Pediatrix Screening, Inc. of Bridgeville, Pa., has won a new trial in a recent decision by the Third Circuit appellate court. Pediatrix and TeleChem International of Sunnyvale, Calif. had been in litigation over two contracts that developed from Pediatrix proposals regarding experimental microarray technology, including preparing a grant application to the National Institutes of Health, and a study to develop a microarray screening process for several genetic disorders. According to court documents, TeleChem had agreed that all grant money would go to Pediatrix and that TeleChem would devote commitments of personnel, research, equipment and supplies. TeleChem (now Arrayit) provides technical assistance and hardware for use in microarray technology for genotyping. Pediatrix (now PerkinElmer) provides genetic screening of infants.

As the appellate decision recounts, the two companies had agreed to set up a joint corporation--NGS-ArrayIt--although Pediatrix did not actually file the documents with appropriate authorities. TeleChem later accused Pediatrix of breach of contract, and then Pediatrix filed the suit in question a few days later in November 2001, also asserting breach of contract. TeleChem then filed a counterclaim, asserting breach of contract and tort actions in fraudulent misrepresentation and misappropriation of trade secrets.

At trial, the jury in this case had found that for the contracts under dispute, TeleChem had breached one, for which Pediatrix was awarded nominal damages, Pediatrix and TeleChem had breached the second, in which both were awarded $1 million in liquidated damages, and Pediatrix was liable for fraudulent misrepresentation, for which TeleChem was awarded $500,000 in compensatory and $3.5 million in punitive damages. The claims for misappropriation of trade secrets were nullified. The Third Circuit has allowed a new trial on the misrepresentation claim.

In the appellate court's opinion, the principal issues were if Pediatrix had preserved the misrepresentation question for appeal, and whether the trial court had erred in the legal ruling that allowed tort recovery for conduct (misrepresentation) that could also be breach of contract. The question of whether a case is a tort or contract case falls under the "gist of the action" doctrine. This doctrine prevents a plaintiff from construing a breach of contract case as a tort claim. To be construed properly as a tort, the complained-of action must be the "gist" of the action, and the contract only collateral to the action. Pennsylvania law, which controls this diversity action, states that if fraud claims are "inextricably intertwined" with contract claims, the gist of the action is contractual, and any tort fraud claim should be dismissed.

The appellate court found that Pediatrix had properly preserved the issue for appeal. The court also found TeleChem's characterization of the misrepresentation to be vague, as TeleChem's counsel had stated at different times that the misrepresentation was that TeleChem would benefit commercially from a grant collaboration or that it was fraudulent inducement of TeleChem to enter into the relationship in the first place. Therefore, too much uncertainty was in the record as to whether the misrepresenation was collateral with the first contract or was inextricably intertwined with the parties' actions in the collaboration, so the trial court erred in its disposal of the misrepresentation question. The appellate opinion pointed out that the trial faced difficulties in both parties changing counsel as well as two reassignments of judges, in addition to the complicated technical questions over the trade secrets. The court then ordered a new trial for the counterclaim of misrepresentation.

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