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INTENTIONAL INTERFERENCE WITH PROSPECTIVE ECONOMIC
ADVANTAGE: ELEMENTS OF THE CAUSE OF ACTION
Introduction:
As one expert put it, the very nature of
competition is “interference with the prospective economic
advantage” of one’s competitor”. How, then, can such
activity be considered a wrongful act allowing one to sue the culprit?
The
key element of the cause of action is, “…proving that the
defendant not only knowingly interfered with the plaintiff’s
expectancy (of a profitable business relationship), but also that
defendant engaged in conduct that was wrongful
by some legal measure other than the mere fact of the interference itself.” Delta Penna v Toyota Motor Sales,
Inc., (1995) 11 CA 4th 376.
What
are those “wrongful acts” that go beyond acceptable
competition? What defenses may apply?
That
is the subject of this article.
Acts Constituting Wrongful
Interference with Economic Relationship:
Essentially,
a defendant must have taken acts based on improper motives and use improper means. The means
may be “improper” by falling into several categories:
1.
Violation of a statute or other regulation.
2.
Violation of a common law principle (libel; slander; fraud, etc.)
3.
Violation of an established trade or professional standard (license
requirements; ethical rules applied to a profession, etc.)
Typical
examples of improper means include violations of federal or state law;
unethical business practices; violence; misrepresentation; unfounded
litigation; defamation; trade libel; trademark infringement. It should be noted that many of these
wrongful actions are causes of action in themselves. (One can sue for
trade libel and also for the resultant interference with a prospective
business advantage as two separate causes of action.) But the wrongful
act need not, itself, be actionable.
Thus,
if a defendant violated a statute that does not, itself, allow one to sue
him for damages, that same violation can allow one to file suit for
interference with an economic relationship. (Typically, a statute
prohibits a certain type of production technique and allows the county
(only) to seek an injunction but does not allow a private individual to
file suit). However, that private individual could file suit if the purpose of the violation was wrongful
interference with an economic relationship. (See Stella Foods, Inc. v.
Superior Court (1997) 60 CA 4th 299).
Other
typical examples: a doctor who violates state law as to professional
standards or a lawyer who violates laws as to acceptable solicitation of
clients; a contractor who ignores or violates the building codes; a
competing business that routinely ignores zoning laws or commits a public
nuisance.
All these activities, perhaps not allowing anyone other than the
government to sue, can still allow the wronged party to sue IF it forms
part of intentional efforts to disrupt a business relationship.
Intentional and Knowing
Purpose and Causation
It is
also vital to demonstrate that the defendant intended to do the wrongful act and knew of the economic
relationship that was to be destroyed. This, obviously, also requires
proof that plaintiff enjoyed such a business relationship or was likely
to. This could be proved by past business with the alienated customer;
evidence of likelihood of future business; and the actual knowledge that
defendant must have had both that the business relationship existed and
meant to perform the wrongful act to disrupt it.
Plaintiff
must also prove that there was a causal connection between the
intentional interference and the disruption of the business relationship.
In one case, a plaintiff sued our client making such a claim but sought
to ignore the fact that cost of raw materials had recently soared thus
making both his business (and our client’s) no longer competitive
against local manufacturers. Summary judgment was granted in our
client’s favor against the plaintiff. Put simply, plaintiff must show that
without defendant’s interference, plaintiff would have entered into
a concrete business relationship with the third party from which plaintiff
would have profited financially.
Damages
are the lost profits, of course, but punitive damages may also lie. See
the article on Torts, Negligent and Intentional
for a fuller discussion of punitive damages.
Defenses Allowed:
1. JUSTIFICATION.
In
both this business tort and the related business tort of interference
with an existing business contract, there exists the defense that the
interference was “justified.” As with all affirmative
defenses, the defendant has the burden of proving that the acts were
justified.
Typical
instances of justification are defendant arguing that the First Amendment
Right to Free Speech allowed the admittedly erroneous statement; another
justification is the existence of another conflicting duty, such as
fiduciary duty imposed upon defendant to communicate to the third party;
need to protect the public safety or morals, etc. For example, a
defendant could claim that he communicated information to the director of
a customer because the director was a beneficiary of a trust in which the
defendant was the trustee, thus he “had to” try to protect
them, even though the information was perhaps inaccurate.
To
determine whether this defense is valid, the courts balance the social and private importance of the objective
advanced by the interference against the interest interfered with.
The courts consider all circumstances including the nature of the
defendant’s conduct and the parties’ relationship. (Lowell
v Mother’s Cake and Cookie Co. (1978) 79 CA 3d 13). Defendant
essentially has to prove that the motivations in taking the action were
the welfare of society or someone to whom he or she owed a duty rather
than alienation of business for profit.
Thus,
if I contact your customer and indicate that I have heard that you are
not making your bread products with the correct ingredients and it turns
out that it was not true yet I ruined that relationship, but I can prove that I was worried
about danger to the health of the customers and thought there was an immediate
health risk, it is up to the court to determine if my action was
“justified.”
2. FAIR
COMPETITION
This
privilege allows a competitor to divert business to itself as long as it uses
fair and reasonable means. (PMC Inc. v Saban Entertainment, Inc. (1996)
45 CA 4th 579). Competition in business, even when the rival
is ruined, is NOT ordinarily actionable provided the competition does not
involve wrongful conduct such as fraud, misrepresentation, coercion,
intimidation or illegal molestation of the rival. There is no tort existing by fair competition; one can beat a
business rival to prospective customers in the absence of prohibition by
statue, illegitimate means or some other unlawful element.
3. ABSOLUTE PRIVILEGE IN OFFICIAL
PROCEEDINGS
Under
California Civil Code Section 47 (b) an absolute privilege exists for,
“…communications made in judicial, legislative or other
official proceedings authorized by law…” and may not be a
basis for tort. The concept behind that section is to allow litigants and
witnesses the utmost freedom of access to the courts without fear of
being hurt later by derivative tort actions. The privilege applies to any
such communications but does not apply to communications outside of the
confines of the judicial proceeding. To apply the privilege:
The
communication must be made by litigants or other participants
authorized
by law.
The communication must be made
in a judicial or quasi judicial proceeding.
The communications was made to
achieve the objectives of the litigation.
The communication has some
connection or logical relation to the action.
50
C3d 212.
Thus,
if I commence an obviously futile action against a competitor for the sole
purpose of being able to testify falsely about him to alienate a
customer, this privilege would not apply.
4. FIRST AMENDMENT PRIVILEGE
The
right to free speech is, of course, a Constitutional right that cannot be
abridged easily. The proof required to establish this defense depends on
the circumstances involved but NOT on the motive of the person making the
statement. “In this regard, it does not matter whether the
defendant’s speech was motivated by economic self interest because
motives are irrelevant when it comes to public debate. (Hoffmann Co. v.
E.L. DuPont DeNemours & Co. (1988) 202 CA 3d 390. The essential
question, thus, is the existence of a greater public purpose for the
statement being made.
5. STATUTE OF LIMITATIONS
The
applicable statue of limitations is two years, usually beginning from the
date of the wrongful act.
CONCLUSION
Almost
always this particular cause of action is pled with a plethora of others,
such as trade libel, slander and libel, misrepresentation, etc. Since it often
has to be connected with other wrongful action to constitute its own
cause of action that is natural.
But
in terms of “unfair competition” as a family of torts, this
basic cause of action can be seen as the underpinning of the complaint
that the plaintiff advances, namely that the defendant has gone beyond
the bounds of fair competition and is engaging in wrongful acts that
makes a mockery of what a fair system of competition should entail.
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