Economic Justification for the Win – Defeating a Tortious Interference Claim
August 27, 2019
Consider this situation: You are a shareholder of a company who is about to enter into a contract with a third party. But you know that this is a bad deal that will negatively impact the company. Your immediate reaction is to stop this deal from materializing because you have a vested interest in the success of this company. But then you take a step back and consider your exposure to liability. Can you be sued based upon a tortious interference with contract claim? Stay tuned to see what transpired when a third party raised an economic interest defense to a claim for allegedly interfering with a contract between two parties.
In GCA Advisors v Onion, a case pending in the Commercial Division, New York County, plaintiff GCA Advisors, LLC (“GCA”), a financial advisor, brought suit against Univision Communications Inc. (“Univision”) for tortious interference with its contract with Onion, Inc. (“The Onion”), a corporation that publishes satirical news articles.
The Onion and GCA entered into an agreement, which terms included that GCA would act as The Onion’s financial advisor in connection with a possible transaction to sell substantially all of its assets or the majority of the shares. In exchange, The Onion would pay GCA a transaction fee for its advisory services, including a base fee of $2,000,000 if a transaction is completed within 12 months of the contract’s termination. GCA alleged that the Onion terminated the Agreement on April 4, 2015. Nine months after the termination, however, Univision acquired a 40.5% interest in The Onion. GCA alleged that Univision obtained controlling interest in The Onion and decided not to pay the transactional fee to GCA, but rather, to a third party.
GCA commenced suit for 1) breach of contract against The Onion, alleging that it is owed the transaction fee in the amount of $2,000,000 because the transaction consummated, and 2) tortious interference with contract against Univision, alleging that it “knowingly and intentionally” caused The Onion to breach its contractual obligations under the agreement by deciding to pay the transaction fee to a third party instead of GCA.
Univision moved to dismiss the tortious interference claim for failure to state a cause of action, raising its economic interest in the Onion as a defense. Specifically, Univision argued that even if it engaged in the kinds of actions alleged by GCA in its complaint, because it possessed a financial interest in The Onion, as a stockholder, it was justified in intervening with GSA’s contract with The Onion.
The Court held that the economic interest defense applies in cases where “defendants were significant stockholders in the breaching party’s business.” The Court opined that because Univision, who possesses a 40.5% interest in the Onion, has a significant economic interest in the Onion, it can successfully make out a defense of economic interest for allegedly interfering with the Onion’s obligation to pay GCA.
The Court determined that in order to overcome Univision’s economic interest defense, GCA must “allege facts showing that Univision acted with malice or employed illegal or fraudulent means.” However, Justice Saliann Scarpulla opined that Univision’s alleged interference with the contract fails to exceed a “minimum level of ethical behavior in the marketplace.” Justice Scarpulla further stated that even if Univision directed The Onion not to pay GCA the transaction fee, “that conduct alone does not amount to malicious or fraudulent conduct.”
In sum, the economic interest defense may permit shareholders to protect their interests even if it means interfering with a contract.
The economic interest defense is a potential defense available to a tortious interference claim when the complaining conduct was done to protect a party’s own “legal or financial stake” in its business. As the Court of Appeals recognized in White Plains Coat & Apron Co. v. Cintas Corp., the defense can apply in a wide array of situations — beyond merely shareholder status — “where the defendant and breaching party had a parent-subsidiary relationship, where defendant was the breaching party’s creditor, and where the defendant has a managerial contract with the breaching party at the time defendant induced the breach of contract with plaintiff.”