38.3 Misrepresentation & Interference with Business Relations

38.3 Misrepresentation & Interference with Business Relations

NCBE's outline ends with claims based on misrepresentation and on intentional interference with business relations, together with their defenses. These torts protect economic interests, so the plaintiff usually must prove actual financial loss.

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Commercial and Economic Torts

Economic torts protect contractual and prospective business relationships from intentional deception and predatory interference.

1. Fraud / Deceit (Intentional Misrepresentation)

To recover for intentional misrepresentation, the plaintiff must establish five cumulative elements:

1. Material Misrepresentation: A false representation of past or present material fact (silence is not actionable unless there is a fiduciary or confidential relationship, active concealment, a misleading half-truth, or—in many states—a failure to disclose known latent defects in certain transactions, such as home sales);
2. Scienter: The defendant made the statement knowing it was false, or with reckless disregard as to its truth;
3. Intent to Induce Reliance: The defendant intended the plaintiff (or a specific class of persons) to rely on the statement;
4. Justifiable Reliance: The plaintiff in fact reasonably and justifiably relied on the misrepresentation; and
5. Pecuniary Damages: The plaintiff suffered quantifiable monetary economic loss.

2. Negligent Misrepresentation

• Elements: A false representation of material fact made by a defendant in the course of their business, profession, or employment, resulting from a failure to exercise reasonable care in obtaining or communicating the information, inducing justifiable reliance and causing pecuniary loss.
• Scope of Duty: Liability is not owed to the world at large; under the dominant Restatement § 552 view, liability is strictly limited to the person or specifically intended, limited group of persons for whose benefit and guidance the information was supplied (e.g., an independent accountant preparing an audit specifically intended for a designated bank lending $1,000,000). Some states, following Ultramares Corp. v. Touche (N.Y. 1931), require privity or a relationship approaching privity, and a few extend liability to all reasonably foreseeable users.

3. Tortious Interference with Contract

• Elements:
  1. Existence of a valid contract between the plaintiff and a third party (a contract terminable at will can support a claim, but courts often treat interference with it like interference with prospective relations);
  2. The defendant had knowledge of the existing contract;
  3. The defendant intentionally and improperly induced the third party to breach the contract;
  4. The third party in fact breached the contract; and
  5. The plaintiff suffered actual pecuniary damages.
• The Competitor's Privilege: Business competition is not a defense to inducing a breach of an existing term contract. If the contract is terminable at will, however, prospective competitors are privileged to offer higher wages or better terms, provided they do not use unlawful or improper means.

4. Tortious Interference with Prospective Economic Advantage

• Elements: The plaintiff had a prospective business relationship or economic expectancy with a third party; the defendant had knowledge of that expectancy; and the defendant intentionally disrupted the expectancy through WRONGFUL OR IMPROPER MEANS (e.g., physical intimidation, extortion, criminal fraud, predatory antitrust violations, or defamatory lies).
• Fair Market Competition: Healthy, vigorous economic competition is fully privileged. A competitor who wins away a customer merely by offering lower prices, superior service, or aggressive advertising is not liable unless they employed independent illegal or tortious conduct.

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More on Misrepresentation

Opinions, Predictions, and Promises

• Puffery: Vague sales talk, such as "the best pizza in town," is not actionable.
• Actionable opinions: An opinion may support liability when the speaker has superior knowledge (such as an appraiser or jeweler), is in a relationship of trust with the listener, or implies facts that justify the opinion. A statement of opinion also implies that the speaker knows no facts inconsistent with it.
• Promissory fraud: A promise made with no intention of keeping it misrepresents the speaker's present intention and can be fraud.

Reliance and Damages

• Justifiable reliance: A plaintiff generally need not investigate a factual statement unless its falsity is obvious or the plaintiff has reason to doubt it.
• Third persons: A defendant is liable to persons it intends, or has reason to expect, will rely on the misrepresentation, such as a class of investors.
• Damages: Most states award fraud victims benefit-of-the-bargain damages—the value the property would have had if as represented minus its actual value—while others use out-of-pocket damages—the price paid minus the value received. Consequential and punitive damages may also be available, and a victim may instead rescind the transaction.

Innocent Misrepresentation

Under the Restatement (Second) of Torts § 552C, some states hold a person who sells, rents, or exchanges property liable for a material misrepresentation made to induce the transaction even without fault, but limit recovery to out-of-pocket loss.

Limits Based on Contract

Courts are divided on whether the economic loss rule bars tort claims for misrepresentations about matters the parties' contract covers. Fraud that induced the contract usually remains actionable, although some states enforce specific clauses in which sophisticated parties disclaim reliance on statements outside the contract.

More on Interference with Business Relations

Deciding Whether Interference Is Improper

Under the Restatement (Second) of Torts § 767, courts consider:

1. The nature of the defendant's conduct, including the means used;
2. The defendant's motive;
3. The interests of the plaintiff that were interfered with;
4. The interests the defendant sought to advance;
5. Society's interest in protecting both freedom of action and contractual interests;
6. How directly the defendant's conduct caused the interference; and
7. The relations among the parties.

Privileges and Justifications

• Truthful information and honest advice: Giving truthful information, or honest advice that was requested, is generally not improper interference—for example, an advisor honestly telling a client that a contract is a bad deal.
• Protecting others: A person responsible for another's welfare, such as a parent or a corporate officer acting in good faith for the corporation, may advise that person to end a relationship.
• Good-faith claims: Asserting a good-faith legal claim, such as threatening a lawsuit one honestly believes is valid, is not improper interference.
• Competition: A competitor may take business from the plaintiff, including customers under at-will contracts, if the competitor uses no wrongful means, does not create an unlawful restraint of trade, and acts at least partly to advance its competitive interest.

Prospective Relations

The plaintiff must show a reasonable probability that the relationship would have produced an economic benefit. Many states also require independently wrongful conduct—conduct that violates some other legal rule, such as fraud, defamation, or a statute (Della Penna v. Toyota Motor Sales, U.S.A., Inc., Cal. 1995; Korea Supply Co. v. Lockheed Martin Corp., Cal. 2003).

Injurious Falsehood

Injurious falsehood, sometimes called trade libel, product disparagement, or slander of title, is the publication of a false statement disparaging another's property, products, or title that causes pecuniary loss. The defendant must know the statement is false or act in reckless disregard of its truth, and the plaintiff must prove special damages such as specific lost sales. If the statement also attacks the business owner's personal integrity, it may be defamation as well.