A Murky Intersection Between Employment Law And "Business Torts"

Published in Tennessee Bar Journal, Vol. 38, No. 11, November, 2002.

Recipient, Justice Joseph W. Henry Award for Outstanding Legal Writing, presented by the Tennessee Bar Association, June, 2003.

"Business torts" is a generic term which has gained wide use in the last decade to describe a loose category of various claims for economic and business losses caused by wrongful conduct, apart from a breach of contract. Typically "business torts" encompass such claims as fraud, misrepresentation, unfair competition, trademark or trade secret infringement, and wrongful interference with contracts or business relationships (existing or prospective). Recently the Tennessee Supreme Court changed the legal landscape in Tennessee by expressly recognizing a cause of action for intentional interference with business relationships, including prospective and non-contractual relationships, in Trau-Med of America, Inc. v. Allstate Insurance Company¹. In so doing, the Court overruled its decision five years earlier in Nelson v. Martin², wherein the Court had rejected prospective and non-contractual interference claims. While Tennessee has long recognized a "business tort" cause of action for wrongful interference with, or inducement to breach, an existing contractual relationship, there had been considerable confusion regarding whether Tennessee would recognize a claim for wrongful interference with a relationship not subject to an existing contract, but which was prospective in nature. With Court of Appeals decisions going both ways even after the Supreme Court had ruled in Nelson that "interference with prospective economic advantage" was not a valid claim in Tennessee³, the Supreme Court removed the confusion in Trau-Med of America by specifically recognizing a cause of action for tortious interference with business relationships, whether existing or prospective in nature, and whether or not memorialized by an enforceable contract.

But what does the Trau-Med of America decision have to do with employment law, and how might the law of "business torts" intersect with the field of employment law? Actually, Tennessee has long recognized a cause of action for intentional interference with employment relations, even when the employment is at will and not subject to a contract for a definite term. This has never been a particularly favored cause of action by the courts, and lawyers representing employees often overlook it. However, in light of the Supreme Court's recent recognition of interference with prospective business relations, combined with trends in other jurisdictions, lawyers representing both employees and employers will likely become quite familiar with traditional "business tort" claims and defenses in the employment law setting. The expansion of interference torts will likely lead to the assertion of more claims in more contexts, and some fear that as a result there will be further erosion of the doctrine of employment at will.

Interference With At Will Employment in Tennessee. In 1950, the Tennessee Supreme Court decided a forerunner to modern interference cases in the context of at will employment, Dukes v. Brotherhood of Painters, Decorators & Paperhangers of America, Local Union No. 437.⁴ In Dukes, a painter claimed that the local painters' union had procured the termination of his employment by telling his employer that he had been expelled from the union and that the union would go on strike if he was not fired. The Court quoted from other authorities which stated that even an at will employee has a "property right" in continued employment, and it determined that the painter had stated a recognizable cause of action. The Court also noted that to be actionable, the interfering conduct must be "without justifiable reasons," which calls into play the motive and means used to accomplish the interference.

The Supreme Court decided a similar case involving a painter whose employment was terminated due to interference by the local painters' union in Large v. Dick in 1960.⁵ In that case, the Court reiterated that "every man has the right of property in his own labor, and the right to work without interference; and whoever intentionally interferes with this right is liable in tort for the damages caused, unless he can show a privilege or justification for such interference."⁶ Again the Court's caveat regarding "privilege or justification" made a fact-sensitive inquiry into the actor's motivation and means necessary.

Several similar opinions followed in the succeeding decades.⁷ In 1994, the Tennessee Supreme Court again rendered a critical decision in Forrester v. Stockstill.⁸ In Forrester, the medical director of a non-profit blood center told the board of directors that the executive director was vindictive and committed various improper acts, and the board then terminated the executive director's employment. He sued, claiming that the medical director and another board member were acting outside the scope of their duties when they procured his discharge. The executive director won at the trial court and in the Court of Appeals, but the Supreme Court reversed and dismissed the case, holding that there was insufficient evidence that the directors were acting out of personal motives in causing the discharge. The Supreme Court noted that individuals can only be sued for interference when they stand as "third parties" to the employment relationship in procuring the discharge, which turns almost entirely upon the motive and means employed.

The Supreme Court again weighed in on this issue in Nelson v. Martin in 1997,⁹ which involved a three-shareholder close corporation which ousted one of the directors and officers following a dispute. The dismissed officer sued for interference with the employment relationship, interference with prospective economic advantage, and breach of fiduciary duties. The primary holding in Nelson, as mentioned above, was that Tennessee did not recognize a claim for interference with prospective economic advantage. With regard to the claim of interference with the employment relationship, the Court held that the other shareholders/directors were not acting as "third parties" to the employment relationship, as required.

In 2000, the Court of Appeals decided two cases affirming these principles. In Kent v. Edwards & Assoc., Inc.,¹⁰ a corporate officer and director was alleged to have interfered with the plaintiff's employment, but he was not shown to have been acting as a "third party" to the relationship. In Leemis v. Russell,¹¹ a somewhat different scenario was presented. In that case, the employee claimed his former employer had interfered with his subsequent employment by complaining to the subsequent employer about legal claims the employee had asserted. The Court affirmed that "it is well settled that an individual has a property interest in his or her labor and has the right to work without unjustified interference," and that the defendant's motive and means of interference are keys to the question of liability. The Court reversed the trial court's summary judgment in favor of the employer, finding that a sufficient claim had been asserted and a trial was warranted.

In 2001, the Court of Appeals was faced with a unique situation – one employer sued another employer for "pirating away" nearly its entire workforce, leaving the complaining employer unable to service its contracts and allowing the defending employer to usurp its business. In that case, FTA Enterprises, Inc. v. Pomeroy Computer Resources, Inc.,¹² the Court held that the tort of interference with employment can only be asserted by employees who have lost their jobs, and not by employers who have lost their workers.

Finally, the Court of Appeals recently decided a similar case, Lyne v. Price,¹³ which involved claims of the former administrative secretary to the athletic department at the University of Memphis against the University's former head basketball coach, George "Tic" Price. The coach was the secretary's direct supervisor. She alleged that he asked her to falsify expense accounts and approve purchases exceeding her authority, and when she refused, that she was labeled as disloyal and ultimately terminated from employment. She sued the University for retaliatory discharge in the nature of a whistleblowing claim, and she sued the coach individually, claiming that his decision to fire her was motivated by his own interests, rather that those of the University. Thus, the employee alleged, even though the coach was acting as her supervisor in reaching his decision to fire her, he was actually operating as a "third party" to the employment relationship. The Court of Appeals reversed the trial court's dismissal of the secretary's claims, holding that she had sufficiently alleged facts which, if proved, would support a ruling that the coach was acting as a third party who interfered with her employment. In particular, the Court noted that the question at trial would be whether the coach's actions "were motivated substantially by malice or his own personal interests rather than in furtherance of his employer's interests."

Possible Erosion of At Will Employment. As shown by a review of appellate cases in Tennessee, claims for unlawful interference with at will employment have generally proved difficult for employees to win. However, in two of the most recent cases, the Court of Appeals has concluded that the employees deserved trials to adjudicate their claims. While this may or may not signal a trend in Tennessee, similar decisions from courts in other states have caused some to question whether claims for intentional interference with at will employment may move from an afterthought or companion claim status to a significant threat to the general rule of at will employment.

Lawyers and employers are familiar with the basic premise of at will employment, that absent a contract of employment for a particular term, either the employer or the employee may end the relationship at any time, with or without notice, and with or without "cause." The exceptions include situations when an employer has terminated employment on account of the employee's status in some "protected class" (e.g., sex, race, religion, disability), or when the termination offends some public policy (e.g., termination on account of making workers' compensation claims, or whistleblowing activities).¹⁴ Many employees, on the other hand, do not really understand the employment at will rule. In a 1997 survey, 89% of respondents believed that an employer is not allowed to terminate an at will employee because of "personal dislike."¹⁵ Given the state of the law regarding claims for interference with at will employment, those employees may be closer to the truth than most employers believe. When the "personal dislike" leading to a termination of employment can be characterized as hostility, ill will, bad faith, spitefulness, or some similar synonym, then the at will employee may, indeed, have a claim against the supervisor who fired him.

But that would be a claim against the supervisor, not against the employer – so how would at will employment be affected? Some would argue that by imposing liability on an officer or a supervisor for a discharge motivated by improper reasons, courts are moving closer to requiring employers to have "just cause" for any termination. If the supervisor can be held liable, the argument goes, the employer's freedom to discharge its employees is undercut. Since a corporate employer can only act through its agents and supervisors, the supervisor's fear of lawsuits will have the de facto effect of restricting the employer's freedom. In fact, a few courts have even gone so far as to impose liability on the corporate employer for the wrongful acts of its supervisor under the theory of respondeat superior. While it is doubtful that a Tennessee court would hold the employer liable under respondeat superior,¹⁶ since it is doubtful that the supervisor's wrongful actions would be deemed within the scope of employment,¹⁷ there may be some merit to the argument that the chilling effect of these claims on supervisors could impact the principles behind employment at will.

Typical Claim Scenarios. As noted above, one of the fundamental axioms of interference claims is that a party cannot be held liable for wrongfully interfering with its own contract – instead, there must be some interference from a separate, third party. Most interference with employment claims arise in one of two contexts: (1) claims that a supervisor or officer, acting as a "third party," caused the termination of employment; or (2) claims that a former employer interfered with a subsequent employment relationship or prospect, such as by passing along malicious or false information, or making some sort of threats against the new employer.

When the claim is against a supervisor or officer, the first key is establishing that the defendant was acting as a "third party" to the employment relationship. As the Court pointed out in Lyne v. Price, a supervisor may be liable for acts outside the scope of his authority, acts done with malice, or acts done to serve his own interests. If the supervisor or officer has mixed motives, i.e., he is both motivated by his own interests and in furtherance of the company's interests, the question becomes the degree to which each motivated his actions. So long as furtherance of the interests of the company was a "substantial" motivation, there will be no liability. This may prove to be a formidable obstacle for the employee. However, as a general rule, an actor's motivation is a question of fact and properly a jury question, so summary judgment may be difficult for employers to obtain. If the employee can simply make it to the jury, research has shown that juries tend to be fairly sympathetic to employees. Thus far Tennessee courts have not addressed the degree of proof necessary to make the supervisor's motivation a jury question. Arguably, so long as the employee affirmatively alleges that the supervisor acted as a third party to the employment relationship, and so long as there is at least some proof which would warrant that inference, the question should be submitted to the jury. This could make interference claims powerful weapons for employees.

With regard to claims against former employers who pass along information which influences a future employer's decisions, these claims are akin to defamation claims. However, there are some noteworthy distinctions which might make interference claims more attractive than defamation claims. First, under defamation law, there must be a false and defamatory statement of fact, but 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.¹⁸ In addition, whereas defamation law requires false statements of fact, interference claims could be based upon statements of opinion. Like many states, Tennessee has a statute which provides qualified immunity for employers making job references, so long as the information conveyed is truthful, fair and unbiased, and so long as it is not known to be false or made with reckless disregard for its truthfulness, deliberately misleading, or done for a malicious purpose.¹⁹ This again focuses on the actor's state of mind and intentions, and communications which would meet the standard for interference would likely escape the limited immunity of the statute.

Apart from these typical scenarios, interference claims may also be asserted in other contexts, such as against a non-supervisory co-worker who makes an "either she goes or I go" threat, or against an employer who demands enforcement of a questionable non-compete agreement. Interference is a likely companion tort in many cases alleging wrongful discharge or constructive discharge. Interference claims could lead to liability for discriminatory decisions by employers who would otherwise be too small to be covered by anti-discrimination laws, and unlike Title VII claims, there are no "caps" on damages available under interference claims. These factors make interference claims more attractive to employees and lawyers who represent them.

Intentional Interference with Business Relationships. In the Trau-Med of America decision earlier this year, the Tennessee Supreme Court expanded the scope of interference claims in Tennessee by recognizing a claim for interference with business relationships, whether contractual or not. In so doing, the Court stated the elements of the claim as follows: (1) an existing business relationship with specific third parties or a prospective relationship with an identifiable class of third persons; (2) the defendant's knowledge of that relationship and not a mere awareness of the plaintiff's business dealings with others in general; (3) the defendant's intent to cause the breach or termination of the business relationship; (4) the defendant's improper motive or improper means; and (5) damages resulting from the tortious interference.²⁰

With regard to the types of "prospective" relationships which might be subject to interference, the Court adopted the discussion from Restatement (Second) of Torts § 766B, comment c, which includes: "interference with the prospect of obtaining employment or employees, the opportunity of selling or buying land or chattels or services, and any other relations leading to potentially profitable contracts. Interference with the exercise by a third party of an option to renew or extend a contract with the plaintiff is also included."²¹

The Court also discussed in more detail the requirement that the defendant must have acted "improperly," noting that the question is dependent upon the particular facts and circumstances in each given case. The Court did clarify, however, that a plaintiff must show that "the defendant's predominant purpose was to injure the plaintiff."²² In addition, the Court gave examples of types of "improper" conduct, including the use of illegal or independently tortious means (such as violations of statutes, regulations, or recognized common law rules), 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.²³

As is clear from these descriptions, the newly-recognized tort of interference with business relations is potentially very broad and far-reaching. Interestingly, the first example of prospective relationships listed by the Supreme Court is the "prospect of obtaining employment or obtaining employees."²⁴ While it was previously arguable that an employee could not sue a former employer for interfering with a prospective job by communicating with the potential employer or "blackballing" the employee within a trade or industry, as opposed to interfering with an existing job, clearly now such interference claims are recognized. Moreover, interference with business relationships does not simply run in favor of employees – it may run in favor of employers who have lost the "prospect of obtaining employees." Thus a claim for "pirating employees" or spreading disinformation about an employer to a potential job pool may now be actionable, if the other requirements are met.

In Trau-Med of America, the Court cited a string of Tennessee cases originating with its 1915 decision in Hutton v. Watters²⁵ for the proposition that interference with non-contractual relationships has long been proscribed. Hutton and its progeny recognized a claim for intentional interference "without justification or excuse."²⁶ This led to some confusion over whether "justification or excuse" was an affirmative defense, or rather the lack thereof was an element of the claim, as well as confusion as what actions may be justified or excused. For example, under the Restatement view, "legitimate competition" is viewed as a justification defense to a claim for interference with business relations, but it is not recognized as a justification defense to claims of interference with an existing contract.²⁷ Regardless, the inquiry centers upon the defendant's motivations in acting, which is consistent with the Supreme Court's ruling in Trau-Med of America that a plaintiff must show "improper motive or means."

Under the Restatement view, the motive of the interfering party is but one factor in the analysis of whether the conduct was "improper." The other pertinent factors include the nature of the conduct, the interests of the person with whom the actor interfered, the interests sought to be advanced by the actor, the societal interests in protecting the freedom of the actor's conduct and the contractual interests of the other person, the proximity or remoteness of the actor's conduct to the interference, and the relations between the parties.²⁸ The Tennessee Supreme Court, on the other hand, has focused the inquiry solely upon the actor's means, motives and "predominant purpose" in determining whether the interfering conduct was "improper."²⁹ It is unclear whether the Court might expand the inquiry to include the other factors outlined in the Restatement, under appropriate circumstances. Even if it does so, however, the inquiry remains very fact-specific and makes the prospects of summary judgment on such claims quite difficult.

Prospects for the Future and Lessons for Employers. The recent recognition of claims for interference with business relations in Tennessee, combined with recent appellate decisions in Tennessee (and in other states) allowing employees to proceed with claims of interference with at will employment, should be heeded by lawyers who represent the interests of both employees and employers. Given Tennessee's steadfast adherence to the employment at will doctrine, employees will likely continue to have a difficult time prevailing on such claims, but the focus on fact-sensitive inquiries about the motivations of the parties could mean that fewer cases are dismissed on summary judgment. The traditional wisdom is that any time an employee's claim gets to the jury, there is a significant risk for the employer. No doubt there will be legitimate claims made, and most likely there will be victories for some employees. Interference claims may become more than an afterthought and companion tort for plaintiffs' lawyers. Both plaintiff and defense lawyers should be prepared to tackle these issues, and to advise their clients regarding these claims.

Employers and their lawyers already know that firing decisions and job references should be carefully considered, and employment decisions should never be personally motivated. Supervisors should always be able to articulate why any decision was in the company's interests, and they should contemporaneously document those reasons in most cases. However, supervisors are human beings, and the plain truth is that most human decisions are motivated by numerous factors. The more a supervisor allows her personal feelings to enter into her employment decision-making, the more she risks exposing herself to personal liability, and the more she may risk exposing the company to liability. Grudges, vindictiveness, petty arguments, jealousies, retribution, and the like are part of the human condition, but to the greatest extent possible, they must be removed from employment decisions and job references.

The law of "business torts" is filled with arcane rules and exceptions, traps and snares. To some degree employment law is likewise obscure and convoluted. When these areas intersect, there are bound to be interesting cases and outcomes. Tennessee lawyers should keep their eyes on developments in the area of interference claims, and either directly or indirectly those developments will impact employers and employment law.

71 S.W.3d 691 (Tenn. 2002), decided March 25, 2002.

958 S.W.2d 643 (Tenn. 1997).

See FTA Enterprises, Inc. v. Pomeroy Computer Resources, Inc., 2002 Tenn. App. LEXIS 116 (E.S. of Court of Appeals, decided Feb. 12, 2001)(affirming a substantial award for tortious interference with business relations and contractual relations); Stone v. Faulkner, Mackie & Cochran, 2001 Tenn. App. LEXIS 33 (M.S. of Court of Appeals, decided January 22, 2001)(noting that while Tennessee did not recognize a claim for interference with prospective business relations, it did recognize a claim for interference with business relations, even if such relations are not evidenced by an enforceable contract); Watson's Carpet & Floor Coverings, Inc. v. McCormick, 2002 Tenn. App. LEXIS 67 (M.S. of Court of Appeals, decided January 30, 2002), vacated on reh'g, 2002 Tenn. App. LEXIS 238 (decided April 15, 2002)(after originally ruling that interference with a business relationship is not recognized in Tennessee, the Court of Appeals subsequently vacated that ruling when the Court's ruling in another, prior case was called to its attention).

191 Tenn. 495, 235 S.W.2d 7 (1950).

207 Tenn. 664, 343 S.W.2d 693 (1960).

207 Tenn. at 667-68.

See Schwab . International Ass'n of Bridge, Structural & Ornamental Iron Workers, 482 S.W.2d 143 (Tenn. App. 1972)(affirming a jury verdict in favor of the employee); Ladd v. Roane Hosiery, Inc., 556 S.W.2d 758 (Tenn. 1977)(claims against the employee's supervisor were allowed to proceed); Woods v. Helmi, 758 S.W.2d 219 (Tenn. App. 1988)(dismissal of claims against employee's supervisor was affirmed because supervisor had been acting within the scope of his employment); Deiters v. The Home Depot, Inc., 1992 Tenn. App. LEXIS 437 (M.S. of Court of Appeals, decided May 29, 1992)(again, no claim allowed against a supervisor who was acting within the scope of his authority).

869 S.W.2d 328 (Tenn. 1994).

958 S.W.2d 643 (Tenn. 1997).

2000 Tenn. App. LEXIS (E.S. of Court of Appeals, decided January 25, 2000).

2000 Tenn. App. LEXIS 348 (W.S. of Court of Appeals, decided May 24, 2000).

2001 Tenn. App. LEXIS 116 (E.S. of Court of Appeals, decided February 12, 2001).

2002 Tenn. App. LEXIS 461 (W.S. of Court of Appeals, decided June 27, 2002).

See, e.g. Clanton v. Cain-Sloan Co., 677 S.W.2d 441 (Tenn. 1984).

See Pauline T. Kim, Bargaining with Imperfect Information: A Study of Worker Perceptions of Legal Protection in an At-Will World, 83 Cornell L. Rev. 105 (1997).

See, e.g. Bernstein v. Aetna Life & Cas., 843 F.2d 359 (9th Cir. 1988); Capiello v. Ragen Precision Indus., 471 A.2d 432 (N.J. Super. Ct. App. Div. 1984); Yaindl v. Ingersoll-Rand Standard Pump-Aldrich Div., 422 A.2d 611 (Pa. Super. Ct. 1980).

Under Restatement (Second) of Agency § 235 (1959), an employee who is motivated solely by a desire to injure another employee or to advance his own interests does not act within the scope of employment.

According to Restatement (Second) of Torts § 772(a)(1977), providing truthful information is not actionable as interference. Some courts, on the other hand, decline to follow this proposition and say that truthfulness of the information only gives a qualified privilege, subject to a review of the motivations behind the statement. See C.N.C. Chem. Corp. v. Pennwalt Corp., 690 F. Supp. 139 (D.R.I. 1988); Stonestreet Marketing Services, Inc. v. Chicago Custom Engraving, Inc., 1994 U.D. Dist. LEXIS 5548 (N.D. Ill., decided April 26, 1994). No Tennessee case has addressed this issue.

Tenn. Code Ann. § 50-1-105.

71 S.W.3d at 701.

Id. at n. 4 (emphasis added).

Id. at n. 5.

Id.

Cf. FTA Enterprises, Inc. v. Pomeroy Computer Resources, Inc., supra, n. 12 and accompanying text, which holds that the tort of interference with at will employment does not run in favor of employers, but only employees.

132 Tenn. 526, 179 S.W. 134 (1915).

179 S.W. at 135.

See Restatement (Second) of Torts § 768(2)(1977).

Restatement (Second) of Torts § 767 (1977).

71 S.W.3d at 701, n. 5.

View all articles by Bob E. Lype