Business Torts and Employment Law
© Bob E. Lype, 2005
Prepared in connection with the seminar, "Business Torts," presented by Lorman Education Services in Nashville, Tennessee, on July 20, 2005.
The term "business torts" has been coined in recent years to generally describe a number of different types of claims, usually involving economic and business losses caused by some sort of wrongful conduct, other than a breach of contract. Most often the terms is used to refer to claims such as fraud, misrepresentation, inducement to breach contract, interference with business relations, unfair competition, trademark or trade name infringement, and the like. Sometimes the term is also used to refer to certain fiduciary duty claims, good faith and fair dealing claims, and even RICO claims.
Sometimes the claims and theories underlying "business torts" intersect with employer-employee relations and the field of employment law. In fact, there seems to be no limit to the unique claims and theories asserted by and against employers and employees, or asserted between employers concerning employees.
This article will focus upon three particular types of business tort claims in the context of employment law: (1) fraud and misrepresentation claims; (2) certain fiduciary duty claims; and (3) claims involving inducement to breach, interference with employee relations, and "pirating away" employees.
II. FRAUD AND MISREPRESENTATION – DECEPTION IN THE HIRING PROCESS.
Fraud and misrepresentation can arise in various contexts in the employment relationship. Applicants and employees can falsify their credentials in order to gain employment or promotions. By the same turn, employers sometimes use promises to lure prospective employees to change jobs. In both cases, trickery and deceit are used to induce another to make an employment decision, and the result could be an employment-based business tort claim.
(A) Deception by the Employer.
Misrepresentation by employers can lead to liability, particularly when the employer has misrepresented something to a prospective employee in the course of the hiring process. Many employers' lawyers view a 2000 New Jersey jury verdict in favor of an employee for $10 million as a wake-up call regarding such situations. In that case, former pro football player Phil McConkey was being recruited by an insurance brokerage firm to leave his current employment and accept a similar job in a different state. He had heard rumors that the company might be the target of a takeover, so he asked the CEO about the rumors. The CEO denied them, even though in actuality the takeover process was already underway. Seven months after McConkey left his old job and took a job with the brokerage, the acquisition took place and he lost his position. Even though McConkey understood that he was an at-will employee, the jury found that the employer had engaged in intentional misrepresentation, and it awarded McConkey $5 million for punitive damages, $3 million for lost wages, and $2 million for emotional distress damages. The trial court reduced the award to $6 million, and the appellate court affirmed the verdict. McConkey v. AON Corporation, 354 N.J. Super. 25, 804 A.2d 572 (N.J. Super. App. 2002).
Other courts have reached similar results. See Meade v. Cedarapids, Inc., 164 F.3d 1218 (9th Cir. 1999) (applying Oregon law, held there was sufficient evidence to permit the case to go to the jury on a claim that the employer misrepresented to a prospective employee that operations were "ramping up" when, in fact, a decision had already been made to close the facility); Lazar v. Superior Court of Los Angeles County, 12 Ca. 4th 631, 909 P.2d 981 (Cal. 1999) (fraud recognized where employer falsely represented that company was "strong financially" and that plaintiff's job would be secure, inducing him to leave a secure job and relocate from New York to California); Berger v. Security Pacific Info. Sys., Inc., 795 P.2d 1380 (Colo. App. 1990) (jury's fraud verdict upheld where employer concealed the fact that the project for which the employee was hired was operating at a loss and at a substantial risk of being terminated in the near future); Wildes v. Pens Unlimited Co., 389 A.2d 837 (Me. 1978)(actionable misrepresentation when employer told recruit he had a secure place in the company, even though a corporate restructuring was pending).
Could something like that happen to a Tennessee employer? Possibly.
Tenn. Code Ann. § 50-1-102 provides that it is unlawful for any person to "induce, influence, persuade or engage workers to change from one place to another in this state, or to bring workers of any class or calling into this state to work in any type of labor... through or by means of false or deceptive representations, false advertising or false pretenses, concerning the kind and character of the work to be done, or amount and character of the compensation to be paid for such work, or the sanitary or other conditions of the employment...". (Emphasis added). Not only is a violation of the statute a Class B misdemeanor, but the statute also gives the employee a right to sue for damages, as well as attorney's fees and costs. While it appears that this statutory cause of action has been rarely used by Tennessee employees, employers should be aware that it exists.
Besides this statute, Tennessee employees might be able to state a cause of action against employers for common law fraud or negligent misrepresentation, depending upon the circumstances. The employee would need to be able to prove the requisite elements of these causes of action, but there is nothing which would make them any less viable in the employment context. Moreover, since the claims are based in tort, it would make no difference whether the employee was "at will" or under a contract of employment for a specific term. Employees may find it difficult to prove that an employer knew its statements were false at that time they were made, but if that can be proved (as in the McConkey case, discussed above), the potential liability could include punitive damages.
For example, in Jarrett v. Harrison Epperly & Epperly, Inc., 896 F.2d 1013 (6th Cir. 1990), the employer enticed the employee to leave his old job with the promise of part ownership after ten years. In the following ten years, the company prospered. Just before the employee was to be made part owner, the employer sold the business, and the employee was out of luck. He sued for breach of contract, fraud and promissory fraud, and the jury found in his favor for $800,000. The Court of Appeals affirmed the verdict.
Sometimes the employee who is induced to change jobs by misrepresentations of the employer may sue under a theory of promissory estoppel or implied contract, and some Tennessee courts have shown a willingness to consider such claims, even when the employee was "at will." For example, in Richardson v. Goodall Rubber Co., 1986 Tenn. App. LEXIS 3237 (August 19, 1986), the employee left her old job based upon the promises and inducements of a new employer, but then the new employer declined to hire her, after she had already resigned. The trial court found that the employee had relied to her detriment on the promises of the new employer, and therefore she was entitled to recover under the theory of promissory estoppel. The Court of Appeals affirmed the judgment.
By comparison, in Duncan v. American Technical Assoc., Inc., 1988 Tenn. App. LEXIS 407 (July 15, 1988), the employee was promised a job in Tennessee, whereupon he quit his old job in Arizona and bought a house in Tennessee. On the day he was to start, he was told that he was not qualified for the position. He sued the employment agency which had lined up the job (but not the employer), claiming fraudulent inducement. The trial court granted summary judgment to the agency, but the Court of Appeals reversed.
In Georgio v. Howmet Corp., 1992 U.S. App. LEXIS 11235 (6th Cir. 1992), the plaintiff claimed that she moved her family from New Jersey to Tennessee in reliance upon a promise of employment, only to be told that there was no position available once she had moved. She sued the employer under the theories of breach of an oral contract, misrepresentation, promissory fraud, and promissory estoppel. The employer was granted summary judgment on the first three claims, and the promissory estoppel claim went to the jury, which found in favor of the employer. The Sixth Circuit affirmed the judgment, with little discussion of the theories, because of the employee's failure to take required procedural steps at the trial level.
Similar claims have been addressed by Tennessee appellate courts just within the last year. For example, in Gardner v. Anesthesia & Pain Consultants, P.C., 2004 Tenn. App. LEXIS 813 (November 30, 2004), a physician relocated and took a job following an interview and exchange of letters negotiating terms of a written employment agreement, which was supposed to include a 2-year term. After working several months without a written agreement, the employer terminated the physician's employment, largely because a hospital administrator had indicated that he did not want the physician to work in his hospital. The physician sued his employer for breach of contract, fraud, negligent misrepresentation, promissory estoppel and promissory fraud. The trial court dismissed the misrepresentation claims, but the case proceeded to trial on the other claims, resulting in a directed verdict for the employer on most claims and a jury verdict for the employer on the promissory fraud claim. The Court of Appeals first found that the employer's supposed representations about the terms of a written employment agreement, which included a promise to try to "hammer out the final details," did not constitute a misstatement of any past or present fact. Therefore, there was no fraud or negligent misrepresentation, but there might have been promissory fraud. However, the Court of Appeals found that the jury verdict in favor of the employer on the issue of promissory fraud was supported by the evidence. Finally, the Court of Appeals found that the physician's breach of contract claim was not tenable because a "contract to make a contract is not a contract at all."
In Parnell v. Apcom, Inc., 2004 Tenn. App. LEXIS 858 (December 21, 2004), a corporate Vice President claimed she was repeatedly told that she was being groomed to be the next President, but then her employment was terminated as a cost-saving measure. She sued for age and gender discrimination, as well as for breach of contract and under the theory of promissory estoppel. With respect to her promissory estoppel claim, the plaintiff stated that she had made investments in reliance upon the promises that she would be elevated to President, but the Court of Appeals found that it would not have been reasonable for her to act in reliance upon the vague statements she alleged.
In Chopra v. U.S. Professionals, LLC, 2005 Tenn. App. LEXIS 62 (February 2, 2005), the plaintiff won a substantial verdict against his former employer and the owner of the employer-company for intentional misrepresentation (i.e., fraud) and breach of contract. The jury verdict of $126,900 in compensatory damages and $90,000 in punitive damages was affirmed by the Court of Appeals. The plaintiff was an Indian citizen. He proved to the satisfaction of the jury and the Court of Appeals that, while the plaintiff was in India, the defendant employer offered him a job in Tennessee as a computer analyst, at a salary of $42,000. In addition, the employer promised that he would obtain the necessary visa for the plaintiff to work in the United States. When he arrived, the employer refused to employ the plaintiff as a computer analyst, but employed him at less than minimum wage to work as a cashier in gas stations owned by the employer. Under the facts of the case, the jury found for the plaintiff, and the Court of Appeals affirmed.
In Lynn v. Expediters Express, Inc., 2005 Tenn. App. LEXIS 123 (February 25, 2005), the plaintiff sued her employer for misrepresentation related to health insurance coverage. She completed an application for group health insurance, and her employer withheld premium deductions from three of her paychecks, but the insurance company eventually declined to provide group coverage. In reliance upon getting group health coverage, the plaintiff's husband put off seeking medical treatment for undiagnosed symptoms he was having. He was later diagnosed with throat cancer, and he and plaintiff began incurring medical bills related to treatment of the cancer. Plaintiff filed suit for conversion of the premium payments withheld from her paychecks, fraud, negligent misrepresentation, promissory fraud, breach of contract, and violations of the Tennessee Consumer Protection Act. Following a bench trial, the trial court found for the plaintiff under several theories, and it awarded her actual damages, which it trebled, plus punitive damages. (The total award, however, was less than $20,000). The Court of Appeals held that there was no proof of justifiable reliance to support a claim of fraud or negligent misrepresentation, since the plaintiff could not prove that she incurred any medical bills in reliance upon anything her employer had said. Instead, she had incurred the medical bills on account of her husband's health. The Court of Appeals also reversed the judgment for punitive damages, and it left the plaintiff with a judgment for $225 for the insurance premiums which were withheld by the employer, plus interest.
Finally, in Sircy v. Metropolitan Government of Nashville, 2005 Tenn. App. LEXIS 270 (May 3, 2005), the plaintiff was a patient care technician at Vanderbilt Medical Center. Based upon an on-line job advertisement, she applied for a dispatcher position with the Metro Government of Nashville, which was supposed to pay nearly $30,000 per year. She was offered the job and left her position at Vanderbilt. Two days after beginning her work for Metro Government, she was told that there had been a job restructuring, and that her annual salary would actually be $24,000. She worked for 5 ½ months for Metro Government, then resigned and returned to employment at Vanderbilt. However, because she had left Vanderbilt, she lost certain seniority rights and other benefits. She sued Metro Government, apparently under the theory of promissory estoppel and detrimental reliance, and the trial court found in her favor on these grounds, awarding her back pay and front pay damages. For reasons not entirely clear from its opinion, the Court of Appeals viewed the case as a breach of contract case and not a promissory estoppel case. It affirmed the finding of liability for breach of contract, but it held that "back pay" damages were not available in a breach of contract case. (This holding does not resolve whether "front pay" damages might be available in a promissory estoppel/detrimental reliance case).
(B) Deception by the Employee or Applicant.
When a job applicant lies about his or her credentials on an application or resume, and as a result gets a job (or in the case of an existing employee, a promotion) for which he or she is not qualified, the employer has the right to terminate the employment. But does the employer have a claim or cause of action against the employee, and if so, is it a "business tort" claim?
In the real world, it would rarely be productive or advisable for the employer to pursue a damages claim under such circumstances. Frequently the guilty applicant or employee would have limited means to pay any judgment. There may be some circumstances which would warrant the assertion of such a claim, however, such as where the employee's inadequacy has cost the employer a significant account. In addition, asserting such claims against a former employee could be a strategic move in some cases, particularly when an employer is sued on account of the employee's actions, in which case the employer may assert a third-party claim against the employee for indemnification, if for no other reason than to create an opportunity to shift focus from the employer's acts or omissions. If there is a reason for an employer to assert such a claim, the general rules of the law of fraud should apply.
More likely, however, the employer's discovery of application or resume fraud arises after an employee or ex-employee has asserted a legal claim against the employer. In such cases, the employer sometimes learns in the investigation and discovery process that the employee lied about his or her qualifications. In that event, the "after-acquired evidence" of the employee's fraud can form the basis for a defense limiting the employer's liability for a possible "front pay" award, if the employer can establish that it would have terminated the employment, had it discovered the fraud. The employer does not escape liability for its unlawful or discriminatory acts toward the employee, but his or her claims for front pay money damages may be eliminated. See McKennon v. Nashville Banner Publishing Co., 513 U.S. 352 (1995).
Employers should be mindful that resume fraud has become big business in recent years. A number of web-sites offer phony academic degrees, and screening services report that some job-seekers have become sophisticated in their trickery, going so far as using fake toll-free telephone numbers answered by web-site operators who "verify" a job-seeker's education, or in some cases even hiring hackers to break into university databases and insert names into class lists. Apparently the ease of resume fraud and the difficulty of employers in verifying information is leading to an increase in the practice. The background search firm ADP Screening and Selection Services found in a 2003 study that more than 50% of persons it screened had submitted false information, compared to about 40% in 2002.
III. FIDUCIARY AND EMPLOYEE DUTY CLAIMS.
Separate parts of this seminar and separate sections in these materials will deal with claims for breaches of various types of fiduciary duties, as well as trade secrets, non-competition agreements and "unfair competition." The employer-employee relationship is typically also a principal-agent relationship, and an employee (i.e., the agent) is generally held to owe certain fiduciary duties to his or her employer (i.e., the principal), regardless of whether the employee is bound by a non-competition, non-solicitation or non-disclosure agreement. While a detailed discussion of these topics is contained elsewhere in these materials, they bear noting in the context of business torts and employment law.
Most frequently, these issues arise when a former employee has set up a competing business with an ex-employer, particularly when the former employee has solicited other employees to join the venture, or when the former employee has successfully taken one or more large accounts or pieces of business from the ex-employer. Sometimes the ex-employee uses trade secrets or confidential and proprietary business information of the former employer in the competing business. If the employer was wise enough to require a non-competition, non-solicitation and/or non-disclosure agreement, then the dispute will likely center on the enforceability of the agreement, and that topic is covered in detail separately in these seminar materials. Likewise, certain actions may violate trade secret laws regardless of whether there was a non-disclosure agreement in place, and that topic is also covered in more detail separately in these materials.
When there was no non-competition or non-solicitation agreement in place, can the former employer nonetheless assert legal claims against the departed, now-competing ex-employee? In some cases, the answer is yes. Most frequently these claims involve breaches of fiduciary and other duties by the departed employee, and sometimes the employer can be quite successful, depending upon the facts of the case. As a general rule, the law protects freedom of trade and competition, and our society encourages entrepreneurial ventures. However, sometimes the departing employee "steps over the line" and breaches duties owed to the employer, especially when his or her scheme was hatched and put into motion while still employed.
(A) Sources of the Duty.
As noted above, employer-employee law (formerly referred to as "master-servant law") is governed in part by the law of agency, with the employer as a "principal" and the employee as an "agent." See Restatement (Second) of the Law of Agency, § 2, comment a, and § 25 ("the rules applicable generally to principal and agent as to the creation of the relation, delegability and capacity of the parties apply to master and servant").
"An agent is a fiduciary with respect to matters within the scope of the agency and the relationship implies the principal has reposed trust and confidence in the agent, who is bound to exercise the utmost good faith, loyalty and honesty toward the principal." Roberts v. Iddins, 797 S.W.2d 615, 617 (Tenn. App. 1990)(emphasis added); Knox-Tenn Rental Co. v. Jenkins Ins., Inc., 755 S.W.2d 33, 36 (Tenn. 1988).
As to matters within the scope of the agency (i.e., the employment), an employee is bound to exercise good faith, honesty and loyalty toward his employer, and to follow instructions, make full disclosure of all material facts relevant to the agency, to keep records and render accounts, and to not act adversely to the interests of the employer without his consent. "An employee has an implied duty to act solely for the benefit of the employer in all matters within the scope of the employee's employment, avoiding conflicts between the employee's duty to the employer and the employee's self-interest. An employee must not engage in acts which could injure the employer's business or financial interests." 27 Am.Jur.2d "Employment Relationship" § 216.
(B) Tennessee Cases Applying These Standards.
In an unreported case from 1986, Baker v. Battershell, 1986 Tenn. App. LEXIS 3124, a certain travel agency employee attempted unsuccessfully to purchase the business from the owner, eventually threatening to leave, start her own agency, and take other employees with her. The employee had no non-compete or non-solicitation agreement. Her employment was terminated, as was the employment of the other employees who indicated they were interested in going with her, and they commenced the competing business. The proof showed that before leaving her employment, the employee had discussions with the co-workers, she contacted large clients to seek commitments from them, she photocopied client files, copied computer disks, and caused certain documents to be re-routed to her home address. The Court of Appeals noted that an employee "may anticipate future termination of employment and, while still employed, make arrangements for some new employment by a competitor, or the establishment of his own business in competition with his employer. However, he may not solicit his employer's customers for his own benefit, before he has terminated his employment. This would constitute a breach of the undivided loyalty which the employee owes to his employer while he is still employed." (Emphasis added). Despite the actions of the departing employee, the Court affirmed the dismissal of the employer's claims, noting that the employees had "merely notified the customers as to their intentions. They did not actively try to undercut the plaintiff's business by offering lower prices or making promises or offers. They did not deceive customers... We cannot say the evidence preponderates against the trial court's finding that the defendants did not actively solicit plaintiff's clients..."
In an unreported case from 1996, Knott's Wholesale Foods, Inc. v. Azbell, 1996 Tenn. App. LEXIS 774, 12 BNA IER CAS 663, an employee who worked as a route salesman became dissatisfied with his pay and decided to go into business for himself. While still employed, he had conversations with many of the employer's customers regarding whether they would continue to purchase from him, if he were to go into business for himself. He told them of his plans, and that he would "appreciate [their] doing business with [him]," and in discovery he admitted that he did "ask for their business." After the employee left, the employer lost two-thirds of its customers on his route, and it sued him for breach of the fiduciary duty of loyalty. (There was no non-compete or non-solicitation agreement). The trial court granted summary judgment for the employer and the Court of Appeals affirmed with regard to the breach of fiduciary duties claim. It noted: " During the employment relationship, an employee has a fiduciary duty of loyalty to the employer. The employee must act solely for the benefit of the employer in matters within the scope of his employment. The employee must not engage in conduct that is adverse to the employer's interests. The duty of loyalty includes, of course, a duty not to compete with the employer during the employment relationship, even in the absence of a noncompetition agreement." (Emphasis added). In addition, the Court noted that the law distinguishes between solicitation by an employee during the employment relationship and solicitation after the employment has been terminated. It explained:
After the termination of his agency, in the absence of a restrictive agreement, the agent can properly compete with his principal as to matters for which he has been employed... Even before the termination of the agency, he is entitled to make agreements to compete, except that he cannot properly use confidential information peculiar to his employer's business and acquired therein. Thus, before the end of his employment, he can properly purchase a rival business and upon termination of his employment immediately compete. He is not, however, entitled to solicit customers for such rival business before the end of his employment nor can he properly do other similar acts in direct competition with the employer's business. (Emphasis added).
The Court held that the employee's "conversations with customers went beyond merely notifying [them] of his intentions or posing 'brief, non-specific, or strictly hypothetical' inquiries. He asked for their business and even assured them he could supply the same products at the same prices as Knott's. This is active solicitation. Azbell's conduct was a breach of his fiduciary duty to his employer to refrain from actions adverse to the employer's interests and, in particular, the duty not to compete with the employer during the employment relationship, even in the absence of a noncompetition agreement."
In Venture Express, Inc. v. Zilly, 973 S.W.2d 602 (Tenn. App. 1998), the Court considered similar issues in a somewhat more limited context, as the defendant was a former president of the plaintiff corporation who went into competition upon the termination of his employment. This case discusses fiduciary duties owed by reason of status as a corporate officer, not necessarily by reason of the employment relationship, and it also discusses claims of usurpation of corporate opportunity.
In 2001, in another unreported decision of the Tennessee Court of Appeals, FTA Enterprises, Inc. v. Pomeroy Computer Resources, Inc., 2001 Tenn. App. LEXIS 116, there are multiple lessons regarding business torts in the employment context. For purposes of the present discussion, it is worth noting that the Court affirmed a jury verdict in favor of the plaintiff employer for $920,000. The case involved a computer business employee who gave competitors of his employer pricing and other information to permit the competitors to compete, as well as soliciting employees to leave. While the employer asserted claims including tortuous interference with contract and business relations, it also included claims for breach of the employee's fiduciary duty of loyalty. Regarding these claims, the Court of Appeals held that the employee breached his duty of loyalty "by giving [the competitor] confidential information regarding [the employer's] relationship with [a customer] which he acquired while working for [the employer]." (Emphasis added). Once again, a sizeable judgment against the employee and the competitor was affirmed, including an award for punitive damages.
A concise statement of the scope of an employee's fiduciary duty is found in the 2003 unreported case of Boothe v. Fred's, Inc., 2003 Tenn. App. LEXIS 582, 31 Employee Benefits Cas (BNA) 2260. The case involved a claim for breach of an employment agreement and a defense based upon "for cause" termination of employment. Regarding an employee's duty of loyalty, the Court stated:
We equate breaches of duty of loyalty with the acts of a traitor. Traditional examples of breaches of loyalty duties in the employment context include acts of an employee in direct competition with the financial, proprietary, or business interests of an employer, thereby placing the personal interests of the employee before those of the employer, the sale or distribution of the employer's protected trade secrets, and a myriad of other destructive acts amounting to more than a mere mistaken judgment or negligence. Breaches of loyalty are most often intentional, destructive acts completed explicitly for the employee's own self-interests, in direct violation or competition with the interests of the employer. (Emphasis added).
In Efird v. Clinic of Plastic Reconstructive Surgery, P.A., 2003 Tenn. App. LEXIS 935, a physician-employee without a non-competition agreement began taking steps to open his own practice, in competition with the employer. Among other things, he mis-directed certain funds to his own bank account and made specific plans and arrangements for his own, separate office. The employer discovered these actions and terminated the physician's employment. When he sued for recovery of certain fees, the employer counterclaimed for fraud, breach of contract and breach of fiduciary duties. The Court of Appeals reversed the lower court's denial of summary judgment to the employer, in effect granting the employer summary judgment on the fiduciary duty claims. It cited Knott's Wholesale Foods, Inc. v. Azbell, supra, for the proposition that an employee's fiduciary duty of loyalty requires an employee to "act solely for the benefit of the employer in matters within the scope of his employment. The employee must not engage in conduct that is adverse to the employer's interests." While the physician argued that he committed the acts in question only after he had made the decision to leave his employment, the Court chided him for "attempting to serve two masters, and by doing so he was totally wrong. As a matter of law, his actions constitute a breach of the employee's fiduciary duty of loyalty." (Citation omitted). The Court further noted that the remedy for breach of the duty of loyalty by an employee is disgorgement of the profits or benefits received by the employee as a result of his disloyal activities, as well as a surrender of any compensation paid to the employee during the period of the breach. The employer can recover the employee's profits, even if the employer did not suffer direct losses.
Finally, in February, 2004, the Tennessee Court of Appeals rendered a lengthy, unreported decision in a case which has been bouncing around the appellate courts for at least nine years. The case is B&L Corporation v. Thomas and Thorngren, Inc., 2004 Tenn. App. LEXIS 94, 20 BNA IER CAS 1712. (The case was previously the subject of a reported opinion in 1995 at 917 S.W.2d 674, as well as a previous unreported opinion in 1996). In summary, the plaintiff employer was in the business of providing unemployment cost control systems and other professional services. It developed a program for clients to seek proper tax credits. It hired one of the defendants as a vice-president in 1982 and another in 1992, and both defendants had employment agreements with non-competition covenants. The defendants sought to purchase the employer's business, and when that was unsuccessful, they left employment and started their own, competing business. They successfully solicited one of the employer's large customers to terminate its service agreement with the employer and enter an agreement with their new business. The employer filed a civil action, which went through various rounds of appeals, amendments, etc. Regarding fiduciary duties, the employer asserted that the defendants had breached their duties by, among other things, failing to inform the employer of their secret takeover plans, failing to inform the employer of each other's plans to quit and form a new firm, disclosing the employer's confidential information to their new firm, soliciting clients and customers, and generally subordinating the employer's interests to their own. In its 2004 opinion, the Court of Appeals held that some of the alleged breaches were not breaches, but others were. In light of the high rank and position of the defendant employees, the Court of Appeals held that while they were entitled to make "certain preparations toward the establishment of a competing business, including the leasing of office space, equipment, and furniture, and the connection of certain utilities," other elements of their "covert scheme" violated their fiduciary duties. In particular, they were found to have violated their fiduciary duties as executive officers by failing to tattle on one another about their respective intentions, as well as in soliciting two other key employees to leave the company and come to work for them. With regard to damages, the Court held that the proper measure of damages included lost profits and other consequential losses, and if intent is proved, "punitive damages appear permissible for breach of fiduciary duty." However, under the facts of the case, the plaintiff was held to have failed to prove actual damages for the breaches of fiduciary duties, and therefore punitive damages were not recoverable.
IV. INDUCEMENT TO BREACH AND INTERFERENCE CLAIMS.
The topics of inducement to breach contract and interference with business relations will be considered in further detail in the following section of these seminar materials. The reader may wish to cross-reference those materials for a discussion of the elements of these business tort claims and potential defenses.
In addition, the reader may wish to consult the author's article, "A Murky Intersection Between Employment Law and 'Business Torts,'" which appeared in the November, 2002 edition of the Tennessee Bar Journal (Vol. 38, No. 11) for a more detailed discussion of the present topic.
As reflected in the following section of these seminar materials, "interference with contract" or "inducement to breach contract" contemplates some action by a stranger or third party which results in a termination or breach of a contractual relation. An employment relationship, whether at will or for a set term, is a contractual relationship. Therefore, Tennessee has long recognized a claim when a third party interferes with, or causes the breach or termination of, an employment relationship. However, in 2002, the Tennessee Supreme Court decided Trau-Med of America, Inc. v. Allstate Insurance Company, 71 S.W.3d 691 (Tenn. 2002), which for the first time recognized a separate claim or cause of action for interference with "business relationships" which are not necessarily the subject of a contract. Whereas previously Tennessee law required an existing contract in order to maintain an interference claim, after Trau-Med Tennessee recognized a new type of business tort – interference with business relations. This new claim might also have implications in the field of employment law, as well.
(A) Interference with At Will Employment. Employment is "at will" when the relationship is subject to termination by either the employer or the employee, with or without notice, and with or without a sufficient "cause." However, even if employment is at will, and even if there is no signed employment agreement the employment relationship is still contractual in nature.
(1) Case Law.
For many decades Tennessee courts have said that employees have a "property right" in continued employment, which cannot be interfered with by a stranger to the contract without "justifiable reasons." If a third party interferes with the employee's property right in continued employment, that third party can be held liable in tort for the interference. See Dukes v. Brotherhood of painters, Decorators & Paperhangers of America, Local Union No. 437, 191 Tenn. 495, 235 S.W. 2d 7 (1950)(a painter claimed that a local union procured termination of his employment by telling the employer that he had been expelled from the union and that the union would go on strike if he was not fired); Large v. Dick, 207 Tenn. 664, 343 S.W.2d 693 (1960)(also involving a painter whose employment was terminated due to interference by the local painters' union). In the early cases, the courts focused upon whether the interfering party had a "privilege or justification" for the actions, which required an inquiry into the actor's motivation and means.
Because this tort requires interference by a non-party to the contract, it cannot be asserted by a terminated employee against the employer. However, somewhat frequently employees assert this type of claim against a supervisor who caused the termination. The Tennessee Supreme Court has clarified that in order to assert a claim against a supervisor, the employee must show that the supervisor was acting out of personal motives, and not acting while wearing the hat of a employee and agent of the employer, in procuring the discharge. Otherwise, if the supervisor was motivated by the company's interests, then he would not be standing in the relationship of a third party to the contract. See Forrester v. Stockstill, 869 S.W.2d 328 (Tenn. 1994)(finding that claims against a board of directors could not proceed because of insufficient evidence that the directors were motivated by personal reasons); Nelson v. Martin, 958 S.W.2d 643 (Tenn. 1997)(likewise declining to permit the claims because the parties causing termination were not acting as "third parties" to the employment relationship).
In deciding whether a supervisor, director, or corporate officer was acting as a "third party" to the employment relationship, rather than acting under the authority of and as an agent of the employer, a terminated employee must put on proof that the termination was motivated by personal reasons. This is a fact-specific inquiry into the motivations behind the action, which at first blush might seem to cut against summary judgment. However, as the above cases show, the courts will impose a burden on the employee to come forward with some specific evidence of personal motivation, or else summary judgment will be granted. In a more recent case, Lyne v. Price, 2002 Tenn. App. LEXIS 461 (W.S. of Court of Appeals, decided June 27, 2002), the Court of Appeals reversed the trial court's grant of summary dismissal of the employee's claims, finding that the employee (secretary to former University of Memphis basketball coach George "Tic" Price) had sufficiently pled facts which, if proved, could support the employee's claim that the coach's actions "were motivated substantially by malice or his own personal interests rather than in furtherance of his employer's interests." According to the secretary, she had refused to falsify the coach's expense accounts or approve purchases exceeding her authority, and she was thus labeled disloyal and her employment was terminated.
Finally, in FTA Enterprises v. Pomeroy Computer Resources, Inc., 2001 Tenn. App. LEXIS 116 (E.S. of Court of Appeals, decided February 12, 2001), the Court of Appeals clarified that a claim for interference with at will employment can only be asserted by employees who lose their jobs, and not by employers who have lost employees to the "pirating" efforts of other employers. In that case, the complaining employer had lost virtually its entire workforce, leaving it unable to service its contracts and allowing the defendant employer to usurp its business. Still, the Court of Appeals held that the claim could not be asserted by the employer.
(2) Effect on At Will Employment.
Most employers understand that at will employment means they can terminate employment at any time, with or without notice, and for good cause, bad cause, or no cause at all, so long as the employment was not terminated based upon the employee's membership in some "protected class" (e.g., sex, race, religion, disability, etc.). Many employees, on the other hand, do not understand the basic premise of at will employment. According to a 1997 survey, 89% of employees believe that an employer is not permitted to terminate employment on account of "personal dislike."
The tort of interference with at will employment may prove that the employees' beliefs are closer to the truth than many employers understand. Whenever "personal dislike" by a supervisor, corporate officer or director can be characterized as hostility, ill will, bad faith, spitefulness, or some similar synonym, and when that supervisor makes an employment decision based upon such feelings, the employee may have a valid argument that the supervisor was standing as a third party to the employment relationship and should be liable for tortuous interference.
And if employees are permitted to delve into supervisors' motivations, the supervisors will be more and more cautious about their decisions. Some commentators fear that this is akin to forcing the supervisors to have "just cause" for a termination, and since an employer can only act through its agents (including supervisors), the argument is that the de facto effect of this type of claim is to restrict the employer's freedom in termination decisions.
(3) Typical Claims Scenarios.
As noted above, Tennessee courts limit claims for interference with at will employment to claims asserted by an individual employee, not by an employer. In this vein, individual claims for interference by a third party to the employment relationship will most often arise in one of two contexts: (1) claims against a supervisor or corporate officer who, acting as a third party, caused the employment relationship to be terminated; or (2) claims that a former employer has interfered with a subsequent employment relationship, such as by passing along malicious or false information, or by making some sort of threats against the new employer.
With respect to claims against a supervisor or corporate officer, it will be necessary to inquire into that person's motivations in suggesting termination of employment. As a general rule, this is a question of fact and may make summary judgment difficult to obtain. Moreover, it would not be uncommon for a supervisor or corporate officer to have "mixed motives," i.e., to be motivated by both his or her own interests and by the interests of the company. The question then devolves to a matter of degrees – which motivations were more compelling? While there is no Tennessee case addressing this point, it would seem arguable that so long as the supervisor could show that the company's interests were at least a "substantial" motivation, liability should be avoided. However, once again, because these are questions of fact, it may be difficult for the employer or the supervisor to escape on summary judgment.
With respect to claims against former employers, these would seem to be very similar to defamation claims. For example, a former employer might spread a falsehood that the employee was engaged in illegal gambling, or that she committed some dishonest act, which might cause a subsequent employer to terminate the employment. However, there are some noteworthy distinctions which might make interference claims more attractive than defamation claims under such circumstances. Under defamation law, there must be a false and defamatory statement of fact, and the truthfulness of the statement is a defense. In contrast, truth is not necessarily a defense to an interference claim, since the focus is on the propriety of the communication, how it was communicated, and what motivated it. In addition, whereas defamation requires a false statement of fact, interference claims could be based upon statements of opinion.
Other possible claims scenarios for interference with at will employment include situations when a co-worker makes an "either he goes or I go" threat, or against an employer who demands enforcement of a questionable non-compete agreement. Interference claims might be companion tort claims in cases involving wrongful discharge or constructive discharge, and they might lead to liability for discriminatory decisions by employers who would otherwise be too small to be covered by anti-discrimination statutes.
(B) Interference with Business Relations.
In the Trau-Med case of 2002, supra, the Tennessee Supreme Court recognized a new cause of action in Tennessee – intentional interference with business relationships, whether contractual or not. The Court stated the elements of the claim as follows:
- an existing business relationship with specific third parties or a prospective relationship with an identified class of third persons;
- the defendant's knowledge of that relationship, and not a mere awareness of plaintiff's business dealings with others in general;
- the defendant's intent to cause the breach or termination of the business relationship;
- the defendant's improper motive or improper means; and
- damages resulting from the tortuous interference.
With regard to "improper motive or means," the Court instructed that while this requires a case-by-case analysis, a plaintiff must show that "the defendant's predominant purpose was to injure the plaintiff." 71 S.W.3d at 701, n. 5. Examples of "improper" conduct cited by the Court include the use of illegal or independently tortuous means (such as violations of statutes, regulations, or recognized common law violations), the use of violence, threats, intimidation, bribery, unfounded litigation, fraud, misrepresentation or deceit, defamation, duress, undue influence, misuse of inside or confidential information, breach of a fiduciary relationship, means which violate some recognized trade or professional standard, or unethical conduct such as sharp dealing, overreaching or unfair competition. Id.
Examples listed by the Court in the Trau-Med opinion make it clear that this new cause of action may have implications in the area of employment law. In fact, the very first example the Court gives of "prospective relationships" which might be subject to interference is "interference with the prospect of obtaining employment or employees." 71 S.W.3d at 701.
While reported appellate cases in the employment law arena applying this new claim have not yet been seen, some believe it is only a matter of time before "interference" claims become tag-along tort claims in a host of employment cases. Moreover, lawyers should note that the new claim does not merely run in favor of employees – it can also run in favor of employers ("the prospect of obtaining employees"). Thus, while the old claim of interference with at-will employment was not available to employers, the new claim might be applicable, such as when a competitor "pirates away" a workforce or spreads disinformation about a company, so long as the other elements are met. Likewise, "blackballing" an employee within a trade group or industry may now be actionable by the employee.
The focus in employment cases will continue to be on the actor's "motive and means," which could mean fact-specific inquiries which make the prospects of summary judgment quite difficult. These types of claims could become a significant new weapon among plaintiffs' lawyers in the employment law field.