San Francisco Design Center Associates v. Portman Companies (41 Cal. App. 4th 29, 1995)

Opinion

SIMONS, J.

The competition privilege is an affirmative defense to the tort of interference with prospective economic advantage. We hold that to defeat the privilege plaintiff must prove defendants committed an unlawful or illegitimate act which is independently actionable.

Facts and Procedural History

In December of 1985, plaintiff San Francisco Design Center Associates purchased real property at 555 Ninth Street, San Francisco (the Greyhound site), from Greyhound Corporation, intending to develop it as a wholesale furniture mart. Plaintiff’s principals Robert Fippinger and Michael Oettinger, acting through Affiliated Capital Corporation, bought the property in plaintiff’s name for $6.3 million. They borrowed $4.5 million from WestAmerica Bank, $3.1 million of which was paid to Greyhound. That loan was secured by a first deed of trust. Greyhound took back a note for $3.2 million which was secured by a second deed of trust. Both notes were due in one year.

Golden Gate Apparel Association (Association) is a nonprofit corporation whose members are independent apparel sales representatives. The main function of the Association is to conduct trade shows. In the 1980’s the Association held approximately five trade shows annually in the Showplace Square Concourse which was owned by defendant Bill Poland. Many of the Association members and other apparel sales representatives had showrooms at 821 Market Street, a distance from the Concourse. In late 1986, the Association was searching for a developer who could build an apparel mart. The site committee sought a one-roof facility that would house exhibition space for trade shows, permanent showrooms for members who wanted them and temporary space for representatives wanting space only during trade shows.

In late 1986, plaintiff learned of the Association’s search for an apparel mart developer. Plaintiff started to modify its project to accommodate the needs of the Association. In 1987, Michael Wolyn was president and Robert Friedberg was vice-president of the Association. Both men served on the site committee. On May 1, 1987, Wolyn executed a letter of intent for the Association to lease space in plaintiff’s proposed facility to be constructed on the Greyhound site.

In the late summer of 1987, plaintiff met with representatives of defendant The Portman Companies to discuss the possibility of a joint venture to develop an apparel mart. John C. Portman, Jr., the owner of The Portman Companies, is the architect and codeveloper of the Embarcadero Center, Hyatt Regency and Portman Hotel in San Francisco and the Atlanta Market Center in Georgia. Sam Williams is an executive vice-president of one of the Portman Companies. Williams was aware that plaintiff had a close relationship with the Association.

On October 7, 1987, plaintiff met with Sam Williams, who was representing the Portman Companies and Michael Wolyn, who was acting on behalf of the Association. Williams and Wolyn had differences of opinion as to who was to control the project. Sometime during November of 1987, Williams told Fippinger, “We had to break two associations in the past, and I don’t necessarily want to have to break another one." Nevertheless, negotiations on the project continued. On December 24, 1987, Wolyn and Friedberg, on behalf of the Association, executed a letter of commitment to enter into an apparel mart lease subject to ratification by the Association’s board of directors, final adjustment to lease terms, and the satisfaction of the Association that plaintiff had the necessary financing commitments to complete the development. A copy of the commitment letter was sent to Sam Williams.

While the Portman group was negotiating with plaintiff, Sam Williams was also communicating with Bill Poland, president of Bay West Development Company (Bay West) and owner of the Showplace Square complex in San Francisco. Williams had known Poland since the early 1960’s. In late November or early December of 1987, Poland told Williams he intended to develop an apparel mart on the Yellow Cab site near Showplace Square. Poland had received a letter from Wolyn, dated November 5, 1987, which indicated the Association’s interest in Poland’s proposed mart project on the Yellow Cab site. Williams decided to negotiate a partnership arrangement with Poland the first week of December. During Christmas week Williams informed Fippinger he was going to work with Poland.

On January 5, 1988, Williams and another Portman employee met with Wolyn in New York. Williams told Wolyn the Portman Companies would form a joint venture with Bay West, they would develop the Yellow Cab site and they wished to have the Association make a commitment as tenants. Williams stated plaintiff was manipulating the association, plaintiff would not be able to package a deal, and indicated the Portman/Bay West project would be built with or without the participation of the Association. Wolyn responded that the Association felt obligated to negotiate exclusively with plaintiff for at least six weeks. Wolyn requested that if the Portman Companies wished to communicate with the Association, it should do so in writing or through the Association’s attorney.

Nevertheless, defendants continued to talk with Association members as well as A1 Cramer and Howard Lester who were members of the board of directors. In January 1988, Portman/Bay West hired Cheri Randall-Robinson, a former board chairman and past president of the Association, as a leasing agent for their project.

On January 7, 1988, one day before an Association board of directors meeting and right before the January market show, the Portman Companies and Bay West issued a press release informing the public of its apparel mart project. Wolyn perceived the timing of the announcement as a power play to manipulate the Association.

On January 11, 1988, plaintiff’s attorney wrote a letter to Sam Williams. He stated Williams’s contacts with Wolyn and the timing of the press release constituted actionable interference with the business relationship between plaintiff and the Association. The letter demanded that the Portman Companies and Bay West cease and desist such activities.

Believing the Association had no firm commitment to plaintiff, the Port-man/Bay West project proceeded. A promotional book describing the project was delivered to each member of the Association’s board of directors and potential tenants were actively solicited. Cheri Randall-Robinson told Wolyn that certain clothing manufacturers such as Levi Strauss, Jessica McClintock and Joanie Char had made commitments to the Portman/Bay West project. Members of the Association’s executive committee were invited to Atlanta at Portman’s expense for a presentation, although none accepted.

The Portman Companies conducted marketing strategy meetings in Atlanta. The Portman group wanted to get the Association as a tenant. However, even if the Association did not lend its support to the project, the Portman group intended to proceed without it. If the Portman group could not get the Association as a tenant, it would break the Association’s hold by signing up individual members.

Meanwhile, plaintiff and Pacific Union Company agreed to form a joint venture to build an apparel mart on the Greyhound site. The parties operated under the terms of a preliminary letter agreement until April of 1988.

On February 19, 1988, plaintiff and the Association executed a lease and supplementary apparel show agreement. At the same time, a letter setting forth two conditions precedent to the effectiveness of the lease and show agreement was signed by the parties. One condition was “Receipt by San Francisco Design Center Associates of necessary financing commitments to complete the proposed development [,] such commitments to be received no later than April 15, 1988 and such commitments to be satisfactory to the Golden Gate Apparel Association.”

As previously stated, when plaintiff bought the Greyhound site in 1985 it executed promissory notes to WestAmerica Bank and Greyhound. Plaintiff was in default on both notes in early 1987. In May 1987, Greyhound purchased the bank’s interest in the property. Greyhound agreed to forbear foreclosing on the property for 90 days and was willing to grant further delays if plaintiff’s project appeared to be progressing. However, on January 7, 1988, Greyhound notified plaintiff it would only agree to further extend the forbearance period to March 15, 1988, on condition that plaintiff execute a lease with the Association on or before February 15, 1988, and plaintiff demonstrate to Greyhound’s satisfaction that a joint venture lender-equity partner was willing to make a substantial investment in the project. On March 17, 1988, Greyhound foreclosed on the property. Plaintiff never informed the Association it had lost the property. A week later Greyhound informed plaintiff the property could be purchased for $7 million.

On March 25, 1988, plaintiff advised the Association that it had reached an understanding with an investment group to commit $9 million to plaintiff’s project and that a good faith deposit of $500,000 was expected within two weeks.

Coincidentally, this was the same date that Portman/Bay West sent two letters. The first was addressed to Friedberg. It stated the Portman/Bay West project had received positive responses from potential tenants, had established a major financial endorsement, and had progressed in obtaining a final building permit.

The second letter was sent to the members of the Association. It noted that the Association had two options for the Association “home.” The letter stated in part: “Your organization is in the process of making a decision that will affect your working environment for years to come. Be a part of that decision. Don’t stand by passively. Be aware of the issues at hand and make a statement for the proposed apparel facility in San Francisco that will provide the long term support and success you and your organization deserve.” (Italics in original.) The letter invited the individual Association members to a cocktail reception on April 15, 1988, during the next market show.

Although Wolyn and Friedberg were committed to plaintiff’s project, some of the board members, as well as many Association members, questioned why the Portman/Bay West project was not being considered. As a result of the Portman/Bay West March 25 letter, on March 28, 1988, the Association’s board concluded that at least some members felt it would be in the Association’s best interest to listen to the Portman/Bay West proposal.

Pursuant to the lease agreement, April 15, 1988, was the deadline for plaintiff to produce the necessary financing commitments for its proposed mart. On that day plaintiff delivered to the Association a letter from an attorney describing continuing negotiations between plaintiff and a Japanese investment group. A memorandum of understanding had been negotiated and was expected to be executed on April 17, 1988.

April 15, 1988, was also the beginning of another of the Association shows. A general membership meeting had been called to announce the board’s decision to accept plaintiff’s project. At the membership meeting, Friedberg announced that plaintiff’s proposal was being accepted. Membership reaction was very mixed. There were questions regarding the validity of plaintiff’s ability to perform and regarding the board’s failure to consider the Portman/Bay West project. Ultimately, the meeting adjourned without any vote. Despite the reaction of the membership, when Friedberg left the meeting he told Fippinger and Oettinger that they had a deal and offered congratulations.

On the same evening Portman/Bay West hosted its cocktail party, which featured a marketing presentation for prospective tenants of their apparel mart project. At the party an Association member, Ray Totten, spontaneously took the microphone and argued that the Association board should have considered the Portman/Bay West project.

On April 16, Friedberg wrote a letter to the Association’s membership which was distributed at the show. The letter stated that plaintiff’s project had been funded.

On April 20, the Association’s counsel wrote to plaintiff. He stated that because the February 19 conditions precedent had not been satisfied, the lease was terminated. The letter was later withdrawn, then reinstated on April 25, 1988. The April 25 letter also referred to “pressure” on the Association’s board to review presentations by other developers for an apparel mart facility. The Portman/Bay West group was eventually selected to develop the apparel mart.

Plaintiff’s first amended complaint alleges various causes of action including breach of contract and intentional interference with contract, as well as intentional and negligent interference with economic relationship. At the commencement of the trial, the court ruled that the Greyhound foreclosure and trustee’s sale had extinguished the February 19, 1988, lease. However, the court indicated that plaintiff could amend its complaint and attempt to prove a subsequent agreement with the Association after the March 17, 1988, extinguishment. Because no evidence of a subsequent agreement was offered, nonsuit was granted on all causes of action against the Association and on the allegations of interference with contract against the Portman/Bay West defendants.

Trial continued against the Portman/Bay West defendants on the theory of negligent and intentional interference with prospective economic advantage. The trial was bifurcated between compensatory damages and punitive damages. In the first phase the jury was instructed on the elements of intentional interference with prospective economic advantage, and negligent interference with prospective economic advantage. It was also instructed on the privileges of competition and free competition.

The jury found that defendants had both intentionally and negligently interfered with plaintiff’s prospective economic advantage and that their acts were not privileged. Compensatory damages were fixed at $800,000. The jury also found there was “oppression, fraud or malice” in the conduct on which they based their finding of liability.

In the second phase of the trial on punitive damages, the jury fixed the punitive damages at $200,000 for defendant Poland, $500,000 for defendant Williams, and $4.5 million for defendant John Portman.

The Portman/Bay West defendants moved for judgment notwithstanding the verdict (n.o.v.) and for a new trial. Plaintiff moved for new trial on the issue of compensatory damages. The court granted defendants’ motion for judgment n.o.v. on the cause of action for negligent interference with prospective economic advantage, granted defendants’ motion for new trial on the issue of excessive punitive damages, and denied both defendants’ and plaintiff’s motions for new trial on other grounds.

Defendants The Portman Companies, John C. Portman, Jr., Sam Williams, Bill Poland, and Bay West now appeal from the judgment that they interfered with plaintiff’s prospective economic relationship. Plaintiff cross-appeals on various grounds.

Discussion

Intentional Interference with Prospective Economic Advantage

It is firmly established that the requisite elements for proving the tort of intentional interference with prospective economic advantage are “(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.” (Youst v. Longo (1987) 43 Cal.3d 64, 71, fn. 6 [233 Cal.Rptr. 294, 729 P.2d 728, 85 A.L.R.4th 1025].)

While not requiring proof of a binding contract, the tort protects the same interest in stable economic relationships as the tort of interference with contract. (Buckaloo v. Johnson (1975) 14 Cal.3d 815, 826-827 [122 Cal.Rptr. 745, 537 P.2d 865].) The primary difference between interference with prospective economic advantage and interference with contract is that a broader range of privilege to interfere is recognized when the relationship or economic advantage interfered with is only prospective. (Pacific Gas & Electric Co. v. Bear Stearns & Co. (1990) 50 Cal.3d 1118, 1126 [270 Cal.Rptr. 1, 791 P.2d 587]; Shida v. Japan Food Corp. (1967) 251 Cal.App.2d 864, 866 [60 Cal.Rptr. 43].)

It is also settled that an affirmative defense to the tort of interference with prospective economic advantage is the privilege of competition. Restatement Second of Torts section 768 provides: “(1) One who intentionally causes a third person not to enter into a prospective contractual relation with another who is his competitor or not to continue an existing contract terminable at will does not interfere improperly with the other’s relation if: (a) the relation concerns a matter involved in the competition between the actor and the other and [f] (b) the actor does not employ wrongful means and [H (c) his action does not create or continue an unlawful restraint of trade and [^] (d) his purpose is at least in part to advance his interest in competing with the other. [