Chancery Addresses Issue of First Impression in Delaware: When Threat of Lawsuit is Tortious Interference with Prospective Business Relationships
Soterion Corp. v. Soteria Mezzanine Corp., C.A. No. 6158-VCN (Del. Ch. Oct. 31, 2012).
Why This Case is Noteworthy: This decision addresses for the first time in Delaware the applicable standard to determine when the threat of a lawsuit can be tortious interference with prospective business relationships. This opinion also features the rare instance when attorneys’ fees are assessed based on an exception to the American Rule (as compared with Rule 37 for motions to compel).
The core background facts of this case involve the sale of two imaging centers which, it was argued, were not consummated because of the threat of litigation that was sent in a letter to the prospective buyers with a copy of a draft complaint. That draft complaint was not filed until three months later. Moreover, several days prior to the eventual trial on that complaint, the plaintiff stipulated to a judgment dismissing the claims. The defendants counterclaimed based on an argument that the threat of litigation constituted a tortious interference with prospective business relationships and was the cause of the two deals not closing.
The claims in the complaint that were dismissed, in essence, argued that the sale of the two imaging centers was not properly authorized. As indicated, the plaintiffs stipulated to a dismissal of those claims a few days before trial. The court found that the plaintiffs knew that their claims were false and unjustified at the time they filed them, and, as a result, this case is a rare example of the court awarding fees incurred to defend those frivolous claims based on an exception to the American Rule.
However, the court also found after a thorough analysis that the counterclaims for tortious interference did not satisfy the necessary elements of that cause of action.
Several highlights of key parts of this 52-page opinion include the following:
When Threat of Lawsuit Can Itself be Actionable as Tortious Interference
(1) For the first time in a Delaware opinion, the Court announces the applicable standard to be applied in order to determine whether the threat of litigation satisfies the elements of tortious interference with prospective business relationships, especially in the context of threatened litigation that is designed to thwart the sale of a business. See footnote 141 and accompanying text. The court determined that the applicable test would be based on Comment c of Section 767 of the Restatement (Second) of Torts. This test requires proof that either the interferer had no belief in the merit of the suit, or while having some belief in its merit, the interferer institutes or threatens to institute the litigation in bad faith, intending only to harass the third-parties and not to bring the claim to definitive adjudication.
(2) This should be contrasted with a situation involving the filing of a lawsuit when the claims are asserted in good faith, which is not improper. See Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 160 (Del. Ch. 1985).
(3) The court found, despite contrary testimony by the plaintiffs, that the plaintiffs never intended to bring their claims to definitive adjudication and they knew that their claims were false when they made them. However, as for other torts, in order to prevail on a tortious interference claim, the claimant must establish proximate cause. Delaware recognizes the traditional “but for” definition of proximate cause, which is defined as: “One which in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred.” See footnotes 158 to 160. The court found, however, that the threatened litigation was not the proximate cause of the two deals not closing, and therefore, the prerequisites to tort liability were not satisfied. (But see basis for exception to American Rule on attorneys’ fees.)
Elements of Tortious Interference with Prospective Business Opportunity
(1) The Court recited the elements of a claim for tortious interference with a prospective business opportunity. See footnote 124 and accompanying text. The court explained that the first prong requires the existence of a reasonable probability of a business opportunity, which means that the plaintiff: “must identify a specific party who is prepared to enter into a business relationship but was dissuaded from doing so by the defendant and cannot rely on generalized allegations of harm.” The court further explained that in order to qualify as a reasonably probable business opportunity, it must be: “something more than a mere hope or the innate optimism of a salesman or mere perception of a prospective business relationship.” As mentioned, the counterclaim defendants did not satisfy the proximate causation prerequisite that is an essential element of this tort. See Slip op. at 34. See also footnotes 124 to 137.
(2) The court discussed the factors in Section 767 of the Restatement, that are applied in order for the Court to determine if intentional interference is improper or without justification. See footnote 134. Those seven factors address the circumstances under which threatened or filed litigation will be considered unjustified interference (or when it may not).
(3) Noteworthy is the reference to Section 772 of the Restatement, which is the “truth exception,” and which provides that: “One who intentionally causes a third person not to enter into a prospective contractual relation with another does not interfere improperly with the other’s contractual relation, by giving the third person truthful information.” See footnote 138 (citing cases where the disclosure of ongoing litigation to a third party in support of truthful statements is not actionable. )
Award of Attorneys’ Fees
(1) The court explained the rarity of applying the bad faith exception to the American Rule, (which is that everyone pays their own way for attorneys’ fees). The court applied the exception in this case because the court found that the plaintiffs knew that the core allegations of their complaint were false when they filed the complaint. The court cites cases in support of its holding at footnotes 167 through 170. The court also rejected the arguments that counsel for the plaintiffs should be faulted for the dereliction of their clients.
(2) The court distinguished a situation which would not be subject to the bad faith exception when: “A party [was] acting merely under the incorrect perception of its legal rights.” That is not considered bad faith conduct. Thus, the Court awarded the defendants all of their attorneys’ fees and expenses incurred up through the date shortly before trial when the plaintiffs agreed to have their complaint dismissed. The award of fees as an exception to the American Rule should also be contrasted with the award of fees in connection with a motion to compel pursuant to Rule 37, which is not uncommon at all. (The only claims that proceeded to trial were the counterclaims on tortious interference, which failed, and for which fees were not awarded.)
Choice of Law
(1) Also instructive was the choice of law analysis in this case. Because there were several entities that were involved in events that crisscrossed several states, the court conducted a choice of law analysis. The court observed that the Delaware courts generally apply a four-factor test when determining which state’s law applies: (1) The place where the injury occurred, (2) The place where the conduct causing the injury occurred, (3) The domicile, residence, nationality, place of incorporation and place of business of the parties, and (4) The place where the relationship, if any, between the parties is centered. See footnote 118. The court also observed that mere incorporation within the state is not necessarily the determinative factor, but it is considered to be an important factor when determining which law to apply.
(2) The court reasoned that the parties in this case voluntarily chose to form Delaware entities through which to conduct their commercial relationships, and those very entities are involved in this litigation. The Court also reasoned that its decision to apply Delaware law is further supported by the fact that “a plurality of the parties are Delaware entities . . . .” Slip op. at 33.