Business Torts in California

When a person causes harm to another person, the injured party may be able to sue for compensation. The same is true for businesses in California – a business can be injured and obtain damages for the harm done, so long as the requirements are met. 

California recognizes the right of a business to sue for misappropriation of its trade secrets under the state’s Uniform Trade Secrets Act (UTSA). This statute gives business broad protection against theft or misappropriation of trade secrets by an employee, stating that an employer owns all trade secrets created by an employee within the scope of their employment. The UTSA also gives businesses the right to sue a rival company that uses a trade secret without authorization. 

A trade secret, as defined by California law, may include a variety of confidential information utilized by a business, including

*              lists/databases of clients, customers, or suppliers, or other information

*              business processes and techniques

*              formulas, patterns, and programs (including software)

Under the UTSA, a business must prove two elements to win a claim for trade secret misappropriation: (1) that the information at issue was, in fact, a trade secret; and (2) that the information was misappropriated. 

Restrictive covenants are contract clauses which limit the activities of an employee after employment has ended. They are often used to prevent misappropriation of trade secrets. One of the most common types of restrictive covenants is a non-competition provision, wherein the employee agrees to not work for a competitor or start a competitive business for a certain period of time and within a certain geographic area, after employment ceases. 

As of 2024, California law explicitly bans virtually all non-compete clauses. Under the California Business and Professions Code, employers are prohibited from including non-compete provisions in employment agreement or requiring employees to enter into non-competes. Employers who use employee non-compete clauses are required to give written notice to their employees that the non-compete provisions in place are void. 

“Conversion” typically involves an intentional taking or unauthorized use of another’s property. In the business context, conversion deprives a company of its money and property and may require litigation to resolve. In California, a plaintiff must prove three elements to show conversion: (1) the business’s ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or in a manner that is inconsistent with the business’s property rights; and (3) resulting damages. Damages for a conversion claim can be compensatory (paying the plaintiff for the converted property) or equitable (returning the plaintiff’s property).

These causes of action may arise when two parties contract or intend to contract, and a third-party tries to disrupt that relationship. A tortious interference with a contract requires an existing contractual relationship, while tortious interference of a prospective economic advantage involves a business relationship that has not been finalized.

In order to bring a claim, a plaintiff must show that it had a valid contract with another party, that the defendant knew about the contract and intentionally procured a breach of contract, causing damage to the plaintiff. 

A successful plaintiff can recover monetary damages, including the loss of any benefits the plaintiff would have received under the contract that was interfered with. Injunctive relief may be available if monetary damages are not adequate. 

A defendant that interferes with a contract that has not been signed yet may also be held liable for resulting harm to the plaintiff. Tortious interference in such cases requires proof that the defendant intentionally and knowingly induced the third party to act, and that the defendant acted by wrongful means, such as fraud, deceit, undue economic pressure or physical violence. In addition, the plaintiff must show that but for the defendant’s conduct, the plaintiff would have received the contract.

California’s UCL defines “unfair competition” as any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising. The statute allows the state Attorney General as well as private citizens to bring an action for deceptive and unlawful trade practices. Typically, claims under this law involve false or misleading advertising targeted to consumers.

In order to bring a claim under the UCL for deceptive and unlawful trade practices, a plaintiff must show that they have suffered an injury and lost money or property as a result of the unfair competition. This must include some form of economic injury.

Damages

Plaintiffs can recover actual damages suffered, restitution for any gains the defendant made through the deceptive practices, and in some cases, statutory damages or civil penalties up to $2,500 per violation of the UCL.

California’s UCL defines “unfair competition” as any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising. The statute allows the state Attorney General as well as private citizens to bring an action for deceptive and unlawful trade practices. Typically, claims under this law involve false or misleading advertising targeted to consumers. 

In order to bring a claim under the UCL for deceptive and unlawful trade practices, a plaintiff must show that they have suffered an injury and lost money or property as a result of the unfair competition. This must include some form of economic injury. 

Damages

Plaintiffs can recover actual damages suffered, restitution for any gains the defendant made through the deceptive practices, and in some cases, statutory damages or civil penalties up to $2,500 per violation of the UCL. 

Fraudulent transfers or conveyances are when a debtor in bankruptcy tries to shield its assets from creditors by transferring them to someone else. Such action is unlawful under California’s Uniform Fraudulent Transfer Act (UFTA). 

A creditor may cancel a transfer of property by a debtor when the transfer was made to escape monetary claims of the creditor and the transfer was made for consideration that was less than reasonably equivalent value of that property at the time. 

A fiduciary duty is an obligation that one person act in the best interests of another person or entity. Typically, there is a relationship between the parties involving special trust or reliance on the fiduciary to exercise his or her discretion or expertise for the benefit of the other party. There are three categories of fiduciary duties: duty of care, duty of loyalty, and duty of candor. Examples of actions that would breach a fiduciary duty include self-dealing or deception.

To bring a claim for breach, the plaintiff must prove: (1) a fiduciary relationship and duty existed; (2) a breach of the duty occurred; and (3) damages were suffered as a result of the breach.

A successful plaintiff may be awarded direct and indirect damages, injunctions, restitution, rescission, legal fees and other appropriate remedies as provided under the law.

Generally, officers and directors are not personally liable to third parties for the corporation’s torts, unless they have personally acted in some way in furtherance of the wrongdoing. A plaintiff must show that the officer or director authorized, directed or otherwise participated in the tortious conduct, or knew or reasonably should have known that some hazardous condition or activity under their control could injure the plaintiff and negligently failed to take action to avoid the harm. The officer’s’ or director’s conduct also must have resulted in damages to the corporation. 

Business torts can be difficult to prove but can result in significant liability for a defendant when a claim is successful. Parties should consult an attorney for advice on how best to proceed.

Romano Law can provide guidance on business torts in New York, California and Florida.

Photo by Jordan Crawford on Unsplash