Pacific Gas & Electric Co. v. Bear Stearns & Co.

long-term contract for the purchase of hydroelectric power from Placer County Water Agency (Agency). It alleged intentional interference with contractual relations, intentional interference with prospective business advantage, and attempted inducement of breach of contract. Bear Stearns demurred successfully, and the complaint was dismissed. The Court of Appeal reversed the trial court’s order as to the first two causes of action.

The facts pleaded in PG&E’s second amended complaint are as follows. In April 1963, PG&E entered into a power purchase contract with the Agency to buy all of the hydroelectric power to be generated by its Middle Fork American River Project. The contract provided that the agreement would terminate in 2013 or at the end of the year in which the Agency completed retirement of its project bonds, whichever occurred first.

As energy prices rose, the Agency wished it could terminate the contract and sell its hydroelectric power in a more favorable market, but felt it could not do so without a breach. Bear Stearns approached the Agency and spent several years overcoming the Agency’s resistance to making any effort to terminate the contract. Finally it succeeded, and in May 1983, the Agency entered into a contingent fee agreement with Bear Steams, in which Bear Stearns agreed to pay for legal, engineering, and marketing studies on the feasibility of terminating the power contract, in return for 15 percent of any resulting increase in the Agency’s revenues above $2.5 million for 20 years.

Bear Stearns retained legal counsel to draw up a plan by which the Agency could retire its project bonds, and to litigate the question whether the Agency could terminate the contract. It also retained an engineer, and conducted a marketing campaign to solicit buyers for the Agency’s power. It agreed to pay half of the fees of the Agency’s independent counsel.

In December 1984, the Agency served a demand for arbitration under the power contract on PG&E, to resolve the question whether the Agency could terminate the contract before 2013 by retiring its project bonds. PG&E responded by filing several lawsuits, including the first complaint in this one. The Agency withdrew the demand for arbitration and sought a declaratory judgment that the contract could be terminated early by retiring the project bonds. The trial court entered a judgment on the pleadings in favor of the Agency. The Court of Appeal reversed, finding that the trial court had erred in failing to consider certain extrinsic evidence showing that the parties did not intend the contract to be terminable before 2013.^[1] That action is still pending.

cause of action for interference with contractual relations or intentional interference with prospective economic advantage.

It has long been held that a stranger to a contract may be liable in tort for intentionally interfering with the performance of the contract. (Lumley v. Gye (1853) 2 El. & Bl. 216 [118 Eng. Rep. 749]; Imperial Ice v. Rossier (1941) 18 Cal.2d 33 [ 112 P.2d 631 ], and cases cited.) The elements which a plaintiff must plead to state the cause of action for intentional interference with contractual relations are (1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage. (See Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752 , 765-766 [ 206 Cal.Rptr. 354 , 686 P.2d 1158 ]; Ramona Manor Convalescent Hospital v. Care Enterprises (1986) 177 Cal.App.3d 1120 , 1130 [ 225 Cal.Rptr. 120 ]; Farmers Ins. Exchange v. State of California (1985) 175 Cal.App.3d 494 , 506 [ 221 Cal.Rptr. 225 ].)

The tort of interference with prospective economic advantage protects the same interest in stable economic relationships as does the tort of interference with contract, though interference with prospective advantage does not require proof of a legally binding contract. (Buckaloo v. Johnson, supra, 14 Cal.3d 815 , 823.)*^[2] The chief practical distinction between interference with contract and interference with prospective economic advantage is that a broader range of privilege to interfere is recognized when the relationship or economic advantage interfered with is only prospective. (Environmental Planning and Information Council v. Superior Court (1984) 36 Cal.3d 188 , 194; Buckaloo v. Johnson, supra, 14 Cal.3d at p. 823, fn. 6.)

The parties have raised two questions under the settled law we have recited. The first is whether inducing a party to a contract to seek to terminate the contract according to its terms is ever actionable interference with contractual or prospective economic relations. The second question is whether actual interference is adequately alleged when the interference consists of inducing litigation on the contract. Considering the established

boundaries of the tort, we conclude that it may be actionable to induce a party to a contract to terminate the contract according to its terms. On the second point, we acknowledge that interference which makes enjoyment of a contract more expensive or burdensome may be actionable, and that PG&E alleges its rights under the contract have been made more expensive because it has incurred significant costs in defending itself against the declaratory relief action that it alleges Bear Stearns induced the Agency to bring. This conclusion will bring us face to face with the question, not squarely framed by the parties, whether it is proper to impose liability for inducing a potentially meritorious lawsuit. We will conclude that it is not.

Bear Stearns claims initially that there can be no cause of action for inducing a contracting party to seek to terminate the contract according to its terms. The claim runs afoul of the rule, established in this and the majority of other jurisdictions,^[3] giving rise to a cause of action for inducing termination of an at-will contract, as the Court of Appeal perceived.

Cases establishing a cause of action for interference with at-will and voidable contracts make it clear that it is the contractual relationship, not any term of the contract, which is protected against outside interference. We have affirmed that interference with an at-will contract is actionable interference with the contractual relationship, on the theory that a contract “ ‘at the will of the parties, respectively does not make it one at the will of others’ ” (Speegle v. Board of Fire Underwriters (1946) 29 Cal.2d 34 , 39 [ 172 P.2d 867 ], quoting Truax v. Raich (1915) 239 U.S 33 , 38 [ 60 L.Ed. 131 , 134, 36 S.Ct. 7 ]). As Justice Tobriner said in the context of voidable contracts; “The actionable wrong lies in the inducement to break the contract or to sever the relationship, not in the kind of contract or relationship so disrupted, whether it is written or oral, enforceable or not enforceable.” (Zimmerman v. Bank of America (1961) 191 Cal.App.2d 55 , 57 [ 12 Cal.Rptr. 319 ]; see also Kozlowsky v. Westminster Nat. Bank (1970) 6 Cal.App.3d 593 , 598 [ 86 Cal.Rptr. 52 ].) Reviewing courts have reiterated in case after case that the contractual relationship is at the will of the parties, not at the will of outsiders. (Speegle v. Board of Fire Underwriters, supra, 29 Cal.2d at p. 39; Abrams & Fox, Inc. v. Briney (1974) 39 Cal.App.3d 604 , 608 [ 114 Cal.Rptr. 328 ]; Skelly v. Richman (1970) 10 Cal.App.3d 844 , 862 [ 89 Cal.Rptr. 556 ]; Kozlowsky v. Westminster Nat. Bank, supra, 6 Cal.App.3d at p. 598; Freed v. Manchester Service, Inc. (1958) 165 Cal.App.2d 186 , 189 [ 331 P.2d 689 ]; Romano v. Wilbur Ellis & Co. (1947) 82 Cal.App.2d 670 , 673 [ 186 P.2d 1012 ].)

Further, the expectation that the parties will honor the terms of the contract is protected against officious intermeddlers. Since people “ ‘usually honor their promises no matter what flaws a lawyer can find, the offender should not be heard to say that the contract . . . meddled with could not have been enforced. . . .’ ” (Buckaloo v. Johnson, supra, 14 Cal.3d at p. 826; see also Prosser & Keeton, op. cit. supra, § 129, at p. 995.)^[4]

Nor do express termination provisions create a privilege to interfere, contrary to Bear Stearns’s suggestion. In Shida v. Japan Food Corp., supra, 251 Cal.App.2d 864 , for example, plaintiff had a one-year exclusive distributorship contract with a third party, with an express termination date. The contract had been renewed for seven years. Despite the express termination clause, plaintiff was protected against unjustified interference by third parties.^[5] (See also A. F. Arnold & Co. v. Pacific Professional Ins., Inc. (1972) 27 Cal.App.3d 710 , 712, 717 [ 104 Cal.Rptr. 96 ] [actionable interference with renewal of insurance policies at the end of the policies’ express term]; Charles C. Chapman Bldg. Co. v. California Mart (1969) 2 Cal.App.3d 846 , 855 [ 82 Cal.Rptr. 830 ] [ratifying concept of actionable interference with a lease with an express termination clause].) The result seems obvious; if we protect an economic relationship that is wholly prospective from outside interference, we must also protect contractual relationships that are subject to termination.^[6]

Bear Stearns’s second argument is that a cause of action for intentional interference with contractual relations or prospective advantage requires an allegation that the interference has caused or will ultimately cause a breach of contract or disruption of the relationship. Since it is undisputed that the Agency will not cease performing under the contract unless it obtains a judicial determination that the termination clause of the contract permits it to do so, Bear Stearns concludes that PG&E fails to meet this requirement.

Plaintiff need not allege an actual or inevitable breach of contract in order to state a claim for disruption of contractual relations. We have recognized that interference with the plaintiff’s performance may give rise to a claim for interference with contractual relations if plaintiff’s performance is made more costly or more burdensome. (See Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d 752 , 766; Lipman v. Brisbane Elementary Sch. Dist. (1961) 55 Cal.2d 224 , 232 [ 11 Cal.Rptr. 97 , 359 P.2d 465 ]; see also Ramona Manor Convalescent Hospital v. Care Enterprises, supra, 177 Cal.App.3d at pp. 1130-1131 [holdover tenant liable for interference with landlord’s contractual relations with new tenant].)^[7] Other cases have pointed out that while the tort of inducing breach of contract requires proof of a breach, the cause of action for interference with contractual relations is distinct and requires only proof of interference. (Shamblin v. Berge (1985) 166 Cal.App.3d 118 [ 212 Cal.Rptr. 313 ] [defendant warned off potential buyers of real estate, causing rescission of sales contract]; Manor Investment Co. v. F. W. Woolworth Co. (1984) 159 Cal.App.3d 586 , 593, fn. 3 [ 206 Cal.Rptr. 37 ] [termination of at-will license could be basis for action for intentional interference with contractual relations, but judgment reversed because inconsistent verdicts]; see also Rest.2d Torts, supra, § 766A, at p. 17 & corns, c and g, at pp. 18-19; Prosser & Keeton, Torts, supra, § 129, at pp. 991-992; Note, Civil Conspiracy and Interference with Contractual Relations (1975) 8 Loyola L.A. L.Rev. 302, 314, fn. 45; Comment, Interference with Contractual Relations: A Property Limitation (1966) 18 Stan.L.Rev. 1406 .)^[8]

PG&E has not alleged that Bear Stearns’s conduct in promoting the Agency’s power among potential buyers, conducting engineering studies, or promoting the idea of termination in the Placer community have had any impact on PG&E. It is not alleged that Bear Stearns induced the Agency to undertake a plan to terminate the contract unilaterally and immediately begin to sell its power elsewhere. It is not alleged that Bear Stearns’s marketing campaign for the Agency’s power has caused PG&E a present or imminent injury.^[9] There is no allegation that unilateral termination is threatened. The only threat to the contract is the litigation. There will be no termination of the contract unless there is a judicial determination that the Agency may terminate, and it appears that PG&E’s only present damages are in responding to the action for declaratory relief.

PG&E claims that the cost of defending the contract in the declaratory relief action brought by the Agency is an actual disruption, in that it has made performance more expensive or burdensome.^[10] PG&E is entitled to the quiet enjoyment of its contract, and we may have some sympathy with its claim that Bear Stearns’s actions have interfered with its contractual relations by forcing it into a costly legal battle the loss of which would deprive it of very valuable expectancies. Nonetheless, the question remains whether inducing a third party to bring litigation on a colorable claim can be the basis for tort liability.

No California case upholding a claim for interference with contract or prospective advantage has involved this kind of conduct. Under

existing law, the only common law tort claim that treats the instigation or bringing of a lawsuit as an actionable injury is the action for malicious prosecution. The actionable harm is in forcing the individual to expend financial and emotional resources to defend against a baseless claim. (Bertero v. National General Corp. (1974) 13 Cal.3d 43 , 50 [ 118 Cal.Rptr. 184 , 529 P.2d 608 , 65 A.L.R.3d 878 ].) The bringing of a colorable claim is not actionable; plaintiff in a malicious prosecution action must prove that the prior action was brought without probable cause and was pursued to a legal termination in plaintiff’s favor. (Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863 , 871 [ 254 Cal.Rptr. 336 , 765 P.2d 498 ]; Bertero v. National General Corp., supra, 13 Cal.3d at p. 50.)^[11] We have joined other courts in recognizing the cause of action as a disfavored one because it may deter judicial resolution of differences. (Sheldon Appel Co. v. Albert & Oliker, supra, 47 Cal.3d at pp. 872, 875.) In fact we have recently refused to vest the jury with the task of determining whether plaintiff has demonstrated that the prior action was brought without probable cause; a court must make the determination “[t]o avoid improperly deterring individuals from resorting to the courts for the resolution of disputes. . . .” (Id. at p. 875.) The probable cause requirement is essential to assure free access to the courts; the cause of action is the result of an accommodation “between the freedom of an individual to seek redress in the courts and the interest of a potential defendant in being free from unjustified litigation.” (Oren Royal Oaks Venture v. Greenberg, Bernhard, Weiss & Karma, Inc. (1986) 42 Cal.3d 1157 , 1169 [ 232 Cal.Rptr. 567 , 728 P.2d 1202 ].) Obviously if the bringing of a colorable claim were actionable, tort law would inhibit free access to the courts and impair our society’s commitment to the peaceful, judicial resolution of differences.

Other jurisdictions have perceived the same danger in allowing a petition for judicial or administrative relief to be the basis for a claim of interference with contract or prospective advantage. In Baker Driveaway Co., Inc. v. Bankhead Enterprises (E.D.Mich. 1979) 478 F.Supp. 857 , the district court dismissed a count alleging interference with prospective economic advantage because it was based solely on defendant’s intervention in an administrative proceeding. Plaintiffs had sought to patent a trailer design and defendant had formally intervened in the patent office proceedings with the intent to delay them (and thus avoid the obligation to pay royalties); this intervention could not be the basis for a claim of interference with prospec

tive advantage. “Our system of government places a high value on the freedom of the public to petition the government, and such activity will not be curtailed without some extraordinary showing of abuse.” (Id. at p. 859.) The court concluded that the cause of action closely resembled one for malicious prosecution and that it was premature since the patent office action had not concluded.

Similarly in Blake v. Levy (1983) 191 Conn. 257 [ 464 A.2d 52 , 55-56], the Connecticut Supreme Court held that pursuing litigation, unless the litigation is terminated in plaintiff’s favor, cannot be the basis for a cause of action for interference with a business relationship. There, plaintiff and a third party had negotiated a merger. On the day it was to be consummated defendant demanded a broker’s commission. Plaintiff refused and defendant sued for the fee and ultimately settled. Plaintiff then sued in turn, claiming that defendant’s act of filing suit and pursuing it to settlement was tortious interference with plaintiff’s contractual relations under the merger agreement. The court disagreed. It compared the torts of malicious prosecution and interference with prospective economic advantage, and said that in order to protect free access to the courts, the same limitation that the prior “interfering” action must have concluded in plaintiff’s favor should apply to both.

Our concern with assuring free access to the courts has extended to the privilege for statements made in the course of litigation. We assure all participants in litigation, including litigants, prospective witnesses and counsel, “the utmost freedom of access to the courts without fear of being harassed subsequently by derivative tort actions” by extending a broad privilege for publications made in the course of litigation. (Silberg v. Anderson, ante, 205, 213 [ 266 Cal.Rptr. 638 , 786 P.2d 365 ]; see Civ. Code, § 47, subd. 2.) The policy of encouraging free access to the courts is so important that the litigation privilege extends beyond claims of defamation to claims of abuse of process, intentional infliction of emotional distress, negligent misrepresentation, invasion of privacy, fraud, and to the torts alleged here: interference with contract and prospective economic advantage. ( 50 Cal. 3d 205 , 215 and cases cited.)^[12] In fact, the privilege applies to any action except one for malicious prosecution. (Silberg v. Anderson,

supra, 50 Cal.3d at p. 216; Ribas v. Clark (1985) 38 Cal.3d 355 , 364 [ 696 P.2d 637 , 49 A.L.R.4th 417 ].)^[13]

Our concern with protecting free access to the courts has also led us to refuse to expand the tort of abuse of process to include the alleged improper filing of a lawsuit. (Oren Royal Oaks Venture v. Greenberg, Bernhard, Weiss & Karma, Inc., supra, 42 Cal.3d at p. 1170.) We observed that if the filing of a action for an improper ulterior purpose were sufficient to state a claim, the probable cause element of the malicious prosecution tort would be negated. This would upset the established balance between the interest in being free from unjustified litigation and the interest in free access to the courts.^[14]

The concern we express here, that to permit either cause of action in this context would impair free access to the courts, has led other courts to establish that the scope of the interference torts is limited by the constitutional right to petition for redress of grievances.^[15] Beginning with Sierra Club v. Butz (N.D.Cal. 1972) 349 F.Supp. 934 , courts have applied the Noerr-Pennington doctrine to shield good faith litigants from tort liability for bringing a lawsuit. This doctrine relies on the constitutional right to petition for redress of grievances to establish that there is no antitrust liability for petitioning any branch of government, even if the motive is anticompetitive. (California Transport v. Trucking Unlimited (1972) 404 U.S. 508 , 510-511 [ 30 L.Ed.2d 642 , 646, 92 S.Ct. 609 ]; Mine Workers v. Pennington (1965) 381 U.S. 657 , 670 [ 14 L.Ed.2d 626 , 636, 85 S.Ct. 1585 ]; Eastern R. Conf. v. Noerr Motors (1961) 365 U.S. 127 , 136-137 [ 5 L.Ed.2d 464 , 470-471, 81 S.Ct. 523 ].) The exception is for sham petitions, brought without probable cause for the purpose of harassment. (Bill Johnson’s Restaurants, Inc v. NLRB (1983) 461 U.S. 731 , 741 [ 76 L.Ed.2d 277 , 287-288, 103 S.Ct. 2161 ]; California Transport v. Trucking Unlimited, supra, 404 U.S. at pp. 512, 515 [30 L.Ed.2d at pp. 647, 649].)

In the seminal case, the Sierra Club and four individuals sought injunctive relief against a timber company to prohibit logging in a certain area

sense that they involved baseless claims that were not genuinely aimed at securing the government action petitioned for, they were privileged. (Havoco of America Ltd. v. Hollobow (7th Cir. 1983) 702 F.2d 643 ; see also Suburban Restoration Co., Inc. v. Acmat Corp. (2d Cir. 1983) 700 F.2d 98 ; King v. Levin (1989) 184 Ill.App.3d 557 [ 540 N.E.2d 492 ]; Citizens Nat. Bk. of Grant Cty. v. First Nat. Bk., Marion (1975) 165 Ind.App. 116 [ 331 N.E.2d 471 , 484]; Trepel v. Pontiac Osteopathic Hosp. (1984) 135 Mich.App. 361 [ 354 N.W.2d 341 , 350]; Protect Our Mountain v. District Court (Colo. 1984) 677 P.2d 1361 , 1367; Anchorage Joint Venture v. Anchorage Condo. (Colo.Ct.App. 1983) 670 P.2d 1249 .)

Although this court has not spoken on the precise issue, we have been guided by the constitutional right to petition for relief of grievances in interpreting the reach of the cause of action for malicious prosecution. Thus, in City of Long Beach v. Bozek, supra, 31 Cal.3d at page 539, we held that a municipality may not state a cause of action for malicious prosecution against a citizen who unsuccessfully sues the city. We reached the conclusion that the government may not respond to any lawsuit with an action for malicious prosecution, because such an action would unduly chill the citizen’s constitutional right to seek redress of grievances.^[16] (Accord Cate v. Oldham (Fla. 1984) 450 So.2d 224 .) And more directly to the point, a concern with assuring the constitutional right to petition the courts and administrative tribunals has led the Court of Appeal to conclude that an applicant for a liquor license may not bring a cause of action for intentional interference with prospective economic advantage against a group of competitors who had brought an unsuccessful administrative protest against the granting of the license. (Matossian v. Fahmie (1980) 101 Cal.App.3d 128 [ 161 Cal.Rptr. 532 ].)^[17]

These cases, of course, protect the litigant from liability for undertaking to bring a colorable claim to court. Bear Stearns is not the litigant. Nonetheless, the constitutional doctrine assuring the right to petition may “impose the outer limits upon the category of conduct that may be subject to liability on the basis of common law doctrine, and thus serve to shape the doctrine itself.” (Environmental Planning & Information Council v. Superi-

or Court, supra, 36 Cal.3d at p. 195.) Our concern not to chill the right to petition the courts for redress of grievances must inform our view of whether the act of inducing litigation is a tort.

Not every person who wishes to achieve the object of a lawsuit, or who is involved in the bringing of a lawsuit, is a named party.^[18] In fact we have no public policy against the funding of litigation by outsiders. (See, e.g., Abbott Ford, Inc. v. Superior Court(1987) 43 Cal.3d 858 , 883, 885, and fn. 26 [ 239 Cal.Rptr. 626 , 741 P.2d 124 ] [settlement agreemenTYtructured~aTlban'repayable out of recovery from nonsettling defendant].) If any person who induced another to bring a lawsuit involving a colorable claim could be liable in tort, free access to the courts could be choked off with an assiduous search for unnamed parties. It is important to remember what PG&E is trying to achieve through this lawsuit. It seeks to enjoin Bear Stearns from further participation in the lawsuit in order to avert what it considers to be the irreparable harm of an adverse judgment. It is essentially seeking to abort the lawsuit by starving the litigant of funds. In Sierra Club v. Butz, supra, 349 F.Supp. 934 , too, there were, doubtless, persons who induced the representatives of the club to bring the action, and who provided financial assistance in support of the lawsuit, but were not named parties. Yet it would defeat the purpose of assuring free access to the couFts7hlid' cause' a flood of oppressive derivative htigatioñTYó-asse^forTniabnityTor their activities.^[19]

The torts of inducing breach of contract and interference with prospective advantage have been criticized as protecting the secure enjoyment of contractual and economic relations at the expense of our interest in a freely competitive economy. (See Perlman, Interference with Contract and Other Economic Expectancies: A Clash of Tort and Contract Doctrine, supra, 49 U.Chi.L.Rev. 61 , 78-79.)^[20] We have been cautious in defining the interfer

cause is remanded to the Court of Appeal with directions to affirm the judgment of the trial court dismissing the action.

Lucas, C. J., Mosk, J., Eagleson, J., Kennard, J., Arabian, J., and Puglia (Robert K.), J.,^[21] concurred.