Tortious Interference With Contracts and Prospective Business Advantage: Proving and Defending Claims Navigating the Complexities of Lawsuits Alleging Intentional and Improper Business Disruption

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WEDNESDAY, FEBRUARY 11, 2015

Presenting a live 90-minute webinar with interactive Q&A

Aaron D. Hall, CEO & Business Attorney, Thompson Hall Santi Cerny & Katkov, Minneapolis

Zachary G. Newman, Partner, Hahn & Hessen, New York

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Navigating the Complexities of

Lawsuits Alleging Intentional &

Improper Business Disruption

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Introductions

Hahn & Hessen LLP (New York)

Focuses on banking litigation, commercial litigation, fiduciary litigation, breach of fiduciary duty claims, and art and antique litigation.

Represents public and private companies, national banking associations, commercial lenders, leasing companies, and hedge funds in business litigation throughout the United States.

Aaron D. Hall ahall@ThompsonHall.com

Thompson Hall Santi Cerny & Katkov (Minneapolis)

Focuses on business transactions, business litigation and intellectual property.

Counsels company owners in complex contracts, employment law, intellectual property, real estate, estate planning, and taxes, as well as litigation in these areas.

Zachary G. Newman znewman@hahnhessen.com

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Courts generally recognize three

universal members of the “tortious

interference family.”

The elements of each claim are similar but

not identical, and some of these differences are in fact more substantive

than linguistic.

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Tortious Interference with an Existing Contract

A plaintiff generally must allege:

1. the existence of a contract between the plaintiff and a third party,

2. the defendant’s knowledge of the contract,

3. the defendant’s intentional inducement of the third party to breach or otherwise render performance impossible, and

4. damages to the plaintiff.

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The plaintiff must allege actual knowledge, as generally “objective standards like implied knowledge or constructive knowledge are

insufficient.”

DBS Constr., Inc. v. New Equip. Leasing, Inc., 2011 U.S. Dist. LEXIS 32681, at *11 (N.D. Ind.

Mar. 28, 2011).

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Tortious Interference with Business Relations

Obvious distinction between this claim and its sister claim is that it is not necessary to establish the existence

of any actual contract between the parties.

Cole v. Homier Distrib. Co. Inc., 599 F.3d 856, 861

(8th Cir. 2010) (applying Missouri law).

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A claimant must only show that:

1. it had a business relationship with a third party and the breaching party knew of that relationship and

2. intentionally interfered with it,

3. the breaching party acted solely out of malice or used improper or illegal means that amounted to a crime or independent tort, and

4. the breaching party’s interference caused injury to the relationship with the third party.

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What exactly qualifies as a “business relationship”

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A business relationship is “‘something less than a contractual right, something more than a mere hope’ [and] exists only when there is a

reasonable probability that a contract will arise from the parties’ current dealings.”

Alvord-Polk, Inc. v. F. Schumacher & Co., 37 F.3d 996, 1015 (3d Cir. 1994) (quoting Thompson Coal Co. v. Pike Coal Co., 488 Pa. 198,

209, 412 A.2d 466, 471 (Pa. 1979))

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Tortious Interference with an “Economic Advantage”

If NO valid contract exists and the ability to establish a business relationship is MURKY, some

jurisdictions may recognize a cause of action for tortious interference

with an “economic advantage.”

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A claimant generally must show 1. an existing reasonable expectation or reasonable expectation of

economic benefit or advantage;

2. the defendant’s knowledge of that expectancy;

3. The defendant’s wrongful, intentional interference with that expectancy;

4. the reasonable probability that the claimant would have received the anticipated economic benefit in the absence of the defendant’s interference; and damages resulting from the defendant’s interference.

Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1167 (3d Cir. 1993)

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A valid business expectancy is one in which there is a reasonable likelihood or probability that the expectancy will come to fruition; mere wishful thinking is not sufficient to support a claim.

First Public Corp. v. Parfet, 246 Mich. App. 182, 199, 631 N.W.2d 785 (Mich. Ct. App. 2001), vacated in part on other

grounds, 468 Mich. 101, 658 N.W.2d 477 (Mich. 2003)

Trepel v. Pontiac Osteopathic Hosp., 135 Mich. App. 361, 377, 354 N.W.2d 341 (Mich. Ct. App. 1984)

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What’s Protected? Historical Relationships Course of Dealing

a customer relationship as

a protectable right because the relationship existed for close to

20 years, even though every year the customer offered its business

to all bidders. Conoco, Inc. v. Inman Oil Co. Inc., 774 F.2d

895, 907 (8th Cir. 1985) (applying Missouri law). According

“a regular course of similar prior dealings suggests

a valid business expectancy.” Slone v. Purina Mills, Inc.,

927 S.W.2d 358, 370 (Mo. Ct. App. 1996).

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Independent Tortious or Wrongful Conduct

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What distinguishes legitimate competitive economic activity—something that is protected in our freemarket system—from actionable interference?

The act must be tortious, meaning that the plaintiff “must plead and prove at

least some improper motive or improper means.”

Golembeski v. Metichewan Grange No. 190, 20 Conn. App. 699, 702, 569 A.2d 1157 (Conn. App. Ct. 1990)

A plaintiff must also show actual loss “resulting from the improper

interference with the contract; the tort is not complete unless there has been

actual damages suffered.”

Appleton v. Bd. of Educ. of Town of Stonington, 254 Conn. 205, 213, 757 A.2d 1059 (Conn. 2000)

Generally requires proof “the defendant was guilty of fraud, misrepresentation, intimidation or molestation or that the

defendant acted maliciously.”

Blake v. Levy, 191 Conn. 257, 261, 464 A.2d 52 (Conn. 1983)

Most courts require this conduct to be “knowing” or “intentional”— mere

negligence will not suffice.

White Plains Coat & Apron Co., Inc. v Cintas Corp., 8 N.Y.3d 422, 426, 867 N.E.2d 381, 835 N.Y.S.2d 530

(N.Y. 2007)

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Examples of (Wrongful) Conduct Improper

Misuse of confidential information

Defamation

Unethical conduct

Bribery or fraud

Unfounded litigation

Sharp business practices

Unfair competition

Not Improper

Interference after the underlying contract expired

Relying upon personal knowledge and memory to reconstitute customer lists

Exercise of a lawful right (e.g., foreclosing on UCC lien)

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Practical Advice: Proving Improper Conduct

Factors are analyzed in determining if the defendant’s conduct was improper:

The nature of the defendant’s conduct;

Defendant’s motive;

The interests of plaintiff with which defendant’s conduct interferes;

The interests which defendant seeks to advance;

The social interests in balancing defendant’s freedom to act against the contractual interests of plaintiff;

The “proximity or remoteness” of the conduct relative to the interference claimed by plaintiff;

The relations between plaintiff and defendant.

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Not Every Act That Disturbs A Contract Or Business Expectancy

Is Actionable

Courts encourage competition and

frown upon a litigant’s attempt to stifle

competition or to promote one’s self

interest

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Angry Client or Angry Court

PRACTICE TIPS WHEN DRAFTING OR PRESENTING THE CLAIMS

Wrong versus free competition (is client using the claim to prevent the loss of customers)

Fairness versus resentment

Feel & taste of the wrongful conduct alleged

Managing client expectations & client’s desire to disparage counterparty

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Initial Strategy Plaintiff ’s Tasks Defendant’s Tasks

Choosing state court versus federal court based on pleading detail standards

Extent of damages alleged and concern over “opening the door to broad financial discovery”

Avoiding inferences or conclusions that the conduct complained of was motivated by economic choices – the “hook”

Seeking provisional remedies

Availability of counterclaims

Whether to move to dismiss – capitalize upon state’s nuances

Capitalize on courts’ strong predisposition to permit competitive behavior

Stipulated to injunctive relief and avoiding immediate

Broad and invasive discovery requests

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How Different Can The States’ Laws Be? Under Arizona law, an officer of a corporation cannot, as a

matter of law, interfere with the corporation’s contracts. Southern Union Co. v. S.W. Gas Corp., 165 F. Supp. 2d 1010, 1038 (D. Ariz. 2001)

Some states have even addressed the viability of the cause of action if the contract at issue is terminable at will. Virginia: Duggin v. Adams, 234 Va. 221, 226, 360 S.E.2d 832,

836 (Va. 1987) (permitting such claims provided allegations support improper means)

New York: New Stadium, LLC v Greenpoint-Goldman Corp., No. 600493/05, 2010 NY Slip Op 30869U, *11–12 (N.Y. Sup. Ct. Apr. 12, 2010) (only permitting such claims when improper means are specifically alleged, as there is no assurance of future performance in at-will contracts that can be terminated at any time)

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How Different Can The States’ Laws Be (Continued)?

New Jersey: A plaintiff survived a motion to dismiss when the court found it

had a “reasonable expectation” to continue its sales of products to its existing customers and distributors and to sell its products to other members of the trade.

The court protected the plaintiff from the steps undertaken by the defendant to wrongfully undermine the plaintiff ’s business expectations. Graco, Inc. v. PMC Global, Inc., 2009 U.S. Dist. LEXIS 26845, at *69–70 (D. N.J. Mar. 31, 2009)

Texas: Court refused to “recognize a cause of action by an insured

against his insurer for tortious interference with the insured’s relationship with his attorney arising out of the insured’s handling of the defense of a third party claim ....” Taylor v. Allstate Ins. Co., 2011 Tex. App. LEXIS 2418, at *20 (Tex. Ct. App. Mar. 31, 2011)

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SPEC

IFIC

ITY

Some courts have taken a more lenient approach, permitting claims to go forward even if the plaintiff cannot identify any specific customer or contract that was lost.

Floorgraphics, Inc., 2006 U.S. Dist. LEXIS 70834, at *18–19 (plaintiff need not identify specific lost business opportunities)

Other courts, however, have dismissed pleadings that do not contain adequate and specific allegations identifying the actual customers or contracts that were lost as a result of the alleged tortious conduct.

Soaring Helmet Corp. v. Nanal, Inc., 2011 U.S. Dist. LEXIS 262, at *21 (W.D. Wash. Jan. 3, 2011)

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Commercial Disputes Competitive businesses

Former employees

Borrowers and guarantors

Recoup lost business

Bolster unfair competition and breach of non-compete covenant cases

Landlord-tenant disputes

Misuse of Inside or Confidential Information

Dissemination of false, misleading, or malicious information to the plaintiff ’s existing and prospective clients

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Lending Disputes

Rise in tortious interference claims in commercial and residential lending disputes.

Are these claims creating issues for lenders?

Are these claims worthwhile to pursue for borrowers and guarantors?

What should you be considering …

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Tale of Two Cities – You Decide Torres v. The Steel Network, Inc., 2009 NCBC 19 (N.C. Super. Ct. July 27, 2009)

In Support of MTD In Opposition of MTD

Here, the Complaint shows on its face that the purported actions of the Bank were not motivated by malice but instead by the justifiable protection of its pre-existing contractual and proprietary interests …

the Complaint fails to allege that the Bank used any improper means to protect its legitimate business interest … The Complaint does not allege that the Bank did not have the contractual right to call the Bank Note in the event of a violation of its terms.

Exercising, or threatening to exercise, one’s rights under a pre-existing contract cannot possibly be considered the use of improper means to interfere with a third-party’s contract.

Bank of America frames its actions – demanding that one of its customers breach a four million dollar contract with a third party who had no relation at all to the Bank – as business as usual; just the normal and wholly justified acts of a company looking out for its own interests. But this is not business as usual, rather it is precisely the sort of conduct that the tort of tortious interference with contract was meant to protect against; protecting one’s own interest at the deliberate expense of another. Bank of America deliberately and without justification induced The Steel Network, Inc. to breach its $3,968,750.00 contract with Plaintiff Michael Torres, causing Mr. Torres catastrophic damage. The Bank contends that because it is essentially in competition with every individual or company that contracts with its customers, it is therefore justified in inducing the termination of any of its customers’ valid contracts so long as terminating those contracts benefits the Bank. This contention is absurd – the Bank’s conduct was not justified, the Plaintiff has more than adequately pled his claim for tortious interference with contract, and Bank of America’s motion to dismiss that claim should be denied.

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Lending Disputes & Tortious Interference Claims

Borrower’s Perspective Lender’s Perspective

Focus on the conduct being alleged

Lender’s typically have fee recovery provisions and the costs incurred for the lender and the prosecution of the claim may outweigh the benefit of prosecuting the claim

The claim could be viewed outside of jury waivers and forum selection clauses

Extent of damages could be widened with these economic tort claims

A lender must only establish that its conduct was motivated by “legitimate business purposes” rather than malice or a “disinterested malevolence.” Bilimoria Computer Sys., LLC v. America Online, Inc., 829 N.E.2d 150, 157 (Ind. Ct. App. 2005)

A lender’s concern for managing pledged collateral and security interests can also constitute a legitimate business concern

Lender’s refusal to permit subordinate liens will not rise to the level to support tortious interfence claims

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Spoiled Party? Highland Capital Mgmt. L.P. v. UBS Securities, LLC (In re Lyondell Chemical Co.), 505 B.R. 409 (S.D.N.Y. 2014)

A hedge fund sued an investment bank for tortious interference because it was excluded from participation in exit financing for a debtor.

The bankruptcy court granted the investment banker’s motion to dismiss for failure to state a claim, and the hedge fund appealed.

As a defense, UBS asserted an absolute privilege to decide who it wanted to deal with.

The court agreed, noting that state law “states that the privilege with whom to deal ‘exists regardless of the actor’s motive for refusing to enter business relations with the other and even though the sole motive was a desire to harm the other.’”

The “refusal to maintain trade relations with any individual is an inherent right which every person may exercise lawfully, for reasons he deems sufficient and for no reason whatever, and it is immaterial whether such refusal is based on reason or is the result of mere caprice, prejudice or malice.”

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The Far Reach of Tortious Interference Claims

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Agent and E’ee Liability Possible Liability No Liability

A claim may be sustained “if the agent did not act legitimately within the scope of his duty but used the corporate power improperly for personal gain.”

An agent can be charged with tortious interference if he or she “acts against the best interests of the principal or acts solely for his own benefit.”

Courts typically dismiss tortious interference claims against agents upon proof that the agent was “acting legitimately within the scope of his authority.”

The presumption against holding an agent liable for such claims is strong, and “even if the agent is acting with ‘mixed motives’ [it] will usually garner a dismissal.”

Metcoff v. Lebovics, 123 Conn. App. 512, 521, 2 A.3d 942, 948 (Conn. App. Ct. 2010)

Welch v. Bancorp Mgmt. Advisors, Inc., 296 Or. 208, 216, 675 P.2d 172, 178–79 (Or. 1983)

Wellington Systems, Inc. v. Redding Group, Inc., 49 Conn. App. 152, 168, 714 A.2d 21 (Conn. App. Ct. 1998)

Fioriglio v. City of Atl. City, 996 F. Supp. 379, 392 (D. N.J. 1998), aff ’d, 185 F.3d 861 (3d Cir. 1999)

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Agents & Employees – Continued Even a “managing officer of a corporation, including

one with the authority to hire and fire, [can be] subject to liability for intentional interference in the same way as any other corporate employee if the officer acts without any purpose to serve the employer, but solely with improper motives or purposes.” Boers v. Payline Sys., Inc., 141 Or. App. 238, 243, 918 P.2d 432, 436 (Or. Ct.

App. 1996)

Employees and agents are not immune from tortious interference claims.

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Practice Tip Consider the impact of naming agents and employees:

Financial ability to defend and/or pay judgment

Can it be interpreted as a bullying tactic?

Will it be portrayed as a bullying tactic?

Will it delay the case (motions to dismiss; additional counsel; protracted discovery)?

Consider that the employee/agent may retain separate counsel and be entitled to additional document discovery and depositions.

Insurance and indemnity triggers

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Can a negligent standard be applied to this intentional tort family?

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Many states do not recognize “negligent interference with economic relationship” claims (such as California).

Many of these states do recognize however negligent interference with a prospective economic advantage as a claim.

In California, for example, to be liable for negligent interference with a prospective

economic advantage, defendant must owe plaintiff a specific duty of care.

Courts balance various factors to determine whether a duty exists. the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury

suffered, the moral blame attached to the defendant's conduct, and the policy of preventing future harm.

No a very popular or wildly successful claim.

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Practical Applications and Case Results

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However, in Czech Beer Importers, Inc. v. C. Haven Imports, LLC, Case No. 04 Civ. 2270 (RCC), 2005 U.S. Dist. LEXIS 12310 (S.D.N.Y. June 22, 2005), Judge Richard Conway Casey denied the defendant’s motion to dismiss plaintiff’s tortious interference with contract and tortious interference with prospective economic advantage claims, holding that plaintiff pled all of the required elements.

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Compensatory & Punitive Damages

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Compensatory Damages: Run of the mill?

Economic tort of recovery

Direct damages

Lost profits

Damages for uncompleted projects or unshipped orders – unperformed contracts

Destruction of business

Damage to business reputation

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Clawson valued GSI, with its trade secrets and confidential information intact, at just over $34.1 million. Second, Clawson valued GSI, when considering the risk of loss to its projected cash flow as a result of its trade secrets and confidential information not being intact, at about $29.7 million—resulting in a loss to GSI's overall value of around $4.3 million. GSI offered the testimony of two expert witnesses regarding damages incurred by GSI as a result of the defendants' actions but, significantly, Clawson's testimony was offered only for GSI's claims under the Trade Secrets Act, and Riley's testimony was competent only to establish GSI's claims under the Trade Secrets Act. Accordingly, after viewing the evidence on appeal in the light most favorable to GSI, we hold that the evidence was insufficient to: (1) prove, with any reasonable certainty, the amount of damages incurred as a result of Collelo's alleged breach of contract; and (2) prove that GSI incurred damages as a result of Autometric's and/or Boeing's tortious interference with a contract. As a result, we hold that the trial court did not err in striking GSI's breach of contract and tortious interference with a contract claims.

Riley testified that she agreed with GSI's determination that the cost to develop its trade secret was about $3 .3 million. Riley indicated that this sum represented an “actual loss to GSI” in that “the value [of GSI's trade secret had] decreased because of Boeing's use of the trade secret.” Yet, Riley did not testify as to the actual value of GSI's trade secret or the actual diminution in value of either GSI's trade secret or GSI, itself, as a result of the defendants' actions. Moreover, Riley admitted that there was no evidence of Boeing taking any contracts away from GSI. The insufficiency of the testimony of both Clawson and Riley as evidence of actual loss to GSI allegedly caused by the defendants is reinforced by the testimony of GSI's operations manager, Jennifer Lopatin. Lopatin admitted that GSI could not “point to any money, whether it's a million or half a million, that was actually lost in terms of a contract or any actual money.” In short, she stated, GSI “ha[d not] actually lost [any] money.”

Supreme Court of Virginia COLLELO v. GEOGRAPHIC SERVICES, INC. Nos. 101411, 101421 (January 13, 2012)

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Punitive Damages Still must meet prevailing

egregious standard

Actual malice; recklessness to demonstrate a conscious disregard of the party

High hurdle

Not often awarded

Question the utility and downside of asserting

Not typically covered by insurance

Empire Trucking v. Reading Anthracite Coal 71 A.3d 923 (June 21, 2013)

No precise formula for determining if a defendant's conduct is improper for purposes of a tortious interference claim. Case-by-case analysis is needed.

“[C]entral inquiry" in that regard is "whether the defendant's conduct is sanctioned by the rules of the game which society has adopted.”

Conduct went beyond the rules of the game. The defendant lied, saying that payment was en route when it was not. It lied to the subcontractors about payment. It drove the subcontractors to it to the other party’s detriment.

The court refused to conclude that the alleged legitimate ends justified its improper means. A party, when pursuing a legitimate interest, still must abide by the rules of the game.

$2 million punitive award upheld. 47

Thank You

Communication of information by, in, to or through this seminar and its materials, and your participation in this seminar (1) is not provided in the course of and does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from a qualified, retained attorney. You should not act upon any such information without first seeking qualified professional counsel on your specific matter.

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