USCOA,2 No. 116
Carvel Corporation,
Appellant, v. Elizabeth A. Noonan, et al.,
Respondents,
et al.,
Defendants,
et al.,
Special Masters.
2004 NY Int. 122
October 14, 2004
This opinion is uncorrected and subject to revision before
publication in the New York Reports.
Mitchell A. Karlan, for appellant. J. Manly Parks, for respondents. Caesars Entertainment, Inc.; Independent Franchisees of
Weight Watchers International, Inc.; The Inverraz Group, amici curiæ.
R. S. SMITH, J.:
Several franchisees of Carvel Corporation sued it in
federal court, complaining of the distribution of Carvel's
products through supermarkets that competed with the franchisees.
Juries awarded damages to three of the franchisees on tort and
contract claims, and Carvel appealed to the United States Court
of Appeals for the Second Circuit. That court has certified to
us the question of whether the franchisees have a valid tort
claim for "interference with prospective economic relations." We
hold that they do not.
The Facts
Until the early 1990's, Carvel ice cream was
distributed only through franchised stores, and Carvel had
repeatedly told its franchisees it had no plans to sell through
supermarkets. A decline in Carvel's fortunes caused it to change
its mind, however, and Carvel adopted a "supermarket program."
The program called for sales to supermarkets by Carvel itself and
by those franchisees that chose to participate in the program --
which required franchisees to pay substantial license fees and to
upgrade their stores. Most franchisees chose not to participate.
From 1993 to 2000, the supermarket program grew rapidly, while
many franchised stores went out of business. The franchisees assert that Carvel's supermarket
program was harmful to them in itself, and that the details of
the program's implementation made things worse. Among their
grievances are that Carvel sold to supermarkets at bargain
prices; that it issued coupons to customers that Carvel would
redeem from supermarkets but not from franchisees; and that those
coupons were printed on bags that Carvel required franchisees to
use in their stores. They contend that, as their expert witness
testified, Carvel's supermarket program was not "consistent with
the customary practices and standards of the franchise industry."
The franchisees' claims, both in contract and tort, are
illuminated by their written agreements with Carvel. Those
agreements were of two types. The earlier agreements, known as
"Type A", included a specific restriction on Carvel's rights to
compete with its franchisees, providing that Carvel "will not
establish or license another person to establish a Carvel Store"
within a quarter mile of the franchisee's store on the same
street. The Type A agreements contained other language,
including a reference to "a unique system for the production,
distribution and merchandising of Carvel products," that the
franchisees interpret as prohibiting Carvel from implementing its
supermarket program. The later, "Type B," agreements also contained the
"unique system" language, but not the quarter-mile restriction.
They provided that the license granted to the franchisee was
"non-exclusive", and that Carvel "in its sole and absolute
discretion" could license other Carvel stores and could sell its
products "through the same or different delivery systems or other
distribution channels." The franchisees who signed Type B
agreements had all received, before they signed the agreements,
an offering circular saying that Carvel was free to sell through
"supermarkets."
Of the three franchisees whose cases are now before us,
two, Marsella and the Noonans, signed Type A agreements; the
third, Giampapa, signed Type B. Each agreement contains a New
York choice of law clause, and it is not disputed that New York
law governs both the contract and tort claims. The two franchisees who signed Type A agreements were
allowed to go to juries on claims that Carvel "breached its
franchise agreement" with them. One of them, the Noonans, got a
favorable verdict on that claim. All three of the franchisees
went to juries on claims that Carvel "breached the implied
covenant of good faith and fair dealing" and "tortiously
interfered with the [franchisee's] existing or prospective
business relations," and all three got favorable verdicts on
those two claims. Only the verdicts for tortious interference
with business relations are now our concern.
The Certified Questions
The Second Circuit Court of Appeals certified the
following two questions to us:
1."Under applicable standards for a claim
of tortious interference with prospective
economic relations, did the evidence of the
franchisor's conduct in each of the three
trials on review in these consolidated
appeals permit a jury finding in favor of the
franchisee?"
2."Is public harm required for a punitive
damages claim by a franchisee against its
franchisor for tortious interference with the
franchisee's prospective economic relations
customers?"
We answer the first question "no." This answer renders
the second question academic.
Discussion
The franchisees' tort claim is that Carvel unlawfully
interfered with the relationships between the franchisees and
their customers. The franchisees do not claim that the customers
had binding contracts that Carvel induced them to breach; they
allege only that, by implementing its supermarket program, Carvel
induced the customers not to buy Carvel products from the
franchisees. The juries have found that Carvel did so induce
customers, and the question for us is whether that inducement was
tortious interference under New York law. We conclude that it
was not because Carvel's conduct, which did not constitute a
crime or an independent tort and was not aimed solely at harming
franchisees, was also not the sort of egregious wrongdoing that
might support a tortious interference claim in the absence of
such an independently unlawful act or evil motive. We have recognized that inducing breach of a binding
agreement and interfering with a non-binding "economic relation"
can both be torts, but that the elements of the two torts are not
the same. Our leading cases, as the Second Circuit Court of
Appeals noted, are Guard-Life Corp. v S. Parker Hardware Mfg.
Corp. (50 2 183[1980]) and NBT Bancorp Inc. v Fleet/Norstar
Fin. Group, Inc. (87 2 614 [1996]). We said in NBT,
summarizing what we had held in Guard-Life:
"[T]he degree of protection available to a
plaintiff for a competitor's tortious
interference with contract is defined by the
nature of the plaintiff's enforceable legal
rights. Thus, where there is an existing,
enforceable contract and a defendant's
deliberate interference results in a breach
of that contract, a plaintiff may recover
damages for tortious interference with
contractual relations even if the defendant
was engaged in lawful behavior. Where there
has been no breach of an existing contract,
but only interference with prospective
contract rights, however, plaintiff must show
more culpable conduct on the part of the
defendant."
(87 2 at 621 [citations omitted].)
By saying in NBT that a defendant who induced the
breach of a binding contract could be liable "even if the
defendant was engaged in lawful behavior," we implied that the
same was not ordinarily true where the plaintiff complained only
of "interference with prospective contract rights." This applies
equally if not a fortiori, here, where the franchisees complain
of interference not with "contract rights" but only with existing
or prospective economic relations. Under NBT, where a suit is based on interference with a
non-binding relationship, the plaintiff must show that
defendant's conduct was not "lawful" but "more culpable." The
implication is that, as a general rule, the defendant's conduct
must amount to a crime or an independent tort. Conduct that is
not criminal or tortious will generally be "lawful" and thus
insufficiently "culpable" to create liability for interference
with prospective contracts or other non-binding economic
relations. Since the franchisees have not shown that Carvel's
conduct was criminal or independently tortious, they cannot
recover unless an exception to the general rule is applicable.
Such an exception has been recognized where a defendant engages
in conduct "for the sole purpose of inflicting intentional harm
on plaintiffs" ( NBT Bancorp Inc. v Fleet/Norstar Fin. Group Inc.
[215 AD2d 990 [3d Dept 1995], aff'd , 87 NY2d 614 [1996]]), but
that exception clearly does not apply here. It is undisputed that
Carvel's motive in interfering with the franchisees'
relationships with their customers was normal economic self-
interest; Carvel wanted to reverse a period of business declines
and make itself more profitable. It was not acting solely to
hurt the franchisees; indeed, one of the franchisees' prize
pieces of evidence is a statement by a Carvel executive, in
colorful terms, that he was completely indifferent to the
franchisees' fate. We did not decide in Guard-Life or NBT, and we do not
decide today, whether any other exception to the general rule
exists -- whether there can ever be other instances of conduct
which, though not a crime or tort in itself, was so "culpable,"
to use NBT's word, that it could be the basis for a claim of
tortious interference with economic relations. That is a
question we leave for another day, because no such egregious
conduct was shown here. The sort of "more culpable" conduct we had in mind in
NBT was described in Guard-Life, where we referred to a
Restatement section dealing with the issue of when a business
competitor may recover against another for "tortious
interference." Where no binding contract is interfered with, and
there is no "unlawful restraint of trade," the Restatement
provides that the competitor will not be liable so long as "the
means employed are not wrongful." ( Guard-Life, 87 NY2d at 191,
summarizing Restatement [Second] of Torts § 768.) Continuing to
draw on the Restatement, we added in Guard-Life:
"'Wrongful Means' include physical violence,
fraud or misrepresentation, civil suits and
criminal prosecutions, and some degrees of
economic pressure; they do not, however,
include persuasion alone although it is
knowingly directed at interference with the
contract ([Restatement [Second] of Torts] §
768, Comment e; § 767, Comment c)."
( Id.)
The Restatement section on which Guard-Life relied
refers to actions between business competitors, and the plaintiff
and defendant in Guard-Life were competitors in a marketplace.
The logic of Guard-Life and NBT does not, however, depend on the
parties' status as competitors. The existence of competition may
often be relevant, since it provides an obvious motive for
defendant's interference other than a desire to injure the
plaintiff; competition, by definition, interferes with someone
else's economic relations. Where the parties are not competitors,
there may be a stronger case that the defendant's interference
with the plaintiff's relationships was motivated by spite. But
as long as the defendant is motivated by legitimate economic
self-interest, it should not matter if the parties are or are not
competitors in the same marketplace. Indeed, in NBT, while we
referred to the defendant as the plaintiff's "competitor" (87
2 at 617), it is not clear from the opinion whether we meant
that they were competitors in their everyday business, or only
that they were competing for the particular corporate acquisition
that gave rise to the lawsuit. Thus it is not relevant here whether we characterize
Carvel and its franchisees as "competitors." The question, under
Guard-Life and NBT, is whether the "means" employed by Carvel
were "wrongful" or "culpable" as we used those terms in those
cases. Most of the items in Guard-Life's catalog of "wrongful
means" are acts that would be criminal or independently tortious,
and most are obviously absent here: Carvel did not drive the
franchisees' customers away by physical violence, or lure them by
fraud or misrepresentation, or harass them with meritless
litigation ( Guard-Life, 87 NY2d at 191). The franchisees claim that Carvel did use wrongful
"economic pressure" ( id.), but that argument is ill-founded for
two independent reasons. First, it is ill-founded because the economic pressure
that must be shown is not, as the franchisees assume, pressure on
the franchisees, but on the franchisees' customers. As Federal
courts applying New York law have recognized, conduct
constituting tortious interference with business relations is, by
definition, conduct directed not at the plaintiff itself, but at
the party with which the plaintiff has or seeks to have a
relationship. ( G.K.A. Beverage Corp. v Honickman, 55 F3d 762, 768
[2d Cir 1995] [claim dismissed because alleged conduct was not
directed at plaintiff's customers]; Fonar Corp. v Magnetics
Resonance Plus, Inc., 957 F Supp 477, 482 [SDNY 1997] ["[U]nder
New York law, in order for a party to make out a claim for
tortious interference with prospective economic advantage, the
defendant must . . . direct some activities towards the third
party . . . ."]; Piccoli A/S v Calvin Klein Jeanswear Co., 19 F
Supp 2d 157, 167-168 [SDNY 1998] [claim must fail because
"defendant's alleged conduct concededly was not directed towards
any third party with whom Piccoli had an existing or prospective
business relationship."] While economic pressure brought to bear
by one contracting party on the other may, on rare occasions, be
tortious (see Albemarle Theatre, Inc. v Bayberry Realty Corp., 27
AD2d 172 [1st Dept 1967]; Rich v New York Cent. & Hudson Riv.
R.R. Co., 87 NY 382 [1882]), it cannot constitute the tort of
interference with economic relations. Here, all Carvel did to
the franchisees' customers was to make Carvel goods available in
supermarkets at attractive prices; this, in the language of
Guard-Life, was not "pressure" on these third parties but
legitimate "persuasion," and thus tortious interference with
economic relations was not established. The franchisees' argument is also ill-founded because
the Carvel activities they complain of do not amount to the sort
of extreme and unfair "economic pressure" that might be
"wrongful" under Guard-Life and NBT. The crux of the
franchisees' complaint is that Carvel distributed its products
through competitive channels, to an extent and in a way that was
inconsistent with the franchisor-franchisee relationship. But
the relationship between franchisors and franchisees is a complex
one; while cooperative, it does not preclude all competition; and
the extent to which competition is allowed should be determined
by the contracts between the parties, not by courts or juries
seeking after the fact to devise a code of conduct. The facts of this case illustrate the point. Both the
Type A and Type B contracts between Carvel and its franchisees
expressly dealt with the question of when competition would be
forbidden and when permitted. To the extent that the express
words of the contracts failed to prohibit some acts arguably
inconsistent with the nature of the relationship, the franchisees
could -- and did -- invoke the implied covenant of good faith and
fair dealing. The intervention of tort law to regulate when a
franchisor may or may not compete with its franchisees is neither
necessary or useful. Apart from attacking the supermarket program in general
as excessively and destructively competitive, the franchisees
also attack the coupon-redemption element of that program as
excessive "economic pressure." The essence of the coupon program
was to give customers who used coupons a better price when they
shopped in supermarkets. This, like any other form of price
competition, should be regulated, if at all, by the franchisor-
franchisee contract, not by tort law. The mere institution of a
coupon program was not "economic pressure" rising to the level of
"wrongful" or "culpable" conduct in the Guard-Life / NBT sense. The franchisees also claim that, by putting coupons on
the bags used by the franchisees -- and thus compelling them, in
effect, to promote products sold in supermarkets in competition
with their own -- Carvel went beyond legitimate competitive
activity. The evidence of this practice, however, is extremely
thin. No such evidence was introduced by either Marsella or
Giampapa. John Noonan testified that the Noonans "had to" give
their customers bags supplied by Carvel, and that an exhibit
counsel showed him, a copy of a bag containing a coupon, looked
like "the kind of Carvel bags . . . used in [the Noonans'] Carvel
store from time to time." There was no evidence that the Noonans
or any other franchisees complained of having to distribute these
bags, or were threatened by Carvel with consequences if they did
not do so. There is no evidence of how many bags containing
coupons were distributed, or what if any economic impact the
coupons derived from bags had on any franchisee. At best for the
franchisees, the record shows that the Noonans received some
indeterminate number of coupon-bearing bags from Carvel "from
time to time" and gave them to customers. This does not come
close to showing the kind of "economic pressure" that might
support a claim for tortious interference with economic relations
-- quite apart from the fact that, as explained above, that tort
could exist only if the "pressure" were on the customers, not the
franchisees. The franchisees argue that their tort claim is
supported by our decision in A.S. Rampell, Inc. v Hyster Co. (3
2 369 [1957]), but Rampell is distinguishable. The defendant
in Rampell, a manufacturer, had enticed away not its
distributor's customers, but the distributor's key employees.
The distributor claimed that, because of the "relation of
confidence" between it and the manufacturer, the inducement was
actionable "since its real purpose was the appropriation by [the
manufacturer] of plaintiff's sales organization and good will" (3
2 at 375). No similar claim is made here, and our decision
upholding the complaint in Rampell does not alter our conclusion
in this case. Accordingly, the first certified question should be
answered in the negative and the second not answered as academic.
Carvel Corporation v Noonan
No. 116
GRAFFEO, J., Concurring:
We concur that the first certified question should be
answered in the negative because, under the particular facts and
circumstances of this case, Carvel's conduct was not sufficiently
improper to support a claim for tortious interference with
prospective contractual relations. We write separately, however,
because we find that the standard applied by the majority is too
restrictive. We would adopt the rule set forth in Restatement
(Second) of Torts § 766B, which provides that improper conduct is
the appropriate standard in a tortious interference with
prospective contractual relations case involving non-competitors.
The Restatement (Second) of Torts distinguishes between
interference by a non-competitor and interference by a market
competitor. Section 766B, applicable to non-competitors,
provides that a defendant "who intentionally and improperly
interferes with another's prospective contractual relation . . .
is subject to liability to the other for the pecuniary harm
resulting from loss of the benefits of the relation." In
contrast, section 768 states that a "competitor" who interferes
with another's prospective contractual relation -- where "the
relation concerns a matter involved in the competition between
the [parties]" -- will be liable for such interference only where
the interferer employed wrongful means. Thus, the relevant
inquiry under the Restatement in determining the applicable
standard is whether the interfering party is a market competitor
of the plaintiff.
We have previously applied Restatement section 768's
wrongful conduct test in cases involving competitors. In Guard-
Life Corp. v S. Parker Hardware Mfg. Corp. (50 2 183 1980]),
we held that where the injured party and interfering party are
"business competitors," the injured party must establish that the
interfering party employed wrongful means to state a claim for
tortious interference with prospective contractual relations ( id.
at 190-191, citing Restatement [Second] of Torts, § 768). In NBT
Bancorp Inc. v Fleet/Norstar Fin. Group, Inc. (87 2 614
[1996]), we relied on Guard-Life in affirming the dismissal of a
tortious interference claim by a financial institution against a
competing bank, holding that the plaintiff produced insufficient
evidence that the defendant employed wrongful means.[1]
Here, Carvel was not a "competitor" of its franchisees
within the meaning of the Restatement. Rather, for the purposes
of this claim, Carvel and its franchisees were more akin to
economic partners, whose relationship contemplated cooperation,
mutual promotion of Carvel products and a joint interest in
maintaining consumer loyalty. Clearly, the expectations of these
parties, particularly the franchisees, differed from that of
commercial competitors with no product commonality. Moreover, to
the extent that Carvel was technically "competing" with its
franchisees for customers, such competition was not true free
market competition, since Carvel was in a position of dominance
by virtue of its franchisor-franchisee relationship. In this
context, we therefore would apply section 766B of the Restatement
rather than employ the section 768 wrongful means standard.
The majority concludes otherwise, holding that where a
defendant acts in its own economic self-interest, the standard
applicable to a tortious interference claim is whether the
defendant employed "wrongful means" or committed "egregious
wrongdoing." The majority thus posits that "it is not relevant
here whether we characterize Carvel and its franchisees as
'competitors.'" (majority op at 9). The relevant inquiry under
the Restatement, however, is directed to the nature of the
parties' relationship as competitors or non-competitors. This
issue regarding the interfering party's economic self-interest is
not determinative; rather, where the parties are non-competitors,
economic self-interest under the Restatement is but one of the
factors -- albeit a significant one -- to consider in determining
whether the interferer acted improperly.[2]
Section 767 of the Restatement enumerates a variety of
factors to consider when evaluating a claim of improper
interference:
"(a) the nature of the actor's conduct,
(b) the actor's motive,
(c) the interests of the other with which the
actor's conduct interferes,
(d) the interests sought to be advanced by
the actor,
(e) the social interests in protecting the
freedom of action of the actor and the
contractual interests of the other,
(f) the proximity or remoteness of the
actor's conduct to the interference and
(g) the relations between the parties."
Additionally, commentary to the Restatement categorizes
economic pressure as one type of interference that may constitute
improper conduct and specifies the factors to analyze:
"The question whether [economic] pressure is
proper is answered in the light of the
circumstances in which it is exerted, the
object sought to be accomplished by the
actor, the degree of coercion involved, the
extent of the harm that it threatens, the
effect upon the neutral parties drawn into
the situation, the effects upon competition,
and the general reasonableness and
appropriateness of this pressure as a means
of accomplishing the actor's objective"
(Restatement [Second] of Torts § 767, Comment c).[3]
Although we conclude that the improper conduct standard
should apply, we nonetheless concur with the majority holding
because, based on the record in this case, the proof of economic
pressure engaged in by Carvel does not rise to the level of
improper conduct. Reviewing all of the factors listed in section
767, the franchisees' proof fails to establish that Carvel acted
improperly with respect to either the Type A or Type B
franchisees. As an initial matter, because the determination of
whether economic pressure is improper must be reviewed "in the
light of the circumstances in which it is exerted" and section
767 specifies that "the relations between the parties" is a
consideration, Carvel's actions must be analyzed in the context
of its contractual agreements with its franchisees.
Type B franchisees, like Giampapa, expressly agreed
that Carvel could sell its products "through the same or
different delivery systems or other distribution channels," and a
disclosure form clarified that such alternative marketing
channels could include "supermarkets." Because the Type B
agreements expressly permitted Carvel's sale of ice cream cakes
to supermarkets, and the franchisees under such contracts had
full knowledge that Carvel products could be sold in retail
venues other than Carvel stores, such sales do not constitute
economic pressure rising to the level of improper conduct
sufficient to support a tortious interference claim by the Type B
franchisees.
A closer case is presented with respect to the Type A
franchisees. The Type A franchise agreements restrict Carvel
from licensing other Carvel stores within a quarter of a mile of
a franchisee, creating a relatively small sales territory for the
franchisee. The agreements also refer to "a unique system for
the production, distribution and merchandising of Carvel
products." The franchisees assert that Carvel's supermarket
program is inconsistent with the unique system of Carvel stores
envisioned in their agreements and amounted to improper economic
pressure. Because Carvel and its franchisees were not operating
in an arms-length environment, "the relations between the
parties" factor weighs in the franchisees' favor.
Balancing each of the factors, however, compels the
conclusion that Carvel did not act improperly. Carvel's conduct
in selling ice cream cakes to supermarkets, in and of itself, is
not coercive in nature and is not compelling evidence of improper
economic pressure. Moreover, Carvel's supermarket sales were not
specifically aimed at inducing particular customers away from the
franchisees; such sales were aimed at supermarket customers in
general. Additionally, we agree with the majority that the
franchisees' evidence regarding Carvel's practice of requiring
them to use bags with printed coupons redeemable only at
supermarkets is vague and insubstantial.
In accordance with section 767, the supermarket program
must also be considered in light of Carvel's motive, as well as
the interests Carvel sought to advance through its
implementation. As a result of declining sales due to growing
competition in the frozen desserts industry, Carvel commissioned
a study on its market decline. The study concluded that the
creation of a supermarket program "is totally necessary if Carvel
is to survive as a brand over the next decade." Thus, in
creating the supermarket program, which Carvel introduced in
response to this study, Carvel was legitimately concerned with
its future profitability and cannot be said to have been
primarily motivated by a desire to interfere with relations
between the franchisees and their customers.
Concluding that the franchisees' claim does not meet
the improper conduct standard, we therefore agree that the first
certified question should be answered in the negative.
Footnotes
1 We have defined wrongful means "as representing 'physical
violence, fraud or misrepresentation, civil suits and criminal
prosecutions, and some degrees of economic pressure; they do not,
however, include persuasion alone although it is knowingly
directed at interference with the contract'" ( NBT, 87 NY2d at
624, quoting Guard-Life, 50 NY2d at 191).
2 Of course, we agree with the majority that conduct rising
to the level of an independent tort or a crime, or conduct aimed
solely at harming a plaintiff, would also support a tortious
interference claim.
3 In discussing "economic pressure" as wrongful means, the
majority limits that theory solely to situations where the
defendant directs such pressure at parties with whom the
plaintiff seeks a contractual relationship. The majority relies
on a number of federal cases in support of this proposition ( see G.K.A. Beverage Corp. v Honickman, 55 F3d 762, 768 [2d Cir 1995]
[tortious interference claim dismissed because plaintiffs made
"no allegations that (the defendants) had any contact with the
(plaintiffs') customers or that (the defendants) tried to
convince the customers to make contracts with them rather than
the (plaintiffs)"], cert denied516 US 944 [1995]; Piccoli A/S v
Calvin Klein Jeanswear Co., 19 F Supp 2d 157, 167-168 [SD NY
1998] [tortious interference claim dismissed where "the
defendants' alleged conduct concededly was not directed towards
any third party with whom (the plaintiff) had an existing or
prospective business relationship"]; Fonar Corp. v Magnetic
Resonance Plus, Inc., 957 F Supp 477, 482 [SD NY 1997] [quoting
Honickman], cert denied sub nom. Domenick v Fonar Corp., 522 US 908 [1997]). These cases suggest that the allegedly interfering
party must have some direct contact with the third-party
customers, thereby inducing them not to deal with the plaintiffs.
In this case, Carvel did have contact with the franchisees'
customers through the supermarket program. But these cases do
not hold that "economic pressure" must be exerted on third
parties.