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Monday, April 30, 2007

Generalized Economic Interest: No Defense to Tortious Interference

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It was previously noted that, last month, White Plains Coat & Apron v. Cintas was argued before the New York Court of Appeals.  (For a recap of the facts: see the original post).  The Second Circuit had certified the following question to New York's highest court:

“Does a generalized economic interest in soliciting business for profit constitute a defense to a claim of tortious interference with an existing contract for an alleged tortfeasor with no previous economic relationship with the breaching party?”

In a unanimous decision written by Chief Judge Kaye, the New York court answered the question in the negative.  The court's analysis is after the jump:

It is a familiar proposition that one "who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract." *** Though long a part of our law, this commonly asserted tort continues to generate a spate of decisions, with sometimes varying views. At bottom, as a matter of policy, courts are called upon to strike a balance between two valued interests: protection of enforceable contracts, which lends stability and predictability to parties' dealings, and promotion of free and robust competition in the marketplace.

While New York law recognizes the tort of interference with both prospective and existing contracts, "greater protection is accorded an interest in an existing contract (as to which respect for individual contract rights outweighs the public benefit to be derived from unfettered competition) than to the less substantive, more speculative interest in a prospective relationship (as to which liability will be imposed only on proof of more culpable conduct on the part of the interferer)." ***

In a contract interference case-as here-the plaintiff must show the existence of its valid contract with a third party, defendant's knowledge of that contract, defendant's intentional and improper procuring of a breach, and damages.*** In response to such a claim, a defendant may raise the economic interest defense-that it acted to protect its own legal or financial stake in the breaching party's business. The defense has been applied, for example, where defendants were significant stockholders in the breaching party's business; *** where defendant and the breaching party had a parent-subsidiary relationship; FN7 where defendant was the breaching party's creditor; *** and where the defendant had a managerial contract with the breaching party at the time defendant induced the breach of contract with plaintiff.***

A defendant who is simply plaintiff's competitor and knowingly solicits its contract customers is not economically justified in procuring the breach of contract.*** In other words, mere status as plaintiff's competitor is not a legal or financial stake in the breaching party's business that permits defendant's inducement of a breach of contract. We do not subscribe to the District Court's view that "the only answer is to go out and do it also to the other guy." Rather, the answer is succinctly articulated in the New York Pattern Jury Instructions: "When the defendant is simply a competitor of the plaintiff seeking prospective customers and plaintiff has a customer under contract for a definite period, defendant's interest is not equal to that of plaintiff and would not justify defendant's inducing the customer to breach the existing contract." *** To conclude otherwise-to answer the certified question in the affirmative-would blur the distinction between tortious interference with existing, enforceable contracts and tortious interference with prospective contractual relations, where, as a matter of policy, the balance of interests is different.

Finally, we note that protecting existing contractual relationships does not negate a competitor's right to solicit business, where liability is limited to improper inducement of a third party to breach its contract. Sending regular advertising and soliciting business in the normal course does not constitute inducement of breach of contract.*** A competitor's ultimate liability will depend on a showing that the inducement exceeded "a minimum level of ethical behavior in the marketplace."***

(Emphasis in the original; footnotes omitted).

White Plains Coat & Apron v. Cintas.

[Meredith R. Miller]

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