Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 28

FACTS Pennzoil negotiated with Gordon Getty and the J. Paul Getty Museum over the purchase by Pennzoil of all the Getty Oil stock held by each. Gordon Getty, who was also a director of Getty Oil, held about 40.2 percent of the outstanding shares of Getty Oil. The Museum held 11.8 percent. On January 2, a Memorandum of Agreement was drafted, setting forth the terms reached by Pennzoil, Gordon Getty, and the Museum. After increasing the offering price to $110 per share plus a $5 ''stub'' or bonus, the board of directors of Getty Oil voted on January 3 to accept the Pennzoil deal. Accordingly, on January 4 both Getty Oil and Pennzoil issued press releases, announcing an agreement in principle on the terms of the Memorandum of Agreement but at the higher price.
Having learned of the impending sale of Getty Oil stock to Pennzoil, Texaco hurriedly called several in-house meetings, and hired an investment banker as well, to determine a feasible price range for acquiring Getty Oil. On January 5, Texaco decided on $125 per share and authorized its officers to take any steps necessary to conclude a deal. Texaco met first with a lawyer for the Museum, then with Gordon Getty. Texaco stressed to Getty that if he hesitated in selling his shares, he might be ''locked out'' in a minority position. On January 6, the Getty Oil board of directors voted to withdraw from the Pennzoil deal and unanimously voted to accept the $125-per-share Texaco offer. Pennzoil sued and won an award of $7.53 billion in compensatory damages and $3 billion in punitive damages based on tortious interference with a contract. Texaco appealed.
DECISION Judgment of trial court affirmed.
OPINION Warren, J. New York law requires knowledge by a defendant of the existence of contractual rights as an element of the tort of inducing a breach of that contract. [Citation.] However, the defendant need not have full knowledge of all the detailed terms of the contract. [Citations.]
The element of knowledge by the defendant is a question of fact, and proof may be predicated on circumstantial evidence. [Citation.] Since there was no direct evidence of Texaco's knowledge of a contract in this case, the question is whether there was legally and factually sufficient circumstantial evidence from which the trier of fact reasonably could have inferred knowledge.
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We find that an inference could arise that Texaco had some knowledge of Pennzoil's agreement with the Getty entities, given the evidence of Texaco's detailed studies of the Pennzoil plan, its knowledge that some members of the Getty board were not happy with Pennzoil's price, and its subsequent formulation of strategy to ''stop the [Pennzoil] train'' ***
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A necessary element of the plaintiff's cause of action is a showing that the defendant took an active part in persuading a party to a contract to breach it. [Citation.] Merely entering into a contract with a party with the knowledge of that party's contractual obligations to someone else is not the same as inducing a breach. [Citation.] It is necessary that there be some act of interference or of persuading a party to breach, for example by offering better terms or other incentives, for tort liability to arise. [Citations.] The issue of whether a defendant affirmatively took steps to induce the breach of an existing contract is a question of fact for the jury. [Citation.]
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The evidence discussed above on Texaco's calculated formulation and implementation of its ideal strategy to acquire Getty is also inconsistent with its contention that it was merely the passive target of Getty's aggressive solicitation campaign and did nothing more than to accept terms that Getty Oil and the Museum had proposed. The evidence showed that Texaco knew it had to act quickly, and that it had ''24 hours'' to ''stop the train.'' Texaco's strategy was to approach the Museum first, through its ''key person'' Lipton, to obtain the Museum's shares, and then to ''talk to Gordon.'' It knew that the Trust instrument permitted Gordon Getty to sell the Trust shares only to avoid a loss, and it knew of the trustee's fear of being left in a powerless minority ownership position at Getty Oil. Texaco notes indicated a deliberate strategy to ''create concern that he will take a loss;'' ''if there's a tender offer and Gordon doesn't tender, then he could wind up with paper''; and ''pressure.'' This evidence contradicts the contention that Texaco passively accepted a deal proposed by the other parties.
INTERPRETATION The tort of interference with contractual relations protects a party to a contract from a third party who intentionally and improperly induces the other contracting party not to perform the contract.
ETHICAL QUESTION Did Getty or Texaco act unethically? Explain.
CRITICAL THINKING QUESTION Does the protection afforded by this tort conflict with society's interest in free competition? Explain.