Tortious Interference Part 1: The Knowledge Requirement
In this series, we will explore legal tools to enforce contracts with authorized sellers and independent consultants. This post will focus on “Tortious Inteference”. Sales are the lifeblood of any business. And having a strong distribution network is one of the keys to business success.
When fighting product diversion, it is important to recognize that product diverters need a source for products. That source is too often a distributor selling products in breach of the manufacturer’s agreement. In other words, an unauthorized seller. Tortious interference is a legal claim that can hold a party liable for inducing a breach of contract.
Tortious interference claims can be useful weapons to combat product diversion. But manufacturers must take certain steps to make these claims work. If a company’s contract with its sellers limits the ways products can be sold, a breach of the limitation could support a claim. For example, if independent consultants are only allowed to sell products to end users, selling products to a reseller is a breach of contract.
Tortious interference has advantages over trademark infringement, the other main weapon against product diversion. While trademark claims rely on statute and common law, a tortious interference claim starts with a company’s own contracts. And unlike trademark law, companies draft their own contracts that define the prohibited, or unauthorized, sales.
The problem with tortious interference claims is that they can be a challenge to prove and win. In this first of two articles on tortious interference, we will discuss some key steps companies can take to set up successful tortious inference claims.
The ‘Knowledge’ Element
Generally, the elements of tortious inference are:
- A valid contract;
- Knowledge of the contract;
- Intent to interfere with the contract;
- Actual interference that is improper; and
This article focuses on the “knowledge” element.
One common way that tortious interference claims fail is that a company cannot prove that the unauthorized seller knew about sales restrictions in the contract. If the seller was unaware that his or her actions induced a breach of the contract, the claim will fail.
Further, tortious interference claims often fail due to lack of knowledge. This is because many companies do not publish their contracts.
Sometimes companies even take steps to keep their agreements confidential. One reason is that a company might consider its contracts part of its business advantage over its competitors.
But while there may be good reasons for keeping contract terms out of competitors’ hands, this does not apply to every term of the contract. Rather, it is helpful to publish the sales restrictions that a company wants to enforce.
This helps prove the “knowledge” element of a tortious interference claim. It can also deter unauthorized sales.
Knowledge of the restrictions can deter would-be resellers who may avoid a company’s products if they are aware of the restriction. Consumers may also avoid unauthorized resellers if they know of the restrictions.
If the contract restrictions are generally known, an unauthorized seller will have a hard time arguing a lack of knowledge. At the very least, it is likely to create an issue of fact, precluding dismissal of the claim.
One of the best ways to create a presumption of knowledge is to provide notice on the product packaging itself. For example: “For sale only through authorized distributors.” Anyone who comes in contact with the product will be alerted to the restrictions.
Beyond the packaging, companies can inform the public of the restrictions on their websites and third-party websites. One way of informing the public would be to establish a brand policy through eBay’s VeRO program.
The more ways a company provides notice, the easier it will be to prove that an unauthorized reseller knew or should have known of the restrictions. This helps eliminate one of the main reasons that tortious inference claims fail.
Notice on packaging and online makes sense for many companies and products. However, it might not for others, in which case they should think about other ways of providing notice. After all, there are no set rules on how to provide notice.
A company should consider the type of notice that makes sense and is reasonable for its products and industry. It should ask, “What is the best way to reach both potential unauthorized resellers and end users?”
By taking steps to notify the public of resale restrictions, a company can strengthen its potential tortious interference claims and deter unauthorized sales.
It is better to consider the issue before litigation. By the time a company needs to rely on a tortious interference claim, it could be too late.