THERE REALLY SUCH A THING
by MATTHEW J.NEGRIN
Competition is the hallmark of capitalism. So when does it cross a line? Competition torts, interference with contract and interference with prospective economic advantage, are poorly understood by many businesspeople and sometimes by lawyers, who fail to distinguish the two or overlook the risk altogether. The paradigm is simple: Company A (A-Co.) and Company B (B-Co) are competitors and A-Co has a contract or business relationship (the standards for interference differ) with Third Party. B-Co either takes Third Party’s business away or, at the very least, stops Third Party from continuing to do business with A-Co. B-Co's behavior may cross the line from fair business practices into tortious conduct. A-Co could get damages, including punitive damages, depending on the nature of B-Co's conduct.
I. Intentional Interference with Contractual Relations.
The tort of intentional interference with contract is straightforward – if B-Co intentionally causes nonperformance of a valid contract that exists between A-Co and Third Party, or causes performance of that valid contract to be more costly or more burdensome, B-Co may be liable to A-Co for A-Co's loss and may also be liable for punitive damages. The elements of intentional interference with contract are:
Because an existing contract receives stronger protections in California, this tort requires only proof of interference (such as interference causing a mere delay in performance), not breach of the underlying contract. However, the tort also requires an underlying enforceable contract. Where there is no existing, enforceable contract, only a claim for interference with prospective advantage may be pleaded.
If B-Co is found liable for Intentional Interference with Contract, B-Co can be hit with punitive damages. Careful consideration has to precede any action affecting a competitor’s contracts.
II. Interference with Prospective Economic Advantage.
There are two subsets of interference with prospective economic advantage, intentional interference with prospective economic advantage and negligent interference with prospective economic advantage, both of which impose liability for improper methods of disrupting or diverting the business relationship of another. The chief practical distinction between interference with contract and interference with prospective economic advantage is that, without a contract, the latter requires proof of a "wrongful act."
A. Intentional Interference with Prospective Economic Advantage
The tort of intentional interference with prospective economic advantage is based on the rationale that "the existence of a legally binding agreement is not a sine qua non to the maintenance of a suit based on the more inclusive wrong."1 As with intentional interference with contract, A-Co can indeed get punitive damages.
The elements of intentional interference with prospective business advantage are as follows:
The tort of intentional interference with prospective economic advantage is not intended to punish individuals or commercial entities for their choice of commercial relationships or their pursuit of commercial objectives, unless their interference amounts to conduct that is independently wrongful. Specifically, A-Co would have to show that B-Co (1) engaged in an independently wrongful act, which is defined as an act that is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard; and (2) acted with a desire to interfere or knew that the interference was certain or substantially certain to occur as a result of his or her action.
The following are examples of what does and does not constitute an "independently wrongful act" for the purposes of a claim for intentional interference with prospective economic advantage:
In Korea Supply Co. v. Lockheed Martin Corp.,2 the independently wrongful act element was satisfied by allegations of bribery and offering sexual favors in violation of the Foreign Corrupt Practices Act.
In Edwards v. Arthur Anderson L.L.P.,3 the independently wrongful act element was satisfied by the employer requiring the employee to sign, as a condition of resignation, a Termination of Non-Compete Agreement that released employer from "any and all" claims arising from employment in violation of California law.
One example of “other determinable legal standard” is when A-Co and B-Co are competitors bound by well-defined, established rules or standards of a trade, association or profession, B-Co’s conduct can be deemed an independently wrongful act if the rules or standards which B-Co allegedly violates provide for, or give rise to, a sanction or means of enforcement for a violation of this particular rule or standard (i.e. a right of arbitration between aggrieved members).
In Lange v. TIG Ins. Co.,4 the exercise of a contractual right of termination did not constitute a wrongful act.
In Arntz Contracting Co. v. St. Paul Fire & Marine Ins. Co.,5 a surety's rightful protection of its contractual rights, which interfered with A-Co's relationship with other sureties, was not deemed a wrongful act.
B. Negligent Interference with Prospective Economic Advantage.
In addition to the tort of intentional interference with prospective economic advantage, a party can also plead the tort of negligent interference with prospective business advantage. Certain aspects of the tort of negligent interference with prospective economic advantage differ from the tort of intentional interference with prospective economic advantage. It is the most difficult of the three torts to guard against. However, it also does not bring the specter of punitive damages.
To assert a claim for negligent interference with prospective economic relations, B-Co must have owed A-Co a duty of care as a matter of law. Courts have applied the following five-factor test: (1) the extent to which the transaction was intended to affect A-Co, (2) the foreseeability of harm to A-Co, (3) the degree of certainty that A-Co suffered injury, (4) the closeness of the connection between B-Co's conduct and the injury suffered, (5) the moral blame attached to B-Co's conduct and (6) the policy of preventing future harm.
Among the factors for establishing a duty of care is the "blameworthiness" of B-Co's conduct. For negligent interference, B-Co's conduct is blameworthy only if it was independently wrongful apart from the interference itself (i.e. an act that is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.)6
Further, these six factors place a limit on recovery by focusing judicial attention on the foreseeability of the injury and the nexus between B-Co's conduct and A-Co's injury. Following these principles, recovery for negligent interference with prospective economic advantage will be limited to instances where the risk of harm is foreseeable and is closely connected with B-Co's conduct, where damages are not wholly speculative and the injury is not part of A-Co's ordinary business risk.
In a lawsuit, it is the judge who must specifically state for the jury the conduct that the judge has determined as a matter of law would satisfy the "wrongful conduct" standard. After the judge specifically states for the jury the conduct that the judge has determined as a matter of law would satisfy the “wrongful conduct” standard, the jury must then decide whether B-Co engaged in the conduct as defined by the judge.
California favors competition. However, when one company steps over the line, the law will protect the injured party.
1 Buckaloo v. Johnson (1975) 14 Cal.3d 815, 823.
2 (2003) 29 Cal.4th 1134, 1153.
3 (2008) 44 Cal.4th 937, 950-54.
4 (1998) 68 Cal.App.4th 1179, 1187.
5 (1996) 47 Cal.4th 464, 475.
6 See e.g.Lange, 68 Cal.App.4th at 1187.