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CORAM HEALTHCARE CORP. v. AETNA U.S. HEALTHCARE

November 16, 1999

CORAM HEALTHCARE CORPORATION
v.
AETNA U.S. HEALTHCARE INC.



The opinion of the court was delivered by: Bartle, District Judge.

  MEMORANDUM

Plaintiff Coram Healthcare Corporation ("Coram"), a Delaware corporation, and defendant Aetna U.S. Healthcare, Inc., ("Aetna"), a Pennsylvania corporation, were parties to a written Master Agreement which called for Coram to provide home healthcare services to members of Aetna's HMO plans. Coram has filed this diversity action against Aetna seeking damages for fraud, negligent misrepresentation, and breach of contract. Coram also seeks injunctive and declaratory relief, rescission of the contract based on fraud and misrepresentation, and rescission of the contract based on mistake. Before the court is Aetna's motion to dismiss Counts I (fraud), II (negligent misrepresentation), V (rescission based on fraud and misrepresentation), and VI (rescission based on mistake). Finally, Aetna moves for a more definite statement as to Counts III (breach of contract) and IV (declaratory/injunctive relief).

In considering a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court may rely upon allegations in the complaint, exhibits attached to the complaint, and matters of public record. See Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993). All well-pleaded factual allegations in the complaint are assumed to be true and are viewed in the light most favorable to the non-movant. See Warth v. Seldin, 422 U.S. 490, 501, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). A complaint should be dismissed pursuant to Rule 12(b)(6) only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations. See Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984).

I.

We accept the following facts as true for purposes of considering Aetna's motion. Coram develops and administers networks of providers which work with managed care organizations to provide home healthcare. On April 22, 1998, after extensive negotiation, Coram and Aetna executed a Master Agreement under which Coram would receive compensation on a per member/per month basis in exchange for providing home healthcare to approximately 1.9 million members of Aetna's commercial insurance plans and 200,000 members of Aetna's Medicare plans.

Coram avers that Aetna, during the negotiations for the Master Agreement, fraudulently, negligently, or mistakenly misrepresented the number of HMO members who would actually use Coram's healthcare network. Relying on the numbers presented by Aetna, Coram agreed to a fixed compensation schedule. However, the number of members needing home healthcare was much higher, and Coram was forced to provide services without payment from Aetna. Aetna also purportedly misrepresented the total number of people participating in its HMO plans. Instead of 1.9 million members, Aetna's commercial population was 2.25 million. In addition, Aetna failed to include over 100,000 employees for AT & T/Lucent for whom Coram would have to provide home healthcare. Aetna also allegedly misrepresented its intention to fulfill its obligations under the Master Agreement, as well.

II.

As a threshold matter, we must decide whether Pennsylvania or Delaware law applies to the claims which are the subject of Aetna's motion to dismiss. In determining this issue as a federal court exercising diversity jurisdiction, we look to the choice of law rules of Pennsylvania — the state in which this court sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941).

A choice of law analysis becomes necessary because Pennsylvania and Delaware maintain different parol evidence rules. In general, the parol evidence rule renders evidence of prior or contemporaneous agreements, whether written or oral, inadmissible to the extent they are inconsistent with the parties' written, final agreement. See Restatement 2d Contracts § 213; Cunningham v. Esso Standard Oil Co., 118 A.2d 611, 613 (Del. 1955); In re Carter, 390 Pa. 365, 134 A.2d 908, 912 (1957). In Pennsylvania, it is now settled that the parol evidence rule bars claims of fraud in the inducement and only allows claims of fraud in the execution.*fn1 See Dayhoff, Inc. v. H.J. Heinz, Co., 86 F.3d 1287, 1300 (3d Cir. 1996); 1726 Cherry Street Partnership v. Bell Atlantic Properties, Inc., 439 Pa. Super. 141, 653 A.2d 663, 666 (1995); see also HCB Contractors v. Liberty Place Hotel Assoc., 539 Pa. 395, 652 A.2d 1278, 1279 (1995). Thus, a party may assert that provisions of a written agreement "were omitted by fraud, accident or mistake," but not that it was induced to enter a contract by fraudulent misrepresentation. See id.; 1726 Cherry Street, 653 A.2d at 666. As the Court of Appeals for the Third Circuit has recognized, Pennsylvania's "parol evidence rule bar[s] consideration of prior representations concerning matters covered in the written contract, even those alleged to have been made fraudulently, unless the representations were fraudulently omitted from the contract." Dayhoff, 86 F.3d at 1300. The Pennsylvania parol evidence rule is premised on the principle that if a sophisticated, well-represented party like Coram intends to rely on significant representations made prior to the execution of a full integrated contract, that party can protect itself from fraud or mistake by including those representations in the final written agreement. See Armstrong World Indus., Inc. v. Robert Levin Carpet Co., No. CIV.A. 98-5884, 1999 WL 387329, at *5 (E.D.Pa. May 20, 1999); 1726 Cherry Street, 653 A.2d at 670. In short, Pennsylvania seeks to protect parties from fraudulent inducement claims which could have been prevented by more complete, more thorough contract formation.

Delaware takes a different approach. Its parol evidence rule does not bar claims of either fraud in the inducement or fraud in the execution. Delaware admits parol evidence to prove fraud in any form. See Anglin v. Bergold, No. 185,-1988, 1989 WL 88625, at *2 (Del. June 26, 1989); see generally Restatement (Second) of Contracts § 21. "[T]he parties, because of either fraud or mistake, did not assent to a certain writing or writings as the agreement between the parties; therefore, the parol evidence rule does not apply to a [fraudulently induced] contract." James River-Pennington, Inc. v. CRSS Capital, Inc., 1995 WL 106554, No. CIV.A. 13870, at *6 (Del. Ch. Mar. 6, 1995) (citing 4 Williston on Contracts § 634, at 1017-18).

Pennsylvania courts have adopted § 187 of the Restatement (Second) of Conflict of Laws which "generally honor[s] the intent of the contracting parties and enforce[s] the choice of law provisions in contracts executed by them."*fn2 Kruzits v. Okuma Machine Tool, Inc., 40 F.3d 52, 55 (3d Cir. 1994); see, e.g., Chestnut v. Pediatric Homecare of America, Inc., 420 Pa. Super. 598, 617 A.2d 347, 350-51 (1992). Paragraph 19 of the Master Agreement between Coram and Aetna, entitled "Governing Law," states, "This Agreement shall be governed by the laws of the State of Delaware." Both parties agree that Delaware law applies to Coram's breach of contract claim. The question remains whether Coram's claims of fraudulent inducement to enter into the contract and inducement by negligent misrepresentation, set forth in Counts I and II of its complaint, are subject to the Master Agreement's choice of law provision.

We read the language of the Master Agreement to mean that only claims relating to the construction and interpretation of the contract will be judged according to Delaware law. In essence, Coram and Aetna have agreed that that state's law will control those issues involving their rights and duties under the contract itself. A breach of contract claim is clearly contemplated. Beyond this, the parties did not go. They did not provide more broadly that Delaware law would apply to tortious conduct that led up to the execution of the contract or to other actions arising out of their relationship. See Krock v. Lipsay, 97 F.3d 640, 645 (2d Cir. 1996). Significantly, they did not refer to the matter of contract validity. If these sophisticated parties had wanted a more expansive choice of law provision, they could easily have drafted one. For example, as other parties have done, Coram and Aetna could have inserted language that Delaware law governed "all matters, including, but not limited to, matters of validity, construction, effect or performance." (emphasis added). Composiflex, Inc. v. Advanced Cardiovascular Sys., Inc., 795 F. Supp. 151, 157 (W.D.Pa. 1992); see, e.g., Hitachi Credit America Corp. v. Signet Bank, 166 F.3d 614, 624, 628 (4th Cir. 1999). They did not, and we will not rewrite the contract for them.

Claims by Coram for fraudulent inducement and inducement by negligent misrepresentations emanate from events that occurred before the agreement even came into being and are separate and distinct from any breach of contract, which presupposes the existence of a valid agreement. Thus, the fraud and negligent misrepresentation claims are not subject to the parties' contractual choice of law since the "fair import of the provision [does not] embrace[] all aspects of the legal relationship" between Coram and Aetna. Jiffy Lube Intern'l, Inc. v. Jiffy Lube of Pa., Inc., 848 F. Supp. 569, 576 (E.D.Pa. 1994); see also, Brown v. SAP America, No. C.A. 98-507-SLR, 1999 WL 803888, at *5 (D.Del. Sept.13, 1999).

This court, therefore, must employ Pennsylvania's general choice of law rules in deciding what substantive law governs these two claims. Pennsylvania has adopted a "flexible rule which permits analysis of the policies and interests underlying the particular issue before the court." Griffith v. United Air Lines, Inc., 416 Pa. 1, 203 A.2d 796, 805 (1964). This analysis consists of two steps. First, we "look to see whether a false conflict exists" between the competing policies and interests of the relevant states. LeJeune v. Bliss-Salem, Inc., 85 F.3d 1069, 1071 (3d Cir. 1996). A false conflict exists when "only one jurisdiction's governmental interests would be impaired by the application of the other jurisdiction's law." Lacey v. Cessna Aircraft Co., 932 F.2d 170, 187 (3d Cir. 1991). If a false conflict exists, we will apply the law of the state whose interests are truly implicated by the particular cause of action. See id. A true conflict, on the other hand, exists when the interests of each state would be impaired if the law of the other is given effect. See id. at 187 n. 15. By admitting parol evidence to prove all fraud claims, Delaware has manifested an interest in protecting its citizens from the harmful consequences of an ill-gotten agreement. In contrast, Pennsylvania has adopted a defendant-protecting rule which bars fraud in the inducement claims. The application of one jurisdiction's law will clearly frustrate ...


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