Applied Equipment Corp. v. Litton Saudi Arabia Ltd.

• Decision Date: 31 March 1994
• Docket Number: No. S030637,S030637
• Court: California Supreme Court
• Parties: , 869 P.2d 454, 62 USLW 2636 APPLIED EQUIPMENT CORPORATION, Plaintiff and Respondent, v. LITTON SAUDI ARABIA LIMITED et al., Defendants and Appellants.

Page 475

28 Cal.Rptr.2d 475

7 Cal.4th 503, 869 P.2d 454, 62 USLW 2636

APPLIED EQUIPMENT CORPORATION, Plaintiff and Respondent, v. LITTON SAUDI ARABIA LIMITED et al., Defendants and Appellants.

No. S030637.

Supreme Court of California In Bank.

March 31, 1994.

Arthur W. Homan, Bronson, Bronson & McKinnon, Robert J. Stumpf, Jr. and David Eiseman, San Francisco, for defendants and appellants.

Jennie M. Crowley, Beverly Hills, Victoria Thomas McGhee, San Francisco, John W. Patton, Jr., Los Angeles, Dilworth, Paxson, Kalish & Kauffman, Cutler & Cutler, Felice R. Cutler and Robert A. Philipson, Los Angeles, as amici curiae, on behalf of defendants and appellants.

Hillel Chodos Los Angeles, and Michael A. Chodos, Santa Monica, for plaintiff and respondent.

LUCAS, Chief Justice.

Can a contracting party be held liable in tort for conspiracy to interfere with its own contract? Following a line of appellate cases, the Court of Appeal answered this question in the affirmative. Our study of applicable precedent and policy yields a contrary answer. We will therefore reverse the judgment of the Court of Appeal.

FACTS AND PROCEEDINGS BELOW

Plaintiff Applied Equipment Corporation (Applied) entered into a subcontract with defendant Litton Saudi Arabia Limited (Litton) calling for Applied to procure and supply to Litton spare parts that Litton needed to perform Litton's general contract to provide a military defense communication and control system to the Kingdom of Saudi Arabia. Applied was to be compensated under the subcontract on a commission basis--it was entitled to receive a 26 percent markup on the price of items purchased for Litton.

As part of its performance of the subcontract, Applied agreed to procure VA-145E electron tubes--custom-made products manufactured only by defendant Varian Associates Inc. (Varian). With Litton's approval, Applied ordered from Varian 11 VA-145E tubes at a price of $67,500 per unit. Applied issued a purchase order to Varian; Varian accepted and acknowledged the order.

Five months after Litton approved the purchase, two members of its finance department criticized the $190,000 markup earned by Applied on the tube purchase and recommended in an internal memorandum that "this situation be reviewed in order to determine how Litton might avoid payment of the $190,000."

Litton subsequently contacted Varian directly and renegotiated the Applied/Varian purchase order, eventually obtaining Varian's agreement to sell 12 tubes (rather than 11) at $62,500 each. Six tubes were sold to Applied (subject to the markup in the subcontract); the remaining six were sold directly to Litton (without the markup). The renegotiated purchase order, which resulted in a reduction in Applied's commission, was presented to Applied by Varian as a fait accompli.

Applied sued Litton and Varian for breach of their respective contracts (i.e., the subcontract and the purchase order), and for tortious interference (including conspiracy to interfere) with those contracts. Applied claimed two items of damage: (1) the difference in lost markup, calculated at $81,250; and (2) lost profits arising out of Litton's alleged "failure to renew" Applied's subcontract because of what Applied calls "the Varian tube incident," in the purported amount of $2.5 million. ¹

There was some confusion at trial regarding Applied's conspiracy theory. Applied argued its conspiracy claim was based on a single conspiracy between Varian and Litton to interfere with each company's contractual relations. Varian, however, maintained that there were in effect two separate conspiracy claims: one for conspiracy to interfere with the purchase order and another for conspiracy to interfere with the subcontract. Adopting Applied's view, the court submitted five claims to the jury: (1) breach of the purchase order by Varian; (2) interference with the purchase order by Litton; (3) breach of the subcontract by Litton; (4) interference with the subcontract by Varian; and (5) conspiracy to interfere with undifferentiated "contractual relations."

After a three-week trial and several days of deliberations, the jury returned a complex verdict. The trial court ultimately entered judgment in favor of Applied and against Varian and Litton for contract damages of $112,531.25 ($81,250 plus prejudgment interest) and tort damages of $2.5 million for conspiracy to interfere with contract. Litton was also assessed $12.5 million in punitive damages.

On appeal, the Court of Appeal affirmed the contract awards, but reversed the tort judgments for inconsistency in the jury's verdicts. It rejected Varian's argument that Varian could not, as a matter of law, be held liable for conspiring to interfere with its own contract. ² Varian sought review in this court, limited to the single issue now before us. ³

DISCUSSION

In Wise v. Southern Pacific Co. (1963) 223 Cal.App.2d 50, 71-72, 35 Cal.Rptr. 652 (hereafter Wise), the Court of Appeal addressed the question now before us. Noting the absence of clear case law in California and a split in authority from other jurisdictions, the court held that one contracting party, by use of a conspiracy theory, could impose liability on another for the tort of interference with contract. Without substantial discussion, it concluded that conspiracy liability in this context was both consistent with the "principle that all who are involved in the common scheme are jointly and severally responsible for the ensuing wrong" and also "consonant with good morals." (Ibid.)

Wise has been uncritically accepted and applied in several subsequent appellate decisions. (Shapoff v. Scull (1990) 222 Cal.App.3d 1457, 1465, 272 Cal.Rptr. 480; Manor Investment Co. v. Woolworth (1984) 159 Cal.App.3d 586, 594, 206 Cal.Rptr. 37; Rosenfeld, Meyer & Susman v. Cohen (1983) 146 Cal.App.3d 200, 226, 194 Cal.Rptr. 180; Owens v. Palos Verdes Monaco (1983) 142 Cal.App.3d 855, 872, 191 Cal.Rptr. 381; Owens v. Foundation for Ocean Research (1980) 107 Cal.App.3d 179, 185, 165 Cal.Rptr. 571; Olivet v. Frischling (1980) 104 Cal.App.3d 831, 164 Cal.Rptr. 87; Mayes v. Sturdy Northern Sales, Inc. (1979) 91 Cal.App.3d 69, 77-78, 154 Cal.Rptr. 43; Wetherton v. Growers Farm Labor Assn. (1969) 275 Cal.App.2d 168, 176-177, 79 Cal.Rptr. 543.) However, as the Court of Appeal observed in its opinion in this case, we have never endorsed the rule of Wise in a manner that would constitute binding precedent. (See Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455, 20 Cal.Rptr. 321, 369 P.2d 937.)

Our review leads us to reject the rule of Wise because: (1) it illogically expands the doctrine of civil conspiracy by imposing tort liability for an alleged wrong--interference with a contract--that the purported tortfeasor is legally incapable of committing; and (2) it obliterates vital and established distinctions between contract and tort theories of liability by effectively allowing the recovery of tort damages for an ordinary breach of contract. As explained more fully below, our conclusions in this regard are shared by the better-reasoned cases in other jurisdictions and supported by applicable policy considerations.

1. Conspiracy

Conspiracy is not a cause of action, but a legal doctrine that imposes liability on persons who, although not actually committing a tort themselves, share with the immediate tortfeasors a common plan or design in its perpetration. (Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 784, 157 Cal.Rptr. 392, 598 P.2d 45.) By participation in a civil conspiracy, a coconspirator effectively adopts as his or her own the torts of other coconspirators within the ambit of the conspiracy. (Ibid.) In this way, a coconspirator incurs tort liability co-equal with the immediate tortfeasors.

Standing alone, a conspiracy does no harm and engenders no tort liability. It must be activated by the commission of an actual tort. " 'A civil conspiracy, however atrocious, does not give rise to a cause of action unless a civil wrong has been committed resulting in damage.' " (Doctors' Co. v. Superior Court (1989) 49 Cal.3d 39, 44, 260 Cal.Rptr. 183, 775 P.2d 508 [hereafter Doctors' Co.], citing Unruh v. Truck Insurance Exchange (1972) 7 Cal.3d 616, 631, 102 Cal.Rptr. 815, 498 P.2d 1063.) "A bare agreement among two or more persons to harm a third person cannot injure the latter unless and until acts are actually performed pursuant to the agreement. Therefore, it is the acts done and not the conspiracy to do them which should be regarded as the essence of the civil action." (Note, Civil Conspiracy and Interference With Contractual Relations (1975) 8 Loyola L.A.L.Rev. 302, 308, fn. 28 [hereafter Note].)

We have summarized the elements and significance of a civil conspiracy: " 'The elements of an action for civil conspiracy are the formation and operation of the conspiracy and damage resulting to plaintiff from an act or acts done in furtherance of the common design.... In such an action the major significance of the conspiracy lies in the fact that it renders each participant in the wrongful act responsible as a joint tortfeasor for all damages ensuing from the wrong, irrespective of whether or not he was a direct actor and regardless of the degree of his activity.' " (Doctors' Co., supra, 49 Cal.3d at p. 44, 260 Cal.Rptr. 183, 775 P.2d 508, citing Mox Incorporated v. Woods (1927) 202 Cal. 675, 677-678, 262 P. 302.)

By its nature, tort liability arising from conspiracy presupposes that the coconspirator is legally capable of committing the tort, i.e., that he or she owes a duty to plaintiff recognized by law and is potentially subject to liability for breach of that duty. This follows from two distinct lines of conspiracy cases.

In Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 576, 108 Cal.Rptr. 480, 510 P.2d 1032, the insured sued, as agents of its insurer, an insurance adjusting firm and one of its employees who had processed the insured's claim on...