Interference Claims

Prepared in connection with the seminar, "Business Torts," presented by Lorman Education Services in Nashville, Tennessee, on July 20, 2005.

I. INTRODUCTION.

In many ways, "interference" claims are the epitome of business tort claims. They almost always involve a broken business relationship, but the "breaking" does not fit into the traditional notions of breach of contract. Frequently the business relationship in question is, in fact, memorialized by a written contract which has been broken. Sometimes the business relationship is not memorialized by a written contract or promise, but nonetheless the relationship is broken. While the former scenario (interference with a written contract) has been recognized under Tennessee law as the basis for a potential legal claim for many years, Tennessee has only recently recognized a viable, separate claim for interference with business relationships not memorialized by written contracts. And there are some situations which blur the distinctions, such as when business relationships are governed by a written agreement, but the agreement is not for a set period of time, but rather can be terminated "at will" by one of the parties.

"Interference" claims do have one thing in common – they are claims against third parties, not parties to the contract, who have acted in some manner which has caused the business relationship to end. Sometimes the third party is a competitor, sometimes it is a former employee, and sometimes it is someone who acts purely out of vengeance or malice. One of the difficulties with these types of claims is balancing the interests of "free trade" and promoting competition (typically viewed as a good thing) against protecting businesses from "unfairness" in competition. Therefore, interference claims are only viable if there has been some element of unfairness, and ordinary competition among businesses is still favored.

II. INTERFERENCE WITH CONTRACTUAL RELATIONS.

(A) Historical Perspective.

The tort of interference with contractual relations is traced back to the 1853 decision in Lumley v. Gye, 2 El. & Bl. 216, 118 Eng. Rep. 749 (Q.B. 1853). In that case, an opera singer named Joanna Wagner was under contract to sing exclusively at one theater for the 1852 season, but she was enticed away by another theater owner to perform in his theater. The court drew upon a line of decisions involving enticing away another master's servant and held that the original theater owner could recover damages from the other theater owner who had induced the breach of contract. In its decision, the court emphasized the "malicious" motives for inducing the breach, and thereafter the body of developing case law has emphasized the actor's motives as a critical factor.

(B) Dual Claims in Tennessee – Statutory and Common Law.

Tennessee codified a statutory claim for inducement to breach a contract in 1907. The statute has gone through multiple reenactments, and the current version is found at Tenn. Code Ann. § 47-50-109, which provides:

It is unlawful for any person, by inducement, persuasion, misrepresentation, or other means, to induce or procure the breach or violation, refusal or failure to perform any lawful contract by any party thereto; and, in every case where a breach or violation of such contract is so procured, the person so procuring or inducing the same shall be liable in treble the amount of damages resulting from or incident to the breach of the contract. The party injured by such breach may bring suit for the breach and for such damages.

With respect to the common law cause of action, perhaps the seminal early case in Tennessee was Hutton v. Waters, 132 Tenn. (5 Thompson) 527, 179 S.W. 134 (1915). In this case, the plaintiff ran a boarding house near a school. The school asked her to "turn out" one of her boarders, who was not a student of the school, and thereafter sought to harm her business by threatening to dismiss students if they rented from her. As a result, the plaintiff's business was virtually destroyed, and she filed suit for conspiracy to drive her out of business and intentional interference with the conduct of a lawful business. The trial court dismissed the complaint on demurrer, but the Court of Appeals reversed, and the Tennessee Supreme Court affirmed the Court of Appeals and remanded the case for trial. In so doing, the Supreme Court noted that "every one has the right to establish and conduct a lawful business, and is entitled to the protection of organized society, through its courts, whenever that right is unlawfully invaded." 179 S.W. at 135. The Court noted that "the commission of an actionable wrong is established against any one who is shown to have intentionally interfered with it, without justifiable cause or excuse. To establish justification, it must be made to appear… that it had some real tendency to effect a reasonable advantage to the doer of it." Id. Finally, the Court noted, "In short, if an act be hurtful to another, intentional, and without legal justification, it is malicious in the true legal sense." Id. In the case at bar, the school was not acting as a business rival out of competition, but instead was acting out of malice.

On its face, the Hutton case appears to support a claim for either inducement to breach an existing contract or for interference with a non-contractual business relationship. However, Tennessee courts struggled with this distinction for many decades, until it was resolved in 2002 (discussed below).

Both at common law and under the statute, the Tennessee cause of action for interference with contractual relations consists of the same elements (discussed in more detail below):

a legal contract;
the actor's knowledge of the existence of the contract;
the actor's intention to induce a breach of the contract;
the wrongdoer's actions constituting legal "malice";
a resulting breach of the contract;
the wrongful act is the proximate cause of the breach of contract;
resulting damages.

See Buddy Lee Attractions, Inc. v. William Morris Agency, Inc., 13 S.W.3d 343, 353 (Tenn. App. 1999).

While the elements of the statutory and common law claims in Tennessee are identical, there are two noteworthy distinctions. First, the statutory claim permits an award of treble damages, while the common law claim permits an award of punitive damages. Therefore, a plaintiff will have to make an election of remedies between statutory treble damages or common law punitive damages – but the plaintiff need not make the election until after the fact-finder has determined liability and the amount of damages under each theory, under the rationale that this is fair to both a plaintiff and to a defendant which has been found liable on multiple theories. Buddy Lee Attractions, Inc., 13 S.W.3d at 357. Second, Tennessee case law holds that statutory treble damages require a "clear showing" of all elements, i.e., a heightened burden of proof (that "no serious or substantial doubt can exist" as to the correctness of the conclusions drawn from the evidence). See Buddy Lee Attractions, Inc., 13 S.W.3d at 354, citing Emmco Ins. Co. v. Beacon Mut. Indem. Co., 204 Tenn. 540, 322 S.W.2d 226 (1959). On the other hand, a plaintiff pursuing the common law claim can prove his case by a preponderance of the evidence. However, in order to receive punitive damages under a common law claim, the plaintiff will have to prove the intentional or malicious conduct (a prerequisite to punitive damages) by clear and convincing evidence, as required by Hodges v. S.C. Toof & Co., 833 S.W.2d 896 (Tenn. 1992).

(C) Application of the Rules.

(1) Requirement of Three Parties. As stated in the introduction, above, interference claims are made against third parties to the contract, and they are not available to one party to a contract against another party to the contract, since those parties' rights and relationships are governed by the law of contracts, rather than the law of torts. As a result, courts sometimes are called upon to consider unique circumstances involving the identities of the parties.

A party which suffers the breach of contract as a result of interference is a proper plaintiff, but a party which has breached a contract is not. Oak Ridge Precision Industries, Inc. v. First Tennessee Bank National Ass'n, 835 S.W.2d 25, 29 (Tenn. App. 1992). If a non-party has no interest which would entitle him to bring an action to enforce a contract (such as an incidental third party beneficiary), that non-party cannot sue for inducement to breach. Willard v. Claborn, 419 S.W.2d 168, 169 (Tenn. 1967).

When a corporation is a party to a contract, an action for inducement to breach cannot be maintained against the corporation's officer, director or employee who induced the corporation to commit a breach unless that person was acting outside the scope of his or her duties to the corporation, in furtherance of his or her own personal motivations. See Forrester v. Stockstill, 869 S.W.2d 328, 334-35 (Tenn. 1994); see also discussion of interference with at-will employment, found in preceding seminar materials.

A principal may be liable for his agent's intentional interference with a contract when the agent has been acting within the scope of his authority in inducing the breach, or when the principal later ratifies the agent's actions. See Howard v. Haven, 198 Tenn. 572, 281 S.W.2d 480, 485 (1955).

Two recent opinions from the Tennessee Court of Appeals illustrate the requirement of a third party as the proper defendant. In Apollo Hair Systems of Nashville v. First Lady International Corporation, 2005 Tenn. App. LEXIS 185 (March 29, 2005), Apollo operated a retail sales business and had an exclusive contract with First Lady to sell certain hair replacement products in Tennessee. First Lady sold twenty-six of the products in Tennessee to Apollo's competitors, although it claimed this was done through inadvertence. Apollo sued First Lady for breach of contract and for statutory inducement to breach. The Court of Appeals affirmed summary judgment in favor of First Lady on the inducement to breach claim, noting that "a party to a contract cannot be held liable for procuring its own breach or termination of that contract."

A more interesting variation of this principle is found in Dowlen v. Weathers, ___ Tenn. App. LEXIS ___ (May 17, 2005; the LEXIS citation is not yet available as of the date these materials are being prepared). In this case, a real estate agent sued a broker for inducement to breach contract, causing her to lose the commissions from a property lease. The real estate agent was an independent contractor of the broker. The listing agreement she signed with the property owner provided that all commissions were payable to the broker, and the broker's agreement with the real estate agent provided that 100% of the commissions would be paid by the broker to the agent. When the property owner failed to pay commissions after his property was leased, the real estate agent sued him. In the meanwhile, the real estate agent had ended her relationship with the broker. The property owner approached the broker and convinced him to sign a complete release of all commission claims. Because the listing agreement provided that commissions were payable to the broker, this extinguished the agent's commission claim, and she had to take a non-suit against the property owner. She then sued the broker for inducement to breach contract. The trial court held for the agent and awarded her the value of the commission, which it trebled pursuant to the statute, based upon a finding that the broker acted with malice (discussed further below). In the Court of Appeals, the broker argued that he could not be held liable for inducing a breach of the agreement regarding payment of a commission because the broker was the party to the contract, to whom the commissions were payable. The Court of Appeals found that the broker was a party to the agreement in name only, and the real estate agent was the real party in interest to the agreement, since 100% of the commission earned was supposed to be paid to her. The Court held that the broker was a mere "conduit" for the commission, and therefore its argument that it could not be held liable for inducing the breach of a contract to which it was a party failed.

(2) Existence of a Legal Contract. It is fundamental that if the underlying contact is not legal and valid (e.g., it is against public policy, or unenforceable for some reason), then there can be no cause of action for inducing its breach. See, e.g., Dynamic Motel Management v. Erwin, 528 S.W.2d 819, 822 (Tenn. App. 1975)(no proof that a "valid, binding contract" existed, therefore no inducement claim). Also, once a valid contract has been repudiated by a party, there can be no claim for inducement to breach. See Watts v. Warner, 151 Tenn. 421, 269 S.W. 913 (1925). However, the mere fact that a contract might be terminable at will, such as an employment contract, does not preclude a claim under an inducement to breach theory. See New Life Corp. of America v. Thomas Nelson, Inc., 932 S.W.2d 921, 926-927 (Tenn. App. 1996).

(3) Knowledge of the Contract. Before a third party can be held liable for inducing the breach of a contract, he must know more than a general idea that the parties are in some business relationship – he must have some knowledge of the contract in question. See TSC Industries, Inc. v. Tomlin, 743 S.W.2d 169, 173 (Tenn. App. 1987)(absent knowledge of the sort of duty imposed by the contract, there is no liability for inducing its breach); Dynamic Motel Management v. Erwin, 528 S.W.2d 819, 822 (Tenn. App. 1975)(no liability where defendant knew the parties were contemplating a sale, but did not know about an actual contract). Some commentators believe the TSC Industries decision is too restrictive in appearing to require knowledge of some of the terms of the contract. The Restatement (Second) of Torts view is that "it is not necessary that the actor appreciate the legal significance of the facts giving rise to the contractual duty, at least in the case of an express contract. If he knows those facts, he is subject to liability even though he is mistaken as to their legal significance and believes that the agreement is not legally binding or has a different legal effect from what is it judicially held to have." Id. at §766, comment i.

(4) Intention to Induce Breach. Generally speaking, the intent to induce a breach of contract should be measured by the same standard as the intent required for other intentional torts – either a desire to cause the result, or knowledge to a substantial certainty that the result of the action will be a breach of contract. Negligence in acting is not a basis for liability.

"Intent" is closely related to the element of "malice" (discussed below). It requires an examination of what motivated the defendant's conduct, as well as what means were used. These questions frequently present a substantial obstacle to resolving these types of cases on summary judgment. Both direct and circumstantial evidence may be supplied.

(5) Legal "Malice". "Malice," for purposes of this tort, means the willful violation of a known right, and it does not require actual ill will or spite. See Edwards v. Travelers Insurance of Hartford, 563 F. 2d 105, 121 (6th Cir. 1977); AmeriGAS Propane, Inc. v. Crook, 844 F. Supp. 379, 389 (M.D. Tenn. 1993).

An examination of legal "malice" involves not only an examination of the actor's intent and motivations, but also questions of good faith, legal justification, excuse, and privilege (discussed further below). There is sometimes confusion as to whether justification, privilege and the like are affirmative defenses to be pled by the defendant, or whether their absence is a required pleading by the plaintiff. See, e.g., Waste Conversion Systems, Inc. v. Greenestone Industries, Inc., 33 S.W.3d 779 (Tenn. 2000)(adding to the required elements a burden upon the plaintiff to also prove that a parent corporation acted detrimentally to a subsidiary corporation's best interests, when the question was whether a parent corporation had a privilege to interfere with a subsidiary's contract). Since justification, privilege, etc. are not listed as elements in the statute, they should be treated as affirmative defenses, not as additional required averments in the plaintiff's complaint.

Finally, the recent case of Dowlen v. Weathers, ___ Tenn. App. LEXIS ___ (May 17, 2005; the LEXIS citation is not yet available as of the date these materials are being prepared) is also instructive as to legal "malice." (The facts of Dowlen are described in more detail above in Section II.C(1), pertaining to the requirement of a third party to the contract). In this case, a real estate agent sued her broker for inducement to breach a commission contract, because the broker signed a release agreement which extinguished her right to receive a commission in connection with a property lease. Regarding the issue of legal malice, the broker argued that it had no ill will in signing the release, but that it was merely acting to protect itself. Upholding the trial court's award of treble damages, the Court of Appeals noted that legal malice includes either a "willful violation of a known right" or "an act that is hurtful to another, intentional, and without legal justification." Malice of the "ill will" type is not required. In this case, the Court noted that the broker knew that the agent was entitled to the commission, that the broker signed the release without even checking with the agent (who had left the broker's employ), and that the broker had nothing to lose in signing the release, since the commissions would not be retained by the broker. Under these circumstances, the Court held that legal malice was present.

(6) Breach of Contract. It is fundamental to this tort that there was actually a breach of the contract in question. However, the language of the statute ("breach, violation, or refusal or failure to perform") could give rise to an argument that a "technical breach" is not required. Repudiation or unexcused delay in performance might also suffice.

(7) Proximate Cause. The actions of the defendant must have played an active and substantial part in the breach of contract. Because the tort concept of "proximate cause" is well developed, it bears no further discussion in these materials.

(D) Privileges, Justification, and Excuse.

As noted above, the element of legal malice implies that the defendant acted out of improper motives or through improper means, in the absence of good faith. Cases in Tennessee and in other jurisdictions hold that a defendant may escape liability for inducing a breach of contract where the defendant held some "privilege" for its actions, or where it acted with "legal justification." These amorphous concepts are sometimes hard to define and hard to grasp.

"Inducement to breach a contract will not be wrongful if the person interfering can show a justification and privilege for such interference." Edwards v. Travelers Insurance of Hartford, 563 F.2d 105, 121 (6th Cir. 1977), citing Emmco Insurance Co. v. Beacon Mutual Indem. Co., 204 Tenn. 540, 322 S.W.2d 226 (1959).

The Restatement (Second) of Torts takes a slightly different, but similar, approach. Rather than discussing privilege, justification and "malice," it focuses on whether the interference was "improper." Restatement (Second) of Torts § 767 lists the following factors in determining whether an actor's conduct in interfering was "improper":

The nature of the actor's conduct;
The actor's motive;
The interests of the other with which the actor's conduct interferes;
The interests sought to be advanced by the actor;
The social interests in protecting the freedom of action of the actor and the contractual interests of the other;
The proximity or remoteness of the actor's conduct to the interference; and
The relations between the parties.

The Restatement states: "The issue in each case is whether the interference is improper or not under the circumstances; whether, upon a consideration of the relative significance of the factors involved, the conduct should be permitted without liability, despite its effect of harm to another. The decision therefore depends upon a judgment and choice of values in each situation." Id. at §767, comment b.

In Hutton, supra, decided in 1915, the Tennessee Supreme Court addressed the concept of "justification" as follows: "To establish justification, it must be made to appear, not only that the act complained of was otherwise lawful and performed in a lawful manner, but likewise that it had some real tendency to effect a reasonable advantage to the doer of it. But in order to determine the reasonableness of such act it must be considered from the standpoint of both parties, with a view to ascertaining whether the defendant has acted merely in due exercise of his own rights to carry on business for himself." 179 S.W. at 135. In Crye-Leike Realtors, Inc. v. WDM, Inc., 1998 Tenn. App. LEXIS 641 (Court of Appeals, W.S., decided September 23, 1998), the Court stated that "interference is without justification if it 'is done for the indirect purpose of injuring the plaintiff or benefiting the defendant at the plaintiff's expense.'" (citing Bismarck Realty Co. v. Folden, 354 N.W.2d 636 (N.D. 1984)). Query: just what is an "indirect purpose," and how can it be proved?

In some instances, a defendant may be "privileged" or "justified" in inducing a breach of contract in order to protect the interests of another, particularly when the actor has fiduciary or agency-type responsibilities toward one of the parties to the contract. In Collins v. Greene County Bank, 916 S.W.2d 941 (Tenn. App. 1995), the Court discussed "the doctrine of justification," quoting from Mefford v. City of Dupontonia, 49 Tenn. App. 349, 354 S.W.2d 823 (1961): "One who is charged with responsibility for the welfare of another is privileged purposely to cause him not to perform a contract, or to enter into or continue a business relation, with a third person if the actor (a) does not employ improper means and (b) acts to protect the welfare of the other."

Finally, some commentators (and some courts) discuss a "privilege of competition" which might insulate a third party from liability for inducing a breach. However, before business competitors decide that they have a license to "compete" by any means possible, including inducing others to break contracts, a careful review of the cases shows that this privilege is actually limited. See. e.g., Polk & Sullivan v. United Cities Gas, 783 S.W. 2d 538 (Tenn. 1990)(holding that, under the circumstances of that case, the alleged interference was "a classic example of the free enterprise system at work"). The "competitive privilege" will be reviewed in the same light as "justification" and "malice," with an eye toward whether the motives and the means employed were improper, under the circumstances.

(E) Damages. As reflected above, the statutory cause of action provides for treble damages, upon a "clear showing" of the required elements, and the common law cause of action permits an award of punitive damages, upon clear and convincing proof of intentional or malicious misconduct. A successful plaintiff can plead in the alternative and need not elect his remedy until the judge or jury decides questions of liability and resulting damages under each theory. Buddy Lee Attractions, Inc., 13 S.W.3d at 357.

Regarding compensatory damages, the Tennessee Supreme Court adopted the approach suggested by the Restatement (Second) of Torts § 774A in Dorsett Carpet v. Whitt Tile & Marble, 734 S.W. 2d 322, 324-25 (Tenn. 1987):

One who is liable to another for interfering with a contract… is liable for damages for

the pecuniary loss of the benefits of the contract…
consequential loses for which the interference is a legal cause; and
emotional distress or actual harm to reputation, if they are reasonably to be expected to result from the interference.

In an action for interference with a contract by inducing or causing a third person to break the contract with the other, the fact that the third person is liable for the loss does not affect the amount of damages awardable against the actor; but any damages in fact paid by the third person will reduce the damages actually recoverable for the judgment.

Therefore, a plaintiff is not limited to traditional breach of contract damages, but rather is entitled to recover damages consistent with the tortuous nature of the action.

(F) Lessons from Recent Cases.

Some cases recently decided by the courts in Tennessee expound upon and serve as examples of some of the foregoing rules.

In B & L Corporation v. Thomas and Thorngren, Inc., 2004 Tenn. App. LEXIS 94, 20 BNA IER Cas 1712 (Middle Section of Court of Appeals, decided February 10, 2004), the Court of Appeals rendered the latest of several decisions in a long-running dispute involving former employees who left an "unemployment cost control" business to set up a competing business, despite being parties to a non-compete agreement. The former employees, who were high-level corporate officers, immediately met with and solicited a large client (Krystal Company), which then terminated its services contract with the plaintiff. The plaintiff sued the former employees and their new company under various theories, including breach of fiduciary duties and inducement of Krystal to breach its agreement. After a trial resulting in a Two Million Dollar monetary judgment for the plaintiff, including a $70,000 judgment on the inducement to breach claim, the defendants appealed. The February, 2004 decision addresses multiple issues, including the claim for inducement to breach. In summary, the court found that although the initial contract in question had expired, it had then automatically renewed, and therefore there was an existing contract between the plaintiff and Krystal. The court further found that, as officers of the plaintiff corporation, the defendants had at least constructive knowledge of the Krystal contract. It also said that their intent to induce a breach was evidenced by the fact that they arranged the meeting with Krystal less than one week after they left their employment with the plaintiff. Finally, the court held that legal malice was shown, and it defined the required malice as: "the intentional doing of a wrongful act without just cause or excuse, with an intent to inflict injury or under circumstances that the law will imply an evil intent." (Emphasis added).

In Frankenbach v. Rose, 2004 Tenn. App. LEXIS 81 (Middle Section of Court of Appeals, decided February 3, 2004), film distributors sued film producers over a failed television series, which was to be known as "America's Dumbest Criminals." The plaintiffs had a written "memo" which outlined production options with the owner of the copyrights, with the plaintiffs to be agents. The defendants contracted separately with the copyright owners related to funding. However, the defendants reached their agreed spending limit and stopped paying the owners' vouchers (which included agent fees to plaintiffs), and the copyright owner filed for bankruptcy. The plaintiffs sued the defendants under various theories, including in contract, for fraud, and for interference with contract. The trial court granted summary judgment to the defendants on all claims, and the Court of Appeals affirmed. Specifically regarding the claim for intentional interference with contract, the Court found several problems in the plaintiffs' case. First, there was no evidence that the defendants were aware of the written memo ( knowledge of the contract); nor proof of proximate causation; nor proof that there was a breach of the contract. Finally, the Court held that it could not infer malice, under the facts alleged.

In Givens v. Mulliken, 75 S.W.3d 383 (Tenn. 2002), the Tennessee Supreme Court considered whether an insured and an insurance company could be held vicariously liable for various tortuous acts committed by the attorney hired to defend the insured, including abuse of process and discovery abuses designed for harassment (e.g., the defense lawyer served seventy subpoenas for medical and related records). Some of the physicians and healthcare providers sent the plaintiff's confidential medical records to the defense attorney, without appearing at a deposition, pursuant to the defense attorney's instructions. Because of this, the plaintiff claimed that the defense attorney had induced the healthcare providers to breach express and implied contracts of confidentiality. In holding that the plaintiff had not sufficiently pled facts to support these claims, the Court noted that the tort of inducement to breach does cover implied contracts, as well as express ones. However, as noted, the Court determined that the plaintiff had not sufficiently pled the existence of either implied or express contracts of confidentiality.

In Nelson v. Metric Realty, 2002 Tenn. App. LEXIS 698 (Middle Section of Court of Appeals, decided September 26, 2002), reh'g denied, 2002 Tenn. App. LEXIS 805, app. for perm. to appeal denied, 2003 Tenn. LEXIS 784, the court discussed whether a corporate subsidiary, agent or employee has a privilege to interfere with a corporate parent's agreement. In a case with a long and complicated litigation history, the pertinent issue involved a settlement agreement entered by a corporation. When the corporation's affiliates and advisors became aware that honoring the settlement agreement would have disastrous financial effects, they caused the corporation to breach the settlement agreement. The question before the Court was whether those affiliates, agents and advisors were "strangers to the contract," so as to be third parties subject to a claim for interference. The trial court dismissed the interference claims, holding that the defendants were not acting as strangers to the contract. The Court of Appeals affirmed, drawing upon Waste Conversion Systems, Inc. v. Greenestone Industries, Inc., supra, for the proposition that interference by a parent corporation in a subsidiary's contract is only actionable if the parent acted detrimentally to the subsidiary's interests. The Court further relied upon the holding in Forrester v. Stockstill, supra, for the proposition that in order to be liable for interference with a contract, a corporate officer or director must have not been acting in furtherance of the corporation's interests, but rather in furtherance of his own interests. Under the facts of Nelson, the Court noted that while the defendants' actions may have evidenced incompetence, there was no evidence that their conduct was in furtherance of their own interests.

In February of 2001, the Court of Appeals decided FTA Enterprises, Inc. v. Pomeroy, 2001 Tenn. App. LEXIS 116 (Eastern Section of Court of Appeals, decided February 12, 2001), which contains a strong message for would-be interferers. In this case, the Court affirmed a jury award for $920,000 in damages. The case involved plaintiff's computer business, which had a contract for computer services with a large customer (Eastman). After some preliminary discussions about purchasing the plaintiff's business, the defendant hired away the plaintiff's vice-president and 29 of the 30 employees at the branch office, who left without advance notice and who left the business premises in shambles. The plaintiff was unable to perform the contract with Eastman, and the defendants immediately solicited this business. The plaintiff sued its former employee for breaches of fiduciary duties, and it sued his new employer for intentional interference with the Eastman contract. The defendants raised the privilege of normal competition as a defense, arguing that when a contract is terminable at will (as was the Eastman contract), a competitor may legitimately seek a termination of that at-will relationship. The Court of Appeals agreed that this is the general principle, but clarified that this is true only when wrongful means or improper methods are not employed. The Court had little trouble affirming the finding that the defendants had used wrongful means in that case, since the record showed that the defendant company's president had bragged that it was his business philosophy to try to hire away a competitor's key employees in order to get their accounts, which he called "getting under the covers of the business." In addition, he had stated that he would hire the employees of a competitor "just to get rid of them," then fire any of those employees later. These descriptions of the defendant's business philosophy aptly described the conduct in that case, resulting in a large verdict.

Finally, similar lessons can be learned from International Marketing Group, Inc. v. Speegle, 2000 Tenn. App. LEXIS 229 (Middle Section of Court of Appeals, decided March 30, 2000). In that case, the plaintiff's sales manager, who had substantial customer contact, was party to an employment contract with a non-compete provision. The plaintiff was in the business of marketing, selling and distributing books and audio books to truck stops, convenience stores, etc. The employee planned his exit, worked to set up a competing business with another employee and that employee's father, lied about his reasons for quitting, then immediately went to work for the newly-formed business, in violation of the non-compete agreement. He also induced two other employees to quit. When the lawsuit was filed, including claims against the business partners for inducing the breach of the non-compete agreement, the defendants engaged in unethical and fraudulent conduct, including altering and destroying documents during the discovery process, as well as willfully violating the trial court's injunction. Eventually the trial court awarded a default judgment against the defendants as to liability, then proceeded with a trial as to damages. A $4.5 million jury verdict was returned, which the trial court trebled to $13.5 million under the inducement to breach statute. The Court of Appeals affirmed, noting that this was an appropriate case for trebling of damages.

III. INTERFERENCE WITH PROSPECTIVE BUSINESS RELATIONS.

For many years, there was some confusion as to whether Tennessee would recognize a claim for interference when there was no binding contract, but only an expectancy or a "business relationship." The Hutton case of 1915, supra, spoke in terms of interference with the "conduct of a lawful business," but did not seem to require an enforceable contract. See also Lann v. Third National Bank in Nashville, 198 Tenn. 70, 277 S.W.2d 439 (1955)(involving a claim for interference with and injury to business; the court held that regardless of whether the case was viewed as one for interference with business or slander of title, the defendant's statements were privileged and could not serve as a basis for liability); Taylor v. Nashville Banner Publishing Company, 573 S.W.2d 476 (Tenn. App. 1978), cert. denied, 441 U.S. 923 (1979)(involving a claim for intentional interference with prospective economic advantage; summary judgment for the defendant was affirmed, in part because the plaintiff offered no authority that the tort was recognized in Tennessee); Hicks v. Metropolitan Government of Nashville and Davidson County, 1986 Tenn. App. LEXIS 3599 (Middle Section of Court of Appeals, decided October 3, 1986)(involving a claim for interference with prospective business advantage; the court noted that, assuming arguendo that the claim was recognized in Tennessee, plaintiffs failed to plead enough facts to support proximate causation); Chilton Air Cooled Engines v. Omark Industries, 721 F. Supp. 151 (M.D. Tenn. 1988)(involving a claim for malicious interference with prospective business relations; the court noted that while Tennessee had substantial case law on interference with existing business relations, it had not developed any case law on interference with prospective business relations); Warde v. Kaiser, 887 F.2d 97 (6th Cir. 1989)(involving claims for tortuous interference with prospective contractual relations or prospective economic advantage; the court noted that Tennessee had no developed case law on point, but the existing case law seemed to say that a breach of contract is always required); Quality Auto Parts Co., Inc. v. Bluff City Buick Company, Inc., 876 S.W.2d 818 (Tenn. 1994)(involving claims of intentional interference with prospective business relations and interference with prospective business advantage; the Tennessee Supreme Court noted that Tennessee had never expressly adopted nor rejected these claims, but deferred a decision until another day because even if the claims were recognized, the plaintiff did not make sufficient factual allegations to support them); Kultura, Inc. v. Southern Leasing Corporation, 923 S.W.2d 536 (Tenn. 1996)(involving claims for intentional interference with prospective economic advantage; the Tennessee Supreme Court noted that this claim had never been recognized in Tennessee, but it did not clarify that it would be rejected).

The Tennessee Supreme Court finally spoke directly to the viability of these claims in Nelson v. Martin, 958 S.W.2d 643 (Tenn. 1997). In that case, the trial court had dismissed claims for interference with prospective relations for failure to state a claim, and the Court of Appeals affirmed. The Supreme Court took the opportunity to hold that such claims were not recognized under Tennessee common law, since they would run contrary to public policy considerations, including promotion of free competition in the marketplace.

It would appear that the Tennessee Supreme Court had finally resoled the question of viability of claims not involving a breach of contract in Nelson in 1997, but the Tennessee Court of Appeals did not seem so sure. In November of 2000, the Western Section of the Court of Appeals decided Trau-Med of America, Inc. v. Allstate Ins. Co., 2000 Tenn. App. LEXIS 798 (subsequently affirmed in part and reversed in part, as discussed below). In this case, the Court of Appeals held that Tennessee did not recognize a claim for "interference with prospective economic advantage," but it did recognize a claim for "interference with a business relationship," even if the relationship was not the subject of an enforceable contract. 2000 Tenn. App. LEXIS 798 at *8 through *10. In January of 2001, in Stone v. Faulkner, Mackie & Cochran, 2001 Tenn. App. LEXIS 33 (Middle Section of Court of Appeals, decided January 22, 2001), the Court of Appeals noted that while Tennessee did not recognize the tort of "interference with prospective business relationships," it did recognize a claim for "interference with business relationships." In February of 2001, in FTA Enterprises Inc. v. Pomeroy, 2001 Tenn. App. LEXIS 116 (Eastern Section of Court of Appeals, decided February 12, 2001), the Court of Appeals discussed separately the tort of "interference with a business relationship" and the tort of "interference with contracts." In January of 2002, in Watson's Carpet & Floor Coverings v. McCormick, 2002 Tenn. App. LEXIS 67 (Middle Section of Court of Appeals, decided January 30, 2002), vacated and remanded, 2002 Tenn. App. LEXIS 238, the Court of Appeals determined that a claim for "interference with a business relationship not supported by a contract" would be precluded under the holding of Nelson. Even within the Middle Section of the Court of Appeals, the unreported decisions were inconsistent.

Finally, in March of 2002, the Tennessee Supreme Court took the unusual step of reversing its own decision in Nelson from 1997, only five years earlier, in Trau-Med of America, Inc. v. Allstate Ins. Co., 71 S.W.3d 691 (Tenn. 2002). In Trau-Med, the Tennessee Supreme Court recognized the tort claim for interference with business relationships, and it set forth the parameters of the new claim. 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.

With the focus of interference with business relations cases on the actor's "motive and means," such fact-specific inquiries will likely make the prospects of summary judgment difficult. There has been little case law concerning this new cause of action through the appellate courts since the Trau-Med decision of 2002. In one case, Overnite Transportation Company v. Teamsters Local Union No. 480, 2004 Tenn. App. LEXIS 139, 174 LRRM 2498 (Middle Section of Court of Appeals, decided February 27, 2004), reh'g denied, 2004 Tenn. App. LEXIS 212, the Court of Appeals stated that in order to properly state a claim, a plaintiff must allege interference with a business relationship with specific, identified third parties, rather than only naming "general categories" of third parties, such as the category of "employees." The Court also found that the plaintiff had failed to allege the "intent" element with required particularity. Therefore, it appears that the Court of Appeals, Middle Section, will enforce strict compliance with pleading the required elements.

Until further case law develops, the Tennessee practitioner should probably become familiar with, and refer for guidance to, the comments and illustrations found in Restatement (Second) of Torts § 766B, "Intentional Interference with Prospective Contractual Relation," as well as § 767, "Factors in Determining Whether Interference is Improper," since the Tennessee Supreme Court specifically referenced the Restatement (and, in fact, specifically adopted comment c of § 766B).

View all articles by Bob E. Lype