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Carvel Ice Cream store owners whose franchises were undercut when the company began marketing its products in supermarkets cannot sustain a claim for economic interference under New York law, the Court of Appeals held Thursday. Carvel Corporation v. Noonan, 116, is a significant commercial law case where the Court addressed the standards for asserting a tortious interference claim. The case began in federal court and came to Albany, N.Y., after a Southern District jury awarded $439,599 in compensatory damages and $600,000 in punitive damages to former owners of three Carvel franchises. Thursday’s 6-0 decision effectively topples whatever portion of those awards can be attributed to tortious interference. However, the franchisees are apparently still entitled to damages for breach of contract. Records show that until the early 1990s, Carvel sold its products only through franchised stores. However, Carvel changed its marketing strategy and embraced a new program geared toward supermarkets. Under the new program, Carvel sold directly to supermarkets. It also required the franchisees to distribute coupons that could only be redeemed at supermarkets. The franchisees claimed that the supermarket program undermined their businesses — in fact, many of the franchised stores closed during the 1990s — and, through the mandatory coupon distribution, made them agents of their own demise. They prevailed in a federal lawsuit, which led to an appeal by Carvel and two certified questions by the 2nd U.S. Circuit Court of Appeals. The circuit asked the New York Court whether the evidence in this case satisfies the state’s standards for tortious interference and whether punitive damages can be awarded in such a case absent evidence of public harm. Thursday, the Court of Appeals answered the first question in the negative, which rendered the second question academic. Writing for the court, Judge Robert S. Smith said the matter distills to whether Carvel’s apparent effort to induce customers to buy its products at a supermarket rather than through the franchises was tortious interference. “We conclude that it was not because Carvel’s conduct, which did not constitute a crime or an independent tort and was not aimed solely at harming franchisees, was also not the sort of egregious wrongdoing that might support a tortious interference claim in the absence of such an independently unlawful act or evil motive,” Smith wrote. He suggested that plaintiffs in such cases can prevail only when there is “wrongful” or “culpable” conduct, and not just economic pressure. “The intervention of tort law to regulate when a franchiser may or may not compete with its franchisees is neither necessary or useful,” Smith wrote. Joining the main opinion were Judges George Bundy Smith, Albert M. Rosenblatt and Susan Phillips Read. Judge Victoria A. Graffeo wrote a separate concurrence joined by Judge Carmen Beauchamp Ciparick. Chief Judge Judith S. Kaye did not take part. In their separate concurrence, Graffeo and Ciparick agreed with the result but said the standard set by the majority was too restrictive. They would have adopted the rule articulated in Restatement (Second) of Torts �766B and allowed recovery on an “improper conduct” standard, if the franchisees could have met that standard. “Although we conclude that the improper conduct standard should apply, we nonetheless concur with the majority holding because, based on the record in this case, the proof of economic pressure engaged in by Carvel does not rise to the level of improper conduct,” Graffeo wrote. Appearing were Mitchell A. Karlan of Gibson, Dunn & Crutcher in Manhattan for Carvel and J. Manly Parks of Duane Morris in Philadelphia for the franchisees. Karlan said the ruling protects New York businesses from “abusive litigation theories.” “Parties to contracts, especially franchisors, can be more confident that their commercial relations will be governed by their written contracts and not by the imaginative theories of plaintiffs lawyers,” Karlan said. Parks said that while his clients cannot obtain relief on the tortious interference claims, they are entitled to damages for breach of contract and possibly punitive damages. He said the matter now returns to the 2nd Circuit.

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