Getting on the Right Side of
the “v.”: Suing and Being Sued
for Business Torts
Presented By:
LaMar F. Jost and Annie T. Kao
-for-
ACC In House Counsel Forum
April 16, 2014
LaMar F. Jost
Partner at Wheeler Trigg O’Donnell, practicing
primarily in medical malpractice, product
liability, and commercial litigation.
Prior to joining WTO, was Law Clerk to The
Honorable Bobby R. Baldock, United States
Court of Appeals for the Tenth Circuit, and to
The Honorable Clarence A. Brimmer, United
States District Court for the District of
Wyoming.
Contact: jost@wtotrial.com
Annie T. Kao
Joined Vail Resorts in 2010 as Litigation
Counsel, where she manages and litigates a
variety of commercial disputes for the Mountain,
Hospitality, and Real Estate divisions.
Prior to joining Vail Resorts, was a trial attorney
at the law firms of Hogan Lovells, LLP and
Brownstein Hyatt Farber Schreck, LLP.
Clerked for the Honorable Mary J. Mullarkey,
former Chief Justice of the Colorado Supreme
Court in 2002.
Contact: akao@vailresorts.com
Overview
Overview
Business tort lawsuits are becoming
increasingly prevalent as parties and lawyers
look for ways to avoid contractual limitations
on damages.
Tort claims are being used as a "sword" in
commercial disputes to circumvent armslength contractual agreements.
Overview
This session will provide an overview of legal
theories and defenses to help your company
understand when filing a tort claim is
appropriate; and
If necessary, the means to defend a business
tort claim.
Introduction to Business Torts
Introduction
What Are Business Torts?
A tort is a wrongful injury to a person or property.
A business tort is a wrongful injury to a business or
its property; as one commentator described it, a
business tort is “a private wrongdoing in the course
of business.”
Business torts are based in common and statutory
law.
Introduction
A host of different business torts exist. They include:
Tortious interference with a
contract;
Bad faith in business
contracts;
Interference with prospective
advantage;
Unfair competition/
misappropriation;
Breach of fiduciary duties;
Fraudulent/negligent
misrepresentation;
Business defamation;
Unfair competition;
Antitrust;
Misappropriation of trade
secrets;
Civil conspiracy/RICO;
Breach of covenants not to
compete;
Internet and software piracy;
and
Patent or trademark
infringement.
Introduction
Damages and Other Remedies:
Business tort claims expose a defendant-business to
liability for damages its conduct proximately caused.
Although business torts frequently originate with or involve a
contract, tort damages are more expansive than contract
damages.
Compensatory damages include lost profits, loss of good
will, and loss of investments. Punitive damages may also
be available.
Business torts oftentimes require injunctive or
extraordinary relief (e.g., a temporary or permanent
restraining order to enforce a covenant not to compete).
Practical Tips
Protect the company on the front end:
Regularly review and update form contracts;
To the extent permissible under law, include waivers
of tort-based remedies in commercial contracts;
If reputation/publicity matters, consider arbitration
clauses.
If the company is sued, consider moving to
dismiss tort-based claims early in the lawsuit.
Protect your company’s “litigation reputation.”
Avoid negotiating “defense costs” in settlement.
The Boundary Between
Tort and Contract
The Boundary Between
Contract and Tort
Much business-to-business litigation involves a
contract between two commercial entities.
Courts have struggled to draw the line between
contract and tort law.
Economic Loss Rule &
Independent Duty of Care
The economic loss rule generally bars recovery in tort
for injuries other than those sustained by a person or
other property.1
The purpose of the economic loss rule is to maintain a
line between tort and contract.2
The Colorado Supreme Court adopted the economic
loss rule:
“[A] party suffering only economic loss from the breach of an
express or implied contractual duty may not assert a tort claim
for such a breach absent an independent duty of care under
tort law”.
Economic Loss Rule &
Independent Duty of Care
A tort claim cannot be maintained where a
“duty of care is created by, and completely
contained in, the contract[.]”
In one case, the Colorado Supreme Court
reversed a $600,000 judgment for negligence
against the defendant where the jury found
that a contract existed but was not breached.1
Is economic loss an affirmative defense?
Exceptions to Economic Loss Rule
Duty in Tort
The economic loss rule does not apply where
there is an independent duty in tort; in other
words, if the tort claim arises from a duty
extraneous to the contract, then a tort claim for
economic loss may proceed.1
Generally, such duties arise from “duties
imposed by law to protect citizens from risk of
physical harm or damage to their personal
property.”2
Exceptions to Economic Loss Rule
Duty in Tort
The Colorado Supreme Court has been reluctant to
find a duty in tort between commercially
sophisticated parties.1
A court will analyze the following factors to
determine if a tort duty exists:
The relief sought: is the relief sought in
negligence the same as the contractual relief?
The common law: is there a recognized common
law duty of care?
The duties involved: does the negligence duty
differ in any way from the contractual duty?2
Businesses Susceptible to
Tort-Based Claims
Professional services – the company may be sued
for breach of contract or breach of fiduciary duty.
Specialty or “niche” industries (e.g., software
industry, firearms industry) – these types of
companies are often sued in contract and tort
because of valuable and “secret” information (e.g.,
theft of trade secrets).
Insurance industry – insurance companies are
often sued for breach of contract and in tort (i.e.,
“bad faith”).
Exceptions to Economic Loss Rule
Breach of the Implied Duty of Good Faith and Fair Dealing
Sometimes called “Bad Faith in Business Contracts.”
In general, this claim does not exist in tort.1
“Every contract in Colorado contains an implied duty of good
faith and fair dealing . . . . In most contractual relationships, a
breach of this duty will only result in damages for breach of
contract and will not give rise to tort liability.”
For example, the Colorado Supreme Court has rejected
implying this duty to at-will employment contracts.2
The “exception to the exception”: the implied duty of
good faith and fair dealing gives rise to an
independent tort duty in insurance contracts.3
Exceptions to Economic Loss Rule
Economic Loss Doctrine
Construction Defect Litigation
“[S]ubcontractors owe homeowners a duty
of care, independent of any contractual
obligations to act without negligence in the
construction of a home.”1
Practical Tips
Enhance the Sophistication of the Other
Contracting Parties.
Paper your suggestion that they use legal counsel.
Allow sufficient time for them to review the
contract.
Traps of “Discretion” in a Contract:
A Contract is an instruction manual. Are you sure
you want or need open, discretionary terms?
Train your business clients to exercise contractual
power wisely and understand the risks
The Key Business Torts
Intentional Interference with
Contractual Relations
“One who intentionally and improperly interferes
with the performance of a contract (except a
contract to marry) between another and a third
person[.]”1
Tortfeasor must induce or otherwise cause the
third person not to perform the contract.
This tort is meant to punish the conduct of a third
person who is not a party to the contract.2
A party to a contract cannot be held liable for intentional
interference with that contract.
Interference with Prospective
Business Advantage
This tort is similar to tortious interference with a
contract, but focused on intentional interference with
formation of a contract or quasi-contract.
A tortfeasor is liable if he/she/it intentionally and
improperly interferes with another’s prospective
contractual relation (except a contract to marry) if the
interference consists of:
Inducing or otherwise causing a third person not to enter into
or continue the prospective relation; or
Preventing the other from acquiring or continuing the
prospective relation.1
Interference with Prospective
Business Advantage
Factors to consider in determining if the defendant is
intentionally interfering include:
The nature of the actor’s conduct;
The actor’s motive;
The interests of the other with which the actor’s conduct
interferes;
The interests sought to be advanced by the actor;
The social interests in protecting the freedom of action of the
actor and the contractual interests of the other;
The proximity or remoteness of the actor’s conduct to the
interference; and
The relations between the parties.1
Civil Conspiracy
A plaintiff must present evidence of an
agreement to form a conspiracy because a
court will not imply a conspiracy.1
The purpose of the conspiracy must involve an
unlawful act or unlawful means.2
Negligent Misrepresentation
Defendant gave false
information to plaintiff;
Defendant gave such
information to plaintiff in the
course of Defendant’s
business;
Defendant gave information
to plaintiff for his/her
guidance or use in a business
transaction;
Defendant was negligent in
obtaining or communicating
the information;
Defendant gave the
information with the intent of
knowing that plaintiff would
act (or fail to act) in reliance
on the information;
Plaintiff relied on the
information supplied by
defendant; and
Plaintiff suffered damages by
relying on the information the
defendant supplied.1
Breach of Fiduciary Duty
The existence of a fiduciary duty;
Knowing participation in the breach; and
Damages.1
Breach of Fiduciary Duty
Relationships Giving Rise to Fiduciary Duties
Attorney to client;1
Brokerage firm or broker
to customer;2
Director of corporation
to the corporation/
shareholders;3
Members of a limited
liability company to the
company;4
Director of an insolvent
corporation to the
corporation’s creditors
(limited fiduciary duty);5
A general partner to a
limited partner in a
partnership;6
An episcopal diocese
and bishop have a
fiduciary duty to a
parishioner.7
Misappropriation of Trade Secrets/
Unfair Competition - Elements
To prove misappropriation of a trade secret, a
plaintiff must show:
That he or she possessed a valid trade secret;
That the trade secret was disclosed or used without
consent; and
The defendant knew, or should have known, that
the trade secret was acquired by improper means.1
Practical Tips
Fact-Intensive Torts:
Negligent Misrepresentation Inducing a
Contract
Build a strong relationship with your Marketing
Department
Know your in-house contract negotiators
Breach of Fiduciary Duty
Don’t get closer than arms length
Act for the benefit of your own company first
Conclusion
Conclusion
Most business torts originate in contract.
Businesses and lawyers have to be aware and
on top of the ever-changing law on Colorado’s
economic loss rule.
Business tort cases are becoming increasingly
prevalent as parties and lawyers look for ways
to avoid contractual limitations on damages.
A business tort case is oftentimes a search for
extra-contractual damages.
Conclusion
Additional Resources:
Litigating Business and Commercial Tort Cases by Matthew
A. Cartwright, Kirk Reasonover, and Joseph Peiffer (2013).
This is the best treatise on the market on business torts; it is
comprehensive and geared toward the practicing lawyer; it has a lot
of forms for discovery and trial preparation.
Andrew R. Klien, Comparative Fault and Fraud, 48 Ariz. L.
Rev. 983 (2006).
Interesting and thoughtful discussion on whether comparative fault
principles should apply in a fraud action.
The “Business Torts Reporter” – short publication service
dedicated solely to issues that arise in business torts.