Torts refer to claims based on wrongful acts (such as automobile accidents, slip and falls, and medical malpractice), and business torts refer to wrongful acts committed against a business. In each case, the primary distinction is with claims of breach of contract. In a breach of contract, two or more parties have agreed to an exchange of promises or other conduct or items of value, and if one of them breaches the contract, the other has a claim that can be redressed in court. While the distinction is not perfect, tort actions don’t depend on a contract. Usually judge-made law provides the basis of decision. The antecedents of modern claims based on negligent driving or medical malpractice causing someone harm can be traced back to the Old Testament.
Business torts consist primarily of fraud, breach of fiduciary duty, intellectual property infringement, interference with contracts or business expectancies, disparagement, and theft of trade secrets. Other torts exist but are not as common (embezzlement, conversion). While I just said that torts consist of Judge-made law, statutes passed by Congress or state legislatures sometimes modify or codify these theories or add new ones. For example, the Racketeer Influenced and Corrupt Organizations Act (RICO) builds on the judge-made law of fraud and adds powerful remedies. Trademark, copyright, and patent laws provide key factors in the law of intellectual property infringement, even though trademark and copyright infringement were torts before such statutes were passed. Trade secrets legislation supplants or codifies the definition of trade secrets originally provided by judges.
While we provide more detailed pages on each of these claims, here is a brief outline of them, starting with fraud.
Business to business fraud. Every law student is taught the “five fingers” of fraud: (1) a statement of fact, (2) false when made, (3) justifiably relied upon, (4) causing (5) damages. Each of these factors provokes arguments. A statement of fact is not an opinion, not puffing (the “best,” the “greatest,” “unsurpassed”), and not a promise of future performance. What about omissions, half-truths? What if a representation were made negligently but not intentionally? (See Business to business fraud)
Was the statement false when made, or was the statement ultimately disproven by future events? What does justifiably relied upon mean? As Henry Ward Beecher once said, when “we know he is lying; he knows it, . . . it is not lying at all, really.” One cannot close his or her eyes to what is known and one cannot “rely” on a statement contrary to what you know or should know.
Causation and damages provide further matters for argument. Did the lie cause the loss, or did the market? Are the damages lost profits or the amount spent preparing to perform? How much profit was lost? If a contract were obtained by a lie, should the contract be rescinded (torn up as if it never existed) or should it be performed anyway, with damages based on what was represented to be the truth?
One can see why fraud is a heavily litigated and contentious claim. No one wants to be found guilty of fraud, and fraud verdicts therefore require a high standard of proof: it must be shown by clear and convincing evidence, whereas a breach of contract claim only requires proof by a preponderance of the evidence. If the higher standard is reached, however, the money awarded might not only include what was lost or what should have been gained, but punitive damages to punish fraudulent conduct and warn (deter) others not to do it.
Breach of fiduciary duty. Lawyers, accountants, preachers and priests, and trustees, are all agents who must act solely for and in the interests of their clients, congregants, and beneficiaries. A lawyer cannot write himself into his client’s will (unless the client has another, separate lawyer’s advice on the topic), an accountant cannot secretly invest a client’s money in his own business, a preacher cannot disclose a confidence, and a trustee cannot use a beneficiary’s money to pay her own personal bills. In a business setting, officers, directors, and LLC managers owe fiduciary duties to the business, for example, and if they take a deal or other opportunity that belongs to the business, engage in secret competition and conflicts of interest with the business, or obtain concealed bonuses or other improper compensation, they have breached their fiduciary duties.
There can be arguments over whether one is an agent. If a nephew transfers his house to an Uncle, does the Uncle hold it in trust for him? What was the understanding, and how can that understanding be proved?
Intellectual property infringement. If you own a copyright, trademark, or patent, you own intellectual property, and the courts will protect you from others who try to trade and profit on your work. For more detail, see intellectual property infringment, or review chapters 10, 11, 12 in our book, Temporary Restraining Orders and Preliminary Injunctions: Handling the Business Emergency (ABA 2021)
Interference with contracts or other business expectancies. The legal system wants contracting parties to adhere to their contracts, but there can be many competitive pressures to breach them. One can argue that the right to breach a contract is as fundamental as the right to agree to a contract, but what happens when a stranger to the contract induces the breach? Tort law provides a remedy if the inducement were wrongful. What is wrongful? Criminal misconduct, threats, extortion, lies, disparagement, or actions taken with a malicious purpose have been considered wrongful. But there is much controversy over the concept of justified interference. Fair competition is justified; unfair competition isn’t. The tort requires proof that there was a contract, that the stranger unjustifiably induced a breach of that contract, causing damages. The law goes so far as to protect relationships that aren’t reflected or recorded in a contract, typically if they are long-standing. The same elements are required for proof, but instead of the usually easy proof of a contract, additional evidence is required to show that there was an expectancy worthy of the law’s protection.
Disparagement. Lying about someone or some business or some business’s product is actionable as a tort. You need to prove that the lie was made and that lost sales or lost market share resulted.
Theft of trade secrets. Confidential financial information, customer lists, business practices and systems, formulas, marketing and construction plans, are protected by the law. While it is a good practice to label such information confidential, the law typically allows a claim of trade secrets if the information was intended to be confidential and kept confidential (with restricted and controlled access to a limited number of people). If this material is stolen (by a soon to be ex-colleague, for example, or through espionage), you can immediately sue for an injunction to stop the exploitation of the stolen information and to get money damages for its theft.
There are six common law factors for determining the existence of a trade secret: (1) whether the information is known outside the plaintiff’s business; (2) whether the information is widely known in the plaintiff’s business; (3) the security measures taken by the plaintiff to keep the information secret; (4) the value of the information; (5) the effort or money spent developing the information; and (6) whether the information can easily and properly be acquired or duplicated by others.
Click below for more resources on different aspects of Business Torts
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