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Competition Is Not Tortious Inteference

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14.01.08-Uncarrier4

A brief note this Saturday morning…

Conversations around my last post, about FTC taking action on anti-competitive Code of Ethics provisions, have raised an interesting and salient point. The best example comes from the comments, where Brian Rayl writes:

Despite what the FTC states in terms of “soliciting other’s clients” there are very strict laws – federal laws – that prohibit interfering with a contract.

http://en.wikipedia.org/wiki/Tortious_interference

If someone is going down a list of new listings and contacting them with the intention of damaging the contractual relationship, they are guilty of tortious interference. I’m not sure why the FTC would require the code of ethics to allow this when the federal government doesn’t? What are your thoughts on that?

My thoughts are that tortious interference with contract requires a tort. Obviously, what is about to follow is legal mumbo-jumbo, which I do for fun as a blogger with a law background. Please consult your own attorney or counsel; this is not legal advice.

Tortious Interference

Like anything in the law, the subject is far more complicated and complex than can/should be handled in a blogpost. But here’s a decent article written by lawyers for lawyers: Navigating the Nuances of Tortious Interference Claims. Key paragraphs:

To establish any tortious interference claim, a plaintiff must establish that “the defendant’s conduct was independently tortious or wrongful.” Wal-Mart Stores, Inc. v. Sturges, 52 S.W.3d 711, 726 (Tex. 2001). What distinguishes legitimate competitive economic activity—something that is protected in our free- market system—from actionable interference? The act must be tortious, meaning that the plaintiff “must plead and prove at least some improper motive or improper means.” Golembeski v. Metichewan Grange No. 190, 20 Conn. App. 699, 702, 569 A.2d 1157 (Conn. App. Ct. 1990).

Tortious conduct generally requires proof that “the defendant was guilty of fraud, misrepresentation, intimidation or molestation or that the defendant acted maliciously.” Blake v. Levy, 191 Conn. 257, 261, 464 A.2d 52 (Conn. 1983). Courts generally have required a plaintiff to show that the defendant wrongfully interfered for the sole purpose of harming the plaintiff or that it committed independent torts or predatory acts. See, e.g., EDP Hosp. Computer Sys. Inc. v. Bronx-Lebanon Hosp. Ctr., 212 A.D.2d 570, 571, 622 N.Y.S.2d 557 (N.Y. App. Div. 1995).

And further:

“Not every act that disturbs a contract or business expectancy is actionable.” Secord v. Purkey, 2011 Conn. Super. LEX- IS 158, at *14 (Conn. Super. Ct. Jan. 24, 2011). As a matter of public policy, courts encourage competition and frown upon a litigant’s attempt to stifle competition or to promote one’s self- interest. In fact, competitors “have a ‘preference’ in the eyes of the law such that it is not a tort to interfere with a contract” if the action is competitive and the actor does not “employ wrongful means” or create “an unlawful restraint of trade.” United Wild Rice, Inc. v. Nelson, 313 N.W.2d 628, 633 (Minn. 1982) (quoting Restatement (Second) of Torts § 768 (1979)).

Within the real estate industry, there is this widespread sense that doing anything that might result in a buyer or seller terminating an existing agreement — buyer representation agreement or a listing agreement — is tortious interference. This is simply not true.

Tortious interference requires a tort — some sort of wrongful act. And the case law that created the concept of tortious interference have some really weird things in it (as the tort is an ancient common law deal) like someone shooting a shotgun over a neighbor’s pond to scare away ducks.

Competition, even aggressive, vigorous competition that most people might find distasteful, is not a tort. And as a matter of public policy — that of encouraging competition — it’s pretty difficult to prove a tortious interference claim against a competitor.

In fact, the whole reason why Article 16 of the NAR Code of Ethics exists might be to prohibit non-tortious interference with contract. And I think that’s where it will run afoul of the FTC (though I could be wrong, as folks are telling me that NAR has already received the FTC’s blessing on Article 16).

Some Examples for Illumination

Let’s think about this through a couple of examples.

Non-tortious Interference, aka, Legitimate Competition

Suppose REALTOR Smith takes an exclusive listing, but as is common in today’s real estate environment, the listing agreement is terminable at will by the seller.

Jones, a licensed real estate agent, but not a REALTOR (not a member of NAR), telephones the seller and says, “I’ll do everything Smith is doing for you, but for 1% of the commission, not 3%.”

There is no doubt that Jones is not guilty of tortious interference, since there is no tort here. There is no fraud, no misrepresentation, no intimidation or molestation or any such thing. She’s just competing on price.

Furthermore, since Jones is not a REALTOR, she isn’t bound by Article 16 of the Code. Therefore, if the seller terminates the agreement with Smith and gives the listing to Jones, that’s the end of the story. This is legitimate competition, distasteful as it may be.

Tortious Interference

Now suppose that Jones, instead of saying she’ll do what Smith is doing for less money, says something along the lines of:

“Real nice house you got here, Mr. Seller. I’d hate to see it catch fire suddenly and burn up because you gave the listing to Smith.”

Clearly, we have a tortious interference, because we have a tort: threatening someone with arson is a crime in and of itself.

That Grey Area

And of course, nothing is ever so clear cut in real life. Chances are that we’ll have far more of the grey area than such clear black-and-white examples. For example, what if Jones says:

“You really shouldn’t work with Smith, because she’s an alcoholic.”

Now the entire thing probably turns on whether Smith is in fact an alcoholic or not. If she is, and there’s proof (e.g., Smith is enrolled in Alcoholics Anonymous), I’m not sure that’s a tort. If she is not, then there is a tort: fraud. There’s probably a defamation action as well.

Now, Apply Article 16

The issue with FTC v. NARPM I wrote about in the previous post is that Article 16 prohibits non-tortious interference with contract. Take the first example, where Jones tells the seller that she’ll do it for 1% instead of 3%, except that Jones is also a REALTOR, and therefore subject to the Code of Ethics.

She can’t be sued for tortious interference, because there is no tort. She can, however, be brought up on ethical charges before the Board, and sanctioned in various ways.

Knowing this, of course, Jones is unlikely to telephone the seller at all to make the offer in the first place. That, in the opinion of the FTC, is anti-competitive.

All The Exceptions

Some folks have cited the various Standards of Practice under Article 16 that lay out the kinds of things that a REALTOR can do to suggest that Article 16 is not anti-competitive. They may very well be right, and until we see action by the FTC, I suppose we won’t know for sure. However, in my view, and with the above analysis, I don’t see how those SoP’s get around the issue above: that Article 16 prohibits non-tortious interference with contract, which is legitimate competition.

For example, 16-2 says that a “general” campaign is permitted. 16-3 says a REALTOR can contact the consumer to offer a “different type of service”. 16-4 and 16-5 both says a REALTOR can contact consumers to talk about a future relationship. And so on and so forth.

That’s all fine and good, but there is no question that Article 16, with all of these exceptions still prohibits a REALTOR from contacting a specific buyer or specific seller who is under an existing agreement:

Article 16 is intended to recognize as unethical two basic types of solicitations:

First, telephone or personal solicitations of property owners who have been identified by a real estate sign, multiple listing compilation, or other information service as having exclusively listed their property with another REALTOR®, and

Second, mail or other forms of written solicitations of prospects whose properties are exclusively listed with another REALTOR® when such solicitations are not part of a general mailing but are directed specifically to property owners identified through compilations of current listings, “for sale” or “for rent” signs, or other sources of information required by Article 3 and Multiple Listing Service rules to be made available to other REALTORS® under offers of subagency or cooperation.

Such telephone, personal, or direct mail/written solicitations may be 100% legal under tortious interference rules. No fraud, no duress, no unlawful restraint of trade, no maliciousness — just one REALTOR wanting to compete with and take business away from another REALTOR.

The Code of Ethics prohibits that, and considers it unethical, and subject to sanctions and discipline.

There may be excellent reasons why Article 16 ought to be OK. It isn’t as if sellers want to be besieged by phone calls from REALTORS the minute his property is listed in the MLS. It isn’t as if buyers want agents constantly trying to hustle their business. No one really enjoys walking through Shanghai Night Market with its hordes of vendors hawking their wares at potential customers in the most aggressive way imaginable.

I’m not arguing for repeal of Article 16; frankly, until the FTC ruling, I didn’t give it much thought. Things appear to be working out just fine in the industry as they are.

But given that the FTC has taken action against another Association of professionals who work in residential real estate, based on a Code of Ethics provision that prohibits non-tortious interference (aka, competition)… I just don’t see how NAR gets away clean.

Again, people who ought to know — Directors of NAR, chairs of committees, etc. — tell me that the FTC and the DOJ have blessed NAR’s Code of Ethics. Okay, then I suppose there’s nothing to worry about. But if so, I’d like to see a piece of paper with that blessing on it. The issue is too important not to want that assurance.

In any event… since a number of people brought up tortious interference, I thought it might be interesting to talk about that issue a bit.

-rsh

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Rob Hahn
Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.