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.
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.
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.