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Business Torts in Denver and Colorado

Business torts are a general category of torts that pertain to claims relating to business transactions and the ongoing functioning of business entities. Because business torts are inherently related to the functioning of a business, they can have important economic ramifications and effect whether or not a business can survive.

Overall, there are various types of business torts that range from interference with contractual relations to theft of intellectual property such as misappropriation of trade secrets. See Colorado Bar Association et al., Annual Tort Law Update 2016 (2016). This article discusses the primary business torts recognized in Colorado and is intended to provide guidance to businesses currently dealing with potential claims.

 

1. Breach of Fiduciary Duty

Breach of fiduciary duty is a claim relating to the failure of a person or entity to make decisions with the best interests of the beneficiary in mind. With respect to businesses, corporate directors frequently owe a fiduciary duty to act in the best interests of the corporation and must make business decisions accordingly. Thus, where an individual owes a duty to a business but fails to act in the best interests of that business, a breach of fiduciary claim may lie.

Under Colorado law, the elements for a breach of fiduciary duty claim are:

(1) the defendant was acting as a fiduciary for the plaintiff;

(2) the defendant breached that duty;

(3) the plaintiff suffered damages as a result; and

(4) the defendant’s breach of that duty caused the plaintiff’s damages.

See CJI-Civ. 26:1 (CLE ed. 2015). A fiduciary relationship exists where the defendant has agreed to act for the benefit or fin the interest of the plaintiff and has the legal authority to do so. Importantly, confidential relationships can give rise to a breach of fiduciary claim where that confidentiality has been breached.

Damages for a breach of a fiduciary duty claim can include economic and noneconomic losses. However, where the fiduciary duty stems arises from a contract, the economic loss rule limits the remedies available to those in contract, as opposed to tort which are generally more expansive. Accordingly, noneconomic damages such as emotional distress – which can be recovered in tort claims – will likely not be available where the fiduciary duty stems from a contract. See Casey v. Colorado Higher Educ. Ins. Benefits Alliance Trust, 2012 COA 134 (Colo. App. 2012).

Additionally, punitive damages may be applicable where tort remedies are available and where there are sufficient circumstances of fraud, malice, or willful and wanton conduct. See C.R.S. § 13-21-102.

 

2. Breach of Contract

Breach of contract claims are common legal claims that exist in a variety of legal areas and are not necessarily unique to business disputes. However, since contracts are common in business and, indeed, are the underpinnings of business transactions, breach of contract claims are frequently plead in business disputes.

Under Colorado law, a breach of claim requires the plaintiff to show that:

(1) the defendant entered into a contract with the plaintiff;

(2) the plaintiff fulfilled her end of the contract or the plaintiff’s non-performance of the contract was justified;

(3) the defendant failed to fulfill her obligations under the contract; and

(4) the plaintiff incurred damages as a result of the defendant’s breach.

See CJI-Civ. 30:10 (CLE ed. 2015). Where a breach has occurred, whether or not the non-breaching party is still obligated to fulfill their end of the contract depends on whether the breaching party committed a material breach or not.

Where the breach is material, meaning that the unfulfilled obligation is a substantial or essential one under the contract, then the non-breaching party’s performance is excused. That is, where the breaching party fails to fulfill a substantial or essential term of the contract, the non-breaching party may elect not to perform her obligations under the contract as well.

Conversely, where the breach is not material but, instead, is a minor one; the non-breaching party still is must perform her obligations under the contract. However, while the non-breaching party still has to perform under the contract, she still may sue for any damages incurred as a result of the breach. See CJI-Civ. 30:11-12 (CLE ed. 2015).

With respect to damages for a breach of contract claim, the plaintiff may elect to pursue one of three different remedies available. Those remedies are: expectation damages, reliance damages, or restitution damages.

Expectation damages are designed to put the non-breaching party in the position she would have been in had the breaching party performed as the contract required. For example, if the non-breaching party would have made money if the contract was fully performed, then expectation damages would include the profit the non-breaching party would have made if the breach had not occurred.

Reliance damages, in contrast, are designed to put the non-breaching party back in the position she would have been in had the contract never been entered into. For example, if the non-breaching party lost money as the result of relying on the other party’s promise to perform under the contract, those losses would be recoverable as reliance damages.

Lastly, restitution damages are designed to put the non-breaching party back in the position she would have been in if her side of the promise had never been made. For example, where the non-breaching paid money to the breaching party as part of her side of the promise, the money paid would be restored back to the non-breaching party as part of restitution damages.

Importantly, punitive damages are generally not available in ordinary breach of contract claims. See CJI-Civ 30:16 (CLE ed. 2015); Mortgage Finance, Inc. v. Podleski, 742 P.2d 900 (Colo. 1987).

 

3. Fraud or Misrepresentation in the Inducement of a Contract

Fraud or misrepresentation in the inducement of a contract is an affirmative defense to a breach of contract claim. That is, where a plaintiff is alleging a breach of contract claim, if that defendant was induced to enter into the contract fraudulently or based on misrepresentations then the defendant will be excused from performance under the contract and, thus, will not be liable for any breach.

Under Colorado law, fraud or misrepresentation in the inducement of a contract requires a showing:

(1) that the plaintiff concealed, failed to disclose, or falsely represented a past or present fact;

(2) the fact was material;

(3) the defendant entered into the contract relying on the assumption that the fact was true or that the fact did not exist if the plaintiff failed to disclose it;

(4) the defendant’s reliance  was justified; and

(5) the defendant’s reliance caused him damages.

See CJI-Civ 30:16 (CLE ed. 2015). Importantly, if the defendant is excused from the contract based on a fraud or misrepresentation of the plaintiff, any performance already received by the defendant must be returned to the plaintiff; otherwise the plaintiff will have a claim for unjust enrichment for the benefit the defendant received.

Overall, where a defendant has been induced into a contract based on fraud or misrepresentation, that defendant has two main courses of action available. Specifically, the individual may affirm the contract and sue for damages in a tort action for deceit; or disaffirm the contract, return whatever benefit he received under the contract, and sue for recovery of whatever benefit the other party already received. See generally, W. Prosser & W. Keeton, Torts § 105 (5th ed. 1984).

 

4. Intentional Interference with Contractual Relations

Intentional interference with contractual relations occurs where third-party intentionally and improperly interferes with the performance of a contract that he is not a party to. Examples of where an intentional interference with contractual relations claim may apply include where an employee has been improperly lured away from another company and where a third-party has induced a company to break its contract with another company and enter into a new contract with the third-party.

Under Colorado law, proving an intentional interference with contractual relations claim requires that:

(1) the plaintiff had a contract with another individual or entity;

(2) the defendant knew or reasonably should have known of the contract;

(3) the defendant by words or conduct, or both, intentionally caused the other individual or entity to not perform its obligations under the contract, or interfered with the plaintiff’s performance under the contract;

(4) the defendant’s interference was improper; and

(5) the defendant’s interference with the contract caused the plaintiff damages.

See CJI-Civ 24:1 (CLE ed. 2015).In determining whether a defendant’s interference was improper, Colorado courts have adopted a multi-factor test. Specifically, those factors are:

(a) the nature of the actor’s conduct, (b) the actor’s motive, (c) the interests of the other with which the actor’s conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor’s conduct to the interference, and (g) the relation between the parties.

See Krystkowiak v. W.O. Brisben Companies, Inc., 90 P.3d 859, n. 13 (2004). Notably, none of these factors are determinative in and of themselves but, instead, represent an overall framework for determining whether the defendant’s conduct was improper.

Importantly, the third-party must not be a party to the contract. That is, an individual or entity cannot be liable for intentional interference with contractual relations where the individual or entity is a party to the contract. See Colorado Nat’l Bank of Denver v. Friedman, 846 P.2d 159, 170 (Colo. 1993).

 

5. Intentional Interference with Prospective Business Advantage

While intentional interference with prospective business advantage is similar to intentional interference with contractual relations in that both stem from contractual obligations, it is dissimilar in that intentional interference with prospective business advantage does not require the actual formation of a contract. Accordingly, intentional interference with prospective business advantage occurs where a third-party intentionally and improperly interferes with the potential contractual relations of other parties.

Under Colorado law, intentional interference with prospective business advantage requires:

(1) the plaintiff had a prospective business relation with another;

(2) the defendant intentionally and improperly interfered with that business relation;

(3) the defendant’s interference caused the other person not to enter or continue the prospective business relation; and

(4) the defendant’s interference resulted in damages to the plaintiff.

See Harris Group, Inc. v. Robinson, 209 P.3d 1188 (Colo. App. 2009). Notably, in order to prove an intentional interference with prospective business advantage claim the plaintiff must show that if it were not for the defendant’s intentional and improper conduct, a contract would have been formed. See id.

That is, a prospective business relationship that is too speculative will not lead to liability under an intentional interference with prospective business advantage claim; instead, the prospective business relationship must be more than theoretical and the plaintiff must be able to show it would have led to the formation of a business relationship but for the defendant’s conduct.

In determining whether the defendant’s conduct was improper, the same factors from an intentional interference with contractual relations claim apply. Those factors are:

(a) the nature of the actor’s conduct, (b) the actor’s motive, (c) the interests of the other with which the actor’s conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor’s conduct to the interference, and (g) the relation between the parties.

See id. However, where the parties are business competitors different factors apply. In particular, because businesses should be free to compete and induce others to do business with them instead of their competitors, the alleged interference needs to be more egregious than simply luring a customer or prospective business partner away.

In particular, a business competitor’s conduct will be privileged and, thus, protected from an intentional interference with prospect business advantage claims where:

(1) the competitor did not employ wrongful means such as physical violence, fraud, or threatening a lawsuit or criminal prosecution;

(2) the competitor’s actions did not create or continue an unlawful restraint of trade;

(3) and the competitor’s purpose for acting was at least in part to advance its own interests in competing with the other.

See id.; Amoco Oil Co. v. Erwin, 908 P.2d 493, 500 (Colo. 1995) (citing Restatement (Second) Torts § 766B cmt. c (1979)). Important areas where the business competition privilege comes into play is in competing for employees and competing for contracts with other companies.

 

6. Trade Secret Misappropriation

While trade secret misappropriation can have many complex facets, at its simplest trade misappropriation occurs when a company or individual has improperly taken or used information that another company has engaged in reasonable efforts to keep secret.

Specifically, under Colorado law, trade secret misappropriation requires:

(1) that the plaintiff possessed a valid trade secret;

(2) that the trade secret was used or disclosed without consent of the plaintiff; and

(3) that defendant knew, or should have known, that the trade secret was acquired by improper means.

See C.R.S. § 7-74-102.

Further, a “trade secret” is defined by statute to mean:

the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value. To be a “trade secret” the owner thereof must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.

See id. Accordingly, while a trade secret can essentially be anything that confers value to a business, a critical component of maintaining its trade secret status is whether the owner of the trade secret engaged in reasonable efforts to maintain its secrecy. That is, where the trade secret is disclosed non-confidentially or otherwise made publicly available, it will lose its trade secret status and can no longer be the basis for a trade secret misappropriation claim.

Where there is a valid trade secret, misappropriation of that trade secret occurs where it is obtained by another through improper means such as theft, bribery, corporate espionage, or breach of a duty to maintain its secrecy; and where it is disclosed to others or subsequently used by someone that knew or should have known it had been acquired by improper means. See id.

 

7. Common Law Unfair Competition

Common law unfair competition claims are tort claims that generally relate to one company’s use of another company’s trademark or trade name in an improper manner. Specifically, unfair competition claims are designed to rectify a scenario where one company is capitalizing on the goodwill and reputation of another company. See Ovation Plumbing, Inc. v. Furton, 33 P.3d 1221 (Colo. 2001) (upholding a jury verdict for unfair competition where the defendant misrepresented that he was associated with the plaintiff company and obtained business based on that misrepresentation).

In Colorado, proving an unfair competition claim relating to improper use of a trademark or trade name requires that the plaintiff show:

(1) the trade name or trademark acquired a secondary meaning or significance that identifies the plaintiff; and

(2) the defendant must have unfairly used the name or trademark, or a simulation of it against the plaintiff.

See Swart v. Mid-Continent Refrigerator Co., 360 P.2d 440 (Colo. 1961). In essence, the plaintiff must show that its trademark or trade name has become distinctive enough that it is identified with the plaintiff’s goods or services, and that the defendant has capitalized on that relationship by using it for the defendant’s own benefit.

 

8. Constructive Fraud

Constructive fraud can have applications to many different areas of law and generally relates to situations where direct fraud is not present but the circumstances are suspicious enough that the law declares the activities to be fraudulent. In Colorado constructive fraud is broadly defined as:

A breach of a legal or equitable duty that the law declares to be fraudulent because of its tendency to deceive others, to violate public or private confidence, or to injure public interests, irrespective of the moral guilt of the perpetrator.

See Shaw v. 17 West Mill St., LLC, 307 P.3d 1046 (Colo. 2013); Scott Sys., Inc. v. Scott, 996 P.2d 775, 780 (Colo. App. 2000). Constructive fraud is frequently applied to situations where a transaction has taken place such as the transfer of property, assets, or money.

Proving constructive fraud in Colorado requires a plaintiff to show that:

(1) a duty existed due to a relationship between the parties;

(2) violation of the duty by making deceptive material representations of past or existing facts or remaining silent when a duty to speak exists;

(3) reliance thereon by the complaining party;

(4) injury to the complaining party; and

(5) the gaining of an advantage by the party to be charged at the expense of the complaining party.

See Barnett v. Elite Properties of America, Inc., 252 P.3d 14, 24 (Colo. App. 2010). Accordingly, where a duty exists and a transfer has taken place in violation of that duty, the transfer will be determined to be fraudulent and, therefore, void as a matter of law.

Specific circumstances where constructive fraud claims have been applied include distribution of proceeds from the sale of property in violation of the Colorado Uniform Fraudulent Transfer Act, C.R.S. § 38-8-101 et seq, see CB Richard Ellis, Inc. v. CLGP, LLC, 251 P.3d 523 (Colo. App. 2010); a vote by a board of directors to liquidate the assets of a corporation without proper notice to the shareholders, see Security Nat. Bank v. Peters, Writer & Christensen, Inc., 569 P.2d 875 (1977); a release of a deed of trust without authorization from the lender, see Shaw v. 17 West Mill St., LLC, 307 P.3d 1046 (Colo. 2013); and a decision by a board of directors to sell preferred shares of stock to a related trust, see Kim v. Grover C. Coors Trust, 179 P.3d 86 (Colo. App. 2007).

Importantly, constructive fraud claims are equitable in nature meaning that the court will be responsible for determining if constructive fraud occurred and, if so, for fashioning an appropriate remedy. Additionally, equitable defense such as laches and unclean hands are applicable to constructive fraud claims. See Barnett v. Elite Properties of America, Inc., 252 P.3d 14, 24 (Colo. App. 2010).

 

9. Corporate Waste & Mismanagement

Corporate waste and mismanagement claims relate to decisions made on behalf of a company that are allegedly wasteful or in violation of a corporate duty. Proving a corporate waste or mismanagement claim can be relatively difficult as, typically, a significant amount of deference is given to corporate directors and the decisions they make on behalf of the company.

Specifically, in proving a corporate waste or mismanagement claim, the plaintiff must overcome the “business judgment rule”; a presumption that, because directors are charged with a fiduciary duty to the corporation and its shareholders, the decisions the directors make are in the best interests of the company.

Importantly, in order for corporate decision makers to receive the benefit of the business judgment rule, they have to have acted on an informed basis, in good faith, and with the honest belief that the action taken was in the best interest of the company. See Ajay Sports, Inc. v. Casazza, 1 P.3d 267 (Colo. App. 2000). Where these requirements are met, it will be presumed that the decisions made were within the best interests of the company and, thus, did not constitute corporate waste or mismanagement.

Overcoming this presumption is a significant hurdle in proving a corporate waste or mismanagement claim. Generally, in proving such a claim, a plaintiff has to show that the corporate decision makers’ actions amounted to at least gross negligence.

Specific ways that the presumption of the business judgment rule can be challenged include demonstrating that the decision makers were not adequately disinterested from a transaction, that the decision makers were not adequately informed, or that they did not honestly believe they were acting in the best interest of the company. See Griggs v. Jornayvaz, Civil Action No. 09-cv-00629-PAB-KMT (D. Colo. Nov. 29, 2010).

Where the business judgment rule can be overcome, corporate waste has occurred if:

The corporation has engaged in a transaction where the proceeds or exchange of the transaction is so proportionally small that no reasonable business person would find that the corporation received adequate consideration in the transaction.

If corporate waste has occurred, it is breach of a corporate decision maker’s fiduciary duty to the company and, often times, the plaintiff will also be able to plead a breach of fiduciary duty claim as well. See In re Stat-Tech Inern. Corp., 47 F.3d 1054 (10th Cir. 1995).

In bringing a corporate waste or mismanagement claim, the individual or entity must have proper standing to allege it. Under Colorado law, a claim of corporate waste and mismanagement typically belongs to the corporation and, accordingly, must be brought by the corporation or the stockholders on its behalf. Id. However, if a shareholder has sustained distinct and separate harm from the corporation, then the shareholder as an individual will have standing to maintain an action. Id.

 

10. Usurpation of Corporate Opportunities

Similar to corporate waste and mismanagement claims, claims for usurpation of corporate opportunities involve a breach of a fiduciary duty that a corporate director owes to the company. Accordingly, a claim for usurpation of corporate opportunities is not a separate claim for relief but, instead, constitutes an allegation of breach of fiduciary duty. See Astarte, Inc. v. Pacific Indus. Systems, Inc., 865 F.Supp. 693 (D. Colo. 1994).

In establishing a usurpation of corporate opportunities claim, the plaintiff must show that:

(1) a fiduciary duty was owed to the corporation;

(2) that the corporation had an actual or expected interest in an asset or property;

(3) that the corporation had the financial ability to acquire the asset or property;

(4) that a corporate director breached his fiduciary duty by usurping the asset or property.

See id. Importantly, the corporation must demonstrate that it had more than a mere theoretical expectancy or proposed opportunity to acquire the interest. Instead, the corporation must show that it had a practical basis and legitimate expectation of acquiring that interest. Id.

Additionally, bringing a usurpation of corporate opportunities requires proper standing to allege the claim. Similar to a corporate waste and mismanagement claim, under Colorado law a usurpation of corporate opportunities claim belongs to and must be brought by the corporation or the stockholders on its behalf. Id. However, if a shareholder has sustained distinct and separate harm from the corporation, then the shareholder as an individual will have standing to maintain the action. See In re Stat-Tech Intern. Corp., 47 F.3d 1054 (10th Cir. 1995).

 

11. Civil Conspiracy

Civil conspiracy is a claim that extends liability for an underlying claim to other actors. Accordingly, it is not a claim for relief in and of itself but, instead, requires a derivative claim to extent liability from. See Colorado Community Bank v. Hoffman, 338 P.3d 390 (Colo. App. 2013).

Under Colorado law, a civil conspiracy claim requires the plaintiff to show:

(1) two or more persons;

(2) acted to accomplish a goal;

(3) there was a meeting of the minds on the goal or course of action;

(4) one or more unlawful acts were performed to accomplish the goal;

(5) that plaintiff’s injuries were caused by those acts.

See Nelson v. Elway, 908 P.2d 102, 106 (Colo. 1995); CJI-Civ 24:1 (CLE ed. 2015). Importantly, an express agreement is not necessary; however, there must be some indicia of an agreement because a court will not simply imply a conspiracy. More v. Johnson, 568 P.2d 437, 440 (Colo. 1977).

Further, where a civil conspiracy is found, joint and several liability will be imposed on the conspirators. That is, each conspirator is legally liable for the full amount of the judgment. See C.R.S. § 13-21-111.5(4).

© 2017 J.D. Porter, LLC; Jordan Porter. Denver, Colorado.

Disclaimer: The information on this website is intended to be general information only and not legal advice. Laws change frequently and the information on this website may not be up to date, nor is the information intended to be fully comprehensive. For legal advice specific to your case please contact J.D. Porter, LLC or another licensed attorney.