CONTRACTS

Choice of Law • Gist of the Action Doctrine • Breach • Negligence

Insyte Medical Technologies Inc. v. Lighthouse Imaging LLC, PICS Case No. 14-0459 (E.D. Pa. March 11, 2014) McLaughlin, J. (35 pages).

Insyte Medical Technologies, doing business as Trice Orthopedics, joined with Lighthouse to develop an office arthroscope, a device to less invasively examine the inside of patient’s joints. Trice sued Lighthouse for breach of contract, negligence, negligent misrepresentation, fraud and breach of fiduciary duty. Lighthouse’s motion to dismiss the negligence, negligent misrepresentation, fraud and breach of fiduciary duty claims was granted.

Trice, a medical device company, owned technology for real-time visualization in sports medicine, spine and other orthopedic applications, including a disposable office arthroscope system. Lighthouse was a design and engineering firm specializing in miniature optical devices, was a FDA-registered medical device manufacturer and claimed to have the capability to design, engineer and manufacture prototypes and products related to Trice’s technology. Trice approached Lighthouse in early 2012 to design and develop a less invasive, office based arthroscopic probe. The parties entered into a development contract on June 12, 2012. In the contract, Lighthouse represented that it had the necessary experience and design and manufacturing capabilities; agreed to produce a prototype based on Trice’s designs and input, stated that it had the intellectual property needed and granted Trice an irrevocable nonexclusive worldwide licenses to sell any designs used in the device; and agreed that if it decided to discontinue the business of making miniature lens assemblies, It would give Trice the drawings and procedures used in the design.

As the project evolved, Lighthouse’s engineers allegedly recommended changes to the device that caused Trice to incur unanticipated costs, jeopardized the project schedule and compromised the marketability of the product. Trice, relying on Lighthouse’s expertise, approved the changes. Trice asserted that some of those recommendations were a pretext to solidify Lighthouse’s position as the manufacturer of the device.

In the fall of 2012, Lighthouse engineers allegedly convinced Trice to permit Lighthouse to add internal electrical software and hardware components. Trice alleged that Lighthouse had no experience with such equipment, could not get it to work and had to call in outside consultants. In January 2013, Trice learned that Lighthouse did not own all of the intellectual property rights to the components in the device and the manufacturer of one of those components refused to release the designs of its subassembly in the device, thus, prohibiting Trice from commercializing the device it had hired Lighthouse to develop for commercial use.

The court determined that Pennsylvania law would apply rather than that of Maine, which was called for in the choice-of-law clause in the contract. The court found that the choice-of-law language in the contract applied only to claims relating to the construction and interpretation of the contract, not to the tortious conduct alleged in this suit. Trice argued that the case presents a true conflict between the laws of Pennsylvania and Maine because Maine has no rule against classifying wrongful conduct in both tort and contract terms. Lighthouse argued that the conflict was false because, while Pennsylvania adopted a policy prohibiting contract claims from being recast as tort claims, Maine has not fully addressed the issue and has neither adopted nor rejected the gist of the action doctrine. If the court were to decline to apply the gist of the action doctrine and allowed the plaintiff to pursue breach of contract and tort theories arising from the same conduct, Pennsylvania’s policy against such duplicative recovery would be harmed. Since Maine has no policy against limiting a plaintiff to recovery in contract for contractual breaches, Maine would suffer no harm from the court’s application of the gist of the action doctrine.

The gist of the action doctrine barred Trice’s negligence claim. Trice asserted that Lighthouse’s duty arose from its relationship to Trice in a professional engineer/designer role. That relationship was codified in the development contract between the parties. Trice did not allege any duties that are independent of the contract.

The court declined to allow Trice to amend its complaint because Lighthouse did not move to have the breach of contract claim dismissed and that claim could continue.