Wrongful Interference Claims

This article discusses what constitutes wrongful interference under Arizona law. It also examines what conduct is considered “improper” and the defenses to wrongful interference.

Under Arizona law, courts recognize two possible types of wrongful interference claims:

• tortious interference with an existing contract; and
• tortious interference with a prospective business relation, sometimes referred to as a “prospective economic advantage.”

See Restatement (Second) of Torts § 766 (1979); See also Bar J Bar Cattle Co. v. Pace, 158 Ariz. 481, 486 (Ct. App. 1988). The courts have historically defaulted to the Restatement for guidance on interference claims.

Generally, liability for interference with a contract arises when the interferer induces a party to breach a contract by (a) enticing the party not to perform or (b) preventing them from performing their obligations through improper means. The interference must be intentional and without a justifiable purpose. To establish a claim for tortious interference with contract, plaintiff must establish the following elements:

• the existence of a valid contract; 
• knowledge of the relationship on the part of the interferer; 
• intentional interference inducing or causing a beach; 
• resultant damages to the party whose relationship was disrupted; and 
• the defendant acted improperly. 

Wagenseller v. Scottsdale Mem’l Hosp., 147 Ariz. 370, 386-8 (1985); Snow v. W. Sav. & Loan Ass’n, 152 Ariz. 27, 33 (1986). Plaintiff must prove the claim by a preponderance of the evidence. Wells Fargo Bank v. Arizona Laborers, Teamsters & Cement Masons Loc. No. 395 Pension Tr. Fund, 201 Ariz. 474, 495-6 ¶ 86 (2002), as corrected (Apr. 9, 2002). Punitive damages are available because the act is malicious in fact. Chanay v. Chittenden, 115 Ariz. 32, 37 (1977).

There are limitations to the claim. Overall, if a defendant can demonstrate they lacked the knowledge of a contract or the intent to interfere, he can defeat the claim. A two-year statute of limitations limits the claim. Ariz. Rev. Stat. Ann. § 12-542; Clark v. Airesearch Mfg. Co. of Arizona, a Div. of Garrett Corp., 138 Ariz. 240, 243 (Ct. App. 1983). Arizona law recognizes the Restatement Second Torts § 766, which does not allow interference claims between parties of a contract. The interferer must be a third party. Ares Funding, L.L.C. v. MA Maricopa, L.L.C., 602 F. Supp. 2d 1144, 1149 (D. Ariz. 2009). Where there is privity of contract between the parties, the economic loss doctrine applies. Id. at 1150. Lastly, punitive damages are not available where the defendant acts with good faith and under the advice of counsel. Pre-Fit Door, Inc. v. Dor-Ways, Inc., 13 Ariz. App. 438, 441 (1970).

Generally, liability or interference with prospective business relations arises when a person induces a third party not to enter into or continue a business relationship with another party. There is no requirement for a contractual relationship, but the plaintiff must provide a reasonable assurance that the parties would have entered into an agreement. Tortious interference with prospective business relations, also referred to as “expectancy,” follows very close to interference with contract. To establish the claim plaintiff must prove the following elements:

• the existence of a valid business expectancy; 
• the interferer’s knowledge of the expectancy; 
• intentional interference inducing or causing the breach or termination of the expectancy; 
• the resultant damage caused by the disruption to the expectancy; and 
• the defendant acted improperly. 

Dube v. Likins, 216 Ariz. 406, 411 ¶ 8, 413 ¶ 14 (Ct. App. 2007). There must be evidence that the parties would have completed an agreement in all probability. Id. at 414, ¶ 19 (quoting Ethan Allen, Inc. v. Georgetown Manor, Inc., 647 So. 2d 812, 815 (Fla. 1994). Intent requires the defendant to be substantial certain that his conduct would interfere. Snow v. W. Sav. & Loan Ass’n, 152 Ariz. 27, 34 (1986).

In Snow, the court found that the defendant was substantially certain his conduct would induce the parties to back out of a transaction to sell the property. The defendant attempted to exercise a due-at-sale clause to pressure the buyer and seller to accept new conditions for financial qualifications and an interest rate increase. The buyer would no longer gain profit from his planned development. These actions led the parties to cancel the sale contract after escrow. See id. at 29, 33-4.

There are limitations to the claim. Overall, if a defendant demonstrates they lacked knowledge of an expectancy or agreement, or the intent to interfere, he can defeat the claim. The same statute of limitations as above applies. A party may not be liable for the tort if they act with a legitimate competitive reason, despite acting with ill will. Hill v. Peterson, 201 Ariz. 363, 366 (Ct. App. 2001) (quoting Bar J Bar Cattle Co. v. Pace, 158 Ariz. 481, 485 (Ct. App. 1988). In Dube, the court discussed the outer boundaries of the claim but did not make a finding on claims for classes of individuals and cited various jurisdictions that have recognized these claims. See generally 216 Ariz. at 414 ¶ 20-1.

Courts determine if the conduct was improper with a fact-intensive approach. In Wagenseller, the Arizona Supreme Court adopted the seven-factor test from the Restatement (Second) of Torts § 767 to determine if an interferer’s conduct was improper. The factors are:

1. the nature of the actor’s conduct; 
2. the actor’s motive; 
3. the interests of the other with which the actor’s conduct interferers; 
4. the interests sought to be advanced by the actor; 
5. the social interests in protecting the freedom of action of the actor and the contractual interests of the other; 
6. the proximity of remoteness of the actor’s conduct to the interference; and 
7. the relations between the parties. 

Wagenseller, 147 Ariz. at 387 (quoting Restatement (Second) of Torts § 767 (1979). Courts heavily weigh the nature of the actor’s conduct and the actor’s motive. Wells Fargo Bank, 201 Ariz. at 494 ¶ 81.

The outcome of many cases is extremely circumstantial and requires establishing all elements of the claim. Considering there is a seven-factor test for what constitutes improper conduct, there is not a bright-line rule for what is and is not improper. Further, this is not an exhaustive list of factors. See Restatement (Second) of Torts § 767 cmt. b. The Restatement lays out a series of potential categories of conduct with the caveat that the individual claims are fact-intensive: 

• Interference by inducement includes conduct conveying a desire to prevent a deal. Restatement (Second) of Torts § 766 cmt. k. 
• Inducement by refusal to deal includes threatening not to enter, or sever, businesses relations with a party unless they break their other contract or obligation. Id. cmt. l.
• Inducement by the offer of better terms includes offering better pricing if the other party breaks their contract. 
• Threats of physical violence, fraudulent misrepresentation, and threats of illegal conduct are often improper and subject to liability. Although, the court may not consider these types of conduct improper based on the relation between the actor and the person induced. Restatement (Second) of Torts § 767 cmt. c.; Safeway Ins. Co. v. Guerrero, 210 Ariz. 5, 13 ¶ 28 (2005). 
• Bad faith threats to institute criminal prosecution is often improper. Restatement (Second) of Torts § 767 cmt. c.

Courts also focus on the actor’s motive. A strong indicator of improper conduct is if the actor’s sole motive was to interfere. G.M. Ambulance & Med. Supply Co., Inc. v. Canyon State Ambulance, Inc., 153 Ariz. 549, 551 (App.1987) (finding an ambulance company’s conduct was not improper after it interfered with a competing business’ territory because it relied on authority from the state health department). Generally, the court finds improper conduct where the actor affirmatively and intentionally influences an individual to breach a contract or business expectancy. The mere coincidence that a party refuses to deal, and in turn the other party beaches, does not automatically constitute improper conduct. In business expectancy matters, the defense often disputes the relation between the parties by asserting the competitor privilege. See below.

Case examples of improper conduct:

• Former employees sued a former officer of the company for selling the company’s division that the employees were a part of to prevent them from collecting severance payments. Mann v. GTCR Golder Rauner, L.L.C., 483 F. Supp. 2d 864, 871 (D. Ariz. 2007).
• A sporting goods store removed serial numbers from golf clubs that would allow the plaintiff to identify the distributor. The plaintiff had a contract with distributors that the distributors would not sell to third parties. Karsten Mfg. Corp. v. Oshman’s Sporting Goods, Inc.-Servs., 869 F. Supp. 778, 782 (D. Ariz. 1994)
• A lease holder entered into a contract with buyer to sell his company that was contingent on assignment of the lease. The landlord refused to assign the lease without raising the rent. The court found this conduct improper. Campbell v. Westdahl, 148 Ariz. 432, 435, 438-9 (Ct. App. 1985).

Case example of conduct that was not improper:

• Patient referrals outside of a contracted practice group to out-of-network providers were not improper. Neonatology Assocs., Ltd. v. Phoenix Perinatal Assocs. Inc., 216 Ariz. 185, 189 ¶ 15 (Ct. App. 2007).
• An insurance company was free to enter into a “Defense and Indemnification Agreement” with a third-party firm to prevent an insured from entering into a settlement agreement with the third party. The court found the insurance company had a legally protected interest in the original insurance policy that prevents unauthorized settlement agreements. Strojnik v. Gen. Ins. Co. of Am., 201 Ariz. 430, 432 ¶ 4-7, 434 ¶ 15 (Ct. App. 2001).

Restatement illustrations of what is not improper:

• Upon hearing of B’s contract with C, A ceases to buy from B. When asked by B to explain his conduct, A replies that his reason is B’s contract with C. Thereupon B breaks his contract with C to regain A’s business. A has not induced the breach and is not subject to liability to C under the rule. Restatement (Second) of Torts § 769.

Common defenses to establish that the plaintiff failed to establish all of the necessary elements include:

• The defendant was unaware of a contract existed between the plaintiff and third party.
• No contract was in effect.
• The plaintiff did not breach a contract, or the protective business was unaffected.
• The plaintiff would have breached regardless of the defendant’s conduct.
• The defendant did not intend to interfere.
• There was a legal justification or privilege for the defendant’s actions. The Restatement gives various privileges.

The Restatement (Second) of Torts § 768 recognizes the privilege of competitors if:

• the matter is based on competition between the actor and the competitor;
• the actor does not employ improper means;
• the actor does not intend thereby to create or continue an illegal restraint of competition; and
• the actor’s purpose is at least in part to advance his interest in his competition with the other.

Edwards v. Anaconda Co., 115 Ariz. 313, 316 (Ct. App. 1977) (quoting Restatement (Second) of Torts § 768(1)). The competitor’s privilege does not apply to inducement of breach of contract but only to interference with business expectancies. Id. at 193.

This rule does not apply to businesses between the parties that do not compete with each other. An example is A and B are competing distributors of shoes. A induces C not to purchase B’s dwelling. A is not privileged under the rule. Restatement (Second) of Torts § 768 cmt. d. This conduct is improper because A acted to influence a transaction outside of the core businesses in competition (the sale of shoes). The actor is allowed to exert some level of economic pressure and persuasion. Id. cmt. e. Arizona courts recognize that a competitor is free to induce an employee to move to his company. Motorola, Inc. v. Fairchild Camera & Instrument Corp., 366 F. Supp. 1173, 1180 (D. Ariz. 1973). Thus, courts recognize fair competition as long as the competitor does not use improper means.

A person can give truthful information or honest advice within the scope of the request or advice. Restatement (Second) of Torts § 772 (1979). Although, no case law gives a clear example of this privilege. See also Restatement (Second) of Torts § 769.

A good faith defense and bona fide claim privilege operate under the same lens. Courts inquire into the party’s intent and whether or not the conduct was improper. A person is privileged to influence a person, in good faith, from entering into a contract with a third person if he is acting to protect a legally protected interest. Restatement (Second) of Torts § 773 (1979); See generally Ulan v. Lucas, 18 Ariz. App. 129, 130 (1972). Courts look at motive and actual intent when inquiring into the defendant’s alleged good faith. Snow, 152 Ariz. at 35.

In Ulan, the court found that allegations of derogatory motives have no merit in establishing improper conduct, as long as the party was exercising a legal right. 18 Ariz. App at 131. Here, the allegations fell short. Although, if there is sufficient evidence to show coercion, the defense will fail. In Snow, the defendant supplied two documents attempting to establish good faith. The first was a letter that said the company did not intend to interfere with the sale of a property, but the same letter added additional loan conditions. The second letter detailed that the company believed it had the right to exercise a due-at-sale clause to leverage a higher interest rate and more favorable loan conditions. The court found a jury could determine the defendant used the clause as a mechanism to coerce the parties despite the defendant believing he acted in good faith. See Snow, 152 Ariz. at 35-7.

There are two wrongful interference claims: (1) tortious interference with an existing contract or (2) tortious interference with a prospective business relation, sometimes referred to as a “prospective economic advantage.” The courts evaluate a defendant’s conduct to determine if the conduct is improper, but this test is highly fact-intensive. If the Plaintiff establishes a valid tortious interference claim, economic and punitive damages are available to the Plaintiff. Additionally, equitable remedies are also available.