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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Pleading Tortious Interference With Prospective Business Relations Claim
The Delaware Court of Chancery's recent decision in Chapter 7 Trustee Constantino Flores v. Strauss Water, C.A. No. 11141-VCS (Del. Ch. Sept. 22), covers many familiar aspects of Delaware law, such as the importance of contracts under Delaware law and enforcing contracts as written and not how a plaintiff wishes it might have been written. The opinion also addresses ground less traveled—how to plead properly a claim for tortious interference with prospective business relations. This article focuses on the distinction the Delaware Court of Chancery drew between the tortious interference claim that survived the motion to dismiss and the one that did not.
The claims in Flores were brought by the Chapter 7 trustee of the bankruptcy estates of Esio Beverage Co., Esio Holding Co. and Esio Franchising. Esio alleged that the fraudulent and tortious scheme of Strauss Water forced Esio into bankruptcy. The relationship between Esio and Strauss had its origins in 2011, when Esio approached Strauss about a possible investment in Esio. Esio had a license to a beverage dispensing technology and Strauss had developed a specialized carbonation technology that Esio thought would fit well with its new products.
Esio thought that Strauss would loan it $5 million under a convertible bridge loan, secured by Esio's licensed technology that would be converted to equity shortly after closing, to be followed by a $25 million equity investment by Strauss. Strauss, however, never converted the loan or made the equity investment. Instead, when Esio was unable to meet its obligations under the loan, Strauss declared Esio to be in default. Esio declared bankruptcy shortly thereafter. The disagreements between the parties about Strauss' intention to convert the loan and make the equity investment led to most of the claims asserted by the trustee which the court dismissed.
What Esio alleged Strauss did before Strauss declared the default, however, serves as the basis for its tortious interference with prospective business relations claims. Esio alleged that Strauss met with certain of Esio's potential customers without Esio's knowledge or permission. At one of these meetings, with PepsiCo, Strauss attempted to give a demonstration of a preproduction prototype of an Esio dispenser. The prototype malfunctioned. Esio alleged that because of this meeting, Esio lost the chance to work with PepsiCo.
Also, Esio and Strauss met with Euro-Pro, an appliance manufacturer interested in licensing manufacturing rights to Esio's products. Esio hoped to discuss ways in which manufacturing costs could be reduced so that Esio would not need a large capital infusion. Instead, Esio alleged that Strauss' chief executive officer, Rami Ronen, seized control of the meeting and told Euro-Pro that Strauss controlled Esio's technology and the license it held. After this meeting, Euro-Pro refused to deal with Esio.
To plead a claim for interference with prospective business relations, a plaintiff must plead "the reasonable probability of a business opportunity, the intentional interference by defendant with that opportunity, proximate causation and damages." The court held that Esio properly pleaded potential business opportunities with PepsiCo and Euro-Pro and that Strauss intentionally interfered with Esio's prospects of developing business with those companies. The court rejected Strauss' argument that its conduct was permissible because it was protecting its legally protected or financial interests. The court found there was no provision in any of the parties' contracts that would permit Strauss to denigrate Esio's technology. Whether Strauss' other actions were proper to protect its collateral was a fact-intensive issue that could not be resolved on a motion to dismiss.
Applying the third and fourth elements of the claim, the court held that Esio had not pleaded a claim for tortious interference with a prospective relationship with PepsiCo. The court held that Esio did not plead what relationship with PepsiCo that Esio might have had, or how that relationship would have saved Esio from financial ruin. Thus, no proximate cause existed.
The court, however, found the allegations regarding the Euro-Pro relationship did state a claim for tortious interference with a prospective business relationship. Esio alleged that the purpose of the meeting was to discuss how Esio could reduce manufacturing costs to remain financially viable and reduce the need for a larger capital investment to satisfy its debt obligations to Strauss. Although these allegations were "thin," applying the "but for" causation test, the court held that Esio could show at trial that "but for" Strauss' interference, a relationship with Euro-Pro would have lowered Esio's manufacturing costs so that it could have serviced its loan obligations to Strauss and remained viable.
The difference in pleading between these two claims can be traced to the level of specificity in Esio's complaint. The PepsiCo relationship, on the one hand, had no specific goal or other prospects. Indeed, Esio did not even attend. Simply alleging that Esio could have had a relationship of some nebulous scope was insufficient to support a claim because there was no basis on which to show how Esio was damaged. The Euro-Pro relationship, on the other hand, at least had a specific goal—lower manufacturing costs to be able to service the Strauss debt. By the Euro-Pro meeting, Strauss allegedly said it had no intent to make the $25 million equity investment, Esio could only meet its debt obligations if it lowered costs. Because Euro-Pro walked away, Esio no longer could lower those costs and went into default. The court found that this set of allegations, while "thin," were sufficient.
Pleading a tortious interference with prospective business relations is difficult. Under Flores, simply alleging a deal could have been made is insufficient. A plaintiff needs to plead some of the contours of a relationship and how the absence directly affected it to meet the pleading standard.