Business Conspiracy Claims Survive Under Third-Party Rule

Not long ago, Serco, Inc., won summary judgment on various claims asserted against it by L-3 Communications Corp. and L-3 Applied Technologies, Inc., including claims for statutory business conspiracy, common law conspiracy, and tortious interference with business expectancy. On appeal to the Fourth Circuit, however, the court found that the district court erred in granting summary judgment on the conspiracy claims and sent the case back to the Eastern District of Virginia for further proceedings.

The dispute centered around rights to a lucrative government contract. In 2004, the Air Force awarded a prime contract to Serco that called for testing and upgrading services to protect certain Air Force sites from “high altitude electromagnetic pulse” (“HEMP“) events. The Air Force would periodically issue work orders for various projects, and if Serco could not complete the work itself, it could issue a request for proposals (“RFP”) to invite subcontractors to bid on the work.

For a period of several years, Serco sent almost all of its HEMP-related subcontract work to L-3 Communications (or one of its predecessors or affiliated companies). But in July 2009, Serco began awarding HEMP-related task orders to a new company–“Jaxon”–formed by a former L-3 employee. L-3 took exception to this, claiming that Jaxon was not qualified to perform the work and that Serco’s sudden decision to send work that would ordinarily go to L-3 to Jaxon was evidence of a fraudulent scheme to cut L-3 out of the Air Force work. L-3 claimed that Serco encouraged and assisted former L-3 employees (now working for Jaxon) to use L-3’s confidential information when bidding on RFPs for Jaxon, and that it provided Jaxon with inside information about government costs and requirements.

L-3 sued for tortious interference with its business expectancy in HEMP-related task orders, statutory business conspiracy in violation of Virginia Code §§ 18.2-499 and 18.2-500, common-law conspiracy, and other claims. On the tortious interference claim, the trial court found that L-3 could not establish a business expectancy in future HEMP-related work because the terms of the subcontract itself very explicitly stated that Serco “has no obligation to issue and there is no guaranty to [L-3] that [L-3] will receive any work under the terms of this Subcontract.” The trial court granted summary judgment to Serco on that claim. The trial court also granted summary judgment to Serco on the conspiracy claims, finding that (a) they were time-barred under the 5-year royal-air-force-red-arrows-1449089-300x200statute of limitations, and (b) the lack of a valid business expectancy precluded any liability for statutory or common-law conspiracy.

On appeal, the Fourth Circuit held that the tortious interference claim failed as a matter of law because a party cannot interfere with its own contract. The conspiracy claims, however, were remanded to the trial court for further proceedings due largely to what’s known as the “third-party rule.”

The third-party rule basically says that even though a party to a contract or business relationship cannot be liable for interfering directly with that contract or relationship, that party may be held liable for conspiracy with another person to tortiously interfere with the contract or expectancy. As stated by the Fourth Circuit, “the third-party rule provides a cause of action in conspiracy against one who cannot be held directly liable for tortiously interfering with his own business relationship, but nonetheless encourages or induces an outsider to do so.”

A third party or “stranger to the contract”, in other words, can be held liable for both tortious interference with that contract and for conspiring with another to accomplish such interference. A person who is a party to the contract may be held liable for conspiracy to interfere with the contract, but not on a claim for interfering with the contract on his own accord.

In this case, Serco could not be liable for interfering directly with L-3’s expectation in HEMP-related task orders because Serco was a party to those task orders. Serco could, however, be found liable for conspiring with Jaxon (i.e., a third party) to tortiously interfere with L-3’s business expectancy in the task orders.

To succeed on a claim of tortious interference, a plaintiff must show

  1. the existence of a valid contractual relationship or business expectancy;
  2. the putative interferer’s knowledge of the relationship or expectancy;
  3. an intentional interference inducing or causing a breach or termination of the relationship or expectancy; and
  4. resulting damage to the plaintiff.

Serco argued that L-3 could not satisfy the first element because the subcontract included language expressly disclaiming any guarantee of future work. The court, however, found that a reasonable jury could find that despite the language in the contract, L-3 could have a valid business expectancy in light of the parties’ multi-year course of dealing in which Serco awarded all HEMP-related task orders to L-3.

A valid business expectancy can be shown by evidence of a probability of future economic benefit, a fact-intensive inquiry. The record on appeal showed that for a five-year period, Serco awarded every HEMP-related task order to L-3 (and affiliated entities), suggesting that no other companies were even being considered for the work prior to Jaxon entering the picture. Based on this history, the court thought it would be fair for L-3 to have a business expectancy interest in future work despite the subcontract’s disclaimer. A jury might disagree, but the matter should not have been taken from the jury on a summary judgment adjudication.

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