When a “Tort” is not a Tort – All About the Contract

Over the course of many years, there has been a general continuing trend in California towards juries and triers of fact finding tortious conduct – that is, intentional, negligent, or otherwise wrongful conduct – even in relationships that arise out of contract. But a recent case decided at the end of 2021 pushed back on that trend. (Drink Tank Ventures LLC v. Real Soda in Real Bottles, Ltd. (2021) 71 Cal.App.5th 528.) In Drink Tank, the Second Appellate District Court of Appeal overturned a jury verdict in which the jury found a beverage distributor and its founder had committed the tort of intentional interference with prospective economic advantage premised on distributor’s alleged breach of a nondisclosure and noncircumvention agreement (NDA).

Following a jury trial, the jury determined that the distributor and its founder had breached the NDA, and the judge made a determination as a matter of law that the conduct was wrongful, which led the judge to enter a judgment on behalf of the Plaintiff for the sole cause of action that the Plaintiff pursued at trial, namely intentional interference with prospective economic advantage. The appellate court ruled that the cause of action based only on a breach of contract without some separate wrongful conduct, as a matter of law, is not a tort, it’s a breach of contract.

Citing prior California Supreme Court rulings, the Court held that conduct amounting to a breach of contract becomes tortious only when it also violates an independent duty arising from principles of tort law. Although it may be brought under a different cause of action, because a bare breach of contract, without more, is not tortious, such a breach cannot constitute independently wrongful conduct capable of giving rise to the tort of intentional interference with prospective economic advantage. In fact, the Court went so far as to rule that the trial court lacked even basic subject matter jurisdiction to enter a judgment that violates this principle, because subject matter jurisdiction is “the power of the court over a cause of action or to act in a particular way.”

While several of the particulars of this case deal directly with the tort of intentional interference with prospective economic advantage, the Court’s decision also opens up the possibility that where the wrongful conduct alleged in other kinds of tort is actually based on the alleged breach of a contractual relationship, defendants can and should raise both the jurisdictional and failure to state a cause of action arguments on an appropriate demurrer or motion for judgment on the pleadings. This can also be a powerful argument in mediations as contractual breaches are generally immune from punitive and exemplary damages, and plaintiffs aspiring to these additional damages will be more likely to be willing to reach a settlement rather than risk that a jury verdict and judgment be overturned on appeal or dismissed altogether on the eve of trial.