When a person causes harm to another person, the injured party may be able to sue for compensation. The same is true for businesses – a business can be injured and obtain damages for the harm done, so long as certain requirements are met.
A tort is a wrongful act that causes harm and results in legal liability for the actor. Business torts refer to actions that cause economic harm to a business. Examples include theft of trade secrets, interference with business relationships and derogatory statements about a company. These causes of action are distinct from breach of contract claims. New York General Business Law recognizes several different types of business torts, some of which are outlined below.
Misappropriation of Trade Secrets
New York recognizes the right of a business to sue for misappropriation of its trade secrets under common law principles. A party must prove that (1) it possesses a trade secret, and (2) the defendant “used that trade secret in breach of an agreement, a confidential relationship, or duty, or as a result of discovery by improper means.” See N. Atl. Instruments, Inc. v. Haber, 188 F.3d 38, 44 (2d Cir. 1999).
A trade secret is defined as a formula, process, device or compilation which provides an opportunity to obtain an advantage over competitors who do not know or use it. To be considered a misappropriation, the individual or entity must have acquired the trade secret through a relationship of trust (such as employment), or through fraud or other improper means, such as theft, bribery, espionage or hacking. Misappropriation may also be found where the person obtained the information from another party but was aware of facts that indicated the information was acquired improperly by the other party.
Restrictive Covenants Not to Compete
Restrictive covenants are contract clauses which limit the activities of an employee after employment has ended. They are often used to prevent misappropriation of trade secrets. One of the most common types of restrictive covenants is a non-competition provision, wherein the employee agrees to not work for a competitor or start a competitive business for a certain period of time and within a certain geographic area, after employment ceases.
New York law recognizes that employers want to mitigate the risk that their employees will use or benefit from the employer's confidential business information after employment has ended. However, courts carefully scrutinize these provisions, thus they are only enforceable to the extent they meet certain requirements for reasonableness.
Conversion of Business Property
“Conversion” typically involves an intentional taking or unauthorized use of another's property. Conversion of money occurs “where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question.” See Thys v. Fortis Sec. LLC, 903 N.Y.S.2d 368, 369 (1st Dept. 2010).
However, courts do not require a plaintiff to prove that the defendant “intended” to assume or exercise rights over the plaintiff's property. It is enough to show that the defendant acted without authorization. Examples of conversion include improperly comingling the plaintiff's and defendant's funds or delivering the plaintiff's property to someone not entitled to it. Damages for a conversion claim can be compensatory (paying the plaintiff for the converted property) or equitable (returning the plaintiff's property).
Tortious Interference with a Contract and Tortious Interference with Prospective Economic Advantage
These causes of action may arise when two parties contract or intend to contract, and a third-party tries to disrupt that relationship. A tortious interference with contract requires an existing contractual relationship, while tortious interference of a prospective economic advantage involves a business relationship that has not been finalized.
Deceptive and Unlawful Trade Practices
New York General Business Law allows the state Attorney General as well as private citizens to bring an action for deceptive and unlawful trade practices. This law, known as the Consumer Protection from Deceptive Acts and Practices statute in New York, protects consumers from deceptive acts or practices in the conduct of any business, trade or commerce, or in the furnishing of any service in the state. Typically, claims under this law involve false or misleading advertising targeted to consumers.
A private claim under the law must prove that the defendant's act or practice was consumer-oriented, misleading in a material way, and the plaintiff suffered injury as a result of the deceptive act. A showing of intentional, fraudulent or reckless conduct is not required. However, the deceptive practice must be likely to mislead the reasonable consumer.
Plaintiffs can recover compensatory damages; however, they must be different than damages for breach of contract. If the defendant acted willfully or knowingly, punitive damages may be awarded. Treble damages are available where a defendant's actions were intentionally fraudulent.
Commercial or Trade Disparagement
Commercial, trade or business disparagement refers to situations when a business or person makes derogatory statements about another business to discourage the public from dealing with the disparaged business.
A plaintiff must prove that the defendant made a false statement publicly which it knew was false or with reckless disregard for whether it was false. The statement must have been made with the intent or reasonable belief that it would cause financial loss for the business and it caused financial loss to the plaintiff.
Damages can be difficult to prove because the plaintiff must show that the statement directly caused financial harm to a business, such as resulting in fewer customers for the business.
Fraudulent transfers or conveyances are when a debtor in bankruptcy tries to shield its assets from creditors by transferring them to someone else. Such action is unlawful under New York's Debtor and Creditor Law.
To prove fraudulent transfer, assets must have been transferred or “conveyed” within a certain period prior to filing for bankruptcy and must have bene done with an intent to defraud creditors or involve a transfer which is made for less than reasonably equivalent value.
Breach of Fiduciary Duty
A fiduciary duty is an obligation that one person act in the best interests of another person or an entity. Typically, there is a relationship between the parties involving special trust or reliance on the fiduciary to exercise his or her discretion or expertise for the benefit of the other party. There are three categories of fiduciary duties: duty of care, duty of loyalty, and duty of candor. Examples of actions that would breach a fiduciary duty include self-dealing or deception.
To bring a legal claim for breach, the plaintiff must prove: (1) a fiduciary relationship and duty existed, (2) a breach of the duty occurred, and (3) damages were suffered as a result of the breach.
A successful plaintiff may be awarded direct and indirect damages, injunctive relief, restitution, rescission, legal fees and other appropriate remedies as provided under the law.
Tort Liability of Officers and Directors
Generally, officers and directors are not personally liable to third parties for the corporation's torts, unless they have personally acted in some way in furtherance of the wrongdoing. A plaintiff must show that the officer or director authorized, directed or otherwise participated in the tortious conduct, or knew or reasonably should have known that some hazardous condition or activity under their control could injure plaintiff and negligently failed to take action to avoid the harm. The officer's or director's conduct also must have resulted in damages to the corporation.
Business torts can be difficult to prove but can result in significant liability for a defendant when a claim is successful. Parties should consult an attorney for advice on how best to proceed.