Business Torts: Fertile Land For The Skilled Plaintiff Lawyer (And More Particularly For The Skilled Evaluator)
June 7, 2007
By Wylie A. Aitken
This article was inspired by some of the great mentors I have had in my career, including Herb Hafif and Vern Hunt. The theme of this article is that accomplished plaintiff jury trial lawyers, whether aspiring, upcoming, seasoned or veterans can apply their skills in areas otherwise reserved for “litigators” They should not shy away or be intimidated because something is made to look complicated. As Herb Hafif has pointed out in numerous lectures our function as lawyers is to not just fine tune our skills but develop the skills of others and to encourage new talent and not discourage. Too often trial lectures (or articles) are structured to make everything seem daunting and complicated to the new or less experienced lawyer. I recall a video tape of a lecture by a New York Lawyer named Moe Levine who honestly stated (back when million dollar verdicts were rare indeed) that the secret of getting a million dollar verdict was being selected to handle a million dollar case.
As we learned in John Grisham’s popular book “The Rainmaker”, even the novice lawyer can get a great result when an insurance company denies thousands of dollars in covered benefits resulting in the death of the insured, falsifies evidence and records and calls the insured’s mother “stupid, stupid, stupid” in writing while denying the claim. In the more recent “King of Torts” we learned that a skilled public defender can be converted into a class action lawyer (which is often as much business as it is law) with spectacular results. Fiction? Yes, in part. Lessons to be learned? Most definitely.
It is important for every tort practitioner to recognize the effectiveness their jury trial skills can have in litigating business torts. An equally important skill is the ability to identify the key elements of a business tort since an error in judgment and the selection of the wrong case can lead to months of frustration. Many good trial lawyers still shy away from business torts on the often false premise that such cases should be left solely to corporate law firms (usually large) and to a lawyer whose litigation skills are normally directed to non-jury trials or arbitrations (a skill not to be overlooked but of a different character).
A number of years ago I got a call from a prominent Los Angeles trial lawyer named Dan Fogel (since deceased) about a matter his office was considering arising from Orange County. I asked him how he was doing. He proceeded to tell me he had the most important position in his prestigious law firm. And what was that I naively asked? He said “Wylie, I’m the keeper of the gate.” He decided which cases the office accepted and which cases they turned down. What to take was often easy, but what to turn down can be more difficult, though equally important. He pointed out that by saying “no” he saved the law firm hundreds of thousands of dollars in time and costs. This is even more true in a contingency practice, and through the years I have appreciated the wisdom of Dan’s remarks.
Does The Client Have A Business Tort Case?
Some quick rules of thumb. If a client arrives at your office with more than two “Bekins” boxes, turn it down automatically (or at least until it fits into those boxes). If, after hearing your client’s story and you cannot explain it to your non-lawyer spouse (or the closest non-lawyer to you) in two paragraphs or less, also turn it down. Planes do not crash because they are complicated machines with thousands of parts, but due to the failure of one small simple part or a simple explainable event. A space shuttle fails, not due to all of its many intricacies, but apparently due to the discovered “smoking gun”, a block of foam.
Perhaps the easiest way to illustrate this is to note one of the embryonic cases leading to “bad faith” law as we know it today. See U.L. Fletcher v. Western National Life Insurance Co. et al. (1970) 10 Cal.App.3d 376. Early bad faith law was based on what was commonly called the tort of “outrage” (intentional infliction of emotional distress based on outrageous conduct). My torts professor in law school analyzed this tort by giving this illustration. Picture a group of citizens sitting around a kitchen table. One of them tells a story. If those hearing the tale, jump from the table expressing feelings of “outrage”, then bingo you’ve got the makings of a case! Simple? Yes. Non-intellectual? No. Couple this analysis with the story to follow.
A number of years ago a client came into my office. He was the brother of a lawyer friend. By occupation he was a veterinarian pathologist, a profession which I knew nothing about. He explained that he had developed an idea and business which utilized a human health lab to interpret animal samples to help diagnose animal ailments. He, as the pathologist, created the norms needed to interpret the results, norms which were obviously different from those established for humans. At his expense he educated veterinarians on how to use this service and developed an extensive pick-up and delivery system. The lab, which could now use already existing machines “round the clock” saw the obvious profit and agreed to split the proceeds with the veterinarian who operated as “The Institute of Veterinarian Pathology.” The lab was national in scope and was a wholly owned subsidiary of “Revlon”.
Operating without a formal agreement, the business prospered. The “Revlon” subsidiary decided to eliminate the middleman and without notice terminated the relationship with the client, solicited all his customers and destroyed the business overnight, thereby keeping all the profit for themselves. I was “outraged.” I was primarily known as a “personal injury lawyer.” I had not studied business torts extensively and was only vaguely familiar with a tort known as the “tortious interference with an advantageous business relationship.” (See Jerry Klein’s article in this publication.) But what I did know is that I had these three elements:
- Wrongful conduct (in fact outrageous in my mind). What’s that old saying? Where there’s a wrong there must (or should be) a remedy).
- Significant damages to the plaintiff, independent of the possible punitive damages. This is a key point since punitive damages should normally always be looked at as the frosting, but not the cake.
- A responsible, solvent defendant who had the ability to respond in damages.
The case resulted in a substantial jury verdict, $88 thousand in compensatory damages, $663 thousand in punitive damages, and of course an appeal. See Institute of Veterinary Pathology, Inc. v. California Health Laboratories, (1981) 116 Cal.App.3d 111 and an article in AmJur Proof of Facts, Wylie A. Aitken, Tortious Termination of Business Relationship, 21 AMJUR POF2d 509 (1980). My business tort career was established to be followed by a number of others. The three elements above are still the foundation for the analysis of even the most alleged sophisticated case particularly where a contingency fee is to be involved.
The Legal Theories
Just like a doctor describes each medical problem in terms of their own particular specialty, trial lawyers have a tendency to place cases into categories with which they are familiar (the round peg in the square hole) or totally shy away from the unfamiliar. By having a greater overview as to what is out there legally, with a few illustrations as to their application, the big picture develops. The legal theories can be diverse, complications, or often simple depending on the creativity and courage of the trial lawyer.
- How about the simple tort of conversion which we learned in Torts 1? Conversion has generally been defined as “any act of dominion wrongfully exerted over another’s personal property in denial of or inconsistent with his rights therein.” See 3 LEVY, GOLDEN, SACKS, CALIFORNIA TORTS § 40.40 (2003) citing Zaslow v. Kroenert (1946) 29 Cal.2d 541, 549, et al. Elements in a cause of action for conversion consist of the following: tangible personal property; the plaintiff’s actual possession or immediate right of possession, the defendant’s wrongful disposition of the property or interference with the property that denies or is inconsistent with the plaintiff’s right of dominion over the property; the defendant’s intention to exercise dominion either by an affirmative act or by an omission; and proximately caused injury.
- How about fraud, deceit and negligent representation? The terms “deceit”, “actual fraud,” and “fraud” are often used interchangeably to refer to the common law cause of action for fraud or deceit. See 3 LEVY, GOLDEN, SACKS, CALIFORNIA TORTS § 40.01 (2003) citing Gold v. Los Angeles Democratic League (1975) 49 Cal.App. 3d 365, 374 et al. The tort of negligent misrepresentation has also been analyzed as primarily a form of the tort of fraud or deceit. See 3 LEVY, GOLDEN, SACKS, CALIFORNIA TORTS § 40.10 (2003) citing Bily v. Arthur Young & Co. (1992) 3 Cal. 4th 370, 407 et al. The general elements in a cause of action for fraud, deceit, and negligent misrepresentation are (1) misrepresentation (false representation, concealment, or nondisclosure) of a material fact; (2) knowledge of falsity or lack or reasonable ground for belief in the truth of the representation (scienter); (3) intent to induce reliance; (4) actual and justifiable reliance by plaintiff; and (5) resulting damage.
- Misappropriation of trade secret? The Uniform Trade Secrets Act (“UTSA”) provides a specific cause of action for misappropriation of a trade secret, as well as providing for injunctive relief, royalties, damages for actual loss, damages for unjust enrichment, exemplary damages, and attorney’s fees in certain cases. See 3 LEVY, GOLDEN, SACKS, CALIFORNIA TORTS § 40.50 (2003) citing CA Civ. Code §3426-3426.10; see also CA Code Civ. Proc. §2019(d) et al. The cause of action consists of two elements: (1) the existence of a trade secret, and (2) misappropriation of the trade secret.
- Libel and slander of title. In California, slander of title and trade libel are separate tort actions. See 3 LEVY, GOLDEN, SACKS, CALIFORNIA TORTS § 40.70 (2003) citing Matter of Kasler (9th Cir. [Cal.] 1979) 611 F.2d 308, 311 et al. The key difference between the two torts is that slander of title involves false disparagement of another’s title to property, whereas trade libel involves false disparagement of the quality of another’s good or services. See 3 LEVY, GOLDEN, SACKS, CALIFORNIA TORTS § 40.70 (2003) citing Matter of Kasler (9th Cir. [Cal.] 1979) 611 F.2d 308, 311.
- Interference with prospective economic advantage? or interference with contractual relations or unfair competition? The tort of interference with prospective economic advantage consists of improper methods of diverting or taking business from another that are not within the privilege of fair competition. See 3 LEVY, GOLDEN, SACKS, CALIFORNIA TORTS § 40.100 (2003) citing A.F. Arnold & Co. v. Pacific Professional Ins., Inc. (1972) 27 Cal. App.3d 710, 714. This tort consists of the following elements: (1) an economic relationship containing the probability of future economic benefit, (2) knowledge by the defendant of the existence of the relationship, (3) intentional or negligent wrongful acts by the defendant to disrupt the relationship, (4) actual disruption of the relationship, and (5) proximately caused actual damage.
- Unfair Competition. Under California Business and Professions Code Section 17200, unfair competition is defined as any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising. The Business and Professions Code defines false or misleading statements in Section 17500. This section makes it unlawful for any person, firm, or employee thereof with intent directly or indirectly, to dispose of real or personal property, or to perform services, or to induce the public to enter into any obligation relating thereto, to make or disseminate any statement concerning that real or personal property or those services which are untrue or misleading or which by the exercise of reasonable care should be known untrue or misleading.
- Never to be overlooked is the field of “bad faith” which has always piqued my particular interest. More correctly described as the “breach of the implied covenant of good faith and fair dealing”, it is a leading “business tort.” For examples see Neal v. Farmers Ins. Exchange, (1978) 21 Cal.3d 910 (uninsured motorist bad faith law and the method of assessing punitive damages), Levi Boicourt v. Amex Assurance Company, (2000) 78 Cal.App.4th 1390 (insurer’s refusal to disclose policy limits and timely settle case), Gourley v. State Farm Mut. Auto. Inc. Co. (1991) 53 Cal.3d 121 (validity of punitive damages under California and U.S. Constitution).
As A Trial Lawyer Why Practice In The Field Of Business Torts?
Many have predicted for years the ultimate demise of the tort personal injury practice, at least as to the smaller cases which more and more are becoming economically difficult to justify (though just). I do not necessarily share their pessimism. Nonetheless, the practice of law is ever changing and it is important to both anticipate and appreciate those changes. The challenge, the stimulation, variety and satisfaction gained from handling such cases can be rejuvinating.
A review of top verdicts of year by year (1997 to 2002) (last five years) as reported by the Los Angeles Daily Journal discloses the following:
In 1998 the verdicts ranged from $785 million to $17 million with the lead case involving a toxic tort. Of the top ten verdicts only one was a traditional personal injury or wrongful death medical malpractice case, and that was the smallest (a mere $17 million). Three involved breach of contract or economic interference and two involved wrongful termination in a whistle blower context.
In 1999 the verdicts ranged from $5 billion to a paltry $22 million (again a medical malpractice case). Four of them involved a business setting, an HMO refusal to provide care ($121 million), tortious insurance ($47 million), business fraud ($32 million) and copyright infringement (also $32 million). Of the two product liability cases, both involved punitive damages.
In 2000 the trend continued with verdicts ranging from $132 million to $41.4 million, with only one product liability action (again involving punitive damages), a bad faith case, three breach of contract actions involving concealment, tortious interference and unfair business practice, an intellectual property and fraud case.
In 2001 it was $3 billion to $21.4 million. Setting aside “big tobacco” you had the Los Angeles Daily Journal itself noting that “for the second year in a row, breach of contract actions provided the highest plaintiff verdicts” including $94.5 million v. the City of San Diego in a breach of a development agreement, bad faith denial of coverage ($93 million) breach of oral agreement ($64.5 million), breach of contract and fraud ($50.8 million and $46 million) and a rigged bid ($29 million).
2002 saw a range from $28 billion to $40.9 million. Again setting aside “big tobacco” ($28 billion) you had five fraud actions ranging from $190 million to $71 million, a $500 million breach of contract action (failure to pay royalties to a cancer research center, talk about “outrage”) and $114 million for breach of confidentiality. The other two actions involved medical malpractice.
A final note of caution, I’ve reported verdicts with help from our friends at the Los Angeles Daily Journal. Verdicts are often like the judgments that you can paper your walls with. However, they can be a good start. We’d all be happy with fifty cents on some of those dollars!
Conclusion (or Caveats)
This is not to say there are not traps for the unwary. I certainly don’t mean to suggest that if you feel comfortable handling a simple rear-end auto accident, you can make an immediate jump into the world of business litigation. You will be dealing with sophisticated lawyers who will raise numerous procedural difficulties in these potentially exotic torts. There will be specialized defenses, sophisticated causation issues, equitable versus legal contentions with the attendant remedies, disputes, and arguments as to the measure of damages, followed by a challenge to the right to a trial by jury. What I am saying is if you have the commitment, will and drive (and finances) there can be an exciting world out there. Join it!