By Kathryne E. Baldwin and José L. Parra

The nature of business is personal.  Changes in personnel, project outlines, or business models cost businesses time and money to bring about, ward against, or stop.  Any individual involved in business will likely have seen claims for interference with relationships, either prospective or contractual.  But, what do those claims really mean and how viable are they in a capitalist society where free markets are held in such high esteem?

Defendants in lawsuits will typically see these claims pleaded as one of three major categories: intentional interference with prospective economic advantage, intentional interference with contractual relations or contract, or negligent interference with prospective economic advantage.  As the name would suggest, the first two are more concrete and require a showing that the bad actor was aware of the existence of a contract or relationship and took affirmative steps to interfere with that relationship. The latter is more nebulous and looks at business relationships that were likely to occur and are based on a “should have known” standard.

The Framework

California Courts apply a careful analysis when considering each of the aforementioned claims.   As set out in Jenni Rivera Enterprises, LLC v. Latin World Entertainment Holdings, Inc. (2019) 36 Cal. App. 5th 766, 782, the elements of a cause of action for intentional interference with contractual relations are “(1) the existence of a valid contract between the plaintiff and a third party; (2) the defendant’s knowledge of that contract; (3) the defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.”

The court in Rand Resources, LLC v. City of Carson (2019) 6 Cal. 5th 610, 628-629 discussed the similarities between intentional interference with contractual relationship and intentional interference with prospective economic advantage:

The two intentional interference claims share many elements—principally, an intentional act by defendant designed to disrupt the relationship between plaintiff and a third party. (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 944 [81 Cal. Rptr. 3d 282, 189 P.3d 285] [stating that an intentional interference with prospective economic advantage claim requires, among other…]things, “an intentional act by the defendant, designed to disrupt the relationship”]; Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 55 [77 Cal. Rptr. 2d 709, 960 P.2d 513] [laying out the elements of an intentional interference with contract claim, one of which is that the defendant undertook “‘intentional acts designed to induce a breach or disruption of the contractual relationship’”].)

One key distinction between claims for interference with contractual relations and prospective economic advantage is the requirement of an “independent wrongful act.”  (Crown Imports, LLC v. Superior Court (2014) 223 Cal. App. 4th 1395, 1404, citing to Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1158–1159 and Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 392–393.)  An “independent wrongful act” requires a showing that “the alleged interference must have been wrongful by some measure beyond the fact of the interference itself.”  (Ibid.)  This means there must be some other wrong, separate and apart from the interference.

One court defined the distinction between intentional and negligent interference with prospective economic advantage as  one that boils down to an evaluation of the defendant’s intent.  (Crown Imports, LLC v. Superior Court, 223 Cal. App. 4th 1395, 1404, fn. 10.)  In contrast, a claim for negligent interference with prospective economic advantage is established when a plaintiff demonstrates:

(1) an economic relationship existed between the plaintiff and a third party which contained a reasonably probable future economic benefit or advantage to plaintiff; (2) the defendant knew of the existence of the relationship and was aware or should have been aware that if it did not act with due care its actions would interfere with this relationship and cause plaintiff to lose in whole or in part the probable future economic benefit or advantage of the relationship; (3) the defendant was negligent; and (4) such negligence caused damage to plaintiff in that the relationship was actually interfered with or disrupted and plaintiff lost in whole or in part the economic benefits or advantage reasonably expected from the relationship.

(Venhaus v. Shultz, 155 Cal. App. 4th 1072, 1078.)

Competing Policy Considerations

When evaluating these claims, Courts weigh other policy considerations as well.  When found in the context of an employment case, Courts give credence to the well-respected American value that employees are free to move between employers.  (Redfearn v. Trader Joe’s Co. (2018) 20 Cal.App.5th 989 (overturned on other grounds in Ixchel Pharma, LLC v. Biogen, Inc. (2020) 9 Cal.5th 1130).) Stated another way, a former employee of a company has the right to engage in competitive business for themselves and enter into business in competition with the former employer, provided it is fairly and legally conducted.  (Reeves v. Hanlon (2004) 33 Cal.4th 1140.)  As a rule, Courts disprove of efforts by employers to squelch this freedom of movement.

For both negligent and intentional interference with contractual relationships, Courts are understandably protective of the rights of contracting parties.  The right to contract freely is another right enjoyed by society and those without legitimate social or economic interests should not interfere in the expectations of contracting parties.  (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503.)

These policy considerations comprise the basis for the defenses of these types of claims.  While wrongful conduct that amounts to interference in contracts or business relationships can be inappropriate, these causes of action can prove to be amorphous because there are special considerations afforded to defendants, which are not considered in a stricter breach of contract or defamation-type claim.

Using the Framework

The causes of action are inextricably intertwined and, without counsel to assist in guiding a defense, these claims can often blend together.  Small business owners looking for the first time at a lawsuit alleging these claims will undoubtedly see many of the elements amongst them on repeat and have questions.  Looking at some recent examples of how courts are evaluating these cases can be helpful.  In Richards v. Farmers Ins. Exch. (2023) 2023 Cal.Super. LEXIS 42051, a Court found a demurrer to claims for intentional interference with an economic relationship with a probable economic benefit was inappropriate.  The Richards court found the Complaint adequately stated an intentional interference in a discrimination case that alleged supervisors at Farmers had taken the plaintiff’s clients from her and gave them to younger agents of a different race; in so ruling, the Richards court found a likely economic advantage because of the length of time the Plaintiff had them as clients.  (Id. at *10.)

In Yang v. Paz Am 1300 (2023) 2023 Cal.Super. LEXIS 40196, a motion for summary judgment was granted when the Yang plaintiff could not demonstrate an independent wrong; even though the plaintiff argued the defendants had separately breached a fiduciary duty to a third party.  (Id. at *14.)

Defenses

In crafting a defense to the family of interference claims, there are two common types: 1) the Anti-SLAPP Motion and 2) an argument no independently wrongful conduct took place.  An Anti-SLAPP motion is used to attack meritless causes of action that are inappropriately based on acts of freedom of speech.  (Baral v. Schnitt (2016) 1 Cal.5th 376.)  As discussed above, there are competing interests when evaluating intentional or negligent interference claims.  To the extent the alleged improper conduct arises from a protected freedom of speech act (e.g., advertising, working as an employee, or soliciting business), a business owner who finds themselves a defendant in cases with these claims should look first at whether an Anti-SLAPP Motion to strike that cause of action is appropriate.

In addition, a defendant in an interference with prospective economic advantage (either intentional or negligent) claim must have committed some independent tort, separate and apart from the interference.  Oftentimes, plaintiffs make tenuous claims about the existence of the independent tort.  If the conduct alleged is not sufficient as a matter of law, a well-timed demurrer early on can serve to narrow the issues and get rid of frivolous interference claims.  Be sure to retain qualified counsel early on to have sufficient time to evaluate whether one of these defenses will protect your business.