What Are Business Torts?
Business torts, also known as economic torts, are legal claims that arise out of wrongful actions taken by individuals or companies that are intended to cause harm to another individual or business in a purely economic sense. Broadly speaking, these claims can result in the award of damages to the civil plaintiff whose interests have been harmed by the defendant, and in some cases, the imposition of criminal liability on the part of the defendant.
A business tort can take many forms. For instance, consider a scenario where a company is engaged in a lawful activity and invests considerable time and money into identifying a new market for a particular product . If a competitor then commits a business tort against the investing company, such as by making false statements or engaging in unfair competition, the resulting venture could be severely harmed, resulting in substantial financial losses. These types of commercial disputes and their fallout are precisely why business torts are so significant—business torts can literally make or break a company.
There are numerous types of business torts, some of which can themselves be classified into different categories depending on the actions of the responding party. The most common forms of business torts include:
Different Forms of Business Torts
There are several types of business torts which include: fraud, interference with business relations, and breach of fiduciary duty.
Fraud
Fraud is the intentional misrepresentation or concealment of material fact made for the purpose of inducing the other party to enter into the transaction in question. Both civil and criminal fraud require intent to defraud a person or entity out of property. There must be intent to deceive. The perpetrator must knowingly make a false statement of material fact with intent to deceive and induce another person or entity to purchase a product or engage in a business relationship.
Interference with Business Relations
Intentional interference with business relations requires that a plaintiff show: (1) intentional interference with the plaintiff’s existing business relationship; (2) the interference was improper in motive or means; and (3) injury to the plaintiff resulted.
Breach of Fiduciary Duty
Fiduciary duty is a legal duty of one party to act in the best interests of the other. Breach of fiduciary duty requires that a defendant has intentionally harmed one who is at a disadvantage (because of a special relationship). There are five elements to a breach of fiduciary duty claim: (1) existence of a fiduciary relationship, (2) breach of fiduciary duty, (3) causation, (4) damages, and (5) non-adverse interests.
How Business Torts Can Affect a Company
The effect of business torts can be devastating. The obvious concern that every company has (at least, every company that still exists) is the financial impact: what will the company have to pay as a result of the tort? As discussed above, often the element that causes a plaintiff to be able to recover on a business tort is some sort of "special damages" or injury. The most common such damages that are recoverable in business tort actions are economic losses, typically an actual out-of-pocket loss. Even if those losses are clear (like the termination of a contract with another entity), what is not always clear is what sort of actual economic damages would flow from the loss. This is why the defendant (the entity accused of the business tort) will often emphasize the recovery amount and argue it is speculative. However, the plaintiff will argue for the necessity of "lost profits," which is testimony that tries to quantify those lost profits. How many times have you heard the phrase "after-tax profits?" If you are an owner or manager of a business or corporation, you have probably heard it so many times it makes your brain hurt. So, how does that work legally? Generally, that language ("profits after tax") is required in a jury instruction because it allows the jury to be educated about whether they should consider certain deductions. It also allows the opposing party to cross-examine the plaintiff’s expert witnesses, etc.
Another "cost" to a business that often is not included in the calculation of economic damages is corporate resources. For example, if an executive becomes involved in a dispute, they may have to divert time and attention away from normal business functions to deal with the litigation. That is time and resources that is being spent on litigation, not business. It is also the case with employees; sometimes you need the employees to help with certain aspects of the litigation, when their time would otherwise be devoted to revenues or profits for the business.
The legal costs of a lawsuit are obvious: defendants and plaintiffs are both going to be spending a lot of money to get through the process. From beginning to end, a business can spend thousands of dollars on document preparation, depositions, hearings, etc. But even more expensive is the fact that these business torts tend to take a long time to resolve. Often, the first court hearing will be six to twelve months after the lawsuit is filed, so add that to the trial preparation. Then, when the initial trial is done, very often there is at least one appeal (sometimes multiple appeals). Those appeals can go all the way up to the Supreme Court of the State in question or even the United States Supreme Court. Until the entire litigation from beginning to end is resolved by a final judgment, the business is going to have to spend money on its lawyers and related parties the entire time.
another impact of a business tort is a reputational issue. In addition to the costs and various resources devoted to the litigation, the company can suffer reputational harm as well. Although that may not seem like it would be much harm in the big picture, public companies subject themselves to this issue frequently. For example, what is Scope of Waivers? Scope of Waivers attempts to restrict the disclosure of information a company has previously chosen to disclose publicly. In itself, Scope of Waivers is not a significant issue to most individuals. However, for publically traded companies, Scope of Waivers has become somewhat of an issue due to the public disclosure rules and regulations. The real issues with scope of waivers in the business tort arena are public disclosure and the potential loss of stock value. Reputational harm can be very difficult to measure as well, especially considering that the business tort does not usually involve the loss of a client or customer (i.e., most business torts involve some form of internal dispute). Generally speaking, for a business, a business tort is something that is going to take a long time to resolve. It is going to cost the business significant amounts of money: money that could be spent on other things (such as increased advertising or improved services). A business tort is also going to potentially take employees and executives away from revenue-generating operations during the time that litigation is pending. And finally, the business is going to have the potential to face reputational harm. With all of these costs and damages, the impact business torts can have on a company is significant.
Remedies Available for Business Torts
The legal remedies that are available to businesses that have suffered economic losses as a result of a business tort will be determined by the nature of the tort itself and the objectives of the business in seeking a legal remedy. The majority of business torts result in a loss of business that can be quantified. Most businesses are only interested in recovering their business losses.
Some business torts may also result in claims for emotional distress, although those claims vary in degree and are not widely pursued.
Businesses can recover economic damages by pursuing litigation, settlement, or other forms of alternative dispute resolution.
Civil Litigation for Business Torts. Similar to personal injury lawsuits, if a business tort is caused by a person or business’s intentional behavior, the victim business can sue for damages. The type of civil litigation that will be pursued will depend on the cause of action being asserted, and whether an individual or business was responsible for the loss. Some of the causes of action for business torts can include:.
Litigation can be expensive, and sometimes risky. Some businesses choose to resolve a dispute without going to trial. The methods to do this include mediation and settlement. Depending on the parties involved, both sides may wish to pursue mediation before going to trial. In mediation, each side exchanges information and evidence regarding the position of the parties with the goal of trying to reach a settlement. The mediator’s role is to try to help the parties reach an agreement.
Essentially, this is the same process as the Confidential Settlement Meeting (CSM) program that the courts mandate. Much of the information about CSM is available. However, the business community does not use it as much as the public litigants. The drawback is many businesses do not use the CSM program because their business model requires them to maintain confidentiality.
After disclosure has occurred, if the parties cannot agree on a settlement, then placing the case in the hands of a judge or jury may be in the best interest of the businesses.
How to Avoid Business Torts
Businesses can and should take steps to minimize risk of being a plaintiff or defendant in a tort action, i.e., being on either the giving or receiving end of a business tort lawsuit. The following are a few areas where businesses can implement best practices:
Risk Management. The risk management plan for a business should include periodic "tort audits" to make sure that the processes, procedures and practices are in place to handle unforeseen circumstances that could result in losses and lawsuits. The plan should have a clearly defined process for responding to any complaints or disputes. As any lawyer will tell you, and as suggested above, a timely response by the business to a customer, employee , or third party expressing dissatisfaction or perceiving a loss will go a long way toward preventing a lawsuit down the road.
Employees. Businesses of all sizes should have robust employee training programs that teach employees about what constitutes unlawful or unfair competition. Best practices include an employee handbook spelling out what is and is not acceptable behavior and providing a process for making complaints, and a process for investigating complaints. When companies take employee grievances seriously, the employees feel heard and will often be less likely to take further action if the company comes up with an effective solution.
Legal Compliance. Staying in compliance with all applicable laws, rules and regulations is the best way for a business to avoid liability in tort actions. Suffice it say that complaints of tortious conduct that are unfounded or malicious represent an unacceptable cost of doing business. Timely and effective responses to such complaints are not just important; they are essential.
Examples of Business Torts
Case Study 1: Trade Secret Misappropriation in Medical Devices
In 2016, medical device maker Boston Scientific Corporation settled trade secret misappropriation claims against former employee Shlomo Ben-Harush for $27.5 million after he allegedly stole proprietary information to start a competing company in Israel. Ben-Harush first filed the complaint on September 11, 2013 in the Superior Court of California, County of Ventura alleging breach of contract, breach of covenant of good faith and fair dealing, and the misappropriation of trade secrets after he joined St. Jude Medical, Inc. that August. That complaint was dismissed for lack of personal jurisdiction in October 2013 and was later re-filed in the U.S. District Court for the Northern District of California in March 2014. The previous January, Ben-Harush was indicted over alleged insider trading regarding the St. Jude acquisition by Boston Scientific in September 2013 without ever notifying his employer. In May 2014, he pled guilty to one count of securities fraud and was sentenced to 30 months in federal prison over various charges related to insider trading. Boston Scientific brought the suit against Ben-Harush for misappropriating confidential documents from a company computer which he allegedly downloaded and leaked to third parties prior to leaving for St. Jude – everything from development activities to patient data to physician agreements, said Judge Edward Davila of the Northern District of California. The company sought for an injunction to stop Ben-Harush from joining St. Jude and starting his own Israeli venture, but the injunction was denied. While there was no admission of liability by Ben-Harush in this case, the settlement indicated that he would be permanently restrained from disseminating any of the confidential and trade secret materials in question and must return all documents and information in whatever form it is in to Boston Scientific.
Case Study 2: Theft of Company Data
Earlier this year in 2017 a California firm contracted with Dell for Drafted, a file transfer application intended for transferring secure files. Dell installed a third-party program called Carbon Black, for the purpose of providing Dell data information on active file transfers through the application. The program collected routine data from user activity on the system, including mouse clicks and keystrokes. However, there was an 18-month lapse of time before Dell removed the Carbon Black program, during which the Dell maintenance account was not monitored at all. Instances of Carbon Black logs pertaining to the firm were sold to various third parties, including competitors. After discovering the breach the firm sued Dell for misappropriation of trade secrets among other claims, claiming Dell profited from the information gathered from their employees. The company claimed that this data was specifically tailored to gain an advantage over competitors and for unlawful purposes, such as trade secret theft, invasion of privacy, negligence, misrepresentation, and breach of contract.
Speaking to a Law Specialist
A legal professional is often the best option to assess the validity of a claim of business tort. That is because these cases can be very complex and fraught with legal convolutions. In addition, it is important to keep in mind that these types of cases are typically tried before judges rather than juries, which means it is important to be precise in one’s use of language and arguments. A judge is likely to focus on any legal technicalities in the case that could mean the difference between a winning or losing lawsuit. An experienced and knowledgeable lawyer is going to be better equipped to find these legal technicalities and properly argue them.
Experiencing a business tort can lead to lost revenues and opportunities. This can lead not only to financial loss, but also to serious disruption or even closure of one’s business . Consequently, legal issues should never be undertaken "on the fly." It is essential for a business to take its time, to consider the options and to decide what lawsuit might best meet its specific needs.
Whether it is a lawsuit involving breach of contract, interference with contractual relations, product liability, libel and slander or fraud or misrepresentation, the cost of a qualified legal professional is far outweighed by the need to have a ready defense to such issues. Having this is essential to being ready for anything that comes one’s way and to having a good chance of reaching a resolution that meets one’s needs. It is far better to enter into the litigation phase with a complete understanding of the legal situation at hand than to leave docked at the harbor, where hidden dangers can await.