By Lance Formwalt
Although our work through the dealer association typically involves issues that impact the industry as a whole, I frequently get reminded that dealers are also competitors focused on taking action for the purpose of improving their business prospects. Of course, the flip side to many of these actions is that they might also have a negative impact on the business prospects of another dealer.
I think it is safe to say that all of you are perfectly comfortable with competition and understand it is just part of the business. But it is important to step back and also understand that the phrase “all is fair in love and war” doesn’t always carry over to your relationships with your competition. In fact, actions between competing dealers can get close to, or cross over, what is “fair” in the eyes of the law and can trigger legal liability. In these situations, the typical complaint is that Dealer #1’s action harmed or screwed up Dealer #2’s contract or business relationship. If this action does cross the line, the legal jargon for this type of complaint is “tortious interference”.
Tortious interference can be really difficult to define and it is rare to say that someone has a slam dunk claim. But it can come up in a surprising number of situations so I think it is important to give you some background on this potential legal minefield and when it might apply.
What is Required to Establish Tortious Interference?
The specific requirements to prove tortious interference vary slightly from state to state but they typically consist of the following:
- Dealer #2 has a contract with a third party OR a reasonable expectation of either a new or continuing business relationship with the third party.
- Dealer #1 is aware of Dealer #2’s contract or business relationship.
- Dealer #1 intentionally interferes with the contract or business relationship, resulting in a breach of the contract or a termination of the relationship.
- Dealer #1’s actions were improper.
- Dealer #2 suffers damage.
Most of these factors are fairly easy to establish and understand. But the big hang up for most situations is trying to figure out if Dealer #1’s actions were “improper” or just “fair competition”. Unfortunately, these lines are often fuzzy. The result is that it isn’t easy to give bright line rules in a short article and it can frankly be confusing to figure out where the lines are when judges come to opposite conclusions in similar cases.
Common Dealer Situations Where Tortious Interference is Possible
Even though it can be hard to say exactly when a line is crossed, there are many situations where your antennae should go up and you should consider steps to limit your risk. I will cover some of these situations below, but it is important to note that these are simply situations where risk is present and it does not mean that the actual action is a legal violation or that you have to always stay away from these situations.
- New Product Line/Territory: Taking on a new product line or adding territory for a product line is normally not a problem. However, if this change will result in another dealer losing the product line or getting a diminished territory, the potential for problems exists. Risk increases if Dealer #2 has an exclusive territory or the benefit of a state dealer law that provides similar protection. In contrast, risk will decrease if the discussions about these changes are initiated by the manufacturer instead of Dealer #1.
- Pursuing a Dealership Purchase: As consolidation continues, competition to buy remaining dealerships can be intense. Potential buyers can be at risk of a tortious interference claim if they try to convince a seller to back out of a letter of intent signed with another buyer (or try to influence a manufacturer to achieve a similar result).
- Customers: Competing for customers is something all dealers do but legal risk is still present here. Examples of situations that create more legal risk include (A) getting a customer to violate a binding purchase order with another dealer or (B) making false statements (including statements made by your salespeople) about Dealer #2 to get Dealer #2’s long-term customer to move its business to Dealer #1.
- Key Vendors: Actions by Dealer #1 to get key vendors (even those that don’t supply inventory) of Dealer #2 to stop doing business with Dealer #2 create risk of tortious interference, especially if it is done with the intention of making it difficult for the other dealer to generally conduct business.
- Employees: In most situations, seeking to hire employees to fill positions in your dealership does not create risks of tortious interference. However, risks increase if you are hiring salespeople or executives who may have non-compete or non-solicitation agreements that limit their ability to work for you. To help avoid these risks, it is advisable to proactively find out if potential employees have a non-compete or non-solicitation agreement with their previous employer before you hire them. If they do, then it may make more sense to simply not hire them to avoid a dispute with their previous employer and a potential tortious interference claim. Alternatively, you could try to work out a deal with their previous employer to obtain a waiver/release of the restriction.
Living in the Gray
When it comes to competition, you are always going to have winners and losers. In athletic competitions, we have clear sets of rules and consequences that give us confidence in who the winner is once the game is over. Unfortunately, in our business, we don’t have nearly the same clarity in our rules so it can be very possible that a perceived “winner” becomes a “loser” after the game is over. Since we can’t change this gray area, it is important to keep in mind the situations where your actions increase your risk of losing after the fact and implement steps to either limit these situations or create defenses to possible claims from your competitors.
Lance Formwalt is the leader of the Equipment Dealer Group at Seigfreid Bingham, P.C. The firm also serves as legal counsel to the Far West Equipment Dealers Association (FWEDA). Lance may be contacted at email@example.com or 816-265-4106. Also see www.sb-kc.com. This article is intended to provide general recommendations and is not intended to be legal advice. You should always consult your attorney for advice unique to you and your business.
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