Carvel Corp. v. Noonan

Decision Date14 October 2004
Citation3 N.Y.3d 182,785 N.Y.S.2d 359,818 N.E.2d 1100
PartiesCARVEL CORPORATION, Appellant, v. ELIZABETH A. NOONAN et al., Respondents, et al., Defendants, et al., Special Masters.
CourtNew York Court of Appeals Court of Appeals

Gibson, Dunn & Crutcher LLP, New York City (Mitchell A. Karlan, Marshall King, David Arroyo, Michelle Craven and Michael Passante of counsel), for appellant.

Duane Morris LLP, Philadelphia, Pennsylvania (J. Manly Parks, Wayne A. Mack and James H. Steigerwald of counsel), and Aegis J. Frumento, New York City, for respondents.

Boies, Schiller & Flexner LLP, Albany (George F. Carpinello of counsel), for Caesars Entertainment, Inc., amicus curiae. Proskauer Rose LLP, New York City (Dale A. Schreiber and Nancy Kilson of counsel), for Independent Franchisees of Weight Watchers International, Inc., amicus curiae.

Law Offices of Michael B. Wolk, P.C., New York City (Michael B. Wolk, Edmund F. Wolk, Peter J. Rossi and Michael E. Morrison of counsel), for Inverraz Group, amicus curiae.

Judges G.B. SMITH, ROSENBLATT and READ concur with Judge R.S. SMITH; Judge GRAFFEO concurs in result in a separate opinion in which Judge CIPARICK concurs; Chief Judge KAYE taking no part.

OPINION OF THE COURT

R.S. SMITH, J.

Several franchisees of Carvel Corporation sued it in federal court, complaining of the distribution of Carvel's products through supermarkets that competed with the franchisees. Juries awarded damages to three of the franchisees on tort and contract claims, and Carvel appealed to the United States Court of Appeals for the Second Circuit. That court has certified to us the question of whether the franchisees have a valid tort claim for "interference with prospective economic relations." We hold that they do not.

The Facts

Until the early 1990's, Carvel ice cream was distributed only through franchised stores, and Carvel had repeatedly told its franchisees it had no plans to sell through supermarkets. A decline in Carvel's fortunes caused it to change its mind, however, and Carvel adopted a "supermarket program." The program called for sales to supermarkets by Carvel itself and by those franchisees that chose to participate in the program — which required franchisees to pay substantial license fees and to upgrade their stores. Most franchisees chose not to participate. From 1993 to 2000, the supermarket program grew rapidly, while many franchised stores went out of business.

The franchisees assert that Carvel's supermarket program was harmful to them in itself, and that the details of the program's implementation made things worse. Among their grievances are that Carvel sold to supermarkets at bargain prices; that it issued coupons to customers that Carvel would redeem from supermarkets but not from franchisees; and that those coupons were printed on bags that Carvel required franchisees to use in their stores. They contend that, as their expert witness testified, Carvel's supermarket program was not "consistent with the customary practices and standards in the franchise industry." The franchisees' claims, both in contract and tort, are illuminated by their written agreements with Carvel. Those agreements were of two types. The earlier agreements, known as "Type A," included a specific restriction on Carvel's rights to compete with its franchisees, providing that Carvel "will not establish or license another person to establish a Carvel Store" within a quarter mile of the franchisee's store on the same street. The Type A agreements contained other language, including a reference to "a unique system for the production, distribution and merchandising of Carvel products," that the franchisees interpret as prohibiting Carvel from implementing its supermarket program.

The later, "Type B," agreements also contained the "unique system" language, but not the quarter-mile restriction. They provided that the license granted to the franchisee was "non-exclusive," and that Carvel "in its sole and absolute discretion" could license other Carvel stores and could sell its products "through the same or different delivery systems or other distribution channels." The franchisees who signed Type B agreements had all received, before they signed the agreements, an offering circular saying that Carvel was free to sell through "supermarkets."

Of the three franchisees whose cases are now before us, two, Marsella and the Noonans, signed Type A agreements; the third, Giampapa, signed Type B. Each agreement contains a New York choice of law clause, and it is not disputed that New York law governs both the contract and tort claims.

The two franchisees who signed Type A agreements were allowed to go to juries on claims that Carvel "breached its franchise agreement" with them. One of them, the Noonans, got a favorable verdict on that claim. All three of the franchisees went to juries on claims that Carvel "breached the implied covenant of good faith and fair dealing" and "tortiously interfered with the [franchisee's] existing or prospective business relations," and all three got favorable verdicts on those two claims. Only the verdicts for tortious interference with business relations are now our concern.

The Certified Questions

The Second Circuit Court of Appeals certified the following two questions to us:

1. "Under applicable standards for a claim of tortious interference with prospective economic relations, did the evidence of the franchisor's conduct in each of the three trials on review in these consolidated appeals permit a jury finding in favor of the franchisee?" (350 F3d 6, 23 [2003].)
2. "Is public harm required for a punitive damages claim by a franchisee against its franchisor for tortious interference with the franchisee's prospective economic relations with its customers?" (Id. at 26.)

We answer the first question "no." This answer renders the second question academic.

Discussion

The franchisees' tort claim is that Carvel unlawfully interfered with the relationships between the franchisees and their customers. The franchisees do not claim that the customers had binding contracts that Carvel induced them to breach; they allege only that, by implementing its supermarket program, Carvel induced the customers not to buy Carvel products from the franchisees. The juries have found that Carvel did so induce customers, and the question for us is whether that inducement was tortious interference under New York law. We conclude that it was not because Carvel's conduct, which did not constitute a crime or an independent tort and was not aimed solely at harming franchisees, was also not the sort of egregious wrongdoing that might support a tortious interference claim in the absence of such an independently unlawful act or evil motive.

We have recognized that inducing breach of a binding agreement and interfering with a nonbinding "economic relation" can both be torts, but that the elements of the two torts are not the same. Our leading cases, as the Second Circuit Court of Appeals noted, are Guard-Life Corp. v S. Parker Hardware Mfg. Corp. (50 NY2d 183 [1980]) and NBT Bancorp Inc. v Fleet/Norstar Fin. Group, Inc. (87 NY2d 614 [1996]). We said in NBT, summarizing what we had held in Guard-Life:

"[T]he degree of protection available to a plaintiff for a competitor's tortious interference with contract is defined by the nature of the plaintiff's enforceable legal rights. Thus, where there is an existing, enforceable contract and a defendant's deliberate interference results in a breach of that contract, a plaintiff may recover damages for tortious interference with contractual relations even if the defendant was engaged in lawful behavior. Where there has been no breach of an existing contract, but only interference with prospective contract rights, however, plaintiff must show more culpable conduct on the part of the defendant." (87 NY2d at 621 [citations omitted].)

By saying in NBT that a defendant who induced the breach of a binding contract could be liable "even if the defendant was engaged in lawful behavior," we implied that the same was not ordinarily true where the plaintiff complained only of "interference with prospective contract rights." This applies equally if not a fortiori, here, where the franchisees complain of interference not with "contract rights" but only with existing or prospective economic relations.

Under NBT, where a suit is based on interference with a nonbinding relationship, the plaintiff must show that defendant's conduct was not "lawful" but "more culpable." The implication is that, as a general rule, the defendant's conduct must amount to a crime or an independent tort. Conduct that is not criminal or tortious will generally be "lawful" and thus insufficiently "culpable" to create liability for interference with prospective contracts or other nonbinding economic relations.

Since the franchisees have not shown that Carvel's conduct was criminal or independently tortious, they cannot recover unless an exception to the general rule is applicable. Such an exception has been recognized where a defendant engages in conduct "for the sole purpose of inflicting intentional harm on plaintiffs" (NBT Bancorp, Inc. v Fleet/Norstar Fin. Group, Inc., 215 AD2d 990, 990 [3d Dept 1995], affd 87 NY2d 614 [1996]), but that exception clearly does not apply here. It is undisputed that Carvel's motive in interfering with the franchisees' relationships with their customers was normal economic self-interest; Carvel wanted to reverse a period of business declines and make itself more profitable. It was not acting solely to hurt the franchisees; indeed, one of the franchisees' prize pieces of evidence is a statement by a Carvel executive, in colorful terms, that he was completely indifferent to the franchisees' fate.

We did not decide in Guard-Life or NBT, and we do not decide today, whether any other exception to the general rule exists — whether there...

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