Tortious Interference in ISV-Partner Break Ups –
We have been getting complaints about being too much fun with too many pictures…..Scrooge…here is a 2,500 -word blog on horrible topic Tortious Interference in ISV-Partner Break Ups…the romance is gone, ISV and Partner are fighting, both talking about pulling the plug…so we start a discussion on what happens in one decided to mess with the other on the way out.
In most jurisdictions there are two types of business torts:
- Intentional interference with contract or contractual relations and
- Intentional interference with prospective economic advantage
The former derived from the tort of “inducing breach of contract” – the defendant
intentionally disrupts a contract or a business relationship that already exists between the plaintiff business and a third-party, causing the plaintiff damage. The latter, a much broader tort is really a species of the former, 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 upon the more inclusive wrong.
The tort of intentional interference with an existing contract is straightforward if one party intentionally causes non-performance between the plaintiff and a third-party they might liable to the plaintiff for its resulting pecuniary losses. This theory applies to cases where the party induces or otherwise causes the third-party to refrain from performing the contract, as well as cases where the parties intentional conduct makes contract performance impossible.
The tort of intentional interference with prospective economic advantage based upon the theory that the defendant’s conduct prevented the plaintiff from gaining the financial benefit of a contract that but for the defendant’s actions. The offending party commits this tort by inducing or causing a third-party to refrain from entering into a contract that was certain to be consummated, or by otherwise preventing the plaintiff from acquiring of continuing its prospective relations.
There is also the tort of negligent interference with prospective economic advantage which we will come back to
Elements of an Intentional Interference Claim – Tortious Interference in ISV-Partner Break-Ups
The elements of an intentional interference claim are:
( I ) an existing or prospective economic relationship between the plaintiff and a third party:
(2) knowledge by the defendant of that relationship
(3) an intentional and unjustified interference with the relationship by the defendant: and
(4) damages the plaintiff, These are discussed in turn below.
Existing or Prospective Economic Relationship
This element marks the primary difference between the two intentional interference torts. Any existing contract at issue must be valid and enforceable; a party cannot be charged with disrupting a void or unenforceable contract. This element can be the turning point of an interference case. as evidenced by a trio of Indian casino cases. In those cases. an Indian tribe entered into preliminary contracts with developers (the plaintiffs) to build and/or operate gaming casinos. A subsequent developer (the defendants) swooped in and convinced the tribe to sign with them instead. In each case, the plaintiff brought, among other things.an interference claim.
The defendants in each case argued that the plaintiff’s contracts were legally invalid because they had not been properly approved pursuant to the Indian Gaming Regulatory Act. In two of the three cases.” the courts agreed with the defendants that the contracts were invalid. However, the Northern District of California denied the defendant’s motion to dismiss because in that case. the court found that the contract at issue had made “regulatory approval” a “condition precedent” to the subsequent obligations of the parties.'” Because of the contract, on its face. was valid only in the event of regulatory approval, the defendant was unable to successfully argue invalidity due to lack of approval.
Defendant’s Knowledge of the Relationship
By definition. these are intentional torts the party had to have acted with knowledge. “If the actor had no knowledge or the existence of the contract . . . he cannot be held liable though an actual breach results from his lawful and proper acts.” Note that the defendant must have been a stranger to the relationship between the plaintiff and the third party. There is no cause of action for conspiracy to interfere that includes as a defendant a party to the contract at issue.
Defendant’s Intentional and Unjustified Interference
Many intentional interference cases come down to this element. which considers whether the defendant’s conduct was actionable. Rather than simply aggressive but lawful competition.
The first query is whether the conduct was intentional whether the defendant intended to cause the result or believed the consequences were substantially certain to occur as the result of his or her actions. Note that the question is not whether the defendant intended to engage in the accused conduct. but whether the defendant intended for that conduct to have the alleged consequences. The court will also consider whether the defendant”s conduct justified by kinds or affirmative defenses discussed below.
Plaintiff’s alleging interference with an existing contract will find it easier to prove damages that plaintiffs alleging interference with prospective contracts. Obviously, the stronger the certainty that the relations would have consummated in a contract with future economic benefits to the plaintiff but for defendant’s conduct. The easier it is to prove damages resulting from the conduct. Generally, damages that reasonably flow from the interference are recoverable, regardless of whether a breach of contract was established as between the parties to the contract. The defendant may also be liable for punitive damages in cases of particularly egregious or outrageous conduct.
Generally, damages in interference cases are compensatory damages intended to compensate a plaintiff for lost profits and consequential damages resulting from the interference. In other words. a plaintiff must prove what it lost as a result of the interference, rather than trying to prove what the defendant gained as the result of its interference: it’s generally presumed that the plaintiff’s loss equals the defendant’s gain. Some authority exists, however, for courts to examine the defendant ‘s gain instead or the plaintiff”s loss, disgorging the defendant of profits resulting from its unlawful interference, which courts say are held in ‘”constructive trust” for the plaintiff. Though an exception to the typical standard. it is appropriate in cases where the defendant’s gains were actually more than the plaintiff ‘s losses because it furthers “the policy or discouraging the conduct by depriving the tortfeasor of the opportunity to profit from wrongdoing prospective economic relations, most jurisdictions have enhanced this element.
Defenses to Interference Claims
Most of the affirmative defenses to intentional interference claims derive from the prima facie elements themselves. For example, a defendant may successfully argue that the contract at issue 1s not valid or enforceable. It is also a viable affirmative defense to argue that the defendant had no knowledge of the contract or prospective contract and.or no intent to wrongfully interfere: with that relationship.
The “terminable at will” defense has proven successful for interference defendants. Absent an independent duty to deal. such as a duty imposed by statute or contract. a party 1s privileged to refuse to do business with anyone. This comes up. for example. when the defendant has threatened to stop doing business with a third-party if that third-party enters into a contract with the plaintiff. The defendant will argue that its relationship with the third-party is terminable at will. and it can refuse to continue doing business with the third-party for any reason. The Fifth Circuit Court explained this defense in Fulton v. Hecht when it stated:
An individual can refuse to enter into a contract with or to maintain a business relationship terminable at will for any reason sufficient to himself. Even if the defendant did intentionally inflict economic harm on the plaintiff such behavior is tolerated by the law.
The “Wrongful” Element in Claims of Interference with Prospective Economic Advantage
In many jurisdictions to establish a claim of interference the plaintiff must show that the underlying act was wrongful in and of itself, independent of the interference.
Courts have varied wildly on what constitutes “wrongful” under this enhanced standard. One Arkansas court determined that wrongful meant unlawful. and nothing less than that would be actionable. A defendant seeking to increase his own business may cut rates or prices, allow discounts or rebates, enter into secret negotiation behind the plaintiff’s back, refuse to deal with him or threaten to discharge employees who do, or even refuse to deal with third parties unless they cease dealing with the plaintiff, all without incurring liability
Clearly. unlawful conduct constitutes “wrongful” conduct. In August 2008, the California Supreme Court held that an employer attempted use of a non-compete agreement to constrain a California employee’s future employment constituted intentional interference with that employee’s prospective economic advantage. Non-compete provisions are illegal under California law, so the employer’s requirement and attempted enforcement of the illegal contract constituted the wrongful act required to assert the interference claim. and the employee prevailed in the case.
But the question continues to evolve as to what type of conduct if any falling short of unlawful would still constitute a “wrongful act” sufficient to assert the interference claim Some have argued that “wrongful” conduct should include unethical conduct as well as conduct that violates industry standards and practices. California courts have defined an independently wrongful as one that is unlawful that is prescribed by some constitutional, regulatory, common law. or another determinable legal standard. California courts had previously rejected the argument that conducts violating industry standards” alone wrongful by some legal measure other than the fact of interference
Defendants acting to protect their own economic interests may enjoy a privilege against claims of interference. For example, a defendant who is a stockholder in a company, privileged to interfere with a contract between that company and a third-party if the purpose of the interference is to protect his or her monetary interest and the defendant docs do not employ improper means. Similarly. a party seeking to protect its own contract rights in good faith can not bc guilty of tortious interference with the prospective contractual relations of a proposed competitor. On the other hand. a “‘defendant who is simply plaintiff”s compel1tor and knowingly solicits its contract customers” cannot claim the economic interest privilege in mitigating breaches of those contracts.’
The catch-all affirmative defense to interference claims is the “competition privilege.”‘ Simply stated the competition privilege is a privilege afforded to parties who are in legitimate competition for the same business or contracts. the defendant argues, ..it’s not vengeful it’s just business.”‘ Put another way, it is not tortious to be a business rival to prospective customers.,.., or ··” wrongful” action to sustain a claim, a defendant’s “wrongful.
Where such a situation is created deliberately, or in California even unintentionally, the possibility of an actionable claim for negligent or even intentional tortious interference arises. The courts in California have expressly recognized the tort of negligent interference with prospective economic advantage. The claim is premised on the theory that the defendant knew or should have known that if it did not act with due care, its actions would interfere with the relationship between the plaintiff and a third-party. If the defendant subsequently fails to act with due care, causing the plaintiff foreseeable damages, it may be liable for California’s negligent interference tort.
In National Medical Transportation Network v. Deloitte & Touche (1998) 62 Cal.App.4th 412, a company brought suit against its auditors for a variety of causes of action including negligent interference with the prospective economic advantage after the defendants had resigned from their engagement without issuing an audit opinion. The plaintiff claims that it had lost a potential $10,000,000 capital investment. The defendant accountancy firm had claimed that it had good cause to resign from the engagement because it had determined that the company’s management was uncooperative, rendering financial representations unreliable and because it felt that its independence was impaired due to threats from management.
The trial court entered judgment for the plaintiff following a jury trial, but the court of appeal reversed on a number of grounds. With respect to the prospective advantage claim, it held that the jury instructions were insufficient because they did not include the “independently wrongful” element relying on Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376. In that case, the California Supreme Court had held that “A plaintiff seeking to recover for alleged interference with prospective economic relations has the burden of pleading and proving that the defendant’s interference was wrongful ‘by some measure beyond the fact of the interference itself.'” (11 Cal.4th 376, 392-393, cited in National Medical Transportation at 62 Cal.App.4th 412, 439.)
The “independently wrongful” element is frequently the linchpin of such cases. The nature of competition always creates situations where one party loses a business opportunity because it is usurped by another. It is only tortious, however, if the latter has employed some means of wrongful conduct in order to compete.
Powers v. Rug Barn (2004) 117 Cal.App.4th 1011 discusses the cause of action of interference with contract. The Court of Appeal notes that the elements usually involved in the tort of interference with contract are: (1) a valid contract between the plaintiff and a third-party, (2) the defendant’s knowledge of the contract, (3) the defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship, (4) actual breach or disruption of the relationship, and (5) resulting damage.
A plaintiff may recover damages for intentional interference with an at-will employment relationship under the same California standard applicable to claims for intentional interference with prospective economic advantage.
Reeves v. Hanlon (2004) 33 Cal. 4th 1140. To recover for a defendant’s interference with an at-will partner relationship, a plaintiff must plead and prove that the defendant engaged in an independently wrongful act, i.e., an act proscribed by some constitutional, statutory, regulatory, common-law, or another determinable legal standard that induced an at-will partner to terminate his relationship with the plaintiff. Id at 1143. Under this standard, a defendant is not subject to liability for intentional interference if the interference consists merely of extending a job offer that induces an employee to terminate his or her at-will employment. Id.
In J’Aire Corp. v. Gregory, [S.F. No. 23983. Supreme Court of California. August 13, 1979.] Appellant sought review of order of the Superior Court of Sonoma County (California) which sustained appellate’s demurrer without leave to amend and dismissed appellant’s complaint about damages based in tort for business losses
Appellant, a lessee, sued appellee, a general contractor, for damages resulting from delay in completion of the construction project at premises where appellant operated a restaurant. Appellee demurred successfully and appellant’s complaint was dismissed.
- A duty was owed by appellee to appellant.
- Appellee had the duty to complete construction in a manner that would have avoided unnecessary injury to appellant’s business, even though construction contract was with the owner of a building rather than with appellant, the tenant.
- The contractor owed a duty to avoid injury to the person or property of third parties.
- The risk of harm to appellant was foreseeable and appellant’s injury should not go uncompensated merely because it not by any injury to his person or property.