California Anti-SLAPP Project

Pacific Gas & Electric v. Bear Stearns & Co.

Cite as: 50 Cal.3d 1118, 791 P.2d 587, 270 Cal.Rptr. 1


PACIFIC GAS AND ELECTRIC COMPANY, Plaintiff and Appellant,
v.
BEAR STEARNS & COMPANY et al., Defendants and Respondents.

No. S004037.
Supreme Court of California,
In Bank.
June 7, 1990.

Howard V. Golub, Douglas A. Ogelsby, Shirley A. Sanderson and Randall J. Litteneker, San Francisco, for plaintiff and appellant.

Janice E. Kerr, Michael B. Day and Suzanne Engelberg, San Francisco, as amici curiae, on behalf of plaintiff and appellant.

Thelen, Marrin, Johnson & Bridges, Paul R. Haerle, Steven L. Hock, San Francisco, Greve, Clifford, Diepenbrock & Paras, Claire H. Greve, Sacramento, Mudge, Rose, Guthrie, Alexander & Ferdon, Los Angeles, Thomas W. Evans and Audrey Strauss, for defendants and respondents.

BROUSSARD, Justice.

We are called upon to decide whether a cause of action in tort may be stated for intentional interference with contractual relations or intentional interference with prospective economic advantage when it is alleged defendant induced a party to a contract to seek a judicial determination whether it may terminate the contract according to its terms.

We have concluded that to allow either cause of action to be stated when the only interference alleged is that defendant induced the bringing of potentially meritorious litigation would be an unwarranted expansion of the scope of these torts and a pernicious barrier to free access to the courts. We therefore reverse the judgment of the Court of Appeal.

I.

Pacific Gas and Electric Company (PG & E) sued Bear Stearns & Company (Bear Stearns), an investment brokerage firm, for interfering with its long- term contract for the purchase of hydroelectric power from Placer County Water Agency (Agency). It alleged intentional interference with contractual relations, intentional interference with prospective business advantage, and attempted inducement of breach of contract. Bear Stearns demurred successfully, and the complaint was dismissed. The Court of Appeal reversed the trial court's order as to the first two causes of action.

The facts pleaded in PG & E's second amended complaint are as follows. In April 1963, PG & E entered into a power purchase contract with the Agency to buy all of the hydroelectric power to be generated by its Middle Fork American River Project. The contract provided that the agreement would terminate in 2013 or at the end of the year in which the Agency completed retirement of its project bonds, whichever occurred first.

As energy prices rose, the Agency wished it could terminate the contract and sell its hydroelectric power in a more favorable market, but felt it could not do so without a breach. Bear Stearns approached the Agency and spent several years overcoming the Agency's resistance to making any effort to terminate the contract. Finally it succeeded, and in May 1983, the Agency entered into a contingent fee agreement with Bear Stearns, in which Bear Stearns agreed to pay for legal, engineering, and marketing studies on the feasibility of terminating the power contract, in return for 15 percent of any resulting increase in the Agency's revenues above $2.5 million for 20 years.

Bear Stearns retained legal counsel to draw up a plan by which the Agency could retire its project bonds, and to litigate the question whether the Agency could terminate the contract. It also retained an engineer, and conducted a marketing campaign to solicit buyers for the Agency's power. It agreed to pay half of the fees of the Agency's independent counsel.

In December 1984, the Agency served a demand for arbitration under the power contract on PG & E, to resolve the question whether the Agency could terminate the contract before 2013 by retiring its project bonds. PG & E responded by filing several lawsuits, including the first complaint in this one. The Agency withdrew the demand for arbitration and sought a declaratory judgment that the contract could be terminated early by retiring the project bonds. The trial court entered a judgment on the pleadings in favor of the Agency. The Court of Appeal reversed, finding that the trial court had erred in failing to consider certain extrinsic evidence showing that the parties did not intend the contract to be terminable before 2013. [FN1] That action is still pending.

[FN1] (Pacific Gas and Electric Company v. Placer County Water Agency (Sept. 25, 1987) D005241 [nonpub. opn.].) We may take judicial notice of the Court of Appeal's decision. (Evid.Code, s 452, subd. (d).)
The complaint in the present action alleged disruption of the contractual relation in that the Agency has breached the promises made in its official statement accompanying its bond issue, and in its bond resolution, that the contract would continue in effect until 2013. In addition, PG & E alleged its own performance has been made more expensive and burdensome because of legal expenses incurred in litigation to protect its rights under the power contract, the official statement, and the bond resolution and because it has lost assurance that the Agency will continue to perform. It alleged irreparable injury in that the Middle Fork American River Project is irreplaceable, termination of the power contract may cause a substantial increase in the cost of electricity it provides its customers, and Bear Stearns lacks the capital to reimburse PG & E for its damages if the contract is terminated. The complaint sought an injunction restraining Bear Stearns from continuing to encourage, finance or participate in the Agency's efforts to terminate the contract, and restraining Bear Stearns from continuing to solicit future buyers for the Agency's power, and damages according to proof.

PG & E alternatively sought to state a cause of action for intentional interference with prospective economic advantage, alleging that regardless of the terms of the contract, it had an expectancy that the power sales would continue until 2013, and that Bear Stearns interfered with this valuable expectancy by inducing the Agency to seek to terminate the contract.

The trial court sustained Bear Stearns's demurrer without leave to amend. The Court of Appeal reversed the order sustaining the demurrer as to the causes of action for intentional interference with contractual relations and with prospective economic advantage. It acknowledged that no breach of contract was threatened, but held that either cause of action may be stated without alleging an actual or threatened breach. It drew an analogy between this case and those in which conduct that induces the termination of an at-will contract is deemed actionable. There, too, the outsider's interference is actionable, though the disruption of the existing or prospective contractual relationship it causes does not amount to a breach of contract.

II.

In reviewing the sufficiency of a complaint, we accept as true all the properly pleaded allegations stated in the complaint. (J'Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 803, 157 Cal.Rptr. 407, 598 P.2d 60; Buckaloo v. Johnson (1975) 14 Cal.3d 815, 828, 122 Cal.Rptr. 745, 537 P.2d 865.) With this rule in mind, we consider whether an allegation that defendant induced a contracting party to seek a judicial determination whether it can terminate the contract according to its terms adequately states a cause of action for interference with contractual relations or intentional interference with prospective economic advantage.

It has long been held that a stranger to a contract may be liable in tort for intentionally interfering with the performance of the contract. (Lumley v. Gye (1853) 2 El. & Bl. 216 [118 Eng.Rep. 749]; Imperial Ice v. Rossier (1941) 18 Cal.2d 33, 112 P.2d 631, and cases cited.) The elements which a plaintiff must plead to state the cause of action for intentional interference with contractual relations are (1) a valid contract between plaintiff and a third party; (2) defendant's knowledge of this contract; (3) defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage. (See Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 765-766, 206 Cal.Rptr. 354, 686 P.2d 1158; Ramona Manor Convalescent Hospital v. Care Enterprises (1986) 177 Cal.App.3d 1120, 1130, 225 Cal.Rptr. 120; Farmers Ins. Exchange v. State of California (1985) 175 Cal.App.3d 494, 506, 221 Cal.Rptr. 225.)

The tort of interference with prospective economic advantage protects the same interest in stable economic relationships as does the tort of interference with contract, though interference with prospective advantage does not require proof of a legally binding contract. (Buckaloo v. Johnson, supra, 14 Cal.3d 815, 823, 122 Cal.Rptr. 745, 537 P.2d 865.) [FN2] The chief practical distinction between interference with contract and interference with prospective economic advantage is that a broader range of privilege to interfere is recognized when the relationship or economic advantage interfered with is only prospective. (Environmental Planning and Information Council v. Superior Court (1984) 36 Cal.3d 188, 194, 203 Cal.Rptr. 127, 680 P.2d 1086; Buckaloo v. Johnson, supra, 14 Cal.3d at p. 823, fn. 6, 122 Cal.Rptr. 745, 537 P.2d 865.)

[FN2] We recently noted the elements of the tort: "(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant's knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant." (Youst v. Longo (1987) 43 Cal.3d 64, 71, fn. 6, 233 Cal.Rptr. 294, 729 P.2d 728; see also Blank v. Kirwan (1985) 39 Cal.3d 311, 330, 216 Cal.Rptr. 718, 703 P.2d 58; Seaman's Direct Buying Service Inc., v. Standard Oil Co., supra, 36 Cal.3d at p. 766, 206 Cal.Rptr. 354, 686 P.2d 1158; Buckaloo v. Johnson, supra, 14 Cal.3d at p. 827, 122 Cal.Rptr. 745, 537 P.2d 865.)
The parties have raised two questions under the settled law we have recited. The first is whether inducing a party to a contract to seek to terminate the contract according to its terms is ever actionable interference with contractual or prospective economic relations. The second question is whether actual interference is adequately alleged when the interference consists of inducing litigation on the contract. Considering the established boundaries of the tort, we conclude that it may be actionable to induce a party to a contract to terminate the contract according to its terms. On the second point, we acknowledge that interference which makes enjoyment of a contract more expensive or burdensome may be actionable, and that PG & E alleges its rights under the contract have been made more expensive because it has incurred significant costs in defending itself against the declaratory relief action that it alleges Bear Stearns induced the Agency to bring. This conclusion will bring us face to face with the question, not squarely framed by the parties, whether it is proper to impose liability for inducing a potentially meritorious lawsuit. We will conclude that it is not.

Bear Stearns claims initially that there can be no cause of action for inducing a contracting party to seek to terminate the contract according to its terms. The claim runs afoul of the rule, established in this and the majority of other jurisdictions, [FN3] giving rise to a cause of action for inducing termination of an at-will contract, as the Court of Appeal perceived.

[FN3] See Prosser and Keeton, Torts (5th ed. 1984) section 129, pages 995-996; see also, Restatement Second Torts, section 766, and comment g, pages 10-11; Comment, Tortious Interference with Contractual Relations in the Nineteenth Century: the Transformation of Property, Contract, and Tort (1980) 93 Harv.L.Rev. 1510.
Cases establishing a cause of action for interference with at-will and voidable contracts make it clear that it is the contractual relationship, not any term of the contract, which is protected against outside interference. We have affirmed that interference with an at-will contract is actionable interference with the contractual relationship, on the theory that a contract "'at the will of the parties, respectively does not make it one at the will of others'" (Speegle v. Board of Fire Underwriters (1946) 29 Cal.2d 34, 39, 172 P.2d 867, quoting Truax v. Raich, 239 U.S. 33, 38, 36 S.Ct. 7, 9, 60 L.Ed. 131). As Justice Tobriner said in the context of voidable contracts: "The actionable wrong lies in the inducement to break the contract or to sever the relationship, not in the kind of contract or relationship so disrupted, whether it is written or oral, enforceable or not enforceable." (Zimmerman v. Bank of America (1961) 191 Cal.App.2d 55, 57, 12 Cal.Rptr. 319, see also Kozlowsky v. Westminster Nat. Bank (1970) 6 Cal.App.3d 593, 598, 86 Cal.Rptr. 52.) Reviewing courts have reiterated in case after case that the contractual relationship is at the will of the parties, not at the will of outsiders. (Speegle v. Board of Fire Underwriters, supra, 29 Cal.2d at p. 39, 172 P.2d 867; Abrams & Fox, Inc. v. Briney (1974) 39 Cal.App.3d 604, 608, 114 Cal.Rptr. 328; Skelly v. Richman (1970) 10 Cal.App.3d 844, 862, 89 Cal.Rptr. 556; Kozlowsky v. Westminster Nat. Bank, supra, 6 Cal.App.3d at p. 598, 86 Cal.Rptr. 52; Freed v. Manchester Service, Inc. (1958) 165 Cal.App.2d 186, 189, 331 P.2d 689; Romano v. Wilbur Ellis & Co. (1947) 82 Cal.App.2d 670, 673, 186 P.2d 1012.)

Further, the expectation that the parties will honor the terms of the contract is protected against officious intermeddlers. Since people "'usually honor their promises no matter what flaws a lawyer can find, the offender should not be heard to say that the contract ... meddled with could not have been enforced....'" (Buckaloo v. Johnson, supra, 14 Cal.3d at p. 826, 122 Cal.Rptr. 745, 537 P.2d 865; see also Prosser & Keeton, op. cit. supra, s 129, at p. 995.) [FN4]

[FN4] Many cases have treated claims of interference with voidable and terminable contracts as coming within the cause of action for interference with prospective advantage. (See Buckaloo v. Johnson, supra, 14 Cal.3d at pp. 824-826, 122 Cal.Rptr. 745, 537 P.2d 865, and cases cited [involving voidable brokerage agreements]; Zimmerman v. Bank of America, supra, 191 Cal.App.2d 55, 12 Cal.Rptr. 319 [same]; Shida v. Japan Food Corp. (1967) 251 Cal.App.2d 864, 866, 60 Cal.Rptr. 43 [interference with yearly renewal of contract claimed as interference with prospective advantage, but privileged]; see also Island Air, Inc. v. LaBar (1977) 18 Wash.App. 129, 566 P.2d 972 [inducing termination of contract terminable on 60 days' notice]; Smith v. Ford Motor Co. (1976) 289 N.C. 71, 221 S.E.2d 282 [inducing termination of at-will employment].) Other authorities agree with this characterization. (Prosser & Keeton, op. cit. supra, s 129, at p. 996; see also, accord, 2 Harper et al., The Law of Torts (2d ed. 1986) s 6.7, pp. 311-312; Rest.2d Torts, supra, s 766, com. g, at pp. 10-11.) As we have suggested before, it may be preferable not to distinguish the two as separate torts (Buckaloo, supra, at p. 823, fn. 6, 122 Cal.Rptr. 745, 537 P.2d 865) but we need not resolve that point here, in view of our conclusion that the activity complained of is not included within either tort.
Nor do express termination provisions create a privilege to interfere, contrary to Bear Stearns' suggestion. In Shida v. Japan Food Corp., supra, 251 Cal.App.2d 864, 60 Cal.Rptr. 43, for example, plaintiff had a one-year exclusive distributorship contract with a third party, with an express termination date. The contract had been renewed for seven years. Despite the express termination clause, plaintiff was protected against unjustified interference by third parties. [FN5] (See also A.F. Arnold & Co. v. Pacific Professional Ins., Inc. (1972) 27 Cal.App.3d 710, 712, 717, 104 Cal.Rptr. 96 [actionable interference with renewal of insurance policies at the end of the policies' express term]; Charles C. Chapman Bldg. Co. v. California Mart (1969) 2 Cal.App.3d 846, 855, 82 Cal.Rptr. 830 [ratifying concept of actionable interference with a lease with an express termination clause].) The result seems obvious; if we protect an economic relationship that is wholly prospective from outside interference, we must also protect contractual relationships that are subject to termination. [FN6]
[FN5] PCITE, 791 P.2d 592. Since the court characterized the tort as interference with prospective advantage, with its broader range of privilege, it reversed the judgment for plaintiff on the ground that defendant had only engaged in justified competition.

[FN6] In other jurisdictions, too, the existence of an express termination clause in a contract is no bar to a cause of action for interference with contract. (See Alyeska Pipeline Service v. Aurora Air Service (Alaska 1979) 604 P.2d 1090, 1093; accord Island Air, Inc. v. LaBar, supra, 18 Wash.App. 129, 566 P.2d 972; Smith v. Ford Motor Co., supra, 289 N.C. 71, 221 S.E.2d 282; Mason v. Funderburk (1969) 446 S.W.2d 543, 546; Getschow v. Commonwealth Edison Co. (1982) 111 Ill.App.3d 522, 67 Ill.Dec. 343, 444 N.E.2d 579; but see Ulan v. Lucas (1972) 18 Ariz.App. 129, 500 P.2d 914; Radiology Professional Corp. v. Trinidad Area Health Assn., Inc. (1977) 39 Colo.App. 100, 565 P.2d 952.)

Bear Stearns's second argument is that a cause of action for intentional interference with contractual relations or prospective advantage requires an allegation that the interference has caused or will ultimately cause a breach of contract or disruption of the relationship. Since it is undisputed that the Agency will not cease performing under the contract unless it obtains a judicial determination that the termination clause of the contract permits it to do so, Bear Stearns concludes that PG & E fails to meet this requirement.

Plaintiff need not allege an actual or inevitable breach of contract in order to state a claim for disruption of contractual relations. We have recognized that interference with the plaintiff's performance may give rise to a claim for interference with contractual relations if plaintiff's performance is made more costly or more burdensome. (See Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d 752, 766, 206 Cal.Rptr. 354, 686 P.2d 1158; Lipman v. Brisbane Elementary Sch. Dist. (1961) 55 Cal.2d 224, 232, 11 Cal.Rptr. 97, 359 P.2d 465; see also Ramona Manor Convalescent Hospital v. Care Enterprises, supra, 177 Cal.App.3d at pp. 1130-1131, 225 Cal.Rptr. 120 [holdover tenant liable for interference with landlord's contractual relations with new tenant].) [FN7] Other cases have pointed out that while the tort of inducing breach of contract requires proof of a breach, the cause of action for interference with contractual relations is distinct and requires only proof of interference. (Shamblin v. Berge (1985) 166 Cal.App.3d 118, 212 Cal.Rptr. 313 [defendant warned off potential buyers of real estate, causing rescission of sales contract]; Manor Investment Co. v. F.W. Woolworth Co. (1984) 159 Cal.App.3d 586, 593, fn. 3, 206 Cal.Rptr. 37 [termination of at-will license could be basis for action for intentional interference with contractual relations, but judgment reversed because inconsistent verdicts]; see also Rest.2d Torts, supra, s 766A, at p. 17 & coms. c and g, at pp. 18-19; Prosser & Keeton, Torts, supra, s 129, at pp. 991-992; Note, Civil Conspiracy and Interference with Contractual Relations (1975) 8 Loyola L.A.L.Rev. 302, 314, fn. 45; Comment, Interference with Contractual Relations: A Property Limitation (1966) 18 Stan.L.Rev. 1406.) [FN8]

[FN7] PCITE, 791 P.2d 593. Other jurisdictions recognize the same rule. (See De Jur-Amsco Corp. v. Janrus Camera, Inc. (N.Y.Supreme Ct.1956) 16 Misc.2d 772, 155 N.Y.S.2d 123, 125-126 [defendant's sales interfered with plaintiff's exclusive distributorship contract with a third party, making the contract of less value]; Piedmont Cotton Mills, Inc. v. H.W. Ivey Construction Co. (1964) 109 Ga.App. 876, 137 S.E.2d 528, 531 [defendant liable for destroying work plaintiff is under contract with third party to complete]; Herman v. Endriss (1982) 187 Conn. 374, 446 A.2d 9 [defendant interfered with plaintiff's contract of employment with third party, causing her to lose wages and incur litigation expenses].)

[FN8] The tort of intentional interference with prospective economic advantage requires an allegation that the interfering conduct has disrupted the relationship. (See Youst v. Longo, supra, 43 Cal.3d at p. 71, fn. 6, 233 Cal.Rptr. 294, 729 P.2d 728; see also Blank v. Kirwan, supra, 39 Cal.3d at p. 330, 216 Cal.Rptr. 718, 703 P.2d 58; Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at p. 766, 206 Cal.Rptr. 354, 686 P.2d 1158; Buckaloo v. Johnson, supra, 14 Cal.3d at p. 827, 122 Cal.Rptr. 745, 537 P.2d 865.) We have found no case permitting the cause of action in the absence of some actual disruption. (See, e.g., Buckaloo v. Johnson, supra, 14 Cal.3d 815, 122 Cal.Rptr. 745, 537 P.2d 865 [buyers of real estate who bought directly from seller interfered with prospective agency relationship between seller and broker]; Deeter v. Angus (1986) 179 Cal.App.3d 241, 251, 224 Cal.Rptr. 801 [same]; Rader Co. v. Stone (1986) 178 Cal.App.3d 10, 29, 223 Cal.Rptr. 806 [lessors interfered with broker's prospective agency relationship]; (1985) 172 Cal.App.3d 1020, 1056-1057, 219 Cal.Rptr. 203 [cause of action stated when brewer caused wholesaler to refuse to supply local distributors]; Sade Shoe Co. v. Oschin & Snyder (1984) 162 Cal.App.3d 1174, 1180-1181, 209 Cal.Rptr. 124 [cause of action stated when owner prevented lessee from consummating sale of corporate stock by unreasonably refusing to consent to assignment of lease]; Lowell v. Mother's Cake & Cookie Co. (1978) 79 Cal.App.3d 13, 19, 144 Cal.Rptr. 664 [defendant caused plaintiff to lose profitable offer to buy plaintiff's business]; A.F. Arnold & Co. v. Pacific Professional Ins., Inc., supra, 27 Cal.App.3d 710, 104 Cal.Rptr. 96 [insurance broker stated cause of action against insurance company for preventing broker from retaining lucrative accounts].)

PG & E has not alleged that Bear Stearns's conduct in promoting the Agency's power among potential buyers, conducting engineering studies, or promoting the idea of termination in the Placer community have had any impact on PG & E. It is not alleged that Bear Stearns induced the Agency to undertake a plan to terminate the contract unilaterally and immediately begin to sell its power elsewhere. It is not alleged that Bear Stearns's marketing campaign for the Agency's power has caused PG & E a present or imminent injury. [FN9] There is no allegation that unilateral termination is threatened. The only threat to the contract is the litigation. There will be no termination of the contract unless there is a judicial determination that the Agency may terminate, and it appears that PG & E's only present damages are in responding to the action for declaratory relief.
FN9. Injunctive relief is available to restrain unjustified interference with contractual relations when damages would not afford an adequate remedy. (See Imperial Ice Co. v. Rossier, supra, 18 Cal.2d 33, 112 P.2d 631; Remillard-Dandini Co. v. Dandini (1941) 46 Cal.App.2d 678, 680, 116 P.2d 641; Heavener, Ogier Services v. R.W. Florida Region, Inc. (Fla.1982) 418 So.2d 1074, 1076, 1077; see also Rest.2d Torts, supra, s 766, com. u at p. 17; Prosser & Keeton, Torts, supra, s 129, at p. 1002.)

Note! This case is continued in Part Two


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