New York tort law recognizes claims for tortious interference with both existing contracts and prospective business relations.1 To maintain robust, legitimate competition, however, New York courts apply the economic interest defense to such claims, which generally provides a complete defense where the interference arose through the exercise of defendant’s equal or superior right in the breaching party’s business.2 It has long been the case that existing contracts receive greater protection than prospective contracts, out of respect for individual contract rights. Although both types of claims require a showing of improper interference, plaintiffs seeking to recover for interference with prospective business relations must show a higher level of culpability, specifically malice or wrongful means.3

Whether economic self-interest is sufficient to establish the defense, in claims for both tortious interference with contract and tortious interference with business relations, has been the subject of significant judicial activity, both in the Court of Appeals and the Commercial Division. Following a recent Court of Appeals decision clarifying the breadth of the economic interest defense, the Commercial Division has had the opportunity to revisit its application. These recent decisions highlight the distinction the courts make between claims for tortious interference with contract and tortious interference with business relations. They also reflect that, although the Commercial Division may be limiting the situations in which self-interest justifies interference with an existing contract, it continues to apply the economic interest defense broadly to defendants who interfere with prospective business relations for their own direct benefit.

Court of Appeals Clarifies

Despite the long history of tortious interference claims and the economic interest defense, the Court of Appeals only recently clarified whether a general economic interest in soliciting business can provide an economic interest defense to a claim of tortious interference with contract in the absence of any preexisting relationship between the alleged tortfeasor and the breaching party. In White Plains Coat & Apron v. Cintas, the defendant was a competitor of the plaintiff, which allegedly induced the plaintiff’s contract customers, with whom the defendant had no preexisting relationship, to breach their exclusive service contracts with the plaintiff.

Addressing this question on certification from the U.S. Court of Appeals for the Second Circuit, the Court of Appeals held that the economic interest defense did not protect the defendant who, as a mere competitor, had no existing legal or financial interest in the breaching parties’ business.4 The Court of Appeals reasoned that where the plaintiff has an existing contract, a mere competitor does not have an equal or superior right that justifies interference.

Commercial Division Case

The Court of Appeals case dealt with the common and relatively simple situation in which a direct competitor interferes with the contractual relations of a competing firm to advance its own business. In a subsequent Commercial Division case, UMG Recordings v. Escape Media Group, Justice Barbara Kapnick of the New York County Commercial Division was faced with a far more complicated dynamic.5 The plaintiff, the owner or exclusive licensee of the rights to a vast library of sound recordings, sued the defendant, an Internet music service, for copyright infringement. The defendant counterclaimed for tortious interference with contract, alleging that the plaintiff had improperly induced two companies to breach their contracts with the defendant due to the copyright dispute by misrepresenting to them the nature of the defendant’s business and services. The defendant alleged that one of the breaching parties was the plaintiff’s partner in an unrelated joint venture, and that the plaintiff owned a substantial equity interest in the second breaching party. The plaintiff urged that the counterclaims should be dismissed because, based on the defendant’s own allegations, the plaintiff had significant legal and financial interests in each of the breaching parties.6

Kapnick held that the plaintiff had not established the economic interest defense despite its relationship with, and interest in, the breaching parties. The court recognized that the plaintiff allegedly had interfered with the defendant’s contracts with the third parties to protect its own direct interest, and it allegedly induced its affiliated companies to breach their contracts with the defendant to discourage the defendant from infringing on its intellectual property rights and to confer a benefit on itself. Although the plaintiff had both a financial and legal interest in the breaching parties, the court found that it did not interfere with the contract to promote these interests. Rather, the plaintiff was not acting as a joint venture partner or equity holder, but essentially as a competitor of the defendant in the market for the copyrighted recordings. Kapnick found this distinction to be determinative and, citing to White Plains, held that the economic interest defense applies only when a party interferes with a contract to protect its stake in the breaching party. Because the plaintiff failed to sustain the economic interest defense, the court denied the plaintiff’s motion to dismiss the counterclaims. The court also found that the defendant had sufficiently alleged improper interference by claiming that the plaintiff had misrepresented the nature of the defendant’s business.7

Business Relations Cases

Although in the cases above the Court of Appeals and Commercial Division refused to apply the economic interest defense in tortious interference with contract cases, two other recent Commercial Division cases have affirmed that self-interest is sufficient to sustain the economic interest defense against claims of tortious interference with business relations. Because plaintiffs claiming tortious interference with business relations must allege malice or wrongful means, these cases show that self-interested motivation continues to provide a strong defense in tortious interference with business relations cases.

In Williams v. Citigroup, Justice Bernard Fried of the New York County Commercial Division heard claims of tortious interference with contract and tortious interference with business relations asserted by a former partner at multiple New York law firms against a number of former clients.8 There, the plaintiff alleged that she had developed and patented a structure for issuing bonds while she was a partner at Pillsbury Winthrop Shaw Pittman. She alleged that, although the defendants initially had an interest in using her structure, they ultimately decided that the structure would negatively impact other lines of business. To prevent the use of the structure, the defendants allegedly reassigned the individual employees who had responded positively to it, exerted pressure on other institutions not to use the structure, and erected further barriers by causing long no-call periods on bonds they had underwritten. The plaintiff also alleged that the defendants had pressured two law firms not to continue her employment.9

Fried first addressed the viability of the tortious interference with contract claim. He found that the complaint did not sufficiently plead this claim because it did not allege that the defendants had actually induced either law firm to breach any contract with the plaintiff. Because the plaintiff had not alleged a breach of contract, she could not sustain her claim for tortious interference with contract. Fried next addressed the claim for tortious interference with business relations. The court found that the plaintiff had sufficiently alleged that she had business relations with third parties, that the defendants had interfered with those relations, and that injury had resulted. The court found, however, that the plaintiff had not substantiated the malice or wrongful means necessary to sustain her claim. Because the plaintiff alleged that the defendants were motivated in part by their belief that her patented structure would harm their financial interests, the defendants had acted, at least in part, in their own self-interest and not solely out of malice.

In Meadow Ridge Capital v. Levi, a case arising in the Nassau County Commercial Division, Justice Timothy Driscoll heard a claim of tortious interference with business relations stemming from the failed sale of a food manufacturing company.10 The plaintiff, the prospective buyer of the company, and the defendant, the owner, president and CEO of the seller, entered into extensive negotiations including executing a letter of intent regarding the proposed acquisition. The plaintiff alleged that the defendant walked away from the negotiations in bad faith and to pursue her own economic interests, which the plaintiff alleged conflicted with those of the company and the defendant’s co-shareholders in the company.11

Driscoll easily disposed of this claim. Because the plaintiff alleged that the defendant acted in part to advance her own economic interest, and did not allege a malicious motivation or wrongful means, the economic interest defense protected the defendant.12

The approach that Fried and Driscoll took in these two recent cases was consistent with the Commercial Division’s application of the economic interest defense to claims for tortious interference with business relations before White Plains. For example, in Advanced Global Technology v. Sirius Satellite Radio, a case decided before White Plains, Justice Karla Moskowitz, then presiding in the New York County Commercial Division, heard a claim for tortious interference with business relations arising out of a satellite radio provider’s use of economic pressure to prevent one of its business associates from contracting with the plaintiff.13 There, the plaintiff sold radio receivers made by the defendant’s primary competitor. The plaintiff sought to engage a third-party manufacturer of the defendant’s products to engage in an unrelated business venture. Because of the plaintiff’s relationship with defendant’s primary competitor, the defendant allegedly exerted economic pressure on the third party to prevent it from doing business with the plaintiff.14

The plaintiff argued that the defendant was not motivated by self-interest because the plaintiff and defendant did not compete in the same market. In finding for the defendant, however, Moskowitz held that, despite the lack of competition between the plaintiff and defendant, the defendant was seeking, in part, to advance its economic interests by preventing its business partners from doing business with companies associated with its competitors. The court found it insignificant that the defendant did not act to advance its interest in the breaching party, but instead acted in its own direct interest.15

Conclusion

Recent Commercial Division cases have presented the opportunity to evaluate the applicability of the economic interest defense to claims for tortious interference with contract and tortious interference with business relations. These cases plainly demonstrate the requirement in tortious interference with contract cases that defendants show they were acting to protect their interest in the breaching party, rather than their own self-interest. The economic interest defense remains a strong shield, however, for defendants faced with claims of tortious interference with business relations.

George Bundy Smith is an arbitrator and mediator with JAMS in New York City, and is a former associate judge of the New York Court of Appeals. Thomas J. Hall is a litigation partner with Chadbourne & Parke. Sam Zimmerman, a law clerk with Chadbourne, assisted with the preparation of this article.

Endnotes:

1. White Plains Coat & Apron v. Cintas, 8 N.Y.3d 422, 425 (2007).

2. Felsen v. Sol Cafe Mfg., 24 N.Y.2d 682, 687 (1969).

3. Guard-Life v Parker Hardware Mfg., 50 N.Y.2d 183, 191 (1980).

4. White Plains, 8 N.Y.3d at 425.

5. UMG Recordings v. Escape Media Group, 948 N.Y.S.2d 881 (N.Y. Co. 2012).

6. Id. at 889-90.

7. Id. at 893-94.

8. Williams v. Citigroup, 954 N.Y.S.2d 762 (N.Y. Co. 2012).

9. Id.

10. Meadow Ridge Capital v. Levi, 920 N.Y.S.2d 242, 29 Misc.3d 1224 (Nassau Co. 2010).

11. Id.

12. Id.

13. Advanced Global Tech v. Sirius Satellite Radio, 836 N.Y.S.2d 807, 15 Misc.3d 776 (N.Y. Co. 2007).

14. Id. at 808-09.

15. Id. at 811-12.