University of Memphis Law Review, The: Torts-Trau-Med of America, Inc. v. Allstate Insurance Co.: Th

Trau-Med of America, Inc. (Trau-Med), is a physician practice management company located in Memphis, Tennessee.1 For purposes of this comment, it is important to have a basic understanding of Trau-Med's business operations. The goal of a physician practice management company is to offer medical care to the public, with a primary focus on "uninsured and indigent personal injury victims."2 One source of Trau-Med's business is referrals from personal injury lawyers who are representing uninsured clients that are unable to afford medical services.3 After obtaining a new client, Trau-Med agrees to conduct the administrative duties for the medical doctors who in turn treat the victims.4 Trau-Med is compensated from the proceeds resulting from the settlement or final disposition of the case.5

Trau-Med filed a claim in a Tennessee trial court against Allstate Insurance Company (Allstate) in November of 1998 for the intentional interference with a business relationship.6 The complaint alleged that Allstate "purposefully attacked [Trau-Med's] lawful business by making libelous statements and by creating defamatory documents for the purpose of ruining its reputation in the legal community."7 Also, the complaint submitted that Allstate had instructed the lawyers for its policyholders to file defamatory motions accusing Trau-Med of specific unlawful conduct.8 Further, Trau-Med asserted that Allstate, its agents, and its employees were involved in a conspiracy to "destroy" Trau-Med's business.9 Additionally, the complaint averred that Allstate agents were implying that "all claimants who do receive medical treatment from Trau-Med can expect to be 'embroiled in unnecessary and expensive litigation.'"10 The last of Trau-Med's averments was that "Allstate's actions have received 'wide publication in the legal profession'" thereby '"raising concern with attorneys about the propriety of [Trau-Med's] business.'"11 As a result of Allstate's actions, Trau-Med claimed that the "false and defamatory allegations . . . 'brought about great economic loss, . . . frightened and demoralized its employees and independent contractor physicians and caused irreparable damage to [Trau-Med's] reputation and prospective economic advantage in the community.'"12 Trau-Med sought recovery based on the "tortious interference with a business relationship accompanied by a malicious and intentional motive to destroy and/or damage Trau[]Med's business and to cause it to suffer financial loss."13

In opposition to Trau-Med's intentional interference with a business relationship claim, Allstate filed a motion to dismiss for failure to state a "cause of action upon which relief could be granted."14 The trial court dismissed the intentional interference with a business relationship claim; however, on appeal, the appellate court reversed and found that such a claim did exist.15 An appeal was granted by the Tennessee Supreme Court to determine whether there were sufficient facts on which to base a claim for "tortious interference with a business relationship."16 The Tennessee Supreme Court held, affirmed.17 Tennessee "expressly adopt[s] the tort of intentional interference with business relationships." Trau-Med of Am., Inc. v. Allstate Ins. Co., 71 S.W.3d 691, 701 (Tenn. 2002).

The purpose behind the tort of intentional interference with business relationships is to hold the defendant "responsible for interfering in the noncontractual business relationships of a plaintiff with motives or means contrary to those used to further lawful competitive business practices." In consideration of this goal, the law accepting this tort has not always existed, as it does now, in Tennessee. In fact, "the tort had neither been expressly adopted nor rejected prior to [the 1997] decision in Nelson v. Martin."19

The recognition of the principles of the tort at issue can be traced back to the courts of England.20 In the early 1600's, the English courts held that one may be liable for interference with prospective contracts when he threatened to '"mayhem and vex with suits'" someone who worked for or patronized a particular individual.21 As pointed out in the comments to the Restatement (Second) of Torts section 766B, there are specific relationships that are protected by the intentional interference tort.22 Such relationships include prospective contractual relations that would be of "pecuniary value to the plaintiff[, such as] . . . the opportunity of selling or buying land or chattels or services, and any other relations leading to potentially profitable contracts."23

One of Tennessee's neighboring jurisdictions, Mississippi, has a history of applying the tortious interference with a business relationship claim.24 For example, in MBF Corp. v. Century Business Communications, Inc.,25 the Mississippi Supreme Court recognized four required factors for a claim of tortious interference with a business relationship. The factors considered by Mississippi courts are:

(1) The acts were intentional and willful;

(2) The acts were calculated to cause damage to the plaintiffs in their lawful business;

(3) The acts were done with the unlawful purpose of causing damage and loss, without right or justifiable cause on the part of the defendant (which constitutes malice);

(4) Actual damage and loss resulted.26

In MBF Corp., the court held that MBF Corporation (MBF) established a prima facie case for its claim of tortious interference with a business relationship. In that case, MBF was primarily involved in the distribution of business forms.28 Mark Elliott (Elliott) was the vice president of sales for MBF, and two sales representatives, Walter Moore and Samuel Higginbotham, assisted him.29 Ultimately, in 1989, Elliot's employment relationship with MBF ended and he began working in essentially the same type of business for Century Business Communications, Inc. (Century).30

In 1990, Elliott successfully recruited the services of Moore and Higginbotham to work for him at Century. Prior to their leaving MBF, "Higginbotham and Moore began the [process] of copying all their customer files" for use at their new employ.32 They also held purchase orders that were attained while still working for MBF and even "wrote a letter to the City of Jackson[, Mississippi,] on MBF letterhead indicating that MBF [wished] . . . to be removed from the City's bid list."33

MBF filed suit against Century, Moore, and Higginbotham alleging that their actions amounted to "interference with MBF's business relationships with its clients."34 The Mississippi Supreme Court stated that "[i]t is proper to engage in competition for prospective gain, as long as tortious acts are not employed to further that gain[, and] . . . it is clearly not a tort to fairly compete with a business rival for a prospective customer."35 On the other hand, the court noted that "when a wrongdoer unlawfully diverts prospective customers away from one's business thereby 'encouraging' customers to trade with another[,]" such action amounts to the tortious interference with a business relationship.36

Ultimately, and upon review of the aforementioned test, the court held that MBF had satisfied the requirements necessary for a prima facie case of tortious interference with a business relationship.37 First, it was settled that "Century's acts were intentional and willful."38 Next, the court found that the "acts were calculated to cause damage to [MBF's] customer base and, in turn, to the entire business."39 Further, "Century's acts were not the result of a justifiable purpose within the realm of legitimate competition to acquire customers for itself, but were instead motivated by the unlawful purpose of causing damage or loss."40 Lastly, MBF established a prima facie case of damages by showing the financial losses involved.41

Georgia has also recognized the claim of tortious interference with a business relationship. In U.S. Anchor Manufacturing, Inc. v. Rule Industries, Inc.,42 the Georgia Supreme Court dealt with a particular course of action that may not be characterized as tortiously interfering with a business relationship.43 The court established a rule that "below-cost pricing by a single defendant is not improper in the absence of some other unlawful element and, thus, is not encompassed by the tort of intentional interference with business relations."44 Much in line with the courts of Mississippi, the Georgia Supreme Court stated the following:

The policy of the common law has always been in favor of free competition . . . . In the absence of prohibition by statute, illegitimate means, or some other unlawful element, a defendant seeking to increase his own business may cut rates or prices, allow discounts or rebates, enter into secret negotiations behind the plaintiff's back, [or] refuse to deal with him . . . .45

In the formulation of the tortious interference with a business relationship standard, many jurisdictions have looked to the Restatement (Second) of Torts for guidance.46 Section 766B and the comments thereafter provide useful explanations and rationale regarding the tortious interference action.47 Section 766B, entitled "Intentional Interference with Prospective Contractual Relation," states:

One who intentionally and improperly interferes with another's prospective contractual relation (except a contract to marry) is subject to liability to the other for the pecuniary harm resulting from loss of the benefits of the relation, whether the interference consists of

(a) inducing or otherwise causing a third person not to enter into or continue the prospective relation or

(b) preventing the other from acquiring or continuing the prospective relation.48

One jurisdiction that has used section 766B as a guideline is Kentucky.49 In National Collegiate Athletic Association v. Hornung,50 Paul Hornung (Hornung) sued the NCAA, which had disapproved him as a broadcast announcer for WTBS college football, for "intentional interference with a prospective contractual relation."51 The NCAA's decision not to approve Hornung was unanimous, and the court viewed the reasons given for the disapproval as being made "in good faith."52 The Kentucky Supreme Court's recognition of the NCAA's good faith was primarily based on the premise that Hornung's image did not "personify" college football.53 The NCAA claimed that Hornung had been closely associated with professional football for a long time and, more importantly, that the National Football League had suspended him for gambling activities.54

Prior to the Hornung case, the Kentucky Court of Appeals, in Cullen v. S. East Coal Co., relied on the Restatement (Second) of Torts section 766B and "recognized that intentional and improper interference with the prospective contractual relations of another gives rise to liability."55 On appeal, the Supreme Court of Kentucky in Hornung stated that "the foregoing section[] of the Restatement fairly reflect[s] the prevailing law of Kentucky."56

The Kentucky court's analysis focused on the intent that must be present in intentional interference cases. For a plaintiff to prevail, it is imperative that he show some type of malice or significantly wrongful conduct on the part of the defendant.57 In intentional interference cases, the crux generally tends to be the "defendant's motive or purpose, and the means by which he has sought to accomplish it."58 Alternatively, the court noted that "if the defendant has a legitimate interest to protect, the addition of a spite motive usually is not regarded as sufficient to result in liability."59 Finally the court indicated that "malice may be inferred in an interference action by proof of lack of justification."60 Accordingly, the NCAA's actions were found to have been taken in good faith and in an effort to protect its interests.61

Prior to Trau-Med of America, Inc. v. Allstate Insurance Co., the Tennessee Supreme Court had addressed the tort of intentional interference with a business relationship in several other cases. In Hutton v. Watters,62 Kultura, Inc. v. Southern Leasing Corp., and Quality Auto Parts Co. v. Bluff City Buick Co.,64 the court noted that while other jurisdictions acknowledged the tort of intentional interference with business relationships, Tennessee had neither accepted nor rejected it.65 This changed in 1997 with the Tennessee Supreme Court's decision in Nelson v. Martin.66

In the early 1900's, the Supreme Court of Tennessee, in Hutton v. Watters, recognized the importance of the principles that underlie the tort of intentional interference with a business relationship.67 In Hutton, the court faced a factual pattern involving a defendant's malicious conduct which damaged the plaintiff's boarding house business. The conflict arose when the plaintiff refused the defendant's request to dismiss a particular boarder.69 Consequently and with ill-intent, the defendant began a campaign to deter potential boarders from patronizing the plaintiff's business.70 The campaign was successful as it "destroyed, or practically destroyed, [the] plaintiff's business."71

In its discussion, the court stated that "[e]very one has the right to establish and conduct a lawful business, and is entitled to the protection of organized society, through its courts, whenever that right is unlawfully invaded."72 If a defendant can be "shown to have intentionally interfered" with such a right, "without justifiable cause or excuse," they are subject to liability for their actions.73 The test for showing such justification was stated by the court as: (1) "the act complained of was otherwise lawful and performed in a lawful manner," and (2) the act must serve as a "reasonable advantage" to the party engaging in the activity.74 If the defendant can satisfy this standard, even though he may have caused harm to the plaintiff, he will not be held liable for "an injury in the legal sense."75 In sum, "[one] cannot, with justification in law, use his property, or anything else that appertains to him, in such [a] manner as to wantonly injure [the business practice of] another."76

Interestingly, from 1915 to 1997, the courts in Tennessee recognized "that a defendant's malicious conduct preventing a third person from conducting business with the plaintiff was subject to tort action; however, the tort of intentional interference with a business relationship was not expressly adopted.77 Conversely, as noted above, the aforementioned tort enjoyed a lengthy span of recognition in other jurisdictions and appeared to be established as the majority rule.

The Tennessee Supreme Court eventually issued a definitive holding regarding intentional interference with business relationships in Nelson v. Martin.78 In Nelson, Carl Nelson (Nelson), Harold Martin (Martin), and Jack Gammon (Gammon) each held equal shares of B & M Printing Company, which was a closely held corporation.79 Subsequent to a dispute between Nelson and Martin in 1989, Martin, as president of the company, without consulting with Gammon, terminated Nelson's employment.80 Gammon later confirmed the termination and Nelson was removed from all of his company positions. Nelson filed a claim on the bases that the defendants, conspiring together, "maliciously induced the corporation to terminate his employment" and they interfered with his prospective economic advantage.82

The court listed the elements that generally lead to a claim for [tortious] interference with a prospective economic advantage: "(1) the existence of a business relationship or expectancy (an existing contract is not required); (2) knowledge by the interferer of the relationship or expectancy; (3) an intentional act of interference; (4) proof that the interference caused the harm sustained; and (5) damage to the plaintiff."83 The court noted, however, that the tort of "interference with a prospective economic advantage" was not statutorily established, thus it could be "maintained only if it is found to be a part of the common law in [Tennessee]."84 In this case, the court concluded that this tort enjoyed no recognition in Tennessee.85

The express rejection of interference with a prospective economic advantage was primarily based on the court's policy concerns.86 The court reasoned that if the tort of intentional interference is expanded beyond matters which involve only express contracts, it would do violence to "the principles of free competition in business relationships." Further, and in conclusion of its opinion,88 the court listed the following additional fundamental problems with the tort:

[T]he tort has a highly detrimental effect on commerce and individual liberty. The tort hinders market efficiency, produces erroneous liability rulings, and fosters uncertainty in the law. The courts' interest-balancing approach to the tort is unworkable. Fundamental constitutional rights, including freedom of speech and due process, are impaired. Other rights necessary for a free society, such as freedom of thought, are also detrimentally impacted. Moreover, the tort . . . places an unnecessary burden on an already strained legal system.89

In Trau-Med of America, Inc. v. Allstate Insurance Co. (TrauMed),90 the Tennessee Supreme Court directly addressed the issues surrounding the tort of intentional interference with business relationships.91 In Trau-Med, the Tennessee Supreme Court held that it would be unreasonable to continually ignore the tort; rather it should be expressly adopted and applied in Tennessee courts.92 The analysis of the elements regarding intentional interference with business relationships explains the application that should be followed when considering this claim.93

Trau-Med presented the court with the issue of whether it should recognize a cause of action for tortious interference with business relationships.94 The court began its discussion with a review of reasoning that had been discussed in previous cases regarding the same question.95 The foundation of the reasoning was "that a defendant should be held responsible for interfering in the noncontractual business relationships of a plaintiff with motives or means contrary to those used to further lawful competitive business practices."96 The Trau-Med court explained that from 1915 until 1997, Tennessee courts operated under the presumption that malicious interference with the plaintiff's business relationships among third parties was tortious conduct.97 The tort of intentional interference with business relationships, however, was not accepted or rejected until 1997.98

The court continued by noting that in 1997, it recognized that the ideology underlying the "liability for interference with contractual relations" was being extended to cover noncontractual relationships.99 Nevertheless, it had been unwilling to adopt such an extension, in fear that it would '"greatly hamper free competition in the marketplace.'"100 The original formula for intentional interference with business relationships allowed for an action if proven that the plaintiff's injury was caused by the defendant's intentional acts.101 Other jurisdictions, in establishing the elements and burden-of-proof consequences, "without any consideration of the propriety of the defendant's objective or motive," made "lawful [and] competitive business practices" actionable.102 The Trau-Med court stated that it remained unwilling to accept the tort in this form.103

The court then recognized that a majority of jurisdictions have had similar concerns regarding a threat on free competition in the business arena.104 In coping with this fear, most jurisdictions have inserted into the elements of the tort, a requirement of improper conduct on behalf of the defendant.105 Other states have adopted the intentional interference with business relationships by "requiring a plaintiff to prove that the alleged interference was 'wrongful,' 'improper,' 'illegal,' or otherwise 'independently tortious.'"106 In sum, the Tennessee Supreme Court reasoned:

The theory of the tort of interference, it is said, is that the law draws a line beyond which no member of the community may go in intentionally intermeddling with the business affairs of others; that if acts of which complaint is made do not rest on some legitimate interest, or if there is sharp dealing or overreaching or other conduct below the behavior of fair men similarly situated, the ensuing loss should be redressed; and that the line of demarcation between permissible behavior and interference reflects the ethical standards of the community.107

Finding continuous rejection to be unreasonable, the Tennessee Supreme Court "expressly adopt[ed] the tort of intentional interference with business relationships."108 As the court stated, the elements that must be proven by the plaintiff are as follows:

(1) An existing business relationship with specific third parties or a prospective relationship with an identifiable class of third persons;

(2) the defendant's knowledge of that relationship and not a mere awareness of the plaintiff's business dealings with others in general;

(3) the defendant's intent to cause the breach or termination of the business relationship;

(4) the defendant's improper motive or improper means and finally,

(5) damages resulting from the tortious interference.109

The court further adopted the discussion at section 766B comment c of the Restatement (Second) of Torts.110 That comment provides:

The relations protected against intentional interference by the rule stated in this section include any prospective contractual relations, except those leading to contracts to marry, if the potential contract would be of pecuniary value to the plaintiff. Included are interferences with the prospect of obtaining employment or employees, the opportunity of selling or buying land or chattels or services, and any other relations leading to potentially profitable contracts. Interference with the exercise by a third party of an option to renew or extend a contract with the plaintiff is also included. Also included is interference with a continuing business or other customary relationship not amounting to a formal contract.

The court stated that whether or not the defendant acted with the requisite motive will be dependent upon the specific facts of each case.112 The court did, however, require the plaintiff to prove that "the defendant's predominant purpose was to injure the plaintiff."113 In an effort to provide guidance to courts that may be faced with a claim of intentional interference with business relationships, the court provided examples of improper interference.114 These examples include:

[T]hose means that are illegal or independently tortious, such as violations of statutes, regulations, or recognized common-law rules, violence, threats or intimidation, bribery, unfounded litigation, fraud, misrepresentation or deceit, defamation, duress, undue influence, misuse of inside or confidential information, or breach of a fiduciary relationship, and those methods that violate an established standard of a trade or profession, or otherwise involve unethical conduct, such as sharp dealing, overreaching, or unfair competition.115

In the case before the court, Trau-Med alleged that Allstate had an improper motive and used improper means to interfere with Trau-Med's business relationships.116 It was also claimed that Allstate was aware of the relationships between the plaintiff's lawyers and claimants.117 Further, due to the tortious and improper interference on the part of Allstate, Trau-Med alleged it sustained a substantial economic downturn.118 Finally, Trau-Med maintained that "Allstate's predominant motive was to drive Trau-Med out of business for the sole purpose of limiting health care access to indigent claimants to 'control and limit [Allstate's] claims expenses.'"119 In light of the foregoing facts, the court held that Trau-Med had stated a cause of action for "tortious interference with a business relationship."120

The adoption of tortious interference with a business relationship could be characterized as somewhat overdue. In its own time, however, the Tennessee Supreme Court made the proper decision in recognizing this tort. It is a credit to any decisionmaking body, when the body uses the discipline needed to forego a premature resolution to private and public concerns rather than settling for inadequate remedies and creating additional problems.

Conglomerates, small businesses, and the end-consumer will each draw a benefit from the decision in Trau-Med of America, Inc. v. Allstate Insurance Co.121 The interests of the corporations and businesses will be served by the prohibition of a defendant's use of improper means by which it may interfere with a business relationship.122 Alternatively, the end-consumer will benefit through the competition carried on by product and/or service providers. The consumer's interest is protected by the requirement that the acts by the defendant be improper before a claim of tortious interference with a business relationship will attach.123 In conclusion, the tort of intentional interference with business relationships, while not as timely as one may have expected, has the prospect of serving our business community and end-user in a practical and beneficial manner.

JONATHAN L. BOBBITT*

* Comments Editor, The University of Memphis Law Review, J.D. Candidate, May 2004, The University of Memphis, Cecil C. Humphreys School of Law; M.B.A., Union University; B.S.B.A., Union University. Special thanks to the University of Memphis Law Professor Daniel Wanat for his guidance and thoughtful suggestions.