Business Torts
Spring 2018—Lipsey
Chapter 1: The Economic Loss Rule (I)
I. What is it?
a. Business torts often cause “pure economic loss”—which is economic harm without any accompanying personal
injury or physical property damage.
II. State of Louisiana v. M/V Testbank (5th Cir. 1985)
a.
b.
c.
d.
e.
M/V Sea Daniel (bulk carrier) and the M/V Testbank (container ship) collided around the MS River Gulf outlet, the impact of which
caused Testbank to lose containers and subsequently spill 12 T of PCP into the water. The Coast Guard closed the outlet to navigation for
almost a month and suspended fishing, shrimping, and related activities in the outlet and 400 sq. miles of surrounding marsh &
waterways. 41 lawsuits were filed by various people who suffered economic loss from the spill and subsequent closure of the outlet. The
Defendants move for summary judgment as to all claims for economic loss unaccompanied by physical damage to property.
i. The district court granted the MSJ as to all such claims except those asserted by commercial oystermen,
shrimpers, crabbers and fishermen who had been making a commercial use of the embargoed waters.
ii. 5th Cir. affirmed concluding that claims for economic loss w/o physical damage to a proprietary interest
were not recoverable in maritime tort. The district court relied on Robins Dry Dock v. Flint.
1. After an en banc rehearing, the 5th Cir. held firmly to the doctrine under Robins, i.e., physical damage
to a proprietary interest as a prerequisite to recovery for economic loss.
Robins:
i. Time charterer of a steamship that sued the dry dock for damaging the ship’s propeller; sued for lost profits
(due to loss of ship’s use). Dry dock did not know of the charterer at the time of the damage (they were
“strangers”).
1. The Supreme Court said no liability to the charterer; the dry dock and charterer had no contractual
relationship.
ii. If the rule on economic loss recovery was not limited, then everyone could come up with a semi-related, yet
attenuated claim, there’d be no end to who could sue for damages.
The Plaintiffs in Testbank sought to avoid the Robins rule by characterizing their claims as damages caused by a
public nuisance—suggesting that when a defendant unreasonably interferes with public rights by obstructing
navigation or negligently polluting a waterway he creates a nuisance for which recovery is available to all who
have sustained “particular damages”.
i. But the court thought this would lead to the same problems with ‘foreseeability’
1. Would have to show that the damage is different than public
2. Nuisance is not a separate tort subject to rules of its own, but instead is a type of damage
Policies under Testbank
i. FOR Economic Loss Rule:
1. Indeterminate liability: ups the cost of doing business, deters business
2. Easy to cover the loss through contract, or insurance benefits (the victims are in a better position)
3. Predictability: to find out who is able to sue you for damage
ii. AGAINST Economic Loss Rule:
1. Compensate victims, make them whole, isn’t far to short-change them
2. Question about availability of insurance for victims, costs, etc. (tortfeasors are in a better position)
3. No deterrent effect beyond the loss that would make them shut their doors and close the business
4. Dissent argues that Robins rule should be confined to bar a plaintiff’s claim only if the claim is
derived solely through contract with an injured party.
iii. There’s still some liability of the crash, they owe damages to other people
iv. Still a valid deterrent, bad PR, will lose money themselves
Notes:
i. Business torts usually avoid the application of the economic loss rule set forth in Testbank. Many of the
torts there are intentional in nature, which places them outside the scope of the rule.
1. The Testbank rule tends to preclude only general negligence and strict liability actions that seek
recovery for pure economic loss.
ii. Testbank reflects only one strange of the ELR: the “strangers” side
1. Plaintiff and Defendant are strangers:
a. precluding recovery of pure economic loss is rationalized by the fear that the purely economic
consequences of a defendant’s negligence are not limited by the normal tort limit on the scope
of a negligent defendant’s liability, foreseeability on a case-by-case basis.
2. P & D are non-strangers (either have a contractual relationship or are indirect parties to a market
transaction)
a. The bargaining process (and therefore contract law) is a better method of assigning economic
risks than are the socially-imposed norms of tort law.
III.
PPG Industries, Inc v. Bean Dredging (La. 1984)
a. Defendant’s dredging operations caused damage to Texaco’s natural gas pipeline, as a result, Texaco was unable
to fulfil its contract to supply natural gas to PPG Industries for operation of its manufacturing plant. PPG sued
Bean seeking recovery of the increased cost of obtaining natural gas elsewhere. Bean filed exception of no cause,
contending that LA has never recognized the right of recovery for negligent interference with contractual
relations.
b. Issue: whether a dredging contractor who negligently damaged a natural gas pipeline may be held liable for the
economic losses incurred by the pipeline owner’s contract customer.
c. Held: the LASC held that while the case is very much an Article 2315 case, PPG cannot recover his indirect
economic loss, the damages to the economic interest of the contract purchaser (PPG) do not fall within the scope
of protection intended by the law’s imposition of a duty on dredging contractors not to damage pipelines
negligently.
i. Recovery of economic losses for negligent interference with a contractual relationship is almost uniformly
denied in other jurisdictions, including Louisiana.
IV.
Louisiana Crawfish Producers Ass’n—West v. Amerada Hess Corp. (La. App. 3 Cir. 2006)
a. Commercial crawfishermen filed an action against 18 defendants who were engaged in oil and gas exploration
that alleged defendants destroyed the aquatic ecosystem in cove and eliminated or greatly diminished the ability
to catch crawfish in the area. Trial court dismissed state law claims; third circuit affirmed.
b. The fishermen did not have a proprietary interest in the land of the cove or in the wild crawfish they sought to
catch, and their fishing licenses did not place them in the category of persons holding rights derived from a
landowner (LACC Art. 667)
I.
II.
III.
Chapter 6: The Economic Loss Rule (II)
Comment (b) to § 2 (Restatement (Third) of Torts):
a. Defining economic loss is most challenging when property the plaintiff has bought causes damage to itself
(products liability). The problem can arise when the plaintiff buys a house from a builder and later finds that
defects in one part of it lead to damage in another: leaks in a roof ruin the rafters, or a defective foundation
causes cracks in the walls. The result is damaged property in a literal sense, but the law typically regards such
cases as involving economic loss alone.
Town of Alma v. AZCO Constr., Inc
a. Allowing plaintiffs to assert negligence claims against workers that do faulty work turns every contract claim
into a tort claim; prices will go up; defeats the purpose of entering the bargain
b. Rule: Party suffering only economic loss from a breach may NOT assert tort claims unless an independent duty
exists
i. The court found that there was no independent duty. AZCO and Town of Alma contracted for good pipes,
AZCO provided faulty pipes… this is nothing more than a contract claim
ii. No exemplary damages, too narrowly focuses on injury
Formosa Plastics Corp. v. Presidio
a. Would’ve succeeded under a ‘duty’ test there’s an independent duty to defraud someone
b. If the breach was dependent on the contract, then it’s just a contract claim
i. The court places more importance on the duty; the injury was not a real concern
c. Hard to determine when they actually committed the fraud, whether inducement or performance.
IV.
V.
i. If alleged misrepresentations were simply representations that defendant would fulfill its contractual duty to
do X, a mere failure to later perform a promise does not constitute misrepresentation. Thus the plaintiff
could only recover in contract.
1. Note 5, p. 345: Huron Tool: (If it is mentioned in the contract, then it becomes ‘fraudulent
performance’—pure economic loss is still precluded)
a. Claims for fraud in the inducement of a contract are not barred by the ELR, claims for fraud in
the performance are precluded by the rule.
d. Other Texas cases have noted that when a plaintiff’s only loss or damage is to the subject matter of the contract,
the plaintiff’s action is ordinarily on the contract—not in tort.
e. Generally: Economic loss rule does not preclude recovery in cases of fraud (an intentional defrauding)
§ 3 of Restatement (Third): Preclusion of Tort Liability Arising from Contract)
a. “Except as provided elsewhere in this Restatement, there is no liability in tort for economic loss caused by
negligence in the performance or negotiation of a contract between the parties.
D.S.A., Inc. v. Hillsboro Independent School District (Texas 1998)
a. Issue of whether a party may recover ‘benefit-of-the-bargain’ and punitive damages for negligent and grossly
negligent misrepresentations made by the other party in pre-contractual negotiations.
i. The court held that such damages may not be recovered under either theory
b. DSA oversaw the construction of an elementary school for HISD. The building was rife with defects, HISD
spent additional money to repair the defects then sued DSA for breach of contract, negligence and gross
negligent misrepresentation, and deceptive trade practices violations.
c. The court held that HISD’s misrepresentation claim must fail for lack of any independent injury, without
deciding whether DSA breached a legal duty independent of its contractual duties.
i. The Formosa opinion’s rejection of the independent injury requirement in fraudulent inducement claims
does not extend to claims for negligent misrepresentation or negligent inducement.
1. Unlike fraudulent inducement, the benefit of the bargain measure of damages is not available for a
claim of negligent misrepresentation.
Chapter 2: Misrepresentation
I. Intentional Misrepresentation (aka Fraud)
a. Elements (Common law—Restatement (2d) of Torts)
i. A false, material representation was made;
1. A matter is “material” if “(a) a reasonable man would attach importance to its existence or nonexistence
in determining his choice of action in the transaction; or (b) the maker of the representation knows or
has reason to know that its recipient regards or is likely to regard the matter as important in determining
his choice of action, although a reasonable man would not so regard it.”
a. See Restatement (Second) of Torts, §538.
2. Materiality can be objective or subjective
ii. When made, the speaker knew or believed that the representation was false, or recklessly asserted it
without any knowledge of its truth (the “scienter” requirement);
iii. The speaker made the representation with the intent to induce the plaintiff to act or to refrain from
acting;
iv. The plaintiff justifiably relied upon the representation; and
v. The plaintiff suffered injury/harm resulting from such reliance
b. Burdens
i. Fraud often has heightened pleading requirements (must be especially pleaded), as well as higher burdens of
proof, i.e., “clear and convincing evidence” instead of “preponderance of the evidence”, but not always to all
of the elements.
ii. Louisiana—CC Art. 1953- fraud need only be proved by a preponderance of the evidence.
1. CCP art. 856—in pleading fraud or mistake, the circumstances giving rise to fraud shall be pleaded with
particularity.
iii. FRCP Rule 9(b): in the federal world, it’s notice pleading. But Rule 9(b) requires particularity when
pleading fraud
c. Fraud by Affirmative Act
i. Rest. (2d) §525. Liability for Fraudulent Misrepresentation
1. One who fraudulently makes a misrepresentation of fact, opinion, intention, or law for the purpose of
inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in
deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation
d. Misrepresentations & Omissions
i. Restatement (Second) of Torts:
1. §529. Representation Misleading Because Incomplete
a. a representation stating the truth so far as it goes but which the maker knows or believes to be
materially misleading because of his failure to state additional or qualifying matter is a fraudulent
misrepresentation
i. aka, where you leave out the important “…but….’
ii. Ex: “yeah you can charge $200 in rent, [but it’s illegal]”
2. §531. General Rule
a. One who makes a fraudulent misrepresentation is subject to liability to the persons or class of
persons whom he intends or has reason to expect to act or to refrain from action in reliance upon
the misrepresentation, for pecuniary loss suffered by them through their justifiable reliance in the
type of transaction in which he intends or has reason to expect their conduct to be influenced.
3. §550. Liability for Fraudulent Concealment
a. One party to a transaction who by concealment or other action intentionally prevents the other from
acquiring material information is subject to the same liability to the other, for pecuniary loss as
though he had stated the nonexistence of the matter that the other was thus prevented from
discovering.
4. §551. Liability for Nondisclosure
a. (1) One who fails to disclose to another a thing which he knows may justifiably induce the other
to act/refrain from acting in a business transaction is subject to the same liability to the other as
though he had represented the nonexistence of the matter which he has failed to disclose, if, but
only if, he is under a duty to the other to exercise reasonable care to disclose the matter in
question.
b. (2) One party to a business transaction is under a duty to exercise reasonable care to disclose to
the other before the transaction is consummated when:
i. the parties are in a fiduciary or similar relationship of trust and confidence;
ii. the speaker has uttered a misleading half-truth;
iii. the speaker has learned that a previous statement is untrue or misleading, even though it was
true or believed to be true when made; and
iv. the speaker has made a statement with no expectation that it will be acted upon, but has
subsequently learned that another is about to act in reliance on it in a transaction with the
speaker.
c. (2)(3) a party to a business transaction has a duty to disclose “facts basic to the transaction, if he
knows that the other is about to enter into the transaction under a mistake as to them, and that the
other, because of the relationship between them, the customs of the trade or other objective
circumstances, would reasonably expect a disclosure of those facts”
ii. “Basic Fact” Factors (Prosser & Keeton on Torts):
1. The difference in the degree of intelligence of the parties to the transaction
2. The relation that the parties bear to each other
3. The manner in which the information is acquired
4. The nature of the fact not disclosed
5. The general class to which the person who is concealing the information belongs
6. The nature of the contract itself
7. The importance of the fact not disclosed
8. Any conduct of the person not disclosing something to prevent discovery
e. Cases
i. Lindberg Cadillac Co. v. Aron (Mo. Ct. App. 1963)
1. Facts: Aron owned an older Cadi and wanted to trade it in for a new Cadillac. Before trading it in, he
took it to a mechanic who informed him of 2 cracks on each side of the engine block. Instead of
rebuilding the block, Aron directed the mechanic to seal the cracks and “paint” over them. Nothing was
said about the cracks…but a failure to disclose.
2. Issue: Is an omission/silence actionable as a misrepresentation?
3. Held: representations are not confined to words or positive assertions; it may consist as well of deeds,
acts, or artifices of a nature calculated to mislead another. Defendant’s acts were designed to, and did,
defraud the plaintiff.
ii. Swinton v. Whitinsville Savings Bank (Mass. 1942)
1. Buyer of home sues seller for failure to disclose existence of termites. The court held that there was no
duty to disclose here.
2. Had the parties been involved in a fiduciary relationship, then there would have been a duty to disclose.
a. Swinton reflects the traditional common-law rule that silence is not fraudulent unless there is a
duty to disclose, and there is no duty to disclose merely because the other party would find the
information to be beneficial.
iii. Griffith v. Byers Construction Co.
1. Developer built homes on an old saltwater disposal site (ground was too hostile for vegetation); sold the
lots through a third party to the buyers, did not disclose condition of the soil. Homeowners sue the
developer for fraudulent concealment of a material matter. Developer says “nuh uh! There’s no privity
of contract, ergo I had no duty to disclose.”
a. Trial court bought that BS. The appellate court said no:
i. Where a vendor has knowledge of a defect in property which is not within the fair and
reasonable reach of the vendee and which he could not discover by the exercise of
reasonable diligence, the silence and failure of the vendor to disclose the defect in the
property constitutes actionable fraudulent concealment.
2. The court allowed purchasers to recover on the theory of fraud from a vendor-builder for nondisclosure
of defects; privity of contract defense is inapplicable where the claimants are within a class of persons
the defendant intended to reach.
iv. First American Bankcard, Inc. v. Smart Business Technology, Inc. (E.D. La. 2016)
1. Software buyer filed suit against software developer alleging breach of contract, tortious interference,
fraud, and conversion. Seller moved to dismiss
2. Fraudulent Concealment Claim:
a. La law—fraud entails “a misrepresentation or suppression of the truth made with the intention to
obtain an unjust advantage for one party or to cause a loss or inconvenience to the other.” (CC
art. 1953).
b. Elements- LA
i. (1) A misstatement or omission (2) of material fact, (3) made with the intent to defraud (4)
on which the plaintiff relief; and (5) which proximately caused the plaintiff’s injury.
c. For claims of fraud by silence or omission, there first must be a duty to speak.
i. There is no general duty to speak under Louisiana law, but such a duty may exist in a
fiduciary relationship.
ii. In Louisiana, although a party may keep absolute silence and violate no rule of law or
equity…if he volunteers to speak and to convey information which may influence the
conduct of the other party, he is bound to disclose the whole truth.
f. Scienter
i. §526. Conditions under which Misrepresentation is Fraudulent (Scienter)
1. A misrepresentation is fraudulent if the maker
a. Knows or believes that the matter is not as he represents it to be,
b. Does not have the confidence in the accuracy of his representation that he states or implies, or
c. Knows that he does not have the basis for his representation that he states or implies
2. Restatement (Third) of Torts, §10- Scienter
a. Says the same thing
3. Many courts capture the notion that scienter includes knowingly false representations and knowingly
ignorant representations by stating that fraud can be found when the speaker knows that his statement is
false OR when he makes the statement with “reckless indifference as to its truth”
a. It is enough that being conscious that he has neither knowledge nor belief in the existence of the
matter the defendant chooses to assert it as a fact.
4. If scienter is established, the defendant can be liable even if he meant no harm or simply intended to do a
favor for the plaintiff.
ii. Receivables Purchasing Co. v. Engineering & Professional Services, Inc. (8th Cor. 2008)
1. The court articulates the difference between the tort of fraud and the tort of negligent misrepresentation:
the latter does not require scienter.
a. Fraud is an intentional tort which requires scienter, but negligent misrepresentation is an
unintentional tort, which does not. Thus, a defendant will be liable for negligent
misrepresentation when he “fails to exercise reasonable care or competence in obtaining or
communicating the information.”
2. Arkansas state courts made a mess of the distinction, but the 8th cir. stated they believed AR Supreme
Court would hold that liability for fraud attaches in cases where a defendant lacked knowledge that his or
her representation was false but did not know whether it was true or not.
a. Further, circumstantial evidence can provide a basis for the jury to infer fraud where the
circumstances are inconsistent with honest intent.
g. Intent to Induce Reliance
i. Ernst & Young, LLP v. Pacific Mutual Life Ins. Co (Tex. 2001)
1. Pacific purchased a series of notes from a bank (which eventually failed), claiming they did so in
reliance upon financial audit reports prepared by Ernst & Young. Pacific sued EY for fraudulent
misrepresentation.
2. Issue: whether the intent-to-induce-reliance element of a fraud claim requires a direct relationship
between the alleged fraudfeasor and a specific known person (aka, privity).
3. EY argued that there must be privity between the alleged fraudfeasor and the person he intends to
influence.
a. The court of appeals followed (but misapplied) the Restatement (2d) §531, which does not require
privity and recognizes liability when an alleged fraudfeasor “has reason to expect” a person’s or
class of person’s reliance on the misrepresentations.
4. The court held that EY established as a matter of law that it had no reason to expect the investor’s
reliance on the audit report
a. Privity is not necessary, but there must be a degree of certainty that goes beyond foreseeability
i. EY never dealt with Pacific Life specifically; these audit reports are common practice in the
industry and it was obviously foreseeable that someone in the plaintiff’s position would read
the reports.
1. However, the Texas court held that even an obvious risk that a misrepresentation
might be repeated to a third party is not enough to satisfy the reason-to-expect
standard; rather, the alleged fraudfeasor must “have information that would lead a
reasonable man to conclude that there is an especial likelihood that it will reach those
persons and will influence their conduct”
ii. The claimant’s reliance must be “especially likely” and justifiable, and the transaction sued
upon must be the type the defendant contemplated.
5. Pacific argues that Restatement (2d) §536 affords a presumption that EY had reason to expect Pacific’s
reliance on the filed documents (filed under statute with the SEC).
a. The court says, ordinarily yes, if a statute requires information to be filed for the protection of a
particular class of persons, one who makes a fraudulent misrepresentation in doing so is subject to
liability to the persons for pecuniary loss suffered through their justifiable reliance upon the
misrepresentation in a transaction of the kind in which the statute is intended to protect them…
i. However, EY did not have the file those documents with the SEC, the bank did. So §536
wouldn’t apply here anyway.
h. Reliance
i. Rest. (2d) §537. General Rule
1. The recipient of a fraudulent misrepresentation can recover against its maker for pecuniary loss resulting
from it if, but only if,
a. He relies on the misrepresentation in acting or refraining from action, and (subjective)
b. His reliance is justifiable (objective)
ii. Williams v. Rank & Sons Buick, Inc
iii.
iv.
v.
vi.
1. Williams test drove a car on defendant’s used car lot; he drove it for 1.5 hours, unaccompanied; yet
somehow didn’t bother to see if the A/C worked. After he bought it, he noticed the AC did not work,
and he sued claiming that the Defendant made representations that the car had factor air conditioning and
that an advertisement made a similar claim.
2. Subjective:
a. Newspaper ad the he claimed to have relied upon
i. Was dated two days after he purchased the car
b. Likely that the salesperson did say there was A/C
c. He didn’t test the AC himself, and it would’ve been extremely simple to find out since he had the
car for 1.5 hr.
3. Objective:
a. His reliance was not justifiable.
4. Courts will refuse to act for the relief of one claiming to have been misled by another’s statements who
blindly acts in disregard of knowledge of their falsity or with such opportunity that by the exercise of
ordinary observation, not necessarily by search, he would have known.
a. However, contributory/comparative negligence are not defenses to fraud. The plaintiff’s
unreasonable conduct cannot be asserted as an affirmative defense.
i. Luckily, that same unreasonable conduct might be used to rebut the justifiable reliance
element of the plaintiff’s prima facie case.
Rest. (2d) §540. Duty to Investigate
1. A fraud plaintiff does not have to make an investigation into the truth of a fraudulent statement.
2. Nevertheless, if there are “red flags’ that would put a reasonable person on notice of a statement’s falsity,
a court may reject a claim of justifiable reliance on the ground that it was unreasonable to proceed in the
face of such warning signs without an investigation
Rest. (2d) §541. Representation Known to be Obviously False
1. The recipient of a fraudulent misrepresentation is not justified in relying upon its truth if he knows that it
is false or its falsity is obvious to him.
a. *NO DUTY to investigate unless red flags are raised for some reason*
Rest. (2d) §538. Materiality of Misrepresentation
1. Reliance upon a fraudulent misrepresentation is not justifiable unless the matter misrepresented is
material.
2. The matter is material if:
a. A reasonable man would attach importance to its existence or nonexistence in determining his
choice of action in the transaction in question; or
b. The maker of the representation knows or has reason to know that its recipient regards or is likely
to regard the matter as important in determining his choice of action, although a reasonable man
would not so regard it.
3. Two situations where reliance may be justifiable, but unreasonable:
a. When the plaintiff doesn’t investigate; and when the defendant preys upon an idiosyncrasy
of the plaintiff
Rest. (2d) §546. Causation in Fact
1. The maker of a fraudulent misrepresentation is subject to liability for pecuniary loss suffered by one who
justifiably relies upon the truth of the matter represented, if his reliance is a substantial factor in
determining the course of conduct that results in his loss
II. Statements of Opinion, Law, and Intention
a. Opinion
i. Rest. (2d) §525. Liability for Fraudulent Misrepresentation
1. One who fraudulently makes a misrepresentation of fact, opinion, intention or law for the purpose of
inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in
deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation.
a. Cmt. d. – “Indeed, every assertion of the existence of a thing is a representation of the speaker’s
state of mind, namely, his belief in its existence.”
ii. Hanberry v. Hearst Corp.
1. Misrepresentation - That the shoes were of good quality
2. Different than opinion here because GH held themselves out to be an expert type
a. Worthy of the seal
b. GH had a basis for that opinion, special knowledge
3. Different result is she were to sue the maker of the shoes
a. Maker has an adverse interest, they’re trying to sell their products, engage in puffery, etc.
iii. Restatement (Second) of Torts § 538A Opinion
1. A representation is one of opinion if it expresses only
a. (a) the belief of the maker, without certainty, as to the existence of a fact; or
b. (b) his judgment as to quality, value, authenticity, or other matters of judgment.
2. Cmt. a – “As is indicated [in other sections], the recipient may under some circumstances not be justified
in relying upon a representation of opinion concerning a fact, although he would be justified in reliance
upon a representation of the fact itself.”
iv. Restatement (Third) of Torts §14 Liability for Misrepresentations of Opinion
1. A false statement of opinion may result in liability only if
a. (a) the parties are in a fiduciary or confidential relationship, or
b. (b) the defendant claims to have expertise or other knowledge not accessible to the plaintiff, and
offers the opinion to provide a basis for reliance by the plaintiff.
c. Cmt. a – “False statements of pure opinion ordinarily are not actionable. . . . The reason for the
rule . . . is that reliance on another party's opinion is regarded in most cases as unjustifiable as a
matter of law.”
v. Restatement (Second) of Torts §539 Representation of Opinion Implying Justifying Facts
1. (1) A statement of opinion as to facts not disclosed and not otherwise known to the recipient may, if it is
reasonable to do so, be interpreted by him as an implied statement
a. (a) that the facts known to the maker are not incompatible with his opinion; or
b. (b) that he knows facts sufficient to justify him in forming it.
2. (2) In determining whether a statement of opinion may reasonably be so interpreted, the recipient’s belief
as to whether the maker has an adverse interest is important.
vi. Restatement (Second) of Torts §543 Opinion of Apparently Disinterested Person
1. The recipient of a fraudulent misrepresentation of opinion is justified in relying upon it if the opinion is
that of a person whom the recipient reasonably believes to be disinterested and if the fact that such person
holds the opinion is material.
vii. Restatement (Second) of Torts §542 Opinion of Adverse Party
1. The recipient of a fraudulent misrepresentation solely of the maker’s opinion is not justified in relying
upon it in a transaction with the maker, unless the fact to which the opinion relates is material, and the
maker
a. (a) purports to have special knowledge of the matter that the recipient does not have, or
b. (b) stands in a fiduciary or other similar relation of trust and confidence to the recipient, or
c. (c) has successfully endeavored to secure the confidence of the recipient, or
d. (d) has some other special reason to expect that the recipient will rely on his opinion.
viii. Restatement (Second) of Torts §539 Representation of Opinion Implying Justifying Facts
1. (1) A statement of opinion as to facts not disclosed and not otherwise known to the recipient may, if it is
reasonable to do so, be interpreted by him as an implied statement
a. (a) that the facts known to the maker are not incompatible with his opinion; or
b. (b) that he knows facts sufficient to justify him in forming it.
2. (2) In determining whether a statement of opinion may reasonably be so interpreted, the recipient’s belief
as to whether the maker has an adverse interest is important.
b. Law
i. Rest. (2d) §545. Misrepresentation of Law
1. If a misrepresentation as to a matter of law includes, expressly or by implication, a misrepresentation of
fact, the recipient is justified in relying upon the misrepresentation of fact to the same extent as though it
were any other misrepresentation of fact.
2. If a misrepresentation as to a matter of law is only one of opinion as to the legal consequences of facts,
the recipient is justified in relying upon it to the same extent as though it were a representation of any
other opinion
c. Intention
i. Restatement (Second) of Torts §530 Misrepresentation of Intention
1. (1) A representation of the maker’s own intention to do or not to do a particular thing is fraudulent if he
does not have that intention.
2. (2) A representation of the intention of a third person is fraudulent under the conditions stated in § 526.
ii. Spoljaric v. Percival Tours, Inc.
1. Evidence here shows that Upchurch never actually intended to ever perform
2. Claimed he drafted another version of the bonus plan, but never handed it over
3. Statute of frauds could be an issue with trying to bring a breach of contract claim, also the parol evidence
rule
a. Might only be possible to bring a fraud/intention claim
b. Or for Statute of Limitations issue
4. A promise to do an act in the future is actionable fraud when made with the intention, design, and purpose
of deceiving, and with no intention of performing the act.
a. While a party’s intent is determined at the time the party made the representation, it may be inferred
from the party’s subsequent acts after the representation is made.
b. *Failure to perform, standing alone, is no evidence of the promisor’s intent not to perform when
the promise was made. But it is a circumstance to be considered with other facts to establish intent.
5. When the particular circumstances impose on a person a duty to speak and he deliberately remains silent,
his silence is equivalent to a false representation.
iii. Notes:
1. Ordinarily, a contract itself will suffice as a representation of the defendant’s intent to perform; a party
who signs a contract presumptively represents, at least by implication, an intent to do what the contract
requires.
d. Damages
i. Formosa Plastics Corp. v. Presidio Engineers & Contractors, Inc. (Tex. 1998)
1. Formosa began a construction project. Presidio received an Invitation to Bid from Formosa to construct concrete foundations. Invitation was
accompanied by a bid package with contained several representations about the job. Presidio’s president testified he relied on these
representations in preparing the bid. Because the bid pack said the contractor would be responsible for unknown delays, he added another 30
days to his estimate for completion date at $600k and submitted the contract. Formosa awarded Presidio the contract. Job took over 8 months to
complete (instead of 120 days) causing Presidio to incur substantial add’l costs that were unanticipated at bidding.
a. Presidio sued Formosa for fraudulent induce of contract and fraudulent performance of contract claims based on representations made
by Formosa that Presidio discovered were false after commencing performance. Formosa’s director of civil depart admitted that
Formosa secretly decided to set up its own delivery schedule in order to save money and scheduled multiple contractors doing
mutually exclusive work to be in the same area at the same time.
b. Jury found that Formosa defrauded Presidio and awarded Presidio $1.5M. Based on its findings
that Formosa’s fraud was done willfully, wantonly, intentionally, or with conscious indifference
to the rights of Presidio, the jury further awarded Presidio $10M as exemplary damages.
2. A fraud cause of action requires a “material misrepresentation, which was false, and which was either
known to be false when made or was asserted without knowledge of its truth, which was intended to be
acted upon, which was relied upon, and which caused injury.”
a. Presidio presented legally sufficient evidence that Formosa made representations with no
intention of performing as represented in order to induce Presidio to enter into the contract at a
low bid price. Formosa contends that the adjusted award of $700,000 in fraud damages to
Presidio is excessive.
3. Texas recognizes two measures of direct damages for common law fraud:
a. Out-of-Pocket Measure
i. Computes the difference between the value paid and the value received.
ii. Allows the injured party to recover the actual injury suffered measured by ‘the difference
between the value of that which he has parted with, and the value of that which he has
received.”
iii. Only compensates for actual injuries a party sustains through parting with something, not
loss of profits on a bid not made, and a profit never realized, in a hypothetical bargain never
struck.
b. Benefit of the Bargain Measure
i. Computes the difference between the value as represented and the value received.
ii. Lost profits on the bargain may be recovered if such damages are proved with reasonable
certainty
iii. While BoB measure can include lost profits, it only compensates for the profits that would
have been made if the bargain had been performed as promised.
1. The proper calculation of BoB damages is Presidio’s anticipated profit on the $600k
bid plus the actual cost of the job, less the amount actually paid by Formosa.
ii. The Second Restatement explicitly allows the plaintiff to choose between out-of-pocket damages or benefitof-the-bargain damages.
1. OOP damages may also be chosen in situations where it is difficult to prove with reasonable certainty
what a bargain was worth.
2. BoB damages are often determined by the cost of repair.
3. Some courts hold that simple diminution in value without actual harm/injury is not actionable in fraud.
iii. Principles of proximate causation apply to damages sought in a fraud action:
1. Rest. (2d) of Torts §548A—“A fraudulent misrepresentation is a legal cause of a pecuniary loss resulting
from action or inaction in reliance upon it if, but only if, the loss might reasonably be expected to result
from the reliance.”
a. In general, the misrepresentation is a legal cause only of those pecuniary losses that are within the
foreseeable risk of harm that it creates.
iv. A plaintiff may be able to recover punitive damages for fraud
1. Such damages may be awarded (typically) only if the claimant proves by clear and convincing evidence
that the harm with respect to which the claimant seeks recovery of exemplary damages results from: (1)
fraud; (2) malice; or (3) gross negligence.
a. – Tex. Civ. Pract. & Rem. Code.
III.
Negligent Misrepresentation
a. Fraud v. Negligence
i. 2 Big Differences:
1. Scienter (needed in fraud, but not in negligence)
2. Scope of liability is narrower in negligence
b. Audits
i. Audits are a primary function of accountants.
1. Audits are verifications of the financial statements of an entity through an examination of the underlying
accounting records and supporting evidence.
2. In an audit engagement, an accountant reviews financial statements prepared by a client and issues an
opinion stating whether such statements fairly represent the financial status of the audited entity.
ii. Audit results in an ‘audit report’ or opinion, which evaluates the information obtained to determine whether
the corporation’s financial statements fairly represent the financial position of the corporation in accordance
with the GAAP (Generally Accepted Accounting Practices)
iii. 4 Types of Opinions:
1. Unqualified Audit Opinion: an expression of opinion by the accountant without any exceptions,
reservations, or qualifications that the financial statements of the corporation represent its financial
position and the results of its operations
2. Qualified Audit Opinion:
a. States that improper accounting treatment has been applied to one or more items that,
consequently, the financial statements are not in compliance with the GAAP
3. Adverse Audit Opinion:
a. Issued if any items have a material and pervasive effect on the financial statement, thus
destroying their fairness of representation
4. Disclaimer Audit Opinion:
a. Issued if the accountant is unable to form an opinion because of serious limitations on the scope
of the examination of the audit
c. Scope of Liability
i. Credit Alliance Corp. v. Arthur Andersen & Co. (the “Near Privity” case)
1. Near privity approach: S&K knew about Plaintiff’s role in transaction
a. The accountants must be aware that the reports were to be used for that purpose;
b. In furtherance of which a known party or parties was intended to rely; and
c. Some conduct between the accountant and the parties linking them
i. That link needs to happen on the front end (before the third party relies on the accountant’s
audit report)
2. Here, the court held that the CPA firm (S&K) knew that its client was requesting an audit report for the
purpose of obtaining financing from EBA (plaintiff), and further, that S&K and EBA had been in contact
for some time and EBA relied on S&K’s audit report to its detriment. Even though there was no privity
between S&K and EBA, the court held that there was “near privity”
ii. Citizens Bank v. Timm, Schmidt & Co. (the ‘foreseeability approach’) (minority approach)
1. Foreseeability approach:
a. The parties were foreseeable to the accountant, unless public policy considerations demand that
the accountant be relieved of liability
b. This is the MOST permissible, so plaintiffs really want this approach to be used by the court
iii. Restatement (2d) §552. Information Negligently Supplied for the Guidance of Others
1. One who, in the course of his business, profession or employment, or in any other transaction in which he
has a pecuniary interest, supplies false information for the guidance of others in their business transactions,
is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information,
if he fails to exercise reasonable care or competence in obtaining or communicating the information.
2. Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered
a. by the person or one of a limited group of persons for whose benefit and guidance he intends to
supply the information or knows that the recipient intends to supply it; and
b. through reliance upon it in a transaction that he intends the information to influence or knows that
the recipient so intends or in a substantially similar transaction
iv. Rest. (Third) §5. Negligent Misrepresentation
1. One who, in the course of his business, profession, or employment, or in any transaction in which he has
a pecuniary interest, supplies false information for the guidance of others, is subject to liability for
pecuniary loss caused to them by their reliance upon the information, if he fails to use reasonable care in
obtaining or communicating it.
2. Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered
a. by the person or one of a limited group of persons for whose guidance the actor intends to supply
the information, or for whose guidance he knows the recipient intends to supply it; and
b. through reliance upon the information in a transaction that the actor intends to influence, or that he
knows the recipient intends to influence, or in a substantially similar transaction.
3. A plaintiff’s recovery under this Section is subject to the same principles of comparative responsibility
that apply to other claims of negligence.
v. Rest. (Third) §6. Negligent Performance of Services
1. One who, in the course of his business, profession, or employment, or in any other transaction in which he
has a pecuniary interest, performs a service for the benefit of others, is subject to liability for pecuniary
loss caused to them by their reliance upon the service, if he fails to exercise reasonable care in performing
it.
2. The liability stated in Subsection (1) is limited to loss suffered
a. by the person or one of a limited group of persons for whose benefit the actor performs the service;
and
b. through reliance upon it in a transaction that the actor intends to influence.
3. A plaintiff’s recovery under this Section is subject to the same rules of comparative responsibility that
apply to other claims of negligence.
vi. Ellis v. Grant Thornton, LLP (the Rest. (2) §552 approach)
1. The court outlined 6 elements for an action under §552 against an accountant for the accountant’s
negligent misrepresentations:
a. A finding of liability requires the injured party to prove:
i. Inaccurate information,
ii. Negligently supplied,
iii. In the course of an accountant’s professional endeavors,
iv. To a third person or limited group of third persons for whose benefit and guidance the
account actually intends or knows will receive the information,
v. For a transaction (or for a substantially similar transaction) that the accountant actually
intends to influence or knows that the recipient so intends,
vi. With the result that the third party justifiably relies on such misinformation to his detriment
2. Here, the court held that the plaintiff failed to satisfy elements 4-6 of this approach.
a. Basically b/c he wasn’t a foreseeable party
b. Grant Thornton intended to supply the audit to OCC, not to Ellis (or other potential employees)
3. Credit Alliance (near privity)
a. Fails under the ‘time of misrepresentation’… Quay told him after the audit, not before it occurred
4. Foreseeability Approach
a. Probably the best shot for Ellis
b. Limiting Factors on p. 117 (public policy considerations)
c. “Too remote of an injury”…”too unreasonable of a burden on the negligent tortfeasor”
vii. Credit Alliance v. Rest. (2) §552 approach v. Foreseeability
1. CA requires linking conduct (which is a stricter standard)
2. CA says you have to know the actual identity of the person getting the information (arguable if this is
actually true) (but essentially means actual knowledge)
3. Purpose of §552:
a. More closely defines who will be liable, encourages more activity dealing with commercial info
b. Defendant’s knowledge has to be at the beginning of the auditing process, so you affirmative
assume the risk and who you’ll be liable to
c. Actual knowledge has to be ascertained, constructive knowledge is NOT enough
viii. We know that silence can serve as the basis of a fraud claim, but can it similarly serve as the basis of a
negligent misrepresentation claim?
1. §552’s language seems to preclude silence, but §525 uses the affirmative-sounding language of “makes a
misrepresentation”, and further, §551 brings silence within the purview of this language.
2. The case law is divided.
ix. Compare §531 to §552
1. §531. General Rule
a. one who makes a fraudulent misrepresentation is subject to liability to the persons or class of
persons whom he intends or has reason to expect to act or to refrain from action in reliance upon
the misrepresentation, for pecuniary loss suffered by them through their justifiable reliance in the
type of transaction in which he intends or has reason to expect their conduct to be influenced.
2. §552. Info Negligently Supplied for the Guidance of Others
a. …(2) Except as stated in Subsection (3), the liability stated in Sub(1) is limited to loss suffered:
i. (a) by the person or one of a limited group of persons for whose benefit and guidance he
intends to supply the information or knows that the recipient intends to supply it; and…
3. §531 extends to a class of persons, which is broader than §552’s limited group of persons
a. class of persons: investors; vs. limited group: certain types of investors
4. §531  reason to expect: especially likely
a. compared to §552’s standard that you know it will be relied upon
5. Pecuniary interest requirement: eliminates curbside opinion problem (§552)
a. Don’t need a pecuniary interest in §531 (?)
d. Damages
i. Rest. (2d) §552(B). Damages for Negligent Misrepresentation
1. The damages recoverable for a negligent misrepresentation are those necessary to compensate the plaintiff
for the pecuniary loss to him of which the misrepresentation is a legal cause, including
a. the difference between the value of what he has received in the transaction and its purchase price
or other value given for it; and
b. pecuniary loss suffered otherwise because of the plaintiff’s reliance upon the misrepresentation.
2. The damages recoverable for a negligent misrepresentation do not include the benefit of the plaintiff’s
contract with the defendant.
a. Fraud: choice between benefit of the bargain or out-of-pocket damages
b. Negligent misrepresentation only gets out of pocket damages
ii. Federal Land Bank Assoc. v. Sloane (Tex. 1991) (p. 138)
1. Sloanes were limited to pecuniary loss (out-of-pocket damages)
2. If fraud, could have gone with the benefit-of-the-bargain damages
a. BOTB damages is NOT AVAILABLE in a Negligent Misrepresentation scenario
3. Only left to recover the money they spent to build the chicken houses in reliance on the
misrepresentation.
a. They money they spent because the bank said they’d get the loan
4. Elements for Cause of Action for breach of duty under §552:
a. The representation is made by a defendant in the course of his business, or in a transaction in
which he has a pecuniary interest;
b. The defendant supplies “false information” for the guidance of others in their business;
c. The defendant did not exercise reasonable care or competence in obtaining or communicating the
information; and
d. The plaintiff suffers pecuniary loss by justifiably relying on the representation.
5. The court denied mental anguish damages on that grounds that §552B only allows recovery for
“pecuniary” losses.
a. This is consistent with most other courts
iii. Dousson v. S. Cent. Bell, 429 So. 2d 466, 468-69 (La. Ct. App. 1983)
1. A Louisiana case allowing for the recovery of mental anguish damages in a negligent misrepresentation
claim.
2. Here, the plaintiff wanted to keep his old phone number when he set up his new business. The phone
company (defendant) said he could keep it, so plaintiff spent money on advertisements and whatnot with
that particular phone number on them. Then the phone company said the previous owner of the filling
station failed to pay his bill so plaintiff would have to pay the balance in order to keep the number.
a. Plaintiff obviously chose to sue the phone company.
3. The court relied on CC art. 2315 and also stated that LA jurisprudence has adopted the rule in Rest. (2d)
§552.
4. The question then came down to measure of damages: $5k total, $4k for mental anguish, $1k for lost
profits. The court said the lost profits were speculative at best.
a. But, the court said since this case was couched in negligence and not in contract, thus nonpecuniary damages were allowed. (court nonetheless held the mental anguish damages were
excessive).
b. See LACC art. 1999 and comment (e).
iv. Granger v. Christus Health Central Louisiana (144 So. 3d 736 (La. 6/28/13).
1. In Louisiana, negligent misrepresentation cases are evaluated using the duty-risk analysis on a case-bycase basis.
2. In a negligent misrepresentation case, a plaintiff must prove:
a. that the conduct in question was a cause-in-fact of the resulting harm,
i. the inquiry to be made is “whether the harm would have occurred BUT FOR the
defendant’s alleged substandard conduct or, when concurrent causes are involved, whether
defendant’s conduct was a substantial factor in bringing about the harm.
b. the defendant owed a duty of care to the plaintiff,
i. the plaintiff must show that there was a legal duty on the part of the defendant to supply
correct information
c. the requisite duty was breached by the defendant, and
d. the risk of harm was within the scope of protection afforded by the duty breached
e. Innocent Misrepresentation
i. Often this is simply actionable in contract, e.g., through a breach of warranty claim
ii. Recovery in tort is a minority position
iii. Rest. (2d) permits recovery for innocent misrepresentation (but mimics a breach of warranty recovery)
iv. Rest. (2d) §552(C). Misrepresentation in Sale, Rental, or Exchange Transaction
1. One who, in a sale, rental or exchange transaction with another, makes a misrepresentation of a material
fact for the purpose of inducing the other to act or to refrain from acting in reliance upon it, is subject to
liability to the other for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation,
even though it is not made fraudulently or negligently.
2. Damages recoverable under the rule stated in this section are limited to the difference between the value
of what the other has parted with and the value of what he has received in the transaction.
Chapter III. Tortious Interference with Economic Relations
I.
Intentional Interference with Existing Contract
a. Interfering with Performance Owed to the Plaintiff
i. Lumley v. Gye (Eng. 1853)
1. Lumley (owner of Queen’s Theatre) had contracted with the opera singer Johanna Wagner to perform for
3 months. Gye, the owner of a rival theatre, persuaded (“enticed”) Wagner to breach her agreement with
Lumley.
2. Lumley sued Gye for interfering with his contract with Wagner
3. Gye demurred, but the court held that the “procurement of the breach of the contract” was actionable.
a. How did Gye induce Wagner’s breach?
i. Enticed Wagner not to perform for Lumley.
4. Why did Lumley not just sue Wagner?
a. Gye likely had deeper pockets
5. How would Lumley have fared under Rest. (2d) §766?
a. §766. Intentional Interference with Performance of Contract by Third Person
i. One who intentionally and improperly interferes with the performance of a contract (except a
contract to marry) between another and a third person by inducing or otherwise causing the
third person not to perform the contract, is subject to liability to the other for the pecuniary
loss resulting to the other from the failure of the third person to perform the contract.
1. Intent: purpose or desire to interfere or knowledge of the probability of interference
2. Interference must induce or cause the third person not to perform the contract.
ii. Knight Enterprises v. Beard (Mich. Ct. App. 2004)
1. In order to establish a claim for tortious interference with a contractual relationship, a plaintiff must
demonstrate the following:
a. A contract;
b. A breach, and
c. An unjustified instigation of the breach by the defendant.
i. One who alleges tortious interference with a contractual relationship must allege the
intentional doing of a per se wrongful act or the doing of a lawful act with malice and
unjustified in law for the purpose of invading the contractual rights or business relationship of
another.
b. Interfering with Plaintiff’s Performance
i. §766(A). Intentional Interference with Another’s Performance of His Own Contract
1. One who intentionally and improperly interferes with the performance of a contract (except a contract to
marry) between [A] and [B], by preventing [A] from performing the contract or causing [A’s] performance
to be more expensive or burdensome, is subject to liability to [A] for the pecuniary loss resulting to him.
ii. Nesler v. Fisher & Co. (IA 1990)
1. Nesler purchased a building and the county agencies committed to moving into the building. Pfohl was
president of defendant corporations, which owned space previously leased to the county—he was mad bc
the county agencies were leaving his building and moving into the plaintiff’s building.
2. There was substantial evidence that Pfohl began making repeated trips to the Nesler building and
pressuring the building inspector to take action against the project, with the effect of impeding the process
of restoring the Nesler Centre.
a. The gist of the case is that Pfohl was doing things that prevented Nesler, the plaintiff, from
performing the contract it had with its county agencies (tenants).
3. The court held that the defendant’s actions (Pfohl’s) prevented Nesler from performing his contract and
Defendants were therefore liable to Nesler for his pecuniary losses.
iii. 9-to-5 Fashions v. Spurney (La. 1989) (this will be on the exam)
1. Issue of whether an officer of a corporation owes any duty to a person having a contract with the
corporation to refrain from unjustified, intentional interference with the contractual relationship.
a. District court found that a corporate officer negligently and intentionally interfered with the
plaintiff’s performance of its contract with the corp. to supply uniforms and awarded damages
against the officer. On appeal, the court reduced damage award but affirmed.
2. Supreme Court reversed—“we recognize a duty on the part of a corporate officer to refrain from the
intentional interference with contractual relations between his corporation and other persons, unless there
is a reasonable justification for his conduct.
a. However, in the present case, the corporate officer’s actions were justified and therefore privileged
b/c they were committed in the scope of his corporate authority, were not intended to interfere with
the performance of the contract and were not knowingly contrary to the corporation’s best interest.
3. Must involve an officer of a corporation who has done all these bad things, but does not enjoy the privilege
of a “business judgment” rule
II.
Intentional Interference with Prospective Contract
a. Della Penna v. Toyota Motor Sales, USA (Cal. 1995)
i. The California Supreme Court examined (and decided to adopt) whether the torts of interference with
prospective economic advantage/contractual relations/economic relations require the plaintiff to shoulder the
burden of proving a “wrongful act” as an element.
ii. Back when Toyota introduced Lexus, it sought to only sell Lexus in the US and Toyota placed a “no export”
clause in its dealership agreements, meaning that US dealerships will not re-sell or re-export Lexus cars to
Japanese buyers. Toyota learned of dealers selling to wholesalers who would export the cars to Japan and then
churned out a list of offenders with whom Toyota dealers were to avoid. Della Penna was such a wholesaler,
and he eventually ran out of sources for purchasing Lexus models for re-export,
1. so he sues Toyota Motors alleging interference with his economic relationship with Lexus retailers
iii. Unlike interference with an existing contract, interference with a prospective economic relationship carries a
higher burden of proof, the reason why is because ordinary business competition would otherwise be
actionable under the latter, and that is quite contrary to the principles of our free enterprise market.
1. But at the end of the day, the cause of action for inducing persons not to enter into contracts with another
party is just as viable as a cause of action for inducing persons to break contracts already entered into.
iv. The court holds that a plaintiff seeking to recover for an alleged interference with prospective contractual or
economic relations must plead and prove as part of its prima facie case that the defendant not only interfered
with the plaintiff’s expectancy, but engaged in conduct that was wrongful by some legal measure other than
the fact of the interference itself.
b. §766(B). Intentional Interference with Prospective Contractual Relation
c.
d.
e.
f.
i. One who intentionally and improperly interferes with another’s prospective contractual relation (except a
contract to marry) is subject to liability to the other for the pecuniary harm resulting from loss of the benefits
of the relation, whether the interference consists of
1. Inducing or otherwise causing a third person not to enter into or continue the prospective relation or
2. Preventing the other from acquiring or continuing the prospective relation
a. *not just making it more expensive/difficult—has to actually prevent performance from
happening.
3. Intention; Improper interference; Injury
Unlike §766(A), the language of §766(B) does not include liability for making the realization of a prospective
contract more expensive or burdensome. Nevertheless, some courts have extended liability to cover such
circumstances.
Negligent Interference with a contract is 99.999999% non-actionable
Louisiana does recognize an cause of action for intentional interference with a business relationship, which is the
same as IIPC.
i. On that point, the jury instruction in Della Penna stated that interference with a relationship “containing a
probable future economic benefit or advantage to plaintiff” was an element of an intentional interference with
prospective contract claim
1. Many courts have held that the plaintiff must also show a ‘reasonable probability’ that she would have
entered into the contract.
2. Texas: the law does not require absolute certainty that a prospective contract would have been made
were it not for the interference; it must reasonably appear so, in view of all of the circumstances.
There are cases where the tortious interference doctrine has been extended to other forms of advantageous
economic relations:
i. Interference with plaintiff’s expected inheritance under his mother’s will (Harmon v. Harmon) (Maine)
ii. Interference with plaintiff’s election bid for union secretary (Longo v. Reilly (N.J.))
III. Establishing “Improper” Interference
a. Leigh Furniture & Carpet Co. v. Isom (Utah 1992)
i. Leigh sold a furniture business to Isom on a contract specifying $20k down payment with balance of $60k at
$500/mo plus interest for ten years (rent to own). Leigh decided and admitted that he wanted to sell the entire
building for a more lucrative deal, but prospective buyers would not purchase subject to Isom’s long-term
lease. So Leigh complained that Isom was in default on the balance and would harass Isom at his store in front
of customers, which eventually lead to Isom going out of business and filing for bankruptcy.
1. Isom was then sued for cancellation of lease plus damages; Isom counterclaimed intentional/malicious
interference with his business relations. Jury found for Isom; higher courts affirmed.
ii. The court explained that this wouldn’t be an interference with an existing contract case, because it’s settled that
one party to a contract cannot be liable for the tort of interference with contract for inducing a breach by
himself or the other contracting party.
1. However, the court did say that this was interference with prospective economic relations, wherein the
plaintiff must prove:
a. the defendant intentionally interfered with his plaintiff’s prospective economic relations,
b. for an improper purpose or by improper means,
c. causing injury to the plaintiff.
i. Privilege is an affirmative defense, which does not become an issue unless the acts charged
would be tortious on the party of an unprivileged defendant.
2. The court looks to the predominant purpose underlying the defendant’s conduct
3. Driving away an individual’s existing or potential customers is the “archetypical injury” this cause of
action was devised to remedy.
b. §767. Factors in Determining Whether Interference is Improper
i. In determining whether an actor’s conduct intentionally interfering with a contract or a prospective contractual
relation of another is improper or not, consideration is given to the following factors:
1. 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,
6. The proximity or remoteness of the actor’s conduct to the interference and
7. The relations between the parties
a. Plaintiff has to show (1) Intent, (2) Interference, and (3) Injury
b. Burden then shifts to Defendant to show why the 3-I’s weren’t met
ii. “The rules stated in §§ 768- 774 shows the results of the balancing process in some specific situations that have
been the subject of judicial decision; but they do not constitute an exhaustive list of situations in which it has
been determined that an intentional interference with contractual relations is not improper.” § 767 comment. b.
Note 4, p. 188—Sturges case—an example of a small number of courts permitting impropriety to be established
only through improper means (not for improper purposes)
i. The court in Struges held that, in order to recover for tortious interference with a prospective business relation,
a plaintiff must prove that the defendant’s conduct was independently tortious or wrongful; i.e., that the
defendant’s conduct would be actionable under a recognized tort.
§768. Competition as Proper or Improper Interference
i. (1) One who intentionally causes a third person not to enter into a prospective contractual relation with another
who is his competitor or not to continue an existing contract terminable at will does not interfere improperly
with the other’s relation if
(a) the relation concerns a matter involved in the competition between the actor and the other and
(b) the actor does not employ wrongful means and
(c) his action does not create or continue an unlawful restraint of trade and
(d) his purpose is at least in part to advance his interest in competing with the other.
ii. (2) The fact that one is a competitor of another for the business of a third person does not prevent his causing a
breach of an existing contract with the other from being an improper interference if the contract is not terminable
at will.
1. §768 requires a SOLE purpose to injure the other party, as opposed to Leigh Furniture, which states that
“predominant purpose” has to be to injure the other party.
a. In Texas, motive is irrelevant; cannot turn lawful conduct into tortious interference.
§773- Asserting Bona Fide Claim
i. one who, by asserting in good faith a legally protected interest of his own or threatening in good faith to
protect the interest by appropriate means, intentionally causes a third person not to perform an existing contract
or enter into a prospective contractual relation with another does not interfere improperly with the other’s
relation if the actor believes that his interest may otherwise be impaired or destroyed by the performance of the
contract or transaction.
1. Difference between this and Texas Beef  773 requires good faith on both prongs, TX Beef just
worries about good faith on the second prong.
Richardson v. La Rancherita, Inc (Cal. App. 1979)
i. Plaintiff Breg (corporation) negotiated for purchase of a restaurant with the lessor La Rancherita (thru
Martinez), then the former tenants’ interest in the original lease was assigned to Breg. Breg was losing money
on the restaurant, so the company sought to sale off the assets to Bomze. The contract was contingent upon
Breg obtaining the consent of the lessor to the assignment of the lease.
1. La Rancherita refused, instead wanted to increase rent and give use of the parking lot. Breg said screw
that and just reworked the deal where Breg would sell their corporate stock to Bomze and Breg would
continue as tenant under the lease.
2. LaRanch was pissed and tried to halt the sale of stock, etc. Breg sued for damages for interference with
economic relations. Lower court grnated plaintiffs’ MSJ.
ii. The lease prohibited occupancy by any other party besides the undersigned lessee, but the parties never
disputed the fact that the corporation was listed as lessee…no one further. The court was basically asked to bar
2.
3.
4.
5.
c.
d.
e.
f.
the transfer of shares of stock in a corporation solely because of a lease provision prohibiting assignment of the
lease…
iii. To recover for inducing breach of contract, plaintiff must establish:
1. The existence of a valid contract;
2. The defendant had knowledge of the contract and intended to induce its breach;
3. The contract was in fact breached by the third party;
4. The breach was proximately caused by defendant’s unjustified and wrongful conduct; and
5. That the foregoing resulting in damage to plaintiff.
a. The test for justification is the narrow protection afforded to a party where (1) he has a
legally protected interest, (2) in good faith threatens to protect it, and (3) the threat is to
protect it by appropriate means (Texas Beef Cattle Co., p. 195)
iv. The court found that there was ample evidence that the defendants’ concern with the assignment of the lease
was only incidental to their predominant motive of terminate the existing lease to obtain a new lease upon
more favorable terms to themselves.
g. Note 3, p. 196
i. If a defendant cannot establish such a legal right (for justification) as a matter of law, it may nevertheless
prevail on its justification defense if:
1. The trial court determines that the defendant interfered while exercising a colorable right, and
2. The jury finds that, although mistaken, the defendant exercised that colorable legal right in good faith
h. Walnut Street Assoc., Inc v. Brokerage Concepts, Inc (PA. 2011)
i. The court considered whether Rest. (2d) §772(a) applies to preclude an action for tortious interference with
contractual relations where it is undisputed that the defendant’s interfering statements were truthful.
ii. WSA, health insurance broker, uses BCI to manage administration of employee benefit plans to insureds, such
as Procacci Bros. (customers of WSA). Procacci complained to BCI that prices were too high, BCI refused to
lower costs, and Procacci threatened to leave. An employee from BCI revealed to Procacci what WSA was
being paid in commissions, which was higher than Procacci believed.
1. Procacci terminated its longstanding contractual relationship with WSA. WSA then sued BCI for
tortious interference with the WSA/Procacci contractual relationship by disclosing the amount of WSA’s
compensation.
a. BCI answered that it can’t be held liable for telling truthful, or otherwise justified and privileged
and not confidential.
iii. The superior court reversed the trial jury’s verdict for WSA, relying on Rest. (2d) §772(a)
iv. Together with §§766 and 767, §772 is part of a larger scheme of Rest. Provisions regarding tortious
interference with contractual relations and defines the concept of “improper” interference.
1. Comments to §767 state that in situations where §772(a) truthfulness defense is raised against claims of
tortious interference, analysis of the general factors enumerated in §767 is not necessary
v. The court held that §772(a) applied here and that BCI could not be held liable as a matter of law for making a
truthful statement.
i. §772(a)- Advice as Proper or Improper Interference
i. it is not improper interference if the defendant is merely giving the third person:
1. truthful information, or
2. honest advice within the scope of a request for the advice.
ii. There is, of course, no liability for interference with a contract or with a prospective contractual relation
on the part of one who merely gives truthful information to another.
j. A truth “privilege” under §772 is not universally recognized. Utah does not recognize this (Pratt v. Prodata, Inc.)
k. Note 5, p. 203—“honest advice” provision of §772(b) (J.D. Edwards & Co. v. Podany)
i. This case decided whether there was a defense of “consultant’s privilege” or “honest advice” privilege
ii. The 7th cir. held it was a qualified privilege
l. Louisiana
i. Doussay v. Gulf Coast, 660 F. 2d 594, 600-603
1. Insurance salesman brought suit against insurance company and lender alleging conspiracy in restraint of
trade and tortious interference with business. Court of appeals held that insurance salesman’s second
amended complaint stated a cognizable claim, and though it didn’t exclusively identify tortious
interference with business as the legal basis for recovery, the salesman could prove some set of facts
under which he would be entitled to recover for tortious interference
2. Conspiracy is NOT an element of a cause of action under LACC art. 2315 for the cause of tortious
interference.
a. An individual, regardless of his motive, has an absolute right under LA law to refuse to deal with
another. But the right to influence not to deal is not as broad as an individual’s respective right.
3. Louisiana law protects businessmen from “malicious and wanton interference,” permitting only
interferences designed to protect legitimate interest of the actor
a. Malice is a necessary element of a cause of action for tortious interference with business in
violation of Article 2315.
PART TWO: UNFAIR COMPETITION
CH. 7: DECEPTIVE MARKETING
I.
Early Common Law
a. The tort of unfair competition was severely limited, basically only recognized in cases where a competitor falsely
claimed to have goods from a particular geographic region.
b. We’re now looking at the Restatement (Third) of Unfair Competition
c. §1. General Principles
i. One who causes harm to the commercial relations of another by engaging in a business or trade is not subject
to liability to the other for such harm unless:
1. The harm results from acts or practices of the actor actionable by the other under the rules of this
Restatement relating to:
a. Deceptive marketing,…;
b. Infringement of trademarks and other indicia of identifications,…;
c. Appropriation of intangible trade values including trade secrets and the right of publicity,…;
2. Or from other acts or practices of the actor determined to be actionable as an unfair method of
competition, taking into account the nature of the conduct and its likely effect on both the person seeking
relief and the public; or
ii. The acts or practices of the actor are actionable by the other under federal or state statutes, international
agreements, or general principles of common law- apart from those considered in this Rest.
1.
§1, comment (g)—“Unfair methods of competition”—A primary purpose of the law of unfair competition is the identification
and redress of business practices that hinder rather than promote the efficient operation of the market. Certain recurring patterns
of objectionable practices form the basis of the traditional categories of liability specifically enumerated in Sub. (a)(1)-(3).
However, these specific forms of unfair competition do not fully exhaust the scope of statutory or common law liability for unfair
methods of competition, and Sub(a) therefore includes a residual category encompassing other business practices determined to
be unfair”
2. primary purpose is to hinder the market or cause confusion to the public.
a. Ex: Law firm A buying ad space of Law Firm B, so when someone searches for Law Firm B, an ad
for Law Firm A pops up.
d. Ely-Norris Safe Co. v. Mosley Safe Co.
i. Plaintiff claimed that D was infringing on its patent and deceptively marketing its safe as having features that it
truly did not. District court found in favor of the defendant. Ct. of App, 2d Cir, reversed explaining that if the
plaintiff had a monopoly on the safe (single-source), then there may be a private cause of action where the
defendant tries to market its wares as having a like feature as plaintiff’s.
ii. The Supreme Court reversed, holding that as it appeared, the defendant sold his safes under its own name and
there’s no proof showing that plaintiff is the only one in the world with this type of safe.
II.
Elements of False Advertising Under the Restatement and the Lanham Act
a. Rest. (3d) of unfair competition, §2: Deceptive Marketing; General Principle
i. One who, in connection with the marketing of goods or services, makes a representation relating to the actor’s
own goods, services, or commercial activities that is likely to deceive or mislead prospective purchasers to the
likely commercial detriment of another under the rule stated in §3, is subject to liability to the other…
b.
c.
d.
e.
f.
1. §2 is a broad recognition of liability in connection with misrepresentations about one’s own goods. §2
(and the Lanham Act) departs from the old common law rule with its narrow “single-source exception”
and now permits a cause of action even when there is no intent to deceive.
§3: Commercial Detriment of Another
i. A representation is to the likely commercial detriment of another if:
1. The representation is material, in that it is likely to affect the conduct of prospective purchasers; and
2. There is a reasonable basis for believing that the representation has caused or is likely to cause a diversion
of trade from the other or harm to the other’s reputation or good will.
ii. §3 requires only that a prospective purchaser’s conduct is likely to be affected, and the comments to §§1-2
make clear that the burden of proof is on the plaintiff to demonstrate this
1. this is much lighter than the burden of proof under the “single-source exception”. Under §3, a plaintiff
only needs to show that a representation is “likely to influence prospective purchasers to some substantial
degree”
The Restatement does not do away with reliance—it’s still a factor in a finding of liability.
i. Moreover, the comments note that this is not a subjective test—so “puffery” or “puffing” is still a defense:
1. “…If a reasonably prudent purchaser of the goods or services would not rely on the representation, the
actor is not subject to liability in the absence of evidence establishing that the representation is
nevertheless likely to be relied upon by a significant number of prospective purchasers.”
Though the Lanham Act is typically associated with trademark infringement, §43 broadly provides recovery in a
number of false advertising situations regardless of the presence of a trademark or federal registration of a mark:
i. 15 USC §1125. False Designations of origin, false descriptions, and dilution forbidden
(a) Civil Action
(1) Any person who, on or in connection with any goods or services, or any container for goods, uses
in commerce any word, term, name, symbol, or device, or any combination thereof, or any false
designation of origin, false or misleading description of fact, or false or misleading representation of
fact, which—
(A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection,
or association of such person with another person, or as to the origin, sponsorship, or approval of
his or her goods, services, or commercial activities by another person, or
(B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or
geographic origin of his or her or another person’s goods, services, or commercial activities,
shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged
by such act
ii. §43(a)(1) is divided into 2 main subsections. Subsection (A) (referred to often as “the trademark” provision)
because its scope is broad enough to enforce unregistered trademarks. It also reaches deceptive marketing
techniques such as passing off one’s own goods as those of another
1. Subsection (B) is the false advertising provision—it requires that the false statements be made as part of
commercial advertising.
Elements:
i. False or misleading statement of fact in commercial advertising about its own product;
ii. The statement actually deceives or has a tendency to deceive a substantial segment of its audience;
iii. The deception is material
iv. The defendant placed the false or misleading statement in interstate commerce (NOTE: this is not necessary
for a common law claim)
v. Plaintiff has been or is likely to be injured as a result of the statement.
Literal Falsity, Literally False by Necessary Implication, and Implied Falsity
i. A claim is conveyed by necessary implication when, considering the advertisement in its entirety, the audience
would recognize the claim as readily as if it had been explicitly states…This is not to say, however, that in all
messages implied by an advertisement will support a finding of literal falsity by a factfinder:
1. The greater the degree to which a message relies upon the viewer or consumer to integrate its components
and draw the apparent conclusion, however, the less likely it is that a finding of literal falsity will be
supported. Commercial claims that are implicit, attenuated, or merely suggestive usually cannot fairly be
characterized as literally false
ii. United Indus. Corp.—similarly, a factfinder might conclude that the message conveyed by a particular
advertisement remains so balanced between several plausible meanings that the claim made by the
advertisement is too uncertain to serve as the basis of a literal falsity claim, though even in that case it could
still form the basis for a claim that the advertisement is misleading
g. Literal Falsity and “Puffery”
i. 2 types: (1) exaggerated statements that no reasonable consumer would rely; and (2) vague claims of product
superiority
ii. Statements of fact could be puffery has to be reasonably recognized as a fact
iii. “Tests prove/ establishment” claims an ad claims its assertion is established thru tests or surveys
iv. Superiority claims a general claim of product superiority that does not make express reference to testing, i.e.,
“my product is better than yours”
v. Plaintiff must show superiority claim is objectively false, but lesser burden for attacking “test prove” claims—
need only show the underlying survey is faulty or do not support the claim
III. Other Forms of Deceptive Marketing: Passing-Off and Reverse Passing-Off
a. Governed by Lanham Act § 43(a)(1)(A) (rather than (B) meaning there’s no need to be in commercial advertising
to be actionable)
i. Example of passing-off street vendor selling fake Rolexes as the real deal
ii. Can also extend to false associations of services or sponsorship, e.g., telling a prospective customer that you
are the plumber for the local University when you are not.
b. Passing-Off
i. Rest. (3d) of Unfair Competition, §4: Misrepresentations Relating to Source: Passing Off
1. One is subject to liability to another under the rule stated in §2 if, in connection with the marketing of
goods or services, the actor makes a representation likely to deceive or mislead prospective purchasers by
causing the mistaken belief that the actor’s business is the business of the other, or that the actor is the
agent, affiliate, or associate of the other, or that the goods or services that the actor markets are produced,
sponsored, or approved by the other.
c. Reverse Passing-Off
i. While passing off involves passing off your own products as someone else’s, reverse passing off involves a
situation where you take another’s product and sell it as your own.
1. Because the product is purchased regardless, this cause of action requires a showing of likelihood of
harm
ii. §5: Misrepresentations Relating to Source: Reverse Passing Off
1. One is subject to liability to another under the rule stated in §2 if, in marketing goods or services
manufactured, produced, or supplied by the other, the actor makes a representation likely to deceive or
mislead prospective purchasers by causing the mistaken belief that the actor or a third person is the
manufacturer, producer, or supplier of the goods or services if the representation is to the likely commercial
detriment of the other under the rule stated in §3
a. An obvious example of reverse passing-off would be if an artist, Art, was hired to paint a portrait for
buyer, Bert. Upon completing the work, BERT resells it to an art gallery claiming it to be an original
painting, not by Art, but by Bert himself.
iii. Dastar Corp. v. 20th Century Fox Film Corp. (U.S. 2003)
1. In 1948, Fox (plaintiff) was assigned the copyright for Crusade in Europe, a TV series based on a book of
the same name written by Dwight D. Eisenhower. Fox neglected to renew the copyright on the TV series
before the series expired in 1977, and the series subsequently entered the public domain. However, the
copyright of the book was renewed. In 1988, Fox reacquired the TV rights to the book, which included
the right to license the original Crusade in Europe TV series.
a. In 1995, Dastar (defendant) purchased copies of the original version of the CiE Tv series,
repackaged Dastar’s own version, and sold copies of the video to retailers under a new title. Dastar
listed itself as the producer and distributor of the videos and make no acknowledgments or
references to the original TV series or book.
b. In 1998, Fox brought suit, claiming that the sale of Dastar’s videos without attribution to the original
series amount to reverse passing off, in violation of §43(a) of the Lanham Act. District Court granted
summary judgment in favor of Fox on the §43(a) claim, and the court of appeals affirmed. Supreme
Court reversed.
2. Issue: Whether §43(a) of the Lanham Act prevents the unaccredited copying of a work and if so, whether
a court may double a profit award under §35 in order to deter future infringing conduct
3. Held: yes. A previously copyrights work that enters the public domain may be used freely without
attribution to the author or producer of the work. §43(a) provides a federal right of action against a party
who uses a false designation of origin in relation to goods or services in commerce.
a. This provision has been interpreted as encompassing the origin of source or manufacture of the
physical goods made available in commerce
i. However, the provision cannot be expanded to include the creator or author of any underlying
work encompassed within the physical goods. The Lanham Act was not established to bolster
the rights granted to copyright holders—there’s already a congressional statute for that.
4. §43(a) refers to the party that actually manufactured or produced the physical goods ultimately made
available in commerce.
a. Here, Dastar copied and repackaged portions of a work in the public domain and then sold the
product as a video series. Under §43(a), Dastar was the origin of the video series that it produced and
owed no obligation of attribution to the creators of the original CiE series
IV. Standing for False Advertising Claims and Contributory Liability
a. Prudential Standing
i. §43(a) of the Lanham Act, by its terms, appears to grant a broad class of plaintiffs standing, but courts have
uniformly rejected consumer claims.
ii. To bring suit, a plaintiff traditionally had to show a commercial interest under the concept of prudential
standing. Thus consumers cannot sue for violations of the Lanham Act
iii. Three approaches emerged:
1. The categorical test—limited plaintiffs to only those in direct competition
2. The “reasonable interests” test—looked to whether the plaintiff had a reasonable interest in need of
protecting; and
3. The Conte Bros. test—a balancing test involving 5 factors
iv. Lexmark Int’l, Inc. v. Static Control Components, Inc. changed everything…
1. False statements: that it was impossible to sell cartridges back to anyone other than Lexmark, and that
customers were legally bound to prebate contract with Lexmark.
2. 6th Circuit applied the “reasonable-interest test”
a. (1) false statement in commercial advertisement; (2) statement that could deceive or actually deceives the
consumers (literally false here, so deception is presumed); (3) misrepresentation is material; (4)
advertisement in interstate commerce; and (5) plaintiff suffered injury
i. Static met the elements here
3. Prudential standing: mislabeled, compared it to that of constitutional standing should look at (1) zone of
interest; and (2) proximate causation
4. Static expressly falls within the zone of interest; and their injury was proximately caused by the
misrepresentations of Lexmark
5. The court held that a plaintiff suing under §43(a) ordinarily must show economic or reputational injury
flowing directly from the deception wrought by the defendant’s advertising; and that that occurs when
deception of consumers causes them to withhold trade from the plaintiff.
6. The Restatement appears to prefer the Conte Bros. 5-factor test:
a. (1) the nature of the plaintiff’s alleged injury: is the injury of a type that Congress sought to redress in
providing a private remedy for violations of the Lanham Act?;
b. (2) the directness or indirectness of the asserted injury;
c. (3) the proximity or remoteness of the party to the alleged injurious conduct;
d. (4) the speculativeness of the damages claim;
e. (5) the risk of duplicative damages or complexity in apportioning damages
b. Contributory Liability of Manufacturers and Publishers
i. Once a plaintiff has standing, it can go after a broader class of defendants under the concept of contributory
liability
ii. The Restatement and Lanham Act recognize two forms:
1. The publisher of false statements (such as the newspaper that runs a false ad); and
2. The manufacturer or supplier who induces or knows (or should know) the retailer is committing a
violation and does nothing
iii. Rest. (3d) §7: Contributory Liability of Printers, Publishers, and Other Suppliers
1. (1) One who, by supplying materials or rendering services to a third person, directly and substantially assists
the third person in making a representation that subjects the third person to liability to another for deceptive
marketing under the rules stated in §§ 2-6 is subject to liability to that other for contributory deceptive
marketing.
2. (2) If an actor subject to contributory liability under the rule stated in Subsection (1) acted without
knowledge that the actor was assisting the third person in making a representation likely to deceive or
mislead, the actor is subject only to appropriate injunctive relief.
iv. Rest. (3d) §8: Contributory Liability of Manufacturers and Distributors
1. One who markets goods or services to a third person who further markets the goods or services in a manner
that subjects the third person to liability to another for deceptive marketing under the rules stated in §§ 2-6
is subject to liability to that other for contributory deceptive marketing if:
(a) the actor intentionally induces the third person to engage in such conduct; or
(b) the actor fails to take reasonable precautions against the occurrence of the third person's conduct
in circumstances in which that conduct can be reasonably anticipated.
v. Although 43(a)(1) of the Lanham Act does not address contributory liability, §32 of the Lanham Act provides
for a similar standard as §7 of the Restatement. The Supreme Court has long recognized contributory liability
for trademark violations, and it has been extended to §43.
1. Under the Lanham Act §43, however, these claims are usually in relation to subsection (a)(1)(A) rather
than (a)(1)(B).
2. Although publishers can be liable for contributory liability, innocent publishers are only subject to
injunctive relief
V.
Remedies for False Advertising
a. The primary remedy sought in a deceptive marketing case is injunctive relief, but it is not the sole remedy
i. As noted in the Cashmere case, however, seeking monetary damages rather than injunctive relief will affect
the plaintiff’s burden of proof on its §43(a) or common-law false advertising claim
ii. Unlike a plaintiff seeking injunctive relief who only has to show that the misrepresentation had the tendency to
deceive, a plaintiff seeking monetary damages must show that consumers were actually deceived by the
misrepresentation, unless he can avail himself of a presumption to that effect
1. Along with affecting the consumer-deception element, a party asking for monetary relief also bears a
higher burden on causation. Plaintiff must show actual harm to its business and a causal link between the
defendant’s actions and the damages.
b. Rest. (3d) §35. Injunctions: Trademark Infringement and Deceptive Marketing
i. (2) The appropriateness and scope of injunctive relief depend upon a comparative appraisal of all the factors of
the case, including the following primary factors:
1. the nature of the interest to be protected;
2. the nature and extend of the wrongful conduct;
3. the relative adequacy to the plaintiff of an injunction and of other remedies;
4. the relative harm likely to result to the legitimate interests of the defendant if an injunction is granted, and
to the legitimate interests of the plaintiff if it’s denied;
5. the interests of the third persons and of the public;
6. any unreasonable delay by the plaintiff in bringing suit or otherwise asserting its rights;
7. any related misconduct on the part of the plaintiff; and
8. the practicality of framing and enforcing the injunction
c. for actual damages, Rest. §36 describes 4 sources for damages
i. Direct damages to plaintiff due to lost sales;
ii. Direct damages due to price reductions;
iii. Harm to reputation;
iv. Corrective marketing expenditures
d. §37 also provides that, in limited circumstances, intentional deceptive marketing can result in an award of
defendant’s net profits.
e. The Lanham Act also provides for attorney’s fees and, in limited circumstances, treble damages (3x) so long as
such damages are compensatory and not punitive (these are not provided for in the Restatement)
i. The “exceptional cases” for attorneys fees has been interpreted to mean only in cases of deliberate
infringement, or when the prosecution of the claim is in bad faith
f. ALPO v. Ralston Purina
i. Responsive marketing is advertising made in retaliation of a competitor’s ad campaign
1. Under the Lanham Act §35(a), a party injured by false advertising may recover the cost of its own
advertisements that “actually and reasonable respond to the defendant’s offending ads”
2. Recovery is not limited to advertisements that specifically address the false statements made by the
defendant
a. The injured party need only show that, at the margin, it would not have undertaken the responsive
campaign but for the false ads
ii. Subtracted what ALPO planned on spending on advertising from what they ended up spending on responsive
marketing
iii. Corrective marketing is generally more expensive – costs more to fix, wasn’t unreasonable
iv. Didn’t have to mention Ralston’s ads b/c they didn’t know for sure they were false, and didn’t want to force
them to advertise for Ralston
v. Responsive marketing is mitigation, Courts want to encourage Plaintiffs to respond (mitigate harm)
vi. Courts want Plaintiffs to be willing to run responsive ads, more akin to an injunction
vii. Court remanded b/c ALPO was running false ads too, can’t recover with unclean hands
viii. Public policy concern – want to protect the public
ix. ALPO was going to roll out a national campaign, but held onto the funds
1. The court held that the district court erred in refusing to reduce the award to reflect ALPO’s alternative use
of the funds it did not have to expend on a national rollout
a. In order to reflect economic reality, damages awarded in order to compensate for loss of a business
opportunity should equal the plaintiff’s “opportunity cost” or the return it could have made on an
alternative investment of the funds not spent on the foregone opportunity
x. Court wants accounting to see how the award was spent
xi. Upward enhancement gives Court wiggle room, to award for damages that are more speculative in nature
1. Actual damages under §35(a) of the Lanham Act can include:
a. Profits lost by the plaintiff on sales actually diverted to the false advertiser;
b. Profits lost by the plaintiff on sales made at prices reduced as a demonstrated result of the false
advertising,
c. the costs of any completed advertising that actually and reasonably responds to the defendant’s
offending ads, and
d. quantifiable harm to the plaintiff’s good will to the extent that completed corrective advertising has
not repaired that harm.
g. A plaintiff seeking monetary damages usually must show actual consumer confusion, but only a likelihood of
confusion if the plaintiff is seeking an injunction. However, many courts only require a showing of a likelihood of
confusion for recovery of money spent on responsive advertising.
i. To recover loss control damages, plaintiffs must show that a violation of the Lanham Act has occurred, and
that:
1. There was a likelihood of confusion or damages to sales, profits, or goodwill;
2. Its damage control expenses are attributable to the violation (i.e., caused by the violation); and
3. Its damage control efforts were reasonable under the circumstances and proportionate to the damage that
was likely to occur.
The Role of the FTC and “Little FTC Acts”
a. Consumers have no standing to sue under the Lanham Act and the Restatement. But two important avenues exist
for protecting consumer interests in the absence of a suit by competitors: actions brought by the Federal Trade
Commission under §5 of the FTA Act, and suits brought by consumers themselves under what have become
known as “Little FTC Acts”
b. §5 of the FTCA broadly prohibits deceptive marketing and the FTC has the power to investigate and prosecute
violations of the FTCA.
i. The FTC typically issues injunctions (“cease and desist” letters) but can also assess penalties
c. A number of states have “Little FTC Acts” which give consumers the right to sue for deceptive marketing
practices.
i. Though these vary, most permit consumer plaintiffs to recover damages in excess of actual damages (typically
treble damages), injunctive relief and attorneys fees (e.g., Louisiana Unfair Trade Practices Act—La. R.S.
51:1401 et seq.)
VII.
Louisiana Unfair Trade Practices Act—R.S. 51:1401
a. §1402 gives definitions which are important in practice:
i. “consumer” means any person who uses, purchases, or leases good or services
ii. “consumer interest” means those acts, practices, or methods that affect the economic welfare of a consumer
iii. “trade” or “commerce” means the advertising, offering for sale, sale, or distribution of any services and any
property, corporeal or incorporeal, immovable or movable, and any other article, commodity, or thing of value
wherever situated and includes any trade or commerce directly or indirectly affecting the people of the state.
b. 1405(A) declares any unfair methods of competition and unfair or deceptive acts or practices in the conduct of any
trade or commerce to be unlawful
c. §1406. EXEMPTIONS
i. The provisions of this Chapter shall not apply to:
1. (1) Any federally insured financial institution, its subsidiaries, and affiliates or any licensee of the Office
of Financial Institutions, its subsidiaries, and affiliates, or actions or transactions subject to the
jurisdiction of the Louisiana Public Service Commission or other public utility regulatory body, the
commissioner of financial institutions, the insurance commissioner, the financial institutions and
insurance regulators of other states, or federal banking regulators who possess authority to regulate unfair
or deceptive trade practices.
d. §1409(A) grants a private right of action to any person who suffers any ascertainable loss of money or movable
property, corporeal or incorporeal, as a result of a violation of LUTPA to recover actual damages and, if such
damages are awarded, the court shall award reasonable attorney’s fees and costs
i. If the court finds the unfair or deceptive method, act, or practice was knowingly used, after being put on notice
by the attorney general, the court shall award three times the actual damages sustained
ii. acts which constitute a violation of LUTPA are not specifically defined in the statute and are instead
determined by courts on a case-by-case basis.
iii. §1409(E) states that the action provided by this section shall be prescribed by one (1) year running from the
time of the transaction or act which gave rise to this right of action
e. In general, acts which comprise unfair trade practices involve fraud, deception, misrepresentation, breach of
fiduciary duty, or other unethical conduct
i. To succeed on a LUTPA claim, the plaintiff must show that the alleged conduct offends established public
policy and is immoral, unethical, oppressive, unscrupulous, or substantially injurious
f. Gour v. Daray Motor Co., Inc. (La. App. 3d Cir. 1979)
i. Plaintiff bought his 7th Oldsmobile—that’s all he would drive—as it turns out, the original engine
manufactured by Oldsmobile has been replaced with a General Motors engine? (they’re the same
company…literally all the same parts). He alleged that he was unaware of the substitution and that he would
not have bought the car had he known, and that the dealer, Daray, knew of the switch and didn’t say anything.
ii. The court found this to be a violation of LUTPA
iii. The plaintiff had put 17,000 miles on the car…and the defendants argued that they are entitled to a credit of
use, and the court agreed
VI.
1. “When a sale is rescinded the parties are retuned as nearly as possible to the situation as it existed prior to
the sale. The vendee returns the property to the vendor and the vendor returns the purchase price subject
to whatever adjustments are necessary for his use of the property during the period he possessed same.”
g. Walker v. Hixon Autoplex of Monroe (La. App. 2d Cir. 2017)
i. Plaintiff claimed that at the time of sale, defendant led him to believe that the Mustang GT Anniversary
Edition was the more valuable collector’s Limited Edition. Defendant reconvened for attorneys fees and costs
alleging that plaintiff was in bad faith in bringing his LUTPA claim.
ii. The court held that the plaintiff was misinformed or rather misheard because the Limited Editions had not been
rolled out at the time of purchase. Thus, the buyer’s neglect and no fraud by defendant, was the cause of
buyer’s purchase, and thus the LUTPA claim failed
VIII. Commercial Disparagement
a. Disparagement Under the Common Law- Generally
i. The common law action initially spoke to slander of title or disparagement of specific goods, the concept has
broadened now to include any pecuniary interest
1. This is broad enough to cover services and other pecuniary interests as demonstrated by the Restatement
(2d) of Torts illustration 3 & 4 to §623(A)
ii. Note: the same facts may lead to multiple causes of action such as fraud and tortious interference with
economic relations
iii. Disparagement under the Restatement (Second) of Torts
1. The Restatement (2d) of Torts provides that a defendant may be liable to a plaintiff for publishing a false
statement that is harmful to the plaintiff’s pecuniary interest
2. §623(A). Liability for Publication of Injurious Falsehood—General Principle
a. One who publishes a false statement harmful to the interests of another is subject to liability for
pecuniary loss resulting to the other if:
i. He intends for publication of the statement to result in harm to interests of the other having a
pecuniary value, or either recognizes or should recognize that it is likely to do so, and
ii. He knows that the statement is false or acts in reckless disregard of its truth or falsity
3. §§ 624 & 626 specifically that a defendant may be liable for slander of title (questioning ownership
rights) as well as for trade libel (disparaging the quality of the plaintiff’s land or other property).
a. Liability under §623A is not limited to these two instances, and extends to any pecuniary harm
resulting from disparaging the “interests” of the plaintiff
i. Illustrations:
1. A, knowing his statement to be false, tells C that B has died. As a result C, who had
intended to purchase goods from B, buys them elsewhere. A is subject to liability to B.
2. A, knowing his statement to be false, tells C that B, an importer of wood, does not deal in
mahogany. As a result C, who had intended to buy mahogany from B, buys it elsewhere.
A is subject to liability to B.
4. §629. Disparagement Defined
a. A statement is disparaging if it us understood to case doubt upon the quality of another’s land,
chattels or intangible things, or upon the existence or extent of his property in them, and
i. The publisher intends the statement to cast the doubt, or
ii. The recipient’s understanding of it as casting the doubt was reasonable
iv. Disparagement Distinct from Defamation
1. Defamation impugns the character or reputation of the plaintiff; whereas disparagement harms the
interests of the plaintiff.
a. While it’s possible for a statement to do both, it occurrence in litigation is rare
i. Where the publication on its face is directed against the goods or product of a corporate vendor
or manufacturer, it will not be held libelous per se as to the corporation, unless by fair
construction and without the aid of extrinsic evidence it imputes to the corporation, fraud,
deceit, dishonesty, or reprehensible conduct in its business in relation to said goods or product.
(Nat’l Refining Co. v. Benzo Gas Motor Fuel Co., 8th Cir. 1927)
b. §558- Rest. (2d) of Torts—Elements of Defamation
i.
ii.
iii.
iv.
a false and defamatory statement concerning another;
an unprivileged publication to a third party;
fault amounting at least to negligence on the part of the publisher; and
either actionability of the statement irrespective of special harm or the existence of special harm
caused by the publication.
v. Elements of Disparagement
1. Publication by the Defendant of Disparaging Words
Rest. (2d) of Torts-- §629-Disparagement Defined
a. A statement is disparaging if it is understood to cast doubt upon the quality of another’s land,
chattels or intangible things, or upon the existence or extent of his property in them, and
i. The publisher intends the statement to cast the doubt, or
ii. The recipient’s understanding of it as casting the doubt was reasonable
1. *this is broad enough to permit liability for either intentional OR negligent publications.
2. *Also makes actionable any publication, be it spoken, written, or communicated in some
other manner, and the form does not necessarily affect the other elements of the claim
(unlike defamation)
b. Hurlbut v. Gulf Atlantic Life Insurance Co. (Tex. 1987)
i. Lists the general elements of a claim for business disparagement as:
1. Publication by the defendant of the disparaging words;
2. Falsity;
3. Malice;
4. Lack of privilege; and
5. Special damages
ii. More stringent requirements have always been imposed on the plaintiff seeking to recover for
injurious falsehood in 3 important respects:
1. Falsity of the statement
a. Plaintiff in a disparagement claim must plead & prove the falsity of the statement
as part of his cause of action.
i. The common law presumed the defamatory statement to be false, and truth
was a defensive matter.
2. Fault of the defendant
a. The defendant in a defamation action was held strictly liable for his false
statement; whereas,
i. The defendant in an action for business disparagement is subject to liability
“only if he knew of the falsity or acted with reckless disregard concerning it,
or if he acted with ill will or intended to interfere in the economic interest of
the plaintiff in an unprivileged fashion.”
3. Proof of damage
a. The common law required defamation plaintiff to prove special damages in only a
limited number of situations; whereas
i. Pecuniary loss to the plaintiff must always be proved to establish a cause of
action for business disparagement.
ii. the plaintiff must establish pecuniary loss that has been realized or liquidated
as in the case of specific lost sales.
iii. Moreover, the communication must play a substantial part in inducing others
not to deal with the plaintiff with the result that special damage, in the form
of the loss of trade or other dealings, is established.
2. Falsity
a. Similar concerns from the chapter on misrepresentation and deceptive marketing arise here, such as
whether opinions are actionable and are the statements mere “puffery”
i. One added protection in this area is the right to make unduly favorable comparisons (so long as
nothing specific is asserted)
1. This is a conditional privilege under Rest. (2) of Torts §649.
3. Malice
a. The malice element of a disparagement cause of action does not necessarily mean malice in the
sense that we often use— common law malice = spite or ill will
b. The Restatement §623(A)(a) requires that the maker of the false statement intends “for publication
of the statement to result in harm to interests of the other having a pecuniary value, or either
recognizes or should recognize that it is likely to do so,” and “knows that the statement is false or
acts in reckless disregard of its truth or falsity.”
i. Two-step inquiry:
1. First, the publication must be made either with intent to harm (which is in-line with the
ill will association) or simply recognition that the statement will or is likely going to
cause harm.
2. Second inquiry asks if the statement is known to be false or is made with reckless
disregard for the truth
c. Fashion Boutique of Short Hills v. Fendi USA, Inc. (S.D.N.Y. 1998)
i. An oral defamation directed at the quality of a business’ goods or services is actionable not as
slander, but as disparagement of goods. Plaintiff must prove: (1) falsehood, (2) publication,
(3) malice, and (4) special damages
1. To prove special damages, a plaintiff must identify actual pecuniary loss with
particularity and establish that the disparaging statements caused the loss. (must be the
natural and immediate consequence of the disparaging statements)
ii. The “malice” element can be satisfied either by proof of common law malice or by proof of
actual malice
1. Actual malice is knowledge that the statement at issue is false or reckless disregard of
whether it is false
2. Statements are made with actual malice if they are made with at least a high degree of
awareness of their probable falsity, meaning that the speaker entertained serious doubts
as to the truth of the publication.
iii. The court also discussed the applicability of the doctrine of respondeat superior to a slander
claim—and that it also applies to a claim for disparagement of goods
iv. The court explained that to plead claim that oral statement tended to injure plaintiff in his
profession, the plaintiff must allege that he carried on the profession at the time when the words
complained of were published
1. Without asserting when the offending statements were published, the plaintiff fails to
carry her burden of proving the statement impugned the plaintiff’s integrity or caused her
damage.
4. Special Damages
a. Under the law of defamation, an allegedly false and defamatory statement, negligently made and
without privilege, is enough to incur damages regardless of whether special damages are proven.
i. §623A states that the publisher of the false statement is only subject to liability for “pecuniary
loss resulting to the other.” This is not an issue of just showing the amount of damages.
1. To succeed on a commercial disparagement claim, a plaintiff must prove a direct and
causal connection between an identifiable pecuniary loss and the disparaging
publication.
b. The Restatement sets forth both the types of loss a publisher is liable for, and how a plaintiff may
establish such a loss in §633—Pecuniary Loss
(1) The pecuniary loss for which a publisher of injurious falsehood is subject to liability is
restricted to
(a) the pecuniary loss that results directly and immediately from the effect of the
conduct of third persons, including impairment of vendibility or value caused by
disparagement, and
(b) the expense of measures reasonably necessary to counteract the publication,
including litigation to remove the doubt cast upon vendibility or value by
disparagement.
(2) This pecuniary loss may be established by
(a) proof of the conduct of specific persons, or
(b) proof that the loss has resulted from the conduct of a number of persons whom it
is impossible to identify
c. In both Hurlbut and Fashion Boutique, the courts appeared to require more than just a general loss in
business—they required proof of actual lost customers. But see Rest. (2d) of Torts §633, comment h.
d. Damages are the most sought after remedy in commercial disparagement cases, but injunctive relief
is also available. However, courts are generally reluctant to order injunctions, due in part to First
Amendment concerns and that frequent overlap that occurs between defamation and disparagement
5. Lack of Privilege
a. Although the Hurlbut court adopted ‘lack of privilege’ as an element of a disparagement cause of
action, privilege is an affirmative defense
b. The Restatement (2d) of Torts recognizes both absolute and conditional privileges, utilizing the
same privileges available to a defendant in a defamation cause of action.
i. Absolute privileges cover instances such as when the defendant has been granted consent by the
plaintiff to publish the materials (§583), statements made to a spouse (§592), and various
statements that relate to judicial and legislative proceedings (§§585—590A)
ii. Conditional Privileges
1. Include situations in which the publisher of the disparaging information has done so to
protect a sufficiently important interest of its own, a recipient or third party, or the public.
2. These are labeled “conditional” because they can be lost if abused, such as when
publication occurs with knowledge of the falsity of the statements or with reckless
disregard for their truth.
3. But there are two conditional privileges that are not subject to this abuse qualification:
a. §649- right of a competitor to make an unduly favorable comparison of its own
goods. Because this privilege extends to statements of superiority not made with
an honest belief, it’s obviously not abused by the lack of honest belief in the
superiority claim.
b. §647—permits a publisher to assert that he, rather than the plaintiff, has a legal
right to property. Such claims are privileged, despite being incorrect or
unreasonable, so long as the claim is asserted in good faith (as judged subjectively)
b. False Statements in the Sale of Another’s Goods
i. If there is a sale, why should the plaintiff care?
1. Example: Beer manufacturer who sends products to distributors with the understanding that beer that sits
idle beyond its expiration date will not be sold. The manufacturer’s reasoning is that beer sold past this
expiration date can become stale and the taste may be altered. If distributors continue to sell the product
to retailers as “non-expired beer”, the consuming public may receive stale beer and associate the resulting
poor taste with the manufacturer’s brand.
a. Although a sale of the beer has occurred, the manufacturer would prefer not to have the sale than to
lose goodwill and future sales due to an association with stale, poor tasting beer.
ii. Rest. (3d) of Unfair Competition-- §6
1. This provision covers representations that are likely to deceive or mislead prospective purchasers with
respect to a matter that relates to the goods or services, although the goods are truthfully identified as
originating from another.
a. Misrepresentations are typically laudatory rather than derogatory
b. Example: a seller may assert that the goods are fresh when in fact they are stale or deteriorated, etc.
c. Business Disparagement Under the Lanham Act
i. Recall the elements of false advertising:
1. A false statement of fact by the defendant in a commercial advertisement about its own (for
disparagement—“another’s”) product;
2. The statement actually deceives or has a tendency to deceive a substantial segment of its audience
3. The deception is material, in that it is likely to influence the purchasing decision;
4. The defendant placed the false or misleading statement in interstate commerce; and
5. The plaintiff has been or is likely to be injured as a result of the false statement.
a. While false advertising under the Lanham Act focused upon false claims made about a party’s own
goods or services, disparagement focuses on false claims about another’s goods or services.
i. For a disparagement claim, we simply substitute “another’s” for “its own” in the first element
under §43(a)
1. There is no malice requirement, though malice may assist with consumer deception and
damages and also may help overcome First Amendment concerns.
ii. Commercial Advertising or Promotion
1. An essential element of a §43(a)(1)(B) Lanham Act claim is that the false statement be made “in [a]
commercial advertising or promotion.”
a. Where the claim is made in a TV or newspaper commercial, this element is easily met. But issues
can arise when the statements are made orally to select customers.
2. Three commercial speech factors:
a. Speech is an advertisement;
b. Does the speech refer to a specific product or service; and
c. Does the speaker have an economic motivation for the speech?
3. Fashion Boutique (2nd Cir.—appeal from the first Fashion Boutique case above)
a. Fashion Boutique claimed that its business was ruined by a campaign of disparagement conducted
by a competing boutique. FB asserted error for (1) granting MSJ in favor of Fendi, dismissing
plaintiff’s claims under the Lanham Act, (2) excluding plaintiff’s expert testimony regarding the
value of the lost business, and (3) instructing the jury that general damages recoverable under NY
law for slander were limited to the injury to its reputation in the minds of 3 individual customers.
i. 2d Cir affirmed
CHAPTER X: TRADE SECRETS
I.
Trade Secrets Under the Common Law
a. Protection has been recognized since ancient Rome, but is a fast-growing area
b. A business may create many different forms of intellectual property that could qualify under the term “trade
secret”
i. A new, more efficient process for manufacturing a product may qualify as a trade secret, but so may a
customer list, pricing information, market research, and marketing strategies
ii. Unlike patenting/copyrighting, trade secret protection is governed by state common law and requires no
registration. Such protection has no time limit and the subject matter of what qualifies for protection may be
broader than what is available under patent law.
1. The Restatement (3d) of Unfair Competition §39, cmt (c) describes this relationship”
a.
Federal patent law offers protection to “any new and useful process, machine, manufacture, or composition of matter,” 35
U.S.C.A. § 101, unless the invention “would have been obvious at the time the invention was made to a person having
ordinary skill in the art to which said subject matter pertains.” 35 U.S.C.A. § 103. . . . Unlike the limited protection against
improper acquisition, disclosure, and use accorded to the owner of a trade secret . . ., the holder of a patent enjoys a general
right to exclude others from making, using, or selling the patented invention . . . enforceable even against persons relying
on independent discovery or reverse engineering. . . . Upon issuance of a patent, the specification and other materials
comprising the patent file become available for public inspection. 37 C.F.R. § 1.11. Thus, for matter disclosed in the patent,
issuance terminates the secrecy required for continued protection as a trade secret, even if the patent is subsequently
declared invalid.
2. Trade secret protection may be a better option if the subject matter is not capable of being patented or
copyrighted (e.g., customer lists), or if the holder wishes to have protection beyond the limited
timeframe provided under patents.
iii. Three main sources:
1. Restatement (First) of Torts;
II.
2. Uniform Trade Secret Act (now adopted in 46 states + D.C.); and
3. Restatement (Third) of Unfair Competition
Elements of a Trade Secret Claim
TWO basic elements: (1) the subject of the suit must qualify as a trade secret; AND (2) the secret must be
misappropriated.
a. Qualification of a “Trade Secret”  (1) not known by others, (2) the value of the secret
i. Generally
1. §757, cmt (b) of First Restatement of Torts
a. defines a “trade secret” as “any formula, pattern, device or compilation of information which is
used in one’s business, and which gives him an opportunity to obtain an advantage over
competitors who do not know or use it.”
b. It goes on to list 6 factors which may be used to determine whether something qualifies as a TS:
i. The extent to which the information is known outside of his business;
ii. The extent to which it is known by employees and others involved in his business;
iii. The extent of measures taken by him to guard the secrecy of the information;
iv. The value of the information to him and to his competitors;
v. The amount of effort or money expended by him in developing the information; and
vi. The ease or difficulty with which the information could be property acquired or duplicated
by others.
2. The Unfair Trade Secret Act (UTSA) §1(4) provides that a trade secret is:
a. “information, including a formula, pattern, compilation, program device, method, technique, or
process that:
i. (i) derives independent economic value, actual or potential, from not being generally known
to, and not being readily ascertained by proper means by, other persons who can obtain
economic value from its disclosure or use, and
ii. (ii) is the subject of efforts that are reasonable under the circumstances to maintain its
secrecy”
3. §39 Restatement (Third) of Unfair Competition
a. “A trade secret is any information that can be used in the operation of a business or other
enterprise and that is sufficiently valuable and secret to afford an actual or potential economic
advantage over others.”
4. All of the standards tent to include three common elements:
a. The trade secret must not be known by others; (2) the trade secret must be valuable; and (3) the
plaintiff must have taken reasonable steps to maintain the secrecy.
ii. Not Known By Others
1. Comment (f) of §39 of Rest. (3) of UC notes: “The secrecy, however, need not be absolute. The
rule…requires only secrecy sufficient to confer an actual or potential economic advantage on one who
possesses the information.
a. Revealing the information to employees (who are agents of the business) usually does not destroy
trade secret protection
2. Metallurgical Indus. Inc. v. Fourtek, Inc. (5th Cir. 1986)
a. Texas case concerning the zinc recovery process for extracting tungsten carbide from scrap metal.
i.
ii.
Metallurgical Indus. had been in the carbide reclaiming business since 1967 using a more primitive process; they
then began using the zinc recovery process. They contracted with Therm-O-Vac thru TOV’s representative
(Bielefeldt) to purchase 2 zinc recovery furnaces. Dissatisfied w/ performance, Metallurgical modified the
furnaces extensively, adding on objects known in the industry, but never before been using in combination with a
zinc recovery furnace to facilitate the process. Metallurgical wanted another furnace, but TOV went bankrupt, so
Bielefeldt contacted Metallurgical telling them that his new company, Fourtek, could help out. Metallurgical
showed Fourtek the modified furnaces; Fourtek turned around and built a replica furnace for another company.
Metallurgical sued defendants for misappropriation of trade secrets. Defendants said Metallurgical had made
disclosures to other folks so and the mods were made from common materials, and thus shouldn’t be a trade
secret. The trial court agreed with defendants. 5th Circuit reversed.
b. The 5th Circuit explained that the district court erred when it refused to recognize any protection
Texas law provides to a modification process, which was the trade secret here.
i. The court held that while acknowledging the publicity of the zinc recovery process, however
Metallurgical’s particular recovery process can be as yet unknown to the industry.
c. The court found that Metallurgical took reasonable steps to keep the modifications to the furnaces
a secret (restricted access, non-disclosure agreements with employees, etc.)
i. Rejecting the disclosure to others argument, the court held that a holder may divulge his info
to a limited extent without destroying its status as a trade secret. The disclosures here were
to two businesses with whom Metallurgical was dealing.
3. Notes:
a. The 11th Cir. has held that “even if all of the information is publicly available, a unique
combination of that information, which adds value to the information, also may qualify as a trade
secret.”
b. The plaintiff in a trade secret case bears the burden of establishing the existence of a trade secret
i. “a person claiming rights in a trade secret bears the burden of defining the information for
which protection is sought with sufficient definiteness to permit a court to apply the criteria
for protection described in this Section and to determine the fact of an appropriation” -- §39,
cmt (d) Rest. (3d) of Unfair Comp.
c. the Metallurgical court briefly addressed “negative know how”—i.e., knowledge of what not to
do. But the court concluded that the dispute involved the alleged misappropriation of affirmative
knowledge thus it didn’t squarely address it.
i. A common scenario in which negative knowledge becomes an issue is when a former
employee goes to work for a competitor and helps the competitor avoid the mistakes made
by the previous employer.
iii. The Value of the Secret
1. Trade secret standards require the secret to be valuable
2. Comment (e) to §39 of Rest. (3) of UC observes:
a. “A trade secret must be of sufficient value in the operation of a business or other enterprise to
provide an actual or potential economic advantage over those who do not possess the information.
The advantage, however, need not be great. It is sufficient if the secret provides an advantage that
is more than trivial.”
3. The UTSA states that a trade secret “derives independent economic value, actual or potential, from not
being generally known to, and not being readily ascertained by proper means by, other persons who can
obtain economic value from its disclosure or use.”
iv. Reasonable Steps to Maintain Secrecy
1. Trade secret standards also consider the plaintiff’s efforts to maintain the secrecy of the information.
a. Rockwell Graphic Systems, Inc. v. DEV Industries, Inc. (7th Cir. 1991)—Rockwell was a printing
press manufacturer who brought a trade secret misappropriation claim against DEV, a competing
printing press manufacturer who had hired former employees of Rockwell. The 7th cir. reversed the
district court’s decision for defendants because it was found that Rockwell kept all of its
engineering drawings in a vault. Access to the vault and the building was limited to authorized
personnel only; also the employees were required to sign NDAs.
2. The issue of reasonable efforts is a question for a factfinder (aka the jury, or judge on a bench trial)
3. Rest. (3d) of UC and the UTSA also emphasize the need to examine what is “reasonable under the
circumstances to maintain secrecy.”
4. Learning Curve Toys, Inc. v. Playwood Toys, Inc. (2d Cir. 2003)
a.
Playwood (PW) obtained a jury verdict against Learning Curve (LC) and its representatives for misappropriation of a trade secret in a
realistic looking & sounding toy railroad track under the Illinois Trade Secrets Act. Jury awarded PW a royalty of 8% for a license that
would have been negotiated absent the misappropriation to last for the lifetime of the product. However, despite the overwhelming
evidence, the district court granted JNOV holding that PW did not have a protectable trade secret in the toy railroad track.
i. PW was a small 3-person company in Toronto. The owners met defendants at a toy fair, they regrouped at PW’s workshop to
discuss a manufacturing contract with LC. The meeting began with a tour, then moved to a conference room where the parties
agreed to make the ensuing discussions confidential. PW was shown some drawings from LC and was asked how they should
be improved, PW suggested making strategic cuts in the wooden tracks to make realistic noises, and PW even said “we could
call it the Clickety-Clack-Track”. LC asked if he could take the cut piece of track with him, PW agreed without asking for a
receipt for the cut track nor seeking a written confidentiality agreement to protect PW’s alleged trade secret.
1.
A little while later, PW found out that LC had (1) patented the cut track and (2) began selling it as the “ClicketyClack Track” . LC had $20M in track sales by the first quarter and $40M for combined track and accessory sales .
b. The court explained that the existence of a trade secret ordinarily is a question of fact. And held
that Playwood presented sufficient evidence for the jury to reasonably conclude that the
Restatement factors weighed in PW’s favor.
i. PW proved that its concept for noise-producing toy railroad tracks was not generally known
outside of PW’s business.
1. There was no similar track on the market until LC launched the Clickety-Clack
Track.
a. LC argued that merely being the first or only one to use particular info does
not, in and of itself, transform otherwise general knowledge into a trade
secret.
b. But the court found that PW’s expert testimony that PW’s concept as
embodied in the CCT was unique and permitted its seller to differentiate itself
from a host of competitors who were making a generic product.
i. Moreover, PW presented evidence that LC sought and obtained a patent
on the noise-producing track. It goes without saying that the
requirements for patent and trade secret protection are not synonymous
ii. A trade secret need not be novel or unobvious. However it’s commonly
understood that “if an invention has sufficient novelty to be entitled to
patent protection, it may be said a fortiori to be entitled to protection as
a trade secret.”
ii. Measures taken by PlayWood to guard the secrecy of its concept
1. Sufficient evidence was proffered for the jury to determine that PW took reasonable
precautions to guard the secrecy of its concept
2. Whether the measures taken by a trade secret owner are sufficient to satisfy the Act’s
reasonableness standard ordinarily is a question of fact for the jury…aka ‘stay in your
lane, Judge.’
iii. Value of the concept to PW and to its competitors
1. LC’s sales clearly skyrocketed after bogarting PW’s unique track design. It’s
irrelevant under Illinois law that PW did not actually use the concept in its business.
a. “The proper criterion is not actual use, but whether the trade secret is ‘of
value’ to the company.”
iv. Amount of time, effort, and money expended by PW in developing its concept
1. PW expended very little time and money developing its concept…it cost less than $1
and less than a half-hour to make. The district court erroneously determined that such
an insignificant investment was insufficient as a matter of law to establish the status
of a trade secret.
a. The appellate court said the DCt have too much weight to only one of several
factors to be considered.
v. Ease/difficulty with which PW’s concept could’ve been properly acquired by others
1. There was sufficient evidence for the jury to determine that PW’s concept could not
have been easily acquired thru proper means. The district court failed to appreciate
the fact that PW’s concept was not publicly available.
2. Until disclosed by sale, the trade secret should be entitled to protection. Reverse
engineering can defeat a trade secret claim, but only if the product could have been
properly acquired by others, as is the case when the product is publicly sold.
a. Here, PW disclosed its concept to LC (alone) in the context of a confidential
relationship; LC had no legal authority to reverse engineer the prototype that it
received in confidence.
5. Notes:
a. The efforts taken to maintain secrecy require a factual inquiry into the circumstances
b. Misappropriation
A plaintiff can establish misappropriation by showing that the trade secret was acquired by “improper
means,” or by showing that the secret was disclosed or used in an unauthorized manner.
i. Acquisition by Improper Means
1. §40 of Rest. (3d) of UC makes actionable the acquisition of a trade secret by “means that are improper.”
a. What is “improper”? §43 provides:
i. “’Improper’ means of acquiring another’s trade secret under §40 include theft, fraud,
unauthorized interception of communications, inducement of or knowing participation in a
breach of confidence, and other means either wrongful in themselves or wrongful under the
circumstances of the case.
1. **Independent discovery and analysis of publicly available products or information
are not improper means of acquisition
2. E.I DuPont deNemours & Co. v. Christopher (5th Cir. 1970)
a.
ii. Unauthorized Disclosure or Use
1. §40 Rest. (3d) of Unfair Competition provides that misappropriation can be established by showing
that the secret was disclosed or used in an unauthorized manner:
a.
One is subject to liability for the appropriation of another's trade secret if:
i. (b) the actor uses or discloses the other's trade secret without the other's consent and, at the time of the
use or disclosure,
(1) the actor knows or has reason to know that the information is a trade secret that the actor acquired
under circumstances creating a duty of confidence owed by the actor to the other under the rule
stated in § 41; or
(2) the actor knows or has reason to know that the information is a trade secret that the actor acquired
by means that are improper under the rule stated in § 43; or
(3) the actor knows or has reason to know that the information is a trade secret that the actor acquired
from or through a person who acquired it by means that are improper under the rule stated in §
43 or whose disclosure of the trade secret constituted a breach of a duty of confidence owed to
the other under the rule stated in § 41; or
(4) the actor knows or has reason to know that the information is a trade secret that the actor acquired
through an accident or mistake, unless the acquisition was the result of the other's failure to take
reasonable precautions to maintain the secrecy of the information.
2. Breach of Duty of Confidence
a. §41—Duty of Confidence
i. A person to whom a trade secret has been disclosed owes a duty of confidence to the owner
of the trade secret for purposes of the rule stated in §40 if:
1. The person made an express promise of confidentiality prior to the disclosure of the
trade secret; or
2. The trade secret was disclosed to the person under circumstances in which the
relationship between the parties to the disclosure or the other facts surrounding the
disclosure justify the conclusions that, at the time of the disclosure,
a. The person knew or had reason to know that the disclosure was intended to be
in confidence, and
b. The other party to the disclosure was reasonable in inferring that the person
consented to an obligation of confidentiality
3. Breach of Duty by Current and Former Employees
a. Rest. (2d) of Agency, §395- Using or Disclosing Confidential Information
i. Unless otherwise agreed, an agent is subject to a duty to the principal not to use or to communicate
information confidentially given him by the principal or acquired by him during the course of or
on account of his agency or in violation of his duties as agent, in competition with or to the injury
of the principal, on his own account or on behalf of another, although such information does not
relate to the transaction in which he is then employed, unless the information is a matter of general
knowledge.
b. Rest. (2d) Agency, §396—Using Confidential Information after Termination of Agency
i. Unless otherwise agreed, after the termination of the agency, the agent:
1.
2.
3.
4.
(a) has no duty not to compete with the principal;
(b) has a duty to the principal not to use or to disclose to third persons, on his own account or
on account of others, in competition with the principal or to his injury, trade secrets, written
lists of names, or other similar confidential matters given to him only for the principal's use or
acquired by the agent in violation of duty. The agent is entitled to use general information
concerning the method of business of the principal and the names of the customers retained in
his memory, if not acquired in violation of his duty as agent;
(c) has a duty to account for profits made by the sale or use of trade secrets and other
confidential information, whether or not in competition with the principal;
(d) has a duty to the principal not to take advantage of a still subsisting confidential relation
created during the prior agency relation
c. This would be a breach of Fiduciary Duty in Louisiana
d. Rest. (3d) of Unfair Competition, §42, cmt. b—
i.
The rules governing liability for the appropriation of trade secrets play a more central role in regulating the behavior
of employees after the termination of the employment relationship. Once the employment has ended, the former
employee has the right to compete with the former employer absent an enforceable agreement to the contrary.
Restrictive covenants limiting competition by former employees are enforceable only if the restriction is
reasonable. See § 41, Comment d. However, even in the absence of an enforceable covenant a former employee
remains subject to the general rules prohibiting use or disclosure of another's trade secrets in breach of a duty of
confidence.
e. Common Clauses:
i. Covenant Not to Compete—a promise not to engage in the same type of business for a stated
time in the same market as the buyer, partner, or employer
ii. Confidentiality Agreement—a promise not to disclose trade secrets or other proprietary
information learned in the course of the parties’ relationship
iii. Nonsolicitation Agreement—a promise to refrain from trying to lure customers away from
the employer for a specified period of time.
iv. “No-Hire” or Employee Non-Solicitation Agreement—a promise to refrain from enticing
employees to leave the company for a specified period of time
v. Trailer Clause—require employees to assign their rights to inventions developed during the
employment relationship to the employer, and to assign their rights to inventions developed
post-employment for a specified period of time.
III. Defenses
a. Recall the elements of plaintiff’s prima facie case:
i. First, the plaintiff must establish the existence of a trade secret
ii. Second, they must establish that the secret was misappropriated
1. Misappropriation involves either acquiring by improper means, or disclosing or using a trade secret that
the defendant knew, or should have known, was acquired by improper means.
iii. The burden of proof is a party’s duty to prove a disputed assertion or charge (includes both the burden of
persuasion and the burden of production)
1. Burden of persuasion—the party’s duty to convince the fact-finder to view the facts in a way that favors
that party
2. Burden of production—a party’s duty to introduce enough evidence on an issue to have the issue decided
by the fact-finder, rather than decided against the party in a peremptory ruling such as a summary
judgment or a directed verdict.
b. Reverse Engineering and Independent Discovery
i. If the defendant figured out the process/trade secret through time spent on independent discovery or reverse
engineered a finished, produced product then there should be no liability
c. Shop Rights
i. Shop Rights—employer’s limited license to use trade secret developed by employees during employment
hours
1. Rest. (2d) of Agency, §397. When Agent Has Right To Patents
a. (c) use of employer’s time or facilities. The fact that an employee uses time which he should have
devoted to his employer's affairs in perfecting a patent does not entitle the employer to the patent.
This is true even though, in addition, the employee has used improperly the employer's tools.
However, if the employer's time or facilities are used without his permission, and the employee
invents a device which can be used in the regular business of the employer, the latter is given a
nonexclusive license to manufacture and use it.
IV. Remedies
a. Injunctive Relief
i. Preliminary and Permanent Injunctions
1. The UTSA §2 specifically provides for injunctive relief:
a. (a) Actual or threatened misappropriation may be enjoined. Upon application to the court, an
injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be
continued for an additional reasonable period of time in order to eliminate commercial advantage
that otherwise would be derived from the misappropriation.
2. First, a plaintiff will file a complaint which is accompanied by an ex parte application for a temporary
restraining order (which will last until the preliminary injunction can be considered)
a. The court will then hold a hearing on whether to order a preliminary injunction
i. The party seeking the injunction must show:
1. A likelihood of success on the merits;
2. He will suffer irreparable harm if the injunction is denied;
3. Granting relief will not result in even greater harm to the other party; and
4. the public interest favors such relief.
3. The UTSA and the Third Restatement on Unfair competition both indicate that an injunction should be
long enough to eliminate the commercial advantage gained by the misappropriator, but should not be
longer than necessary.
a. An ordinary preliminary injunction lasts only 10 days, but can be extended by the court
ii. Inevitable Disclosure
1. One of the most powerful uses of injunctive relief is the ability to prohibit a former employee from
working for a competitor under the “inevitable disclosure” doctrine.
a. Based upon a threatened misappropriation, some courts will enjoin a departing employee who has
possession of trade secrets from working for a competitor. This is to avoid the “inevitable
disclosure” of those trade secrets to the new employer.
i. The doctrine can be invoked even if the former employee is not in possession of confidential
documents and even in the absence of a non-compete agreement.
b. PepsiCo, Inc. v. Redmond (7th Cir. 1995) listed 3 factors relevant to successfully invoking the
inevitable disclosure doctrine:
i. The employee must have “extensive and intimate knowledge”; in other words, the employee
must possess knowledge of a trade secret
ii. The old and new positions must be so similar that the former employee would have to rely
on the trade secrets to adequately perform in the new position
iii. The plaintiff must demonstrate proof of the employee’s willingness to exploit the secrets,
such as through a lack of candor by the former employee or the new employer.
2. Bimbo Bakeries USA, Inc. v. Botticella (3d Cir. 2010)
a. PA courts apply the inevitable disclosure doctrine to grant injunctions based not on a trade secret’s
inevitable disclosure, but on its likely disclosure
i. Cf. PepsiCo—“a plaintiff may prove a claim of trade secret misappropriation by
demonstrating that defendant’s new employment will inevitably lead him to rely on the
plaintiff’s trade secrets.”
b. Monetary Damages
i. Both the UTSA and the Third Restatement of Unfair Competition provide for the possibility of monetary
damages regardless of whether an injunction is also ordered
1. §3, UTSA:
a. damages can include both the actual loss caused by misappropriation and the unjust enrichment
caused by misappropriation that is not taken into account in computing actual loss.
ii.
iii.
iv.
v.
V.
i. In lieu of damages measured by any other methods, the damages caused by misappropriation
may be measured by imposition of liability for a reasonable royalty for a misappropriator’s
unauthorized disclosure or use of a trade secret.
Three Categories of damages:
1. Compensatory Damages
a. Available, but difficult to measure. Based upon the owner’s actual loss of the trade secret.
2. Unjust Enrichment
a. Seeks to measure the advantage enjoyed by the defendant as a result of the misappropriation. (the
value to the Defendant).
b. Defendant’s profits/savings: what benefit they gained from taking the trade secret
c. Hard to value if the defendant tried, but failed to turn a profit using the secret
3. Reasonable Royalty
a. Based upon the presumed market value of a license at the time of the misappropriation. What a
willing seller would sell it for, what a willing buyer would buy it for.
b. Now it means “the actual value of what has been appropriated”
Comments to UTSA §3 provide that both compensatory and unjust enrichment damages may be available in
the same case so long as there is no “double counting.”
1. Comment (d) to §45 of Rest. (3d) of Unfair Competition recognizes the ability to recover compensatory
damages and a reasonable royalty. It also identifies two other categories of damages, which may simply
be different ways of measuring the unjust enrichment of the defendant:
a. It provides for a measure of damages that awards the plaintiff the profits derived by the defendant
from the misappropriation
b. it allows the plaintiff to recover the savings enjoyed by the defendant that are attributable to the
misappropriation.
§3 of UTSA also has a provision for exemplary damages—the decision of which is left to the court, and the
amount of such damages is limited to twice the amount of any compensatory award.
1. Exemplary damages under the UTSA require a showing of “willful and malicious misappropriation” by
clear and convincing evidence.
§4 of UTSA provides for attorney’s fees under limited circumstances
1. it states that a court may award reasonable attorney’s fees to the prevailing party if:
a. A claim of misappropriation is made in bad faith;
b. A motion to terminate an injunction is made or resisted in bad faith; or
c. Willful and malicious misappropriation exists.
Federal Laws Affecting Trade Secrets
a. Although trade secret law is primarily left to the states, there are a number of federal laws in the area
i. Computer Fraud and Abuse Act (CFAA)
1. Passed in 1984 and was intended to protect classified financial and credit information on government
and financial institution computers. Initially was a criminal statute, but was amended to include civil
remedies.
2. Relevant provisions:
a. §1030(a)(2)(C)—“whoever intentionally accesses a computer without authorization or exceeds
authorized access, and thereby obtains…information from any protected computer if the conduct
involved an interstate or foreign communication…shall be punished as provided in the statute.
i. §1030(g)—provides that any person who suffers damage or loss by reason of a violation of
this section may maintain a civil action against the violator to obtain compensatory damages
and injunctive relief or other equitable relief.”
b. §1030(a)(4)—a person violates this section if he or she:
i. knowingly and with intent to defraud, accesses a protected computer without authorization,
or exceeds authorized access and by means of such conduct furthers the intended fraud and
obtains anything of value, unless the object of the fraud and the thing obtained consists only
of the use of the computer and the value of such use is not more than $5,000 in any 1-year
period…
c. §1030(a)(5)(C)—whoever intentionally accesses a protected computer without authorization and
as a result of such conduct, causes damage, violates the CFAA.
i. This provision requires the plaintiff to allege that “damage” occurred. Damage = any
impairment to the integrity or availability of data, a program, a system, or information.
3. Two (2) year statute of limitations
ii. Economic Espionage Act of 1996 (EEA) 18 USC §1831 et seq..
1. Criminalizes trade secret misappropriation to combat espionage against private entities and threats to
corporate security. The relevant portions of the Act make it a crime to knowingly covert a trade secret
placed in interstate commerce.
a. At one time, the statute was limited to trade secrets that related to or were included in tangible
products, but this limitation has been removed by the Theft of Trade Secrets Clarification Act of
2012.
b. The EEA’s definition of trade secrets mirrors the UTSA’s, but its definition of misappropriation
does not:
i. §1832 (a)—Whoever, with intent to convert a trade secret, that is related to a product or
service used in or intended for use in interstate or foreign commerce, to the economic benefit
of anyone other than the owner thereof, and intending or knowing that the offense will,
injure any owner of that trade secret, knowingly—
1. steals, or without authorization appropriates, takes, carries away, or conceals, or by
fraud, artifice, or deception obtains such information;
2. without authorization copies, duplicates, sketches, draws, photographs, downloads,
uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails,
communicates, or conveys such information;
3. receives, buys, or possesses such information, knowing the same to have been stolen
or appropriated, obtained, or converted without authorization…
2. Subsection (2) appears to prohibit reverse engineering given that such processes frequently involve
copying, duplicating, or sketching the information.
3. Although the EEA provides no civil remedy, an individual convicted of theft of a trade secret faces a
maximum sentence of up to 15 years in prison and a fine of up to $5,000,00 for foreign espionage, and
up to 10 years’ imprisonment and a fine for domestic theft.
a. Corporations are subject to fines of up to $10,000,000 or three times (3x) the value of the stolen
trade secret to the organization (whichever is greater) for foreign theft, and up to $5,000,000 for
domestic theft.
4. §1836(b)(1)—an owner of a trade secret that is misappropriated may bring a civil action under this
subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or
foreign commerce.
a. §1836(b)(3)—Remedies—a court may:
i. (A) grant an injunction
1. (i) to prevent any actual or threatened misappropriation on such terms as the court
deems reasonable, provided the order does not
a. prevent a person from entering into an employment relationship, and that
conditions placed on such employment shall be based on evidence of
threatened misappropriation and not merely on the information the person
knows; or
b. otherwise conflict with an applicable state law prohibiting restraints on the
practice of a lawful profession, trade, or business,
2. (ii) if determined appropriate by the court, requiring affirmative actions to be taken to
protect the trade secret; and
3. (iii) in exceptional circumstances that render an injunction inequitable, that
conditions future use of the trade secret upon payment of a reasonable royalty for no
longer than the period of time for which such use could have been prohibited
ii. (B) award—
1. (i)(I) damages for actual loss caused by the misappropriation of the trade secret; and
a. (II) damages for any unjust enrichment caused by the misappropriation of the
trade secret that is not addressed in computing damages for actual loss; or
2. (ii) in lieu of damages measured by any other methods, the damages caused by the
misappropriation measured by imposition of liability for a reasonable royalty for the
misappropriator’s unauthorized disclosure or use of the trade secret;
iii. (C) if the trade secret is willfully and maliciously misappropriated, award exemplary
damages in an amount not more than 2x the amount of damages awarded; and
iv. (D) If a claim of the misappropriation is made in bad faith, which may be established by
circumstantial evidence, a motion to terminate an injunction is made or opposed in bad faith,
or the trade secret was willfully and maliciously misappropriated, award reasonable
attorney’s fees to the prevailing party.
5. §1836(d)—Period of Limitations
a. a civil action may not be commenced later than 3 years after the date on which the
misappropriation with respect to the action would relate is discovered or by the exercise of
reasonable diligence should have been discovered. A continuing misappropriation constitutes a
single claim of misappropriation.
b. Agilysis, Inc. v. Hall and Solutions II, Inc (N.D. Georgia, 2017)
i. Software company brought action against former employee and direct competitor, alleging that employee
violated company’s non-disclosure agreement, code of conduct, and business computing policy in violation of
the Computer Fraud and Abuse Act (CFAA), Defend Trade Secrets Act (DTSA), Georgia Trade Secrets Act,
and common law. Defendants moved to dismiss.
c. GROW Financial Fed. Credit Union v. GTE Fed. Cred. Union (M.D. Florida 2017)
i. Plaintiff sued its competitor GTE and its former employee Holliday, who is now employed by GTE. Grow
alleged that Holliday, while still employed by Grow, sent Grow’s trade secrets and confidential/proprietary
information to GTE. Grow alleged against Holliday: CFAA; Florida Computer Abuse and Data Recovery
Act; and common law breach of duty of loyalty.
1. Grow alleged against both defendants: misappropriation of trade secrets under the federal Defend Trade
Secrets Act and the Florida Uniform Trade Secrets Act; tortious interference with advantageous business
relationships; conversion; common law unfair competition; and civil conspiracy.
d. Louisiana Uniform Trade Secrets Act—La R.S. 51:1431 et seq.
i. §1431. Definitions
1. “Improper means” includes theft, bribery, misrepresentation, breach, or inducement of a breach of a duty
to maintain secrecy, or espionage through electronic or other means
2. “misappropriation”
3. “trade secret” – information, including a formula, pattern, compilation, program, device, method,
technique or process, that:
a. derives independent economic value, actual or potential, from not being generally known to and
not being readily ascertainable by proper means by other persons who can obtain economic value
from its disclosure or use, and
b. is the subject of efforts that are reasonable under the circumstances to maintain its secrecy
ii. §1432. Injunctive Relief
1. Actual or threatened misappropriation may be enjoined. Upon application to the court, an injunction
shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an
additional reasonable period of time in order to eliminate commercial advantage that otherwise would be
derived from the misappropriation.
2. If the court determines that it would be unreasonable to prohibit future use, an injunction may condition
future use upon payment of a reasonable royalty for no longer than the period of time the use could have
been prohibited.
3. In appropriate cases, affirmative acts to protect a trade secret may be compelled by court order.
iii. §1433. Damages
1. in addition to or in lieu of injunctive relief, a complainant may recover damages for the actual loss
caused by appropriation. A complainant may also recover for the unjust enrichment caused by
misappropriation that is not taken into account in computing damages for actual loss.
iv. §1434. Attorney’s Fees
1. If a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or
resisted in bad faith, or willful and malicious misappropriation exists, the court may award reasonable
attorney’s fees to the prevailing party.
XI: DATA BREACH & STANDING
I.
II.
Data Breach
a. “Data breach” (as defined in 38 USC §5727—Which deals with Veterans’ Affairs…so odd) means the loss, theft,
or other unauthorized access, other than those incidental to the scope of employment, to data containing sensitive
personal information, in electronic or printed form, that results in the potential compromise of the confidentiality
or integrity of the data.
i. “Sensitive personal information” with respect to an individual, means any information about the
individual maintained by an agency, including the following:
1. Education, financial transactions, medical history, and criminal or employment history
2. Information that can be used to distinguish or trace the individual’s identity, including name, social
security number, date and place of birth, mother’s maiden name, or biometric records.
b. Data Breaches can arise in various situations:
i. The company itself holds the information and that information is subsequently disseminated without
authorization to third parties who may use that information to the detriment of the owners of that information.
1. Lost laptops, hacked data servers, disgruntled employees with access to data, etc.
ii. Third party vendors may be the ones entrusted with the data (such as cloud services, or document-destroying
service) and they disseminate the info through negligence or they are hacked (which they are still alleged to
be negligent in protecting that info)
iii. 9/10, this happens because of some hacker that breaches a company server’s firewall and obtains the sensitive
information.
c. Under §5(a) of the FTC Act, the FTC has authority to regulate in this area. They can impose injunctions and seek
civil actions for companies who violate consumer privacy rights.
i. There are no federal statutes that govern data breaches, rather the FTC and its regulations are the gatekeepers
in this area in the federal domain.
ii. FTC: Data minimization regulations—restricting what types of sensitive data businesses can request from
consumers and limiting how long that company can hold onto that information.
d. GDPR—European Union regulation
i. Requires businesses to monitor and protect the sensitive data of consumers in the EU. It also governs the
exportation of data (international purchases online—which means US businesses that transact in the EU will
have to abide by those regulations.
Standing
a. As you remember from Fed Courts, to bring a suit in federal court, a plaintiff needs to have standing under the
law to bring the action.
b. Clapper v. Amnesty International (S. Ct. 2012)
i. The Court reestablished the injury element of Article III standing:
1. Injury-In-Fact
a. Something more than just an abstract complaint about the violated law;
b. The threatened injury must be certainly impending to constitute injury in fact. The plaintiff must
show that he/she suffered:
i. An invasion of a legally protected interest
ii. That is concrete and particularized, and
iii. Actual or imminent, not conjectural or hypothetical (this actually came from Spokeo)
2. Causation
a. The injury must also be fairly traceable to the asserted unlawful conduct of the Defendant
III.
3. Redressability
a. The injury must also be able to be remedied with the power of the Court.
c. Attias v. Carefirst, Inc. (DC Cir. 2017)
i. Insureds brought putative class action against health insurer, asserting claims for breach of contract,
negligence, and violation of various state consumer-protection statutes, after their personal info was stolen
during data breach. District Court granted insurer’s motion to dismiss; DC Cir reversed.
1. The order dismissing the insured’s action against insurer for lack of SMJ was a final, appealable order,
thus Appeals Court had j/d—because the District Court dismissed without expressly inviting insureds to
amend their complaint
ii. The DC Cir. held that the insured, whose personal information was stolen during data breach, had standing to
bring action against helath insurer for breach of contract, negligence, etc.
1. The insureds plausibly alleged substantial risk of future injury—the data breach exposed insureds’ SSN
and credit card numbers, and the combination of names, DOBs, email addresses, and subscriber
identification numbers alone qualified as personal info and that unauthorized access to such a
combination created material risk of identify theft
2. Injury in fact was fairly traceable to the insurer, and
3. the fact that insureds had reasonably spent money to protect themselves against substantial risk created
potential for them to be made whole by monetary damages (redressability)
iii. The proper way to analyze an increased-risk-of-harm claim is to consider the ultimate alleged harm as the
concrete and particularized injury and then to determine whether the increased risk of such harm makes injury
to an individual citizen sufficiently imminent for standing purposes
iv. Article III does not require that the defendant be the most immediate cause, or even a proximate cause, of the
plaintiffs’ injuries; it requires only that those injuries be fairly traceable to the defendant
v. Self-imposed risk-mitigation costs, when incurred in response to a speculative threat, do not fulfill the injuryin-fact requirement for standing; but they can satisfy the redressability requirement, when combined with a
risk of future harm that is substantial enough to qualify as injury in fact.
d. Galaria v. Nationwide Mutual Ins. Co. (6th Cir. 2017)
i. Kdjfkd
Louisiana Law
a. La R.S. 51:3071 et seq.—Database Security Breach Notification Law
i. §3074. Disclosure upon breach in the security of personal information; notification requirements;
exemption:
1. (A) Any person that conducts business in the state or that owns or licenses computerized data that
includes personal information, or any agency that owns or licenses computerized data that includes
personal information, shall, following discovery of a breach in the security of the system containing such
data, notify any resident of the state whose personal information was, or is reasonably believed to have
been, acquired by an unauthorized person. …
2. (C) The notification required shall be made (1) in the most expedient time possible and (2) without
unreasonable delay, consistent with the legitimate needs of law enforcement or any measures necessary
to determine the scope of the breach, prevent further disclosures, and restore the reasonable integrity of
the data system.
3. (E) Notification may be provided by one of the following methods:
a. written notification
b. electronic notification
c. substitute notification, if an agency or person demonstrates that the cost of providing notification
would exceed $250,000, or that the affected class of persons to be notified exceeds 500,000, or the
agency or person does not have sufficient contact information. Then it can be made by (1) email,
(2) conspicuous posting on internet site, or (3) notification to major statewide media.
4. (G) notification is not required if after a reasonable investigation, the person or business determines that
there is no reasonable likelihood of harm to customers.
ii. §3075. Recovery of Damages
1. A civil action may be instituted to recover actual damages resulting from the failure to disclose in a
timely manner to a person that there has been a breach of the security system resulting in the disclosure
of a persons’ personal information.
b. Ponder v. Pfizer, Inc. (M.D. La. 2007)
i.
Private data on approx.. 17,000 former and current Pfizer employees left the confines of a Pfizer hard drive and into the unauthorized
domain. Data was on a Pfizer laptop which the company provided to one of its employees for home use and caused by the installation
of unauthorized file-sharing software—files with names, SSN, DOB, and addresses and bonus information of employees became
exposed to outsiders.
1. Pfizer notified Terry Horne via written letter detailing the steps it was taking to mitigate the breach and advised employees to
monitor their credit reports and bank statements for unusual activity.
ii. Horne brought class action, alleging Pfizer violated Louisiana’s Database Security Breach Notification Law, and breached its duty to
maintain privacy of info about him and other employees; that Pfizer was in a special fiduciary relationship with the class by reason of
its entrustment with private information; and Pfizer had a duty of reasonable care to use reasonable means to keep the info private and
secure.
1. He claims that plaintiffs have suffered or will potentially suffer damages…and that the class has suffered
fear and apprehension of fraud, loss of money, and ID theft, the burden and cost of credit monitoring;
etc. As well as a constitutional violation.
iii. Motion to dismiss was filed by Pfizer—FRCP 12(b)(6)
iv. Pfizer didn’t inform via written notice until 9 weeks after the breach…but that wasn’t an issue to the court.
v. The court held that the complaint/plaintiff didn’t adequately show standing—that his SSN or other private
info was actually used or money had been taken from his account…just that he has the burden of monitoring
and bearing the cost if his exposed personal info is used in an illicit manner.
1. But these damages asserted are speculative and not recoverable under Louisiana law, which requires that
damages be established to a “legal certainty”
vi. Additionally, the constitutional claims fall because they don’t apply to private companies.
c. Data Breach Insurance Policies
BAD FAITH BREACH OF CONTRACT: Insurance and Beyond
I.
Intro
a. Generally, a mere breach of contract does not give rise to liability in tort. Whether the defendant breaches
intentionally, negligently, or innocently makes no difference—the defendant is ordinarily liable in contract, but not
in tort.
i. It’s a morally neutral act—you pay damages if you do not keep it. The efficient breach of contract occurs when
the gain to the breaching party exceeds the loss to the party suffering the breach, allowing the movement of
resources to their more optimal use.
b. In limited circumstances, tort liability has been imposed for “bad faith” breaches of contract.
i. Insurance disputes are most common, but there has been tort liability in other contractual contexts
(employment)
Insurance
a. The Duty to Defend and the Duty to Indemnify
i. North Start Mutual Ins. Co. v. R.W. (Minn. Ct. App. 1988)
1. It is well established that if any claim is made against an insured which could result in liability for
covered damages, the insurer has a duty to defend.
a. The Minnesota Sup. Ct. has held: “If any part of the claim is arguably within the scope of coverage
afforded by the policy, the insurer should defend and reserve its right to contest coverage based on
facts developed at trial.
2. The duty to defend is broader than the duty to pay, and the obligation to defend is not synonymous with
coverage.
3. Here, the language of the insurance contract was rather broad, and the court held that North Star had a
duty to defend TF in an action of negligent transmission of genital herpes because it is a claim that is
arguably within the scope of coverage afforded by the policy.
Notes:
ii. “First party” insurance is a contract involving an insurer’s promise to pay an insured when the insured himself
suffers a loss.
iii.
iv.
v.
vi.
1. Property insurance and health insurance are examples of first-party insurance
2. By contrast, “third-party insurance is a contract involving an insurer’s promise to pay a third party when
the insured’s actions have resulted in liability to the third party.
a. This protection may involve defending the insured in a lawsuit, paying or settling a claim against
the insured, or a combination of both.
b. Liability is third-party insurance
An insurance policy will have language setting forth the coverage of the policy (the “insuring language”). It is
generally the insured’s burden to prove that a claim is encompassed by the insuring language of the policy
1. The policy will also contain exclusions that allow the insurer to control its risk by providing more
precisely tailored coverage.
a. Most standard liability policies contain an exclusion for intentional harm caused by the insured.
b. Unlike the insuring language, it is generally the insurer’s burden to prove that a policy exclusion
is applicable.
2. Exclusions allow the insurer to create differentiated risk pools and to correspondingly offer less expensive
policies to insureds who do not need protection from particular risks.
Under most standard liability insurance policies, the insurer owes a duty to defend and a duty to indemnify.
1. An insurer’s duty to defend a lawsuit against its insured is both separate and distinct from the duty to
indemnify its insured for liability that is imposed against the insured after trial.
2. In liability policies generally, an insurer assumes both the duty to indemnify the insured (i.e, to pay all
covered claims and judgments against the insured), and the duty to defend any lawsuit brought against the
insured that alleges and seeks damages for an event potentially covered by the policy, even if groundless,
false, or fraudulent.
a. The duty to defend is much broader, however, if the court determines that there is no duty to
defend, the insurer will not have a duty to indemnify.
The initial test for when the duty to defend is triggered:
1. Eight-Corners Rule—(the petition’s four corners, and the policy’s four corners)
a. The insurer must provide a defense when the plaintiff’s pleadings make allegations that, if true,
would create liability that is covered by the policy. In addition, in most jurisdictions the insurer also
has a duty to defend if it becomes aware of information that potentially brings the claim within
coverage.
i. If the complaint alleges one covered claim, then the insurer must defend even if the other
claims are outside the policy.
2. The Duty to Indemnify Test
a. Based instead on the relevant facts as ultimately adjudicated. Suppose that the liability policy
contains an exclusion for liabilities arising out of business-related uses of the insured’s property.
i. The tort plaintiff alleges a negligently caused slip-and-fall injury on the insured’s premises,
the insurer provides a defense, the tort plaintiff obtains a judgment, the insurer refuses to pay
the judgment, and the insured sues the insurer for breach of the duty to pay.
ii. Whether the insurer breached the duty to pay will turn on an adjudication of how the property
was being used.
The insurer’s breach of its duty to defend is generally viewed as a breach of contract.
1. The typical measure of damages for breach of the duty to defend is contractual in nature, as it includes the
costs and reasonable attorney’s fees incurred by the insured in defending himself, plus any consequential
damages suffered by the insured as a result of the insurer’s breach.
a. Because the duty to defend is a contract duty, an insured can recover compensatory damages for the
insurer’s breach of its duty to defend.
b. A breach of the duty to defend does not ordinarily result in the insurer’s liability for an excess
judgment against the insured.
2. Likewise, the insurer’s wrongful refusal to indemnify can give rise to a cause of action in tort, in which
even the insurer may have additional liability
a. An insurer has a duty to act in good faith and fairly in handling an insured’s claim.
i. When it breaches that duty, in some states by unreasonably withholding payments, and in still
others by withholding payments in bad faith, the insurer’s conduct will be deemed to give rise
to a cause of action in tort.
vii. Liability insurance policies often state that the insurer has the “right and duty” to defend the insured. This
language and related terms are typically interpreted to mean that the insurer has a right to control the defense.
1. Primary insurance policies, such as the standard commercial liability policy (CGL policy), give the
company “the right and duty to defend any ‘suit’” in which a claim for a covered loss is asserted against
the insured.
a. It also entitled the company to “investigate and settle any claim or ‘suit’ at the company’s
discretion.
b. In some commercial insurance policies, there may be consent-to-settle clauses that allow the
insurance company to settle on the insured’s behalf at the insurer’s discretion.
viii. The potential availability of insurance can cause plaintiffs to “underlitigate” their tort claims.
1. Underlitigation has been defined as the plaintiff’s choice to plead and prove negligence rather than or in
addition to intentional tort theories when, absent insurance considerations, the plaintiff would either frame
the case solely as an intentional tort claim or emphasize the intentional tort claim.
b. The Duty To Settle
i. Crisci v. Security Ins. Co. (Cal. 1967)
1. Woman sued apartment building and insurer after she was injured in a staircase accident. She suffered
physical injuries and developed psychosis—she asked for $400k for physical and mental injuries and
medical expenses. Crisci (owner) had $10,000 of insurance coverage under a general liability policy
issued by Security. The policy obligated Security to defend the suit against Crisci and authorized them to
make any settlement it deemed expedient. Security rejected a $9000 settlement offer.
a. Jury awarded injured woman $100,000 and her husband $1000. The insurance paid out its max of
$10,000 and told Crisci “good luck!”. Crisci assigned her claim against her insurer to the injured
woman.
2. In every contract, including policies of insurance, there is an implied covenant of good faith and fair
dealing that neither party will do anything which will injure the right of the other to receive the benefits
of the agreement…
a. The Test: whether a prudent insurer without policy limits would have accepted the settlement offer.
3. Security breached its duty to consider the interests of Crisci in proposed settlements. Victim offered to
settle under policy limits, yet Security still rejected it. The trial court found that defendant “knew that
there was a considerable risk of substantial recovery beyond said policy limits” and that the defendant did
not give as much consideration to the financial interests of its insured as it gave to its own interest.
a. That’s all that was required.
4. In some states, where the breach of the insurance contract sounds in tort, and mental anguish logically
proceeds from the tortious conduct of the insured, recovery for mental anguish is allowed (or other nonpecuniary damages)
ii. Notes:
1. Some courts conclude that the duty to settle arises out of a fiduciary relationship between the insurer and
the insured.
2. Standards courts use to determine whether the duty to settle has been breached—
a. See note 6, p. 252.
3. Note 7: factors relevant to determining whether a breach of the duty to settle has occurred, laundry list;
a. P. 254.
4. A firm offer to settle is unnecessary in Louisiana now
a. Insurer’s duty can be triggered by information other than a firm offer to settle.
c. The Duty of Good Faith
i. Universe Life Ins. Co. v. Giles (Tex. 1997)
1. Issue of health insurer alleging breaching duty of good faith and fair dealing after refusing to pay
insured’s medical expenses, arguing it was a pre-existing condition. Court of appeals reduced the amount
of punitive damages awarded the insured but affirmed the lower court’s judgment in favor of plaintiff.
Texas supreme court reversed the punitive damages award, affirmed the rest.
2. An insurer violates its duty of good faith and fair dealing by denying or delaying payment of a claim if the
insurer knew or should have known that it was reasonably clear that the claim was covered.
a. Whether the insurer breached it duty of good faith and fair dealing is a fact question for the jury.
3. Under Texas law, an insurer has a duty to deal fairly and in good faith with its insured in the processing
and payment of claims.
a. An insurer breaches its duty of good faith and fair dealing when the insurer had no reasonable basis
for denying or delaying payment of a claim, and the insurer knew or should have known that fact.
4. The court said there wasn’t any evidence to show that the insurer’s conduct would pose a grave risk to the
plaintiff, thus they completely did away with the punitive damages award
d. Louisiana Law
i. La R.S. 22: 1973. Good faith duty; claims settlement practices; cause of action; penalties
1. (A) An insurer, including but not limited to a foreign line and surplus line insurer, owes to his insured a
duty of good faith and fair dealing. The insurer has an affirmative duty to adjust claims fairly and
promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both. Any
insurer who breaches these duties shall be liable for any damages sustained as a result of the breach.
2. (B) Any one of the following acts, if knowingly committed or performed by an insurer, constitutes a
breach of the insurer’s duties imposed in Subsec. A ^:
a. Misrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue
b. Failing to pay a settlement within 30 days after an agreement is reduced to writing
c. Denying coverage or attempting to settle a claim on the basis of an application which the insurer
knows was altered without notice to, or knowledge or consent of, the insured
d. Misleading a claimant as to the applicable prescriptive period
e. Failing to pay the amount of any claim due any person insured by the contract within 60 days after
receipt of satisfactory proof of loss from the claimant when such failure is arbitrary, capricious, or
without probable cause
f. Failing to pay claims pursuant to 22:1893 when such failure is arbitrary, capricious, or without
probable cause
3. (C) In addition to any general or special damages to which claimant is entitled for breach of the imposed
duty, the claimant may be awarded penalties assessed against the insurer in an amount not to exceed 2x
the damages sustained or $5,000, whichever is greater. Such penalties shall not be used by the insurer in
computing either past or prospective loss experience for the purpose of setting rates or making rate filings
ii. R.S. 22:1892
1. All insurers issuing any type of contract shall pay the amount of any claim due any insured within 30 days
after receipt of satisfactory proofs of loss from the insured or any party in interest. The insurer shall notify
the insurance producer of record of all such payments for property damage claims made in accordance
with his paragraph.
2. – likely to get into this statute when you have a claim that hasn’t been paid, yet hasn’t been reduced to
“settlement”
iii. Kelly v. State Farm Fire & Cas. Co. (La. 5/5/15)
1. Kelly was hit by State Farm’s insured (Thomas). Broken femur. $26k+ in medical bills. Attorney sent
letter to State Farm with medical bills asking to pay the medical expenses in exchange for a release. State
Farm did not respond to the letter nor did State Farm mention the letter to Thomas. State Farm offered to
settle for $25,000, the policy limit, and Kelly’s attorney rejected the offer and filed suit.
a. Thomas was found liable for the accident and cast in judgment for $176, 464.07 plus interest. State
Farm paid Kelly the policy limit of $25,000. Thomas assigned his right to pursue a bad faith action
against State Farm to Kelly in exchange for Kelly’s promise not to enforce the judgment against
Thomas’ personal assets.
b. Kelly filed suit against State Farm, alleging liability for bad faith practices for failing to notify
Thomas of Kelly’s letter; and failure to accept Kelly’s first settlement offer. SF filed MSJ, district
court granted SMJ on the first claim, holding that the January 2006 letter did not constitute a
settlement offer and that SF did not have a duty to notify Thomas when the letter was received. Dist
ct denied SMJ on the second claim, stating that Kelly might be able to prove that SF’s failure to
settle his insurance claim constituted bad faith.
i. State farm sais it could be liable for bad faith failure to settle only if it failed to accept an
actual offer and acted in bad faith—the letter did not constitute a settlement offer. Dist. Ct
dismissed both claims.
2. LASC held that under the statute, the insurance company did not need to have a firm offer to settle to
trigger its duty of good faith and fair dealing with settling the claim.
a. Other relevant information may trigger such a duty—the court held that the letter from Kelly’s
attorney is the type of information that would have triggered the duty.
3. FN. 28: insurer’s duty to settle
a. It is suggested that the insurance company should disregard its policy limits in evaluating the
reasonableness of a settlement offer. The insurer should not be motivated by how much it stands to
gain or lose, thus disregarding the insured’s exposure. Instead, the insurance company should
analyze the claim from the viewpoint of how much it would be willing to pay in settlement of the
case if its policy limits were adequate to cover the insured’s full exposure. Then, it should be
prepared to fund such reasonable settlement up to its policy limits.
i. On the other hand, if the insurer reasonably would risk its own funds in litigation of the
claim, then it should not be required to pay more simply because the insured has purchased
inadequate insurance protection
4. FN 29:
a. A finding that a firm settlement offer is not a requirement does not mean such an offer has no place
in the analysis. Such an offer would unmistakably put the insurer on notice the matter can be
resolved and, if the offer were within policy limits, shield the insured from an excess judgment.