Business Torts

Colorado Law Keeps Competition Among Businesses On Fair Ground

Businesses are allowed to compete with each other for customers. But competition among businesses must be fair. Colorado law protects businesses from the unfair practices of competitors. While many business relationships are based on contracts, a business that has been harmed by the wrongful conduct of another company can pursue legal action against that company even if they do not have a contractual relationship.

A tort is a “legal wrong committed upon the person or property independent of contract.” Legal wrongs that one company commits against another company are called “business torts.” Colorado law recognizes the business tort of intentional interference with contractual relations, which prohibits a company from taking actions that interfere with another company’s contract with a third party.

These cases are usually fact intensive and complex. Nevertheless, a company that believes a third party has improperly interfered with its contractual relationship with another business or individual may have a remedy available to it under Colorado law.

Slater Numismatics, LLC (Slater) is a coin dealer that sent coins to the Independent Coin Grading Company (ICG) for grading and packaging. Once graded and packaged, ICG sent the coins to the Cable Shopping Network (CSN), which purchased the coins from Slater. CSN would then sell the coins it purchased from Slater on television informercials and through call centers.

After learning that CSN was purchasing larges quantities of coins, ICG asked Slater to enter into a referral agreement so that ICG could deal directly with CSN. Slater agreed, so Slater and ICG entered into a Referral Agreement where Slater would refer to ICG all of the coin grading and valuing work for coins sent to CSN. In exchange, ICG would pay Slater each month a referral fee equal to 25% of the net grading fees that were generated from ICG’s sales of grading services to CSN. As a result of the Referral Agreement between Slater and ICG, CSN began purchasing its own coins and sending them directly to ICG for grading. ICG then paid the referral fee to Slater.

James Taylor (Taylor) tried to purchase ICG when he was the CEO of the company. When his attempt to purchase ICG failed, Taylor left ICG and started his own company called Driving Force, LLC (Driving Force). Driving Force then purchased a company called ANACS, which was also in the business of grading and packaging coins and was one of ICG’s main competitors.

Based on their knowledge of ICG’s relationship with CSN, Taylor and Brett Williams (Williams)–who used to work as ICG’s Chief Financial Officer and later joined ANACS–approached CSN with an offer to provide it with the same services that ICG was providing. But because ANACS did not have to pay the 25% referral fee that ICG had to pay to Slater, ANACS was able to undercut ICG’s price and obtain CSN’s business. CSN eventually transferred all of its coin grading business from ICG to ANACS.

Slater filed a lawsuit against Driving Force, the owner of ANACS, for “intentional interference with contractual relations” and “unjust enrichment.”

Colorado recognizes the tort of intentional interference with contractual relations as a valid claim for relief.  Under this claim,

[o]ne who intentionally interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.

Slater Numismatics, LLC v. Driving Force, LLC, 2012 COA 103 ¶ 22 (quoting Restatement (Second) of Torts (1977), § 766) (emphasis added).  Furthermore, to be encompassed by the tort of intentional interference, the conduct of the defendant must also be improper.

A company that interferences with another company’s contract with a third party may also be liable if:

  • the interfering company leaves the third party no choice but to fail in some significant aspect of performance, for example by depriving the third party of the means of performance;
  • the interfering company’s conduct is wrongful; and
  • the interfering company acts either for the primary purpose of interfering with the performance of the plaintiff’s contract, or knowing that the interference is certain or substantially certain to occur as a result of the interfering company’s action.

Slater, 2012 COA at ¶ 39 (citing Restatement § 766 cmts. c, h, j, k, o, p). In most states, the fact that two companies are competitors for the same business does not justify one company from intentionally interfering with a contract it knows its competitor has with a third party.

In the Slater case, the Colorado Court of Appeals held that the district court had incorrectly granted summary judgment to Driving Force before trial, because there was sufficient evidence that “ANACS’s conduct was improper, and was intended to, and did, ’cause’ ICG ‘not to perform’ its contract with [Slater]….” Id. at ¶ 32. In particular, the Court of Appeals found that a reasonable jury could conclude that

ANACS caused ICG to fail in a significant aspect of performance owed to [Slater] by depriving ICG in a significant manner of the means of performance. A jury could conclude that, by hiring away nearly all of ICG’s employees, in a market where there are very few persons qualified to perform coin grading services, ANACS so substantially interfered with ICG’s ability to render services to [CSN] as to cause ICG not to perform its Referral Agreement with [Slater].

The evidence could be interpreted as showing that the impact of ANACS’s conduct on [Slater] was not incidental, but was a key part of the plan. The alleged tortious conduct was integrally related to [Slater's] 25% referral fee. Taylor and Williams could exploit their knowledge of [Slater's] relationship with [CSN], acquired through the Referral Agreement, so that ANACS could approach [CSN] directly and undercut ICG’s pricing structure precisely by eliminating the need to pay that 25% referral fee to [Slater].

[Slater] has also submitted evidence to prove that ANACS’s conduct was wrongful. A reasonable jury could conclude that Taylor and Williams wrongfully used confidential information they acquired about the pricing structure of [Slater's] Referral Agreement through breach of their confidentiality agreements with ICG.

Slater, 2012 COA at ¶ 51, 53-54.

The court summed it up by stating that it could not think of any “principled reason” to insulate ANACS’s alleged conduct from liability to Slater.  “While an outside observer could chalk up such collateral damage to [Slater] by remarking, ‘That’s just the nature of competition,’ we believe such alleged conduct fits within the very purpose for imposing liability on intentional interference with contractual relations.” Id. at ¶ 56.