How Do Contractual Relationships Affect a Firm's Ability To Compete?

Reprinted From Houston Business Journal, May 7, 2004

Identifying, pursuing, and securing new business and a skilled work force are essential to the growth and prosperity of any business. However, your ability to compete for either may be directly affected by contractual relationships that your "target" customer or employee may have with your competitor. The issue is interference with contracts – what's legal and what's not. Because a contract is a legally binding, enforceable document, third parties are generally prohibited from interfering with them, unless they do so in a bona fide exercise of their own rights, or their right to the subject business or employee is equal to or superior to that of the other party. The point of the law is simple: to maintain everyone's right to free commerce while providing some protection from unfair business practices.

Today, businesses often enter into contracts that do not specify a definite time period or event-triggered conclusion. Such contracts are known as "terminable-at-will" contracts, and they may be terminated at any time and for any reason by either of the parties. Until terminated, however, they are valid and enforceable. In Texas, business competitors have a significant amount of freedom when it comes to competing for business that is subject to a terminable-at-will contract. Specifically, you have the legal right to persuade, or attempt to persuade, a party to an at-will contract to exercise the right to terminate the contract if a legitimate, competitive business purpose is being served.

For example, you may actively solicit a competitor's existing at-will business customers by offering better contract terms, lower prices, and/or better selection. Similarly, you may actively recruit a competitor's at-will employees by offering better contract terms, more benefits, and/or higher wages. In short, by itself, there is nothing wrong with your efforts to convince a competitor's existing at-will customers or employees to exercise their rights to terminate.

However, there are certain things that you can't do. For example, you must be careful not to engage in any unlawful acts in your effort. Apart from the obvious, like violence or threats of violence (e.g., threatening a restaurant owner that you'll break his legs if he doesn't buy his produce from you), or fraud (e.g., making it sound like your customer will get a better deal from you when he really won't), there are more subtle unlawful acts, like defamation. We're all eager to promote ourselves over our competitors, but you have to be careful what you say (slander) or write (libel) about him in attempting to induce contract termination. In other words, although you can legitimately induce a party to an at-will contract to exercise his or her contractual right to terminate their contract, you may still be held liable for interfering with the at-will contract if the means used to entice contract termination are wrongful.

Also, you may be held liable for attempting to induce contract termination by encouraging parties to at-will contracts to violate the terms of their contracts. Thus, encouraging contract termination by suggesting that your prospective customer or employee violate a provision of his or her at-will contract with someone else may subject you to liability for interfering with the contract.

To avoid the liability pitfalls associated with competing for at-will customers and employees, simply adhere to the following general guidelines.

1. Make sure your efforts to induce contract termination concern a matter involved in the competition between you and your competitor, and your target customer or employee. For example, as noted above, you can offer better contract terms, lower prices, better selection, more benefits, and/or higher wages.
   
   
2. As previously discussed, avoid using any wrongful means (e.g., defamation, fraud, civil suits, criminal prosecutions, etc.) to persuade the at-will party to terminate its contract with your competitor.
   
   
3. Make sure your efforts to pursue and secure the target customer does not create or continue an unlawful restraint of trade, or create a de facto monopoly.
   
   
4. Make sure your primary purpose for inducing contract termination is to advance your business' legitimate interest in competing with a competitor in the same business, rather than for some illegitimate purpose unrelated to your business (e.g., to damage your competitor's reputation, to ruin your competitor's business, etc.). For example, if you are attempting to recruit a competitor's top salesperson, make it very clear to that salesperson that your efforts to recruit him or her are based solely on your desire to sell more of your company's product, not to harm your competitor's business.

Competing in today's marketplace requires both a solid business clientele and an effective, skilled work force. In instances where terminable-at-will contracts are involved, businesses have the legal right to actively compete for a competitor's customers and employees, so long as a legitimate business purpose is being served. The only caveats to a business' ability to compete for a competitor's at will customers and employees are that the competing business avoid any unlawful means to induce contract termination, and avoid encouraging a party to breach a term of its at-will contract.