Torrent Pharma, Inc. v. Priority Healthcare Distribution, Inc.

• Decision Date: 11 August 2022
• Docket Number: C. A. N18C-05-094 CEB
• Parties: TORRENT PHARMA, INC., QBE UNDERWRITERS LTD., LIBERTY CORPORATE CAPITAL LTD., HAMILTON MANAGEMENT AGENCY LTD., RIVERSTONE MANAGING AGENCY LTD., BRIT SYNDICATES LTD., and ARGO MANAGING AGENCY LTD., Plaintiffs, v. PRIORITY HEALTHCARE DISTRIBUTION, INC., d/b/a CURASCRIPT S.D. SPECIALTY DISTRIBUTION, and DENALI OHIO SOUTHPARK INDUSTRIAL LLC, Defendants.
• Court: Delaware Superior Court

TORRENT PHARMA, INC., QBE UNDERWRITERS LTD., LIBERTY CORPORATE CAPITAL LTD., HAMILTON MANAGEMENT AGENCY LTD., RIVERSTONE MANAGING AGENCY LTD., BRIT SYNDICATES LTD., and ARGO MANAGING AGENCY LTD., Plaintiffs, v. PRIORITY HEALTHCARE DISTRIBUTION, INC., d/b/a CURASCRIPT S.D. SPECIALTY DISTRIBUTION, and DENALI OHIO SOUTHPARK INDUSTRIAL LLC, Defendants.

C. A. No. N18C-05-094 CEB

Superior Court of Delaware

August 11, 2022

Submitted: June 10, 2022

Upon Consideration of Plaintiffs' Motion for Summary Judgment GRANTED IN PART and DENIED IN PART

Upon Consideration of Defendant Priority Healthcare Distribution Inc. 's Motion for Summary Judgment Against Plaintiffs GRANTED IN PART and DENIED IN PART

Upon Consideration of Defendant Priority Healthcare Distribution, Inc. 's Motion for Summary Judgment Against Defendant Denali Ohio Southpark Industrial LLC, DENIED

Upon Consideration of Defendant Priority Healthcare Distribution, Inc. 's Motion in Limine, DENIED

Upon Consideration of Defendant Denali Ohio Southpark Industrial LLC's Motion for Summary Judgment On the Issue of Causation, GRANTED IN PART and DENIED IN PART

Upon Consideration of Defendant Denali Ohio Southpark Industrial LLC's Motion for Summary Judgment On the Issue of Damages, DENIED

Michael B. McCauley, Esquire, PALMER BIEZUP & HENDERSON LLP, Wilmington, Delaware; Kevin G. O'Donovan, Esquire, PALMER BIEZUP & HENDERSON LLP, Philadelphia, Pennsylvania. Attorneys for Plaintiffs.

Elizabeth A. Sloan, Esquire, and Brittany M. Giusini, Esquire, BALLARD SPAHR LLP, Wilmington, Delaware; Matthew D. Knepper, Esquire, and Tanya M. Maerz, Esquire, HUSCH BLACKWELL LLP, St. Louis, Missouri. Attorneys for Defendant Priority Healthcare Distribution, Inc.

Sarah B. Cole, Esquire, MARSHALL DENNEHEY WARNER COLEMAN & GOGGIN, P.C., Wilmington, Delaware. Attorney for Defendant Denali Ohio Southpark Industrial LLC.

MEMORANDUM OPINION

Charles E. Butler, Resident Judge Plaintiff Torrent Pharma, Inc. is an India-based pharmaceutical manufacturer that entered a product distribution contract with Defendant Priority Healthcare Distribution, Inc. ("CuraScript"). CuraScript agreed to manage Torrent's prescription drug products at a warehouse in Ohio (the "Warehouse"). CuraScript leased the Warehouse from Defendant Denali Ohio Southpark Industrial LLC. This litigation concerns the fallout from a leaking Warehouse pipe.

A few years ago, one of the Warehouse's overhead sprinklers leaked water onto 19 pallets of Torrent's products. The leaks allegedly caused over $200,000 in damage. Torrent and its insurers (collectively, "Underwriters") have brought this tort and contract action against the Defendants to recover their losses. The Defendants, in turn, have asserted indemnification crossclaims for full coverage of any award the Plaintiffs receive.

The parties now move for summary judgment.^[1] After culling a herd of issues, the Court concludes that the Defendants are entitled to summary judgment as to the Plaintiffs' tort and third-party beneficiary claims and the Plaintiffs are entitled to summary judgment as to CuraScript's contractual liability. No party is entitled to summary judgment as to the Plaintiffs' damages. And neither Defendant is entitled to summary judgment as to its indemnification crossclaim. The parties' motions are granted and denied accordingly.

BACKGROUND^[2]

A. The Agreements

The parties' arrangements are expressed through two separate agreements. Torrent and CuraScript executed a services contract (the "Logistics Agreement")^[3]that operated at the Warehouse. CuraScript rented the Warehouse under a lease (the "Lease")^[4] that CuraScript's corporate predecessor entered with the Warehouse's previous owner. Denali assumed the Lease when it acquired the Warehouse. Denali is not a party to the Logistics Agreement and Torrent is not a party to the Lease.

Each agreement contains several terms that govern the issues in this case.

1. The Logistics Agreement

Under the Logistics Agreement, CuraScript agreed to "store, handle, and transport" Torrent's products.^[5] CuraScript's duties are measured by three provisions set out in the Logistics Agreement. The Logistics Agreement required CuraScript to render its services consistent with (i) a dozen "Key Performance Indicators" ("KPI");^[6] (ii) rules promulgated by the United States Food and Drug Administration ("FDA");^[7] and (iii) responsibilities listed in the "Operating Guidelines."^[8]

a. KPI #9

The KPI are bilaterally negotiated performance standards incorporated in the Logistics Agreement that use task-specific metrics to determine whether the parties are meeting each other's expectations. One of them-KPI #9-is relevant here.

KPI #9 is directed to product damage.^[9] It imposes liability for "any [product damage] claim arising out of. . . poor handling while on CuraScript's premises."^[10]In contrast to other provisions in the Logistics Agreement, KPI #9 is not tied to a standard of care.^[11]

The parties were contractually required to carry insurance coverage to mitigate any liability for product damage. KPI #9 requires the parties to carry insurance at a policy cap greater than the products' "total value" or "replacement cost."^[12] But the Logistics Agreement does not contain language barring an insurer from bringing a subrogation claim to recoup its payments for covered losses. b. Reg 211.208

The field of FDA regulation is vast. Unhelpfully, the Logistics Agreement generally references FDA's regulations, but does not identify any particular rule that CuraScript must obey. The parties, however, agree that FDA's "drug product salvaging" rule ("Reg 211.208") is the applicable rule.^[13] So the Court starts there.

Reg 211.208 is part of FDA's "good manufacturing practices" or "GMP."^[14]It regulates the sale of "drug products" that have been "subjected to improper storage conditions."^[15] Improper storage conditions are defined to include "extreme" exposures to chemical and environmental forces caused by "equipment failures."^[16]

Under Reg 211.208, improperly stored drug products must be discarded.^[17]This mandate is consistent with GMP. FDA regulations provide that any "failure to comply with" GMP "in the manufacture, processing, packing, or holding of a drug shall render such drug . . . adulterated[.]"^[18] In other words, a drug product that violates GMP "is presumed adulterated."^[19] FDA may sue drug makers who sell improperly stored drug products.^[20]

Reg 211.208 does give drug makers an option to "salvage" their improperly stored products. Before salvaging improperly stored products, however, the manufacturer must first subject the products to scientific testing. Under Reg 211.208, "salvaging operations may be conducted only if there is evidence

[i] from laboratory tests and assays . . . that the drug products meet all applicable standards of identity, strength, quality, and purity [;] and [ii] from inspection of the premises that the drug products and their associated packaging were not subjected to improper storage conditions as a result of the disaster or accident.^[21]

c. The Operating Guidelines

Finally, CuraScript also must follow the Operating Guidelines. The Operating Guidelines are incorporated into the Logistics Agreement and allocate a list of product management functions to CuraScript. For example, the Operating Guidelines designate CuraScript as the party "responsible" for all "physical inventory," including "packing" and "putting away" Torrent's products.^[22] CuraScript is liable for "Loss," including for "product damage,"^[23] that results from a failure to follow the Operating Guidelines.^[24]

2. The Lease

The Lease governs CuraScript and Denali's landlord-tenant relationship. Relevant here, the Lease imposes on the Defendants maintenance duties and accords them qualified indemnification rights.

a. The Maintenance Provision

Under Lease Section 5 (the "Maintenance Provision"), the Defendants divided the duties to maintain the Warehouse's "mechanical systems."^[25] Under the Maintenance Provision, CuraScript must "repair" all mechanical systems and Denali must "replace" all mechanical systems:

[CuraScript's] maintenance obligation . .. include[s] the repair (but not the replacement) of all . . . mechanical systems located within the [Warehouse] .... [Denali] will ... be responsible for replacing (but not repairing) all . . . mechanical systems located within the [Warehouse]. . .,^[26]

The Defendants agree that the Warehouse's sprinklers qualify as mechanical systems. The Lease, however, does not define "repair" or "replace" or specify the circumstances under which a sprinkler would need to be repaired or replaced. It also does not define the level of repair or replacement that must be achieved before maintenance may be deemed adequate.

Moreover, Denali's replacement duties contain a caveat. The Maintenance Provision declares that Denali is not required to replace a mechanical system that needs replacement "due to the fault or negligence of [CuraScript] or its agents[,]"^[27]

b. The Hold Harmless Provision

Under Lease Section 15 (the "Hold Harmless Provision"), the Defendants enjoy a mutual right to indemnification "from any liability . . . associated with any damage ... to any . . . property" that was caused at the Warehouse. CuraScript agreed to indemnify Denali for property damage that "arises directly from [CuraScript's] . . . acts or omissions in connection with [its] use or occupancy of the Warehouse.^[28] Denali agreed to indemnify CuraScript for property damage "occasioned by [Denali's] fault or negligence."^[29]

B. The Sprinklers

The Warehouse contains overhead sprinklers. The sprinklers are structurally integrated with a fire suppression system...