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Corporate Alert: Tortious Interference OR the Right to Solicit Business, Delaware Chancery Court Grants Jurisdiction Over Derivative Claims by LLC Members Seeking Damages, Good News for Creditors with Standing in New York
May 2007
Authors: Edward B. Stevenson, Irwin A. Kishner

Tortious Interference OR the Right to Solicit Business

Can a company induce its customers to breach their contracts with a competitor, and then hide behind the "economic interest" defense when the competitor sues? It has been an unsettled question, but on April 26, the New York Court of Appeals said no. In White Plains Coat & Apron Co. v. Cintas Corp., 2007 NY Slip Op. 03591 (2007), the Court ruled that a generalized economic interest in soliciting business for profit is not enough of an economic interest to constitute a defense to a claim of tortious interference.

White Plains Coat & Apron Co. ("WPL") rents tablecloths and other laundered articles to bars and restaurants. WPL executes contracts with its customers where each customer agrees to exclusively rent from WPL. Cintas Corp. and Cintas Corp. 2 (collectively, "Cintas") are competitors. WPL claims that Cintas intentionally induced dozens of WPL customers to breach their agreements and enter into similar agreements with Cintas.

In cases involving tortious interference of contractual relationships, New York Courts need to strike a balance between two competing public interests: protecting enforceable contracts and promoting free and robust competition. To succeed with a tortious interference case, a plaintiff must show the existence of a valid contract with a third party, the defendant's knowledge of that contract, the defendant's intentional and improper procuring of a breach of that contract, and damages to the plaintiff. In response to a tortious interference claim, a defendant may raise the "economic interest" defense, i.e., that the defendant acted to protect its own legal or financial stake in the third party's business. In White Plains, the Court ruled that a defendant who is simply a competitor of the plaintiff and knowingly solicits its contract customers cannot rely on the economic interest defense; being a competitor of the plaintiff does not itself constitute a legal or financial stake in the third party's business and does not justify inducing a breach.

The Court noted that its ruling has no impact on a competitor's right to properly solicit business, such as sending regular advertising. However, the case decidedly put an end to the broad argument that an ordinary competitor has an economic interest in contracts between its competitors and potential clients that is sufficient to justify inducing those potential clients to breach their agreements. The Court also made it clear that the economic defense will continue to apply in limited circumstances where the defendant:

  • is a significant stockholder in the breaching party's business;

  • is in a parent-subsidiary relationship with the breaching party;

  • is the breaching party's creditor; or

  •  has a managerial contract with the breaching party at the time the defendant induced the breach of contract.

Outside of these circumstances, liability will depend on proving that an improper inducement exceeded "a minimum level of ethical behavior in the marketplace"—a standard incorporating the norms of the marketplace, on a case-by-case basis.

Delaware Chancery Court Grants Jurisdiction Over Derivative Claims by LLC Members Seeking Damages

The Delaware Chancery Court has opened the door for derivative claims seeking monetary and related damages on a company's behalf under certain circumstances. Historically, the Chancery Court would hear only cases seeking equitable relief.

Section 18-1001 of the Delaware Limited Liability Company Act provides that a limited liability company member may bring an action in the Court of Chancery on behalf of the company when managers or other members of the company have refused to bring the action themselves. But the Court of Chancery has, up to now, recognized such derivative claims only if they seek equitable remedies, such as writs, injunctions and specific performance. The Court of Chancery has not historically recognized claims seeking monetary and other related damages, collectively known as "claims of law."

In Rizzo v. Joseph Rizzo and Sons Construction Co., Inc., decided on April 10, 2007, members of a limited liability company (other than the plaintiff) were using the company's real estate and not paying rent. The plaintiff, also a member of the company, sought ejectment, a claim of law which seeks to remove a person from wrongfully occupying another party's land. The Court ruled that though ejectment is technically a claim of law, such claims by limited liability company members are wholly analogous to corporate shareholder derivative claims for money damages, over which the Court has long exercised subject matter jurisdiction. The Court explained that a claim of law like ejectment becomes a "creature of equity" when it is asserted derivatively. In support of this contention, the Court observed that the ejectment claim in Rizzo was based on an alleged breach of fiduciary duty by the managers and members controlling the limited liability company, which is traditionally an equitable claim over which the Court of Chancery has exercised broad jurisdiction.

Good News for Creditors with Standing in New York

A recent ruling by the Appellate Division of New York, First Department brings good news for creditors. In Gryphon Domestic VI, LLC v. APP International Finance Company, et al., 2007 NY Slip Op 03209 (App. Div. 1st Dept.), the court held that any debtor subjecting him or herself to New York jurisdiction gives creditors with standing in New York the power to satisfy a judgment by enjoining the transfer of assets from the United States to a foreign country or ordering assets held overseas to be transferred to New York, short of violating any law of the foreign jurisdiction.

The ruling overturned two Supreme Court Commercial Division rulings that held that the New York court did not have the power to enjoin transfers of property outside the United States, after a Dutch paper manufacturer (subject to New York jurisdiction) issued bonds that went into default and attempted to transfer its assets to Indonesia.

The court noted that debtors may avoid the implications of its holding by not subjecting themselves to New York jurisdiction—a difficult task in many commercial transactions.

For more information on these issues or other corporate matters, please contact:

Irwin Kishner at 212.592.1435 or ikishner@herrick.com
Edward Stevenson at 973.274.2025 or estevenson@herrick.com

Copyright © 2007 Herrick, Feinstein LLP. Corporate Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.