable disease.

In asbestos litigation, insurers and insureds have proposed different interpretations. These include the following:

Construction 1: Only the policies in effect on the date the claimant’s disease first manifests itself provide coverage.

Construction 2: Every policy in effect at any time the claimant was exposed to asbestos provides coverage; there is no coverage after the claimant was no longer exposed to asbestos.

Construction 3: Every policy that provides coverage at any time from the date of the initial exposure to the date of manifestation covers the entire claim.

Construction 4: Same as constructions 2 and 3 with the following modification: Each insurer is required to pay only a pro rata share of the insured’s liability to be determined by the duration of a claimant’s exposure to the insured’s products during the policy periods in relation to the entire duration of the claimant’s exposure to the insured’s product.

J. H. France

In J.H. France, six insurance companies provided coverage between 1967 and 1979. Personal injury claims were brought against J.H. France by persons exposed to J.H. France’s products containing asbestos. Each of the insurance companies refused to provide a defense or to indemnify J.H. France.

J.H. France instituted an action for declaratory relief to determine which of the various insurance companies were liable for the defense and indemnification and, if liable, how the liability was to be apportioned among the insurers.

The relevant language in the insurance policies reads as follows:

[The Insurer] will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury...to which this insurance applies, caused by an occurrence, and [the insurer] shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury....
“Bodily injury” means bodily injury, sickness or disease sustained by any person which occurs during the policy period, including death at any time resulting therefrom....
“Occurrence” means an accident, including continuous or repeated exposure to conditions, which result in bodily injury...neither expected nor intended from the standpoint of the insured.

J.H. France, 626 A.2d at 505.

Pursuant to a stipulation of the parties, the medical evidence at trial included the following:

Pursuant to the stipulation of all parties, the medical evidence at trial included the testimony of Dr. John E. Craighead, an anatomical and clinical pathologist who is an expert in pneumoconiosis and asbestos-related disease, in summary, he testified that “injury” is a “process which alters structure,” and the term is applicable in reference to a cell, a tissue, an organ, or the entire body. “Disease” means “an injury and a response to that injury.” The presence of asbestos in the lungs stimulates a wide range of reactions, which Dr. Craighead divides into three responses.
First, characterized as “direct injury,” asbestos fibers in the respiratory tract interact with the membranes of the cells lining the trachea and cause the release of enzymes and superoxides which either damage or kill individual cells. If sufficient cells are damaged, tissue (an accumulation of cells) is damaged or destroyed. This injury occurs within minutes after asbestos fibers enter the cells.
Second, characterized as “indirect injury,” the presence of asbestos fibers stimulates macrophages to accumulate. Macrophages are scavenger cells which attempt to envelope foreign particles. As microphages attempt to ingest the fibers, there is a release of enzymes which have a damaging effect on tissue. There is also a chemical reaction which scars the injured tissue. The accumulation of scar tissue in the respiratory system prevents the lung from performing its normal oxygen-carbon dioxide gas exchange. The process of macrophage accumulation, tissue scarring, and functional impairment of the lungs begins to occur within a month of exposure.
The third response in the asbestosis process is a change in the form of the cells lining the bronchial tree. The normal lining, designed to move dust particles out of the body, is replaced by cells lacking cilia, resulting in a tendency toward accumulation of asbestos particles.
The asbestosis process continues to progress even after exposure to asbestos ceases. Medical authorities differ on the reasons for this fact. Substantial authority regards this as the nature of the asbestosis pathogenesis. Another view theorizes that disease progression may be attributable to the eventual, and inevitable, decrease in the respiratory function involved in aging, and also to other factors such as cigarette smoking or infection. In either view, the injury process continues after exposure and may culminate in “manifestation,” such severe functional impairment that asbestosis is finally diagnosed, and of course, the disease may be fatal.

Id. at 505-06.

The initial issue that the Supreme Court addressed in its J.H. France opinion was whether the Pennsylvania Superior Court was correct in applying a multiple-trigger interpretation under which an insurer is obligated to pay the entire claim if its policy covers any period from the date of exposure to the date of manifestation. As to exposure, the Pennsylvania Supreme Court ruled that the Pennsylvania Superior Court correctly concluded that:

the medical evidence of discrete cellular injuries occurring upon exposure to asbestos justifies the conclusion that exposure to asbestos causes immediate “bodily injury” in the terms of the insurance policies, triggering the insurers’ duty to indemnify.

Id. at 506.

As to progression and manifestation of the disease, the Pennsylvania Supreme Court stated that “[t]he insurance policy language and the evidence of the etiology and pathogenesis of asbestos-related disease compel us to reach..the result reached by the Pennsylvania Superior Court that “the term ‘bodily injury’ also encompasses the progression of the disease throughout and after the period of exposure until, ultimately, the manifestation of recognizable incapacitation constitutes the final Injury,’ and that these stages in the pathogenesis of asbestos- and silica-related diseases also trigger the liability of J.H. France’s insurance carriers.” Id. (emphasis added).

The Supreme Court offered the following explanation for its ruling that a policy period for asbestos-related cancer extends from the date of initial exposure to manifestation of the disease:

The insurance policies obligate the insurers to “pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury ... to which this insurance applies, caused by an occurrence.” Whether the claimants’ diseases are “bodily injury to which this insurance applies” depends on the definition of bodily injury. The policies define bodily injury as “bodily injury, sickness or disease which occurs during the policy period.” The injuries at issue are caused by an “occurrence,” which the policies define as “an accident, including continuous or repeated exposure to conditions, which result in bodily injury.... neither expected nor intended” by the insured. The medical evidence in this case unequivocally establishes that injuries occur during the development of asbestosis immediately upon exposure, and that the injuries continue to occur even after exposure ends during the progression of the disease right up until the time that increasing incapacitation results in manifestation as a recognizable disease. If any of these phases of the pathogenesis occurs during the policy period, the insurer is obligated to indemnify J.H. France under the terms of the policy.
Abundant authority supports this result. In the surfeit of litigation spawned by asbestos-related disease, many courts have recognized that mere exposure to asbestos causes injury within the meaning of the same policy language which controls this case. See, e.g., Porter v. American Optical Corp., 641 F.2d 1128 (5th Cir.), cert. denied, 454 U.S. 1109, 102 S. Ct. 686, 70 L.Ed.2d 650 (1981); Insurance Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir.1980), clarified, 657 F.2d 814, cert. denied, 454 U.S. 1109, 102 S. Ct. 686, 70 L.Ed.2d 650 (1981). Other courts have recognized that manifestation, likewise, constitutes an injury which triggers the insurers’ obligation to indemnify. See, e.g., Eagle-Picher Industries, Inc. v. Liberty Mutual Insurance Co., 682 F.2d 12 (1st Cir.1982), cert. denied, 460 U.S. 1028, 103 S. Ct. 1280, 75 LEd.2d 500 (1983). Rather than selecting one or another of the phases as the exclusive trigger of liability, it seems more accurate to regard all stages of the disease process as bodily injury sufficient to trigger the insurers’ obligation to indemnify, as all phases independently meet the policy definition of bodily injury. This multiple-trigger approach, as well, has been adopted by other courts. See, e.g, Vale Chemical Co. v. Hartford Accident and Indemnity Co., 340 Pa. Super. 510, 490 A.2d 896 (1985), rev ’d on other grounds, 512 Pa. 290, 516 A.2d 684 (1986); AC and S, Inc. v. Aetna Casualty and Surety Co., 764 F.2d 968 (3d Cir.1985); Keene Corp. v. Insurance Co. of North America,. 667 F.2d 1034 (D.C.Cir.1981), cert. denied, 455 U.S. 1007, 102 S.Ct. 1644, 71 L.Ed.2d 875 (1982). We therefore affirm the Superior Court’s approval of the so-called multiple-trigger theory of liability adopted by the trial court.
Thus, every insurer which was on the risk at any time during the development of a claimant’s asbestos-related disease has an obligation to indemnify J.H. France.

Id. at 506-07 (emphasis added).

The next issue that the Supreme Court addressed in its J.H. France opinion was how to allocate the liability of each insurer when, as is commonly the case, more than one insurer is on the risk at one time or another during the period from initial exposure to manifestation. The Supreme Court rejected the Superior Court’s scheme whereby the several insurers on the risk during the development of the disease would share the obligation to indemnify on a pro rata basis based on the amount of time each policy was in effect. Instead, the Supreme Court concluded that each insurer which was on the risk during the development of an asbestos-related disease is a primary insurer. Thus, J.H. France is free to select the policy or policies under which it is to be indemnified. Id. at 508.

The court concluded that this approach was supported by the language of the policies which provide that each insurer obligated itself to “pay on behalf of the insured all sums which the Insured shall become legally obligated to pay as damages because of bodily injury to which this insurance applies.” Id. at 507.

The court also looked to the definition of an “occurrence” which constitutes a risk against which the insurance was provided. According to the court, this definition suggests that any insurance policy triggered under the multiple-trigger approach with respect to any specific claim is potentially liable for the entire amount of any judgment or settlement since the entire injury from exposure to manifestation is defined as one occurrence, meaning that all damages resulting therefrom fall within the indemnification obligation of the insurer. Id. at 508.

Position of MSA

The relevant facts in this case are almost identical to the relevant facts in J.H. France. There is no Pennsylvania appellate court case law that has questioned the rulings in J.H. France. Thus, I should grant MSA’s motion seeking a ruling that the continuous-trigger approach adopted in J.H. France determines what insurance policies apply to bodily injury claims involving mesothelioma or asbestos-related lung cancer.

Position of North River

In seeking a ruling denying MSA’s motion that the continuous-trigger approach applied in J.H. France controls this litigation, North River agrees with MSA that the law has not changed since J.H. France. However, North River contends that what scientists who study asbestos now know about the progression from exposure to mesothelioma or asbestos-related lung cancer has changed.

In J.H. France, pursuant to a stipulation of the parties, the medical evidence included the opinion of Dr. John E. Craighead who, according to the J.H. France opinion, opined that the disease process begins with the initial inhalation from the initial exposure to asbestos. Consequently, insurance coverage begins at the date of the initial exposure.

North River, relying primarily on the expert testimony of Dr. Thomas Sporn (North River’s expert) states that the scientists studying asbestos now know that the initial inhalation of the initial exposure to asbestos almost never starts the progression. Thus, the date of the initial exposure is not the date of the exposure that begins the disease process and, therefore, cannot be used as the date of bodily injury under the insurance policies. Furthermore, scientists cannot pinpoint the date of the cancer-causing exposure that began the process. In his testimony, Dr. Sporn opines that the disease process for mesothelioma or asbestos-related lung cancer begins with the inhalation of asbestos (T. 119), but the initial inhalation seldom starts the process. Most inhalations of asbestos are transient, meaning that they are eliminated by the body (T. 15).

Dr. Sporn stated that everyone living in an industrialized society inhales asbestos daily and that normally the asbestos fibers are cleaned by the body’s defense mechanisms at the time they are inhaled. Report of Dr. Sporn, at 6. Dr. Sporn also testified that there is a threshold dose of asbestos below which the disease process does not commence (T. 4). As long as the fiber burdens remain below the threshold, the body’s defense mechanisms are sufficient to prevent the start of the process (T. 7).

According to Dr. Sporn, there is overwhelming evidence (and consensus among asbestos researchers) that there is a threshold level below which the process of asbestos and asbestos-related cancer does not commence. “I disagree with any assertion that each and every pre-threshold exposure to asbestos contributes to any disease process as well as the assertion that the disease process begins at the cellular level upon an individual’s first exposure to asbestos (T. 9).”

In summary, there is, according to Dr. Spom, aconsensus among asbestos researchers that in all likelihood it is not the initial exposure that begins the progression. Thus, science does not support the application of the multiple-trigger theory that begins with the initial inhalation.

In these summary judgment proceedings, North River is not asking me to make a ruling that science does not support the use of a multiple-trigger theory based on the initial exposure to asbestos. It only requests that I deny MSA’s motion in order that a fact-finder can consider North River’s contention that there is virtually no scientific support for the opinion that the progression of asbestos-related diseases begins with the initial exposure to asbestos.

Protection of Insured’s Reasonable Expectations

I am rejecting North River’s contention that I should not follow J.H. France even assuming the scientific community has rejected opinions that the initial exposure begins the progression of the disease. I am doing so because I believe that issues of insurance coverage dictated the result which the J.H. France court reached.

The court’s opinion in J.H. France cited and relied upon Keene Corp. v. Ins. Co. of North America, 667 F.2d 1034 (D.C. Cir. 1981). In Keene, the insured (Keene) sought a declaratory judgment as to the rights and obligations of the parties under the comprehensive general liability policies issued to Keene or its predecessors from 1961 to 1980.

Between 1948 and 1972, Keene manufactured thermal insulation products that contained asbestos. As a result, it was named as a co-defendant with other companies in over 6,000 lawsuits alleging injury caused by exposure to Keene’s asbestos products. From 1961 to 1980, several insurance companies provided insurance coverage to Keene under comprehensive general liability (CGL) insurance policies. In this lawsuit for declaratory relief, Keene contended that each insurance company covering any stage in the progression of asbestos-related diseases provides coverage for the full amount of the claim (or the full amount of the policy limits). The defendant insurance companies, on the other hand, proposed one of the other interpretations described at pages 2-3 of this opinion.

The court first considered the language of the policy. It found that it did not provide any answers:

The policy language does not direct us unambiguously to either the “exposure” or “manifestation” interpretation. In the context of asbestos-related disease, the terms “bodily injury,” “sickness” and “disease,” standing alone simply lack the precision necessary to identify a point in the development of a disease at which coverage is triggered. The fact that a doctor would characterize cellular damage as a discrete injury does not necessarily imply that the damage is an “injury” for the purpose of construing the policies. At the same time, the fact that an ordinary person would characterize a fully developed disease as an “injury” does not necessarily imply that the manifestation of the disease is the point of “injury” for purposes of construing the policies. In interpreting a contract, a term’s ordinary definition should be given weight, but the definition is only useful when viewed in the context of the contract as a whole.
Moreover, the legal definition of “injury” in other contexts informs the term’s definition in this case only if the term operates in a functionally similar manner in the other contexts. In the areas of workmen’s compensation, health insurance, and statutes of limitations, the concept of “injury” performs a function that is different from its function in the context of comprehensive general liability policies. Therefore, the term’s definition in those contexts is only minimally relevant to the question at hand. Instead, the purpose of the insurance policies must inform our construction of the term “injury”.

Id. at 1043-44 (footnote omitted) (emphasis added).

The court applied settled case law holding that whenever the language of an insurance policy is not clear, a court shall apply principles of insurance law embodied in each insurance agreement that coverage shall be dictated by the reasonable expectations of an objective insured. Id. at 1041-42.

The court stated that under the reasonable expectations standard, the policies that were issued to Keene were for the purpose of relieving Keene “of the risk of liability for latent injury of which Keene could not be aware when it purchased the insurance.” Id. at 1047.

The court stated that in determining coverage, Keene’s right to be free of all liability is paramount:

Although we have defined the term “injury,” we have done so only as an incidental aspect of a logically prior determination of Keene’s rights under the policies viewed in their entirety. The insurance policies provide Keene with the right to be free of all liability for asbestos-related disease, unless such a disease was known or knowable by Keene at the time it purchased an insurance policy. For that right to be preserved, each policy that Keene purchased between an initial exposure and the ultimate manifestation of a disease must be triggered.

Id. at 1048 (footnote omitted).

The Keene court posited a rule in which manifestation is the sole trigger of coverage to explain why such a rule would be inconsistent with the insurer’s reasonable expectations:

If we were to hold that only the manifestation of disease can trigger coverage, the insurance companies would have to bear only a fraction of Keene’s total liability for asbestos-related diseases.
The possibility of that result would undermine the function of the insurance policies. When Keene purchased the policies, it could have reasonably expected that it was free of the risk of becoming liable for injuries of which it could not have been aware prior to its purchase of insurance.

Id. at 1045-46 (footnote omitted).

The court rej ected the ruling of the District Court that an insurer is obligated to pay only a pro rata share of Keene’s liability because “Keene’s security would be contingent on the existence and validity of all other applicable policies. Each policy, therefore, would fail to serve its function of relieving Keene of all risk of liability.” Id. at 1048.

A Ruling in Favor of MSA

I now consider the present case.

Pennsylvania case law governing the interpretation of insurance policies does not differ from the analysis the court used in Keene.

In Vale Chemical Co. v. Hartford Accident & Indem. Co., 490 A.2d 896, 902 (Pa. Super. 1985), rev’d on other grounds, 516 A.2d 684 (Pa. 1986), the court stated:

As we find that the policy language in the instant case does not direct us unambiguously to either an “exposure” or “manifestation” interpretation, we must look to the general expectations of the insured at the time of purchase in order to determine the extent of coverage. Manufacturers’ policy was entitled “Products Public Liability Policy.” The fact that Vale purchased a general products liability policy indicates that it reasonably expected that it was free of the risk of becoming liable for latent injuries which were incurred during the policy period but manifested at a later time. There is no clear indication in the manufacturers’ policy, considering its totality, that the parties intended to exclude coverage for these latent diseases.

(Citations omitted).

In Butterfield v. Giuntoli, 670 A.2d 646, 653 (Pa. Super. 1995), the court stated that when interpreting an insurance contract where a policy provision is ambiguous, “the proper focus of this scrutiny is the reasonable expectations of the insured at the time of purchase.”

In Betz v. Erie Ins. Exchange, 957 A.2d 1244, 1253 (Pa. Super. 2008), the court stated that the proper focus regarding issues of coverage under insurance contracts is the “reasonable expectation of the insured.”

For the reasons set forth in Vale, 490 A.2d at 902, and in Keene (see page 11 of this opinion), I find that when MSA purchased the North River policies, it would have reasonably expected that it was free of the risk of becoming liable for injuries of which it could not have been aware prior to the purchase of the policy. To meet these expectations, the coverage must include any claims for which the insured may be liable under tort law.

Consider the following fact situation: A steelworker was diagnosed with mesothelioma in 2007. He worked at West End Steel from 1970-1987. He was exposed at the workplace to fire-retardant asbestos manufactured by MSA from 1970-1972 and to the fire-retardant asbestos manufactured by industrial products (now out of business) from 1973-1987.

The steelworker sued only MSA. The steelworker received a verdict of $1 million based on expert testimony, applying the frequency, regularity, and progression test, that the exposure during the 1970-1972 period, as described by the plaintiff, was a substantial cause of the cancer. See Betz v. Pneumo Abex, LLC, 44 A.3d 27 (Pa. 2012); Gregg v. V-J Auto Parts, 943 A.2d 216 (Pa. 2007). MSA sought indemnification from its insurers whose policies covered the period from 1970-1972. The insurers contended that there is no coverage because scientists studying asbestos have concluded that it is far more likely than not that the exposure to asbestos that started the progression of the steelworker’s disease leading to manifestation occurred, at the earliest, at least several years after 1972.

However, in interpreting the insurance policies covering the years 1970-1972, it does not matter whether or not the insured can prove that the exposure that caused the progression occurred between 1970 and 1972. Since MSA was found to be liable to the steelworker under Pennsylvania tort law for exposures between 1970 and 1972, the insurance policies covering these years should provide coverage. Otherwise, MSA does not receive the protection it would have reasonably expected.

A question that the insurance company may ask is why is the company required to provide coverage for policies covering 1970-1972 if the company can prove that in all likelihood there were no injuries from exposure to asbestos leading to progression and manifestation for the period between 1970-1972.

My response is that the insurer is basically saying that it has no obligation to provide coverage when tort law gets it wrong. This position is contrary to an interpretation of the policy based on the insured’s reasonable expectations that the insurance policies relieve MSA of the risk of liability for claims MSA is obligated to pay arising out of exposures between 1970 and 1972.

Using the steelworker example, the policy period is 1970 to 1972. The jury concluded that exposure to MSA’s products between 1970 and 1972 was a cause of the plaintiff’s disease. Thus, the insured became legally obligated to pay the amount of the verdict because of the jury’s determination that there is a link between the exposure between 1970 and 1972 and the disease. Under the reasonable expectations interpretation, the insurer agreed to pay all sums which the insured became legally obligated to pay based on the exposures between 1970 and 1972.

There would be a very different landscape in Pennsylvania if I agreed with North River that J.H. France’s multi-trigger approach begins only when the insured can establish the date of the exposure which began the progression. Under J.H. France, the period of coverage is easily determined — what is the date of the initial exposure and what is the date of manifestation. However, if coverage begins only when the insured can establish the date of the exposure that began the progression, this will be a case-by-case determination based on expert testimony.

J.H. Frances ’ multi-trigger approach that begins with the initial exposure, reaches every claim that is viable under tort law. If coverage begins only on the date of the exposure that began the progression, there will be no certainty as to the period of coverage, and there will likely be claims for which the insured is liable that are not within a period of coverage.

In Ins. Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), also cited approvingly by the J.H. France court, the court stated that the use of the date of the first exposure that began the disease process is an interpretation no one wants because the cost of the litigation would be prohibitive if medical testimony as to the origin would have to be taken in each of the thousands of asbestosis cases. Furthermore, “it is almost impossible for a doctor to look back and testify with any precision as to when the development of asbestosis ‘crossed the line’ and became a disease.” Id. at 1218. On the other hand, a ruling that bodily injury takes place upon initial exposure to asbestos is “both a literal construction of the policy language and the construction which maximizes coverage. It is also the construction which, we think, best represents what the contracting parties intended.” Id. at 1223.

In Commercial Union Ins. Co. v. Sepco Corp., 765 F.2d 1543 (11th Cir. 1985), the insurer contended that the medical evidence in the case contradicts the essential tenet of the exposure theory that each inhalation of asbestos fibers results in bodily injury. The insurer offered expert testimony “to the effect that not everyone exposed to asbestos contracts an asbestos-related disease such as asbestosis and that exposure to asbestos does not produce instantaneous sub-clinical cellular changes in the lungs.” Id. at 1545-46.

The court responded by stating: “We believe that the exposure theory is more accurately analyzed as positing not that each inhalation of asbestos fibers results in bodily injury, but rather that every asbestos-related injury results from inhalation of asbestos fibers...[Bjecause it is impossible practically to determine the point at which the fibers actually imbed themselves in the victim’s lungs, [equating] exposure to asbestos with ‘bodily injury’ caused by the inhalation of asbestos is the ‘superior interpretation of the contract provision.’” Id. at 1546.

In summary, the multi-trigger approach of J.H. France where coverage begins with the initial exposure to asbestos and ends at the date of manifestation serves the function of relieving MSA of the risk of liability for injuries for which MSA may be found liable. There may be other approaches that achieve the same result. However, the bottom line is that the reasonable expectations of the insured should be protected through an interpretation of insurance coverage that parallels the insured’s liability, and J.H. France provides such protection.

For these reasons, I enter the following order of court:

ORDER OF COURT

On this 13 day of February, 2014, it is hereby ordered that Mine Safety Appliances Company’s motion is granted, and the continuous-trigger approach adopted in J.H. France Refractories Co. v. Allstate Ins. Co. determines which policies apply to bodily injury claims involving mesothelioma or asbestos-related lung cancer arising out of exposure to asbestos.

      . “The relevant terms in the North River policies are substantially similar to those in the J.H. France’s carriers.

      . Construction 2 might, instead, use the date of the exposure that began the progression of the disease.

      . Construction 3 might, instead, use the date of the exposure that began the progression of the disease.

      . The dates of the initial exposure to asbestos and the date of manifestation are readily obtainable facts. Thus, it is easy to establish coverage by applying this continuous-trigger approach that begins with the initial exposure.

      . Parts of Dr. Spom’s deposition testimony are at Binder index E, exhibit 9 and index G, exhibit B; his report is at Binder index E, exhibit 2.

      . According to North River’s experts, it is not possible to establish the date of the exposure that began the progression of the disease. At best, estimates can be made by working backwards from the date of manifestation. See report of Dr. Sporn, at 8 (“...there are individual variations that make it impossible to establish exactly what the threshold is and when it is reached....”).

      . I find no merit to North River’s contention that J.H. France’s multi-trigger approach applies only to asbestosis. The Pennsylvania Supreme Court’s opinion in J.H. France never restricted its analysis to asbestosis claims.
      The Superior Court opinion in J.H. France, which adopted the continuous-trigger approach, said that the evidence establishes that there is a discrete injury occurring almost contemporaneously with the exposure to asbestos which “if one continues to be exposed to asbestos, will result in asbestosis, mesothelioma or other asbestos-related disease.” 578 A.2d at 468, 474 (Pa. Super. 1990) (emphasis added). Thus, the court found to be dispositive the question of “under what circumstances can France reasonably conclude that coverage is provided for the occurrence of asbestos-related diseases?” Id. at 475 (emphasis added).
      According to the Supreme Court opinion, the Superior Court reached the conclusion that the stages in the pathogenesis of asbestos-and silica-related diseases also trigger the liability of J.H. France’s insurance carrier. The Supreme Court ruled that “we find no error in this analysis and conclusion. The insurance policy language and the evidence of the etiology and pathogenesis of asbestos-related disease compel us to reach this result.” 626 A.2d at 506 (emphasis added). The court also affirmed the Superior Court’s approval of the multiple-trigger theory of liability and thus, “every insurer which was on the risk at any time during the development of the claimant’s asbestos-related disease has an obligation to indemnify J.H. France.” Id. at 507.
      In addition, the Pennsylvania Supreme Court opinion relied on the Keene case, discussed at pages 10-12 of this opinion, which applied the multiple-trigger approach to asbestos-related diseases.
      Furthermore, assuming that J.H. France applied the multiple-trigger approach only to asbestosis, I extend its application to all cancer-related diseases caused by exposure to asbestos in order to protect MSA’s reasonable expectations. See my discussion of protection of insured’s reasonable expectations at pages 10-12 of this opinion.

      . While no insurance company favored Keene’s proposed interpretation, they were not in agreement as to what inteipretation they wanted the court to apply.

        . In this case, the language of the policies is ambiguous for the reasons set forth in Keene-see pages 10-11 of this opinion. Thus, I need not decide whether or not a court can consider an insured’s reasonable expectation only in situations in which the Insurance contract is deemed ambiguous. See Betz v. Erie Ins. Exchange, 957 A.2d 1244, 1253 (Pa. Super. 2008).

      . Vale was cited with approval in J.H. France at 626 A.2d at 507.