Business Interference: From The Outside And Inside

Monday, December 1, 2008 - 01:00

The principle that all is fair in love and war does not apply when the market is the battleground. Understanding the rules of play is important in times of market uncertainty; when the survival instinct can blur the distinction between lawful competition and unlawful competition. In this climate, existing market competitors and emerging market competitors press the boundaries.

Business Interference From The Outside

The policies favoring free competition collide with notions of fair play whenever companies compete for a market advantage, especially in finite markets. This collision sparks the concepts of tortious interference with contract and tortious interference with prospective economic advantage, which protect against malicious business interference.1This concept is not new. Over 100 years ago, our courts stated:

a trader may lawfully engage in the sharpest competition with those in like businesses by holding out extraordinary inducements, by representing his own wares to be better and cheaper than those of others, [but] when he oversteps that line and commits an act with the malicious intent of inflicting injury upon his rival's business, his conduct is illegal , and, if damage results from it, the injured party is entitled to redress.2

To prevail on a claim, a plaintiff must prove that it had a reasonable expectation of economic benefit in an actual or prospective business relationship that was lost as a direct result of a third party's malicious interference, and that it suffered some loss.3

The difficulty rests in determining whether the interference was "malicious" or a justified competitive conduct. Certainly, the line is clearly drawn at fraudulent, dishonest, or illegal conduct.4But what about the "sharpest competition" that does not quite reach that level? In those cases, the courts use a flexible standard. "Malicious interference" means conduct both "injurious and transgressive of generally accepted standards of common morality or of law;" in other words, it must be outside of the "rules of the game."5

However, even where the rules of the game sanction conduct, the courts do not necessarily follow suit. Wear-Ever Aluminum, Inc. v. Townecraft Industries, Inc. 6concerned a practice that was common in the industry of home cooking utensil sales - the mass inducement (or pirating, depending on your point-of-view) of a competitor's sales force. In that case, Townecraft induced dozens of its competitor Wear-Ever's sales-persons to leave Wear-Ever and join Townecraft. It did so through organized meetings between Townecraft and the Wear-Ever employees. The strategy worked. Thirty-five Wear-Ever sales-persons left Wear-Ever and joined Townecraft. The mass exodus spelled doom for Wear-Ever.

Even though the mass solicitation of a competitor's work force was allowed by the rules of the relevant game, the Court was not moved. It reasoned that "even if [Townecraft] had established that the custom in the trade was to pirate salesmen from competitors, this court would not permit such a custom to justify and legitimatize what otherwise would be tortious conduct." Indeed, the court expressed that among the judiciary's function "is to raise the standard of business morality and care . . .[h]igher standards benefit and protect both the innocent member of the industry and the general public."

So does the same hold true as to customers? Does the inducement of customers away from a competitor through sharp competitive practices constitute actionable behavior? What if the conduct is charged by a real animosity or ill-will? Consider Ideal Dairy Farms, Inc. v. Farmland Dairy Farms, Inc., where Ideal, a dairy dealer and distributor, ended its relationship with Farmland and started a relationship with Farmland's competitor, Tuscan Dairy. Farmland was not pleased so it specifically targeted Ideal-Tuscan's customers and offered to sell them products at prices that were unprofitably low. On the trial level, the court ruled that Farmland's conduct constituted malicious interference with Ideal-Tuscan's business - after all, Farmland was clearly motivated by spite and ill-will toward Ideal, it targeted Ideal-Tuscan's customers and Farmland used unprofitably low prices to divert business away from Ideal-Tuscan.

The appellate court disagreed. It recognized that Farmland's marketing plan, though infused with some venom, was justified by business reasons: Farmland had lost market share to Ideal-Tuscan and was facing excess plant capacity and a decline in sales. Therefore, even though Ideal-Tuscan lost customers as a result of Farmland's aggressive campaign, Farmland's conductdid not rise to the level of malicious interference.7

Lamorte v. Burns is another important case to consider. In that case, an insurance adjustment company's employees secretly gathered and used their employer's protected trade secrets, including client lists, to stage an elaborate coup that would essentially gut their employer's business in a single weekend. Their goal was to convert their soon-to-be former employer's clients to their newly formed competing venture. The New Jersey Supreme Court did not approve. It explained that converting clients who were obtained at their employer's expense, and using their employer's trade secrets "effectively to target [the employer's] clients is contrary to the notion of free competition that is fair."8

Wear-Ever, Ideal Dairy and Lamorte are guideposts. It is clear that courts will focus on a company's objective to determine whether its conduct is "malicious interference" or justified by business reasons. In Ideal Dairy , the defendant's object was to gain market share through ultra-aggressive, if not commercially unreasonable, pricing. If this were to cripple the plaintiff's business, then this would only be the by-product of "sharp competition." On the other hand, taking direct action to cripple a competitor's business, like hijacking its sales force or misappropriating its clients or trade secrets will not be viewed as forgivingly. At the end of the day, if an aggressive, sharp business strategy is to be used, the strategist must be prepared to justify both the ends and the means.9

Business Interference From The Inside

In addition to existing market competitors, and as the Lamorte case illustrates, businesses often face an internal threat - employees. Most often, this threat takes the form of employees who plan to leave an employer and take with them the employer's accounts or business information. However, this threat can also arise more subtly where an employee assists a competitor. Each of these scenarios are subject to rules of fair play even in the absence of any agreement between employee and employer.

In New Jersey, employees owe to their employers a duty of loyalty that prohibits them from taking affirmative steps to injure their employer's business. More precisely, an employee may not compete with her employer or assist her employer's competitor during her employment .10"In evaluating an employee's conduct under the breach of the duty of loyalty standard, the employee's level of trust and confidence, the existence of an anti-competition contractual provision, and the egregiousness of the conduct are important factors to consider."11

The duty of loyalty is a "basic and common sense obligation." 12In Cameco v. Gedicke , the New Jersey Supreme Court explained:

Employees should not engage in conduct that causes their employers to lose customers, sales, or potential sales. Nor should they take advantage of their employers by engaging in secret self-serving activities. Employees who defraud their employers or engage in direct competition with them run the risk of discharge, forfeiture of the right to compensation, and other legal and equitable remedies.13

Disloyal employees face stiff consequences. Depending upon the circumstances, they may be required to disgorge any profits earned from the competitive behavior, forfeit wages and salary paid to them by the employer and, in some cases, even face a restriction on post-employment business activity.

Cameco, Inc. v. Gedicke exposes the amorphous nature of the analysis. In that case, Cameco, a food distributor, employed Gedicke as its traffic manager. Gedicke's duties included arranging for the transportation of Cameco's food products. While employed, Gedicke and his wife started an independent business through which they transported goods for various other companies, including two of Cameco's competitors. (Notably, Gedicke spent approximately 15 minutes of each Cameco work day working on his independent business.) Cameco sued Gedicke for breaching the duty of loyalty. The New Jersey Supreme Court noted that

The case is not one in which an employee, while employed by one employer, advanced his interests by seeking other employment. Nor is it one in which the employee surreptitiously tried to capture the employer's business, disparage its products, or divert its business to another. Rather, the case is one in which a salaried employee, while working for his employer, supplemented his income by establishing a business that, although it did not compete directly with his employer, may have assisted certain of the employee's competitors . Hence, the question focuses on the level of assistance to a competitor that would justify a finding that an employee breached the duty of loyalty owed to his or her employer.14

The Court held that the duty of loyalty varies with the nature of the particular relationship, and under the circumstances, Gedicke's mere assistance of Cameco's competitors could be deemed to be a breach of the duty of loyalty.

Ultimately, these cases rise and fall with the egregiousness of the employee's conduct and the facts of each case with the focus on "the acts of direct competition" undertaken by the employee. Because of the competing interests of allowing an employee some latitude in switching jobs and at the same time preserving some degree of loyalty owed to the employer while on the job, mere planning to compete or post-employment competition alone are not actionable.15The touchstone for the analysis is (1) whether during employment there has been direct competition or assistance rendered to a competitor and (2) if so, whether it has substantially hindered the employer in the continuation of its business.

The amorphous yet common sense analysis could be avoided through reasonable restrictive covenants and confidentiality and non-disclosure agreements. As the enforceability of these types of agreements are fact sensitive, vary from state-to-state and change from time-to-time, it warrants a discussion with counsel.

To sum up, it is important to be aware of the rules of the game in order to stay on the right side of the line separating lawful from unlawful competition. It is also important to be aware of the threats posed by existing competitors and potential, emerging competitors, such as employees. This awareness is a smart way to ensure that profits can be directed to where they are intended, rather than on legal fees that could have been avoided through planning. 1Printing Mart-Morristown v. Sharp Elec. Corp . , 116 N.J. 739, 750 (1989).

2Van Horn v. Van Horn, 56 N.J.L. 318, 323 (1893) (emphasis added).

3Baldasarre v. Butler, 132 N.J. 278, 293 (1993); Ideal Dairy Farms, Inc. v. Farmland Dairy Farms, Inc . , 282 N.J. Super. 140, 199 (App.Div.), certif. denied, 141 N.J. 99, 660 (1995).

4Ideal Dairy Farms, Inc., supra, 282 N.J . Super. at 205.

5Harper-Lawrence, Inc. v. United Merchants and Mfrs., Inc., 261 N.J. Super . 554, 568 (App.Div.), certif. denied, 134 N.J. 478 (1993) (quoting Di Cristofaro v. Laurel Grove Mem'l Park, 43 N.J. Super. 244 (App. Div. 1957); Ideal Dairy Farms, Inc., supra, 282 N.J. Super. at 199

6 75 N.J. Super. 135 (Ch.Div.1962),

7Ideal Dairy Farms, Inc., supra , 282 N.J. Super. at 200-01.

8Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 309 (2001)

9Id . at 307.

10Id. at 302.

11Id. at 305

12Chernow v. Reyes, 239 N.J. Super. 201, 204 (App.Div.), certif. denied, 122 N.J. 184 (1990) (citing Auxton Computer Enters., Inc. v. Parker, 174 N.J. Super. 418, 425 (App.Div.1980).

13Cameco v. Gedicke, 157 N.J. 504, 516-522(1999).

14Id. at 514-515.

15Auxton Computer Enter., supra, 174 N.J. Super at 424.

Anthony Argiropoulos is a Member of the Firm's Litigation Practice Group and practices in the Firm's Princeton office. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C.

Please email the author at aargiropoulos@sillscummis.com with questions about this article.