When there is a business dispute, a party sometimes wants to use the maximum leverage possible. Caution should be exercised to make sure that the effort to exercise leverage does not boomerang.
One of the common ways that parties seek to exert leverage is to have their attorneys make threats of legal action. In Waldron v. George Weston Bakeries, Inc., 570 F.3d 5 (1st Cir. 2009), a party’s lawyer made a threat that went beyond a threat to sue, and the other party used it to terminate the contract.
In Waldron, the plaintiffs had exclusive rights to purchase and distribute, within designated geographic territories or “routes,” baked goods purveyed by the defendants, George Weston Bakeries Inc. The distribution agreements had no term and specified that the plaintiffs would work as independent contractors.
The plaintiffs were unhappy over the handling of the routes, and they filed a civil action against Weston. They lost. They filed another civil action and lost at the trial level. One day before the appellate brief was due to be filed by the plaintiffs, the plaintiffs’ lawyer left a voice mail message for defense counsel. The plaintiffs’ lawyer demanded $5,000 to settle the pending litigation, and he warned:
My clients are not going to put this behind them regardless of how the appeal comes out. That is, there will be information provided to the appropriate taxing authorities, workers compensation board, etc. If we’re not able to come to a mutually agreeable settlement today, and I understand that’s quick but we’re talking about $5,000, Jim, which is much less than what it’ll cost your client to work on this appeal. If the settlement is not agreeable then all bets are off. There will be no offer of settlement beyond today and your clients can expect to continue to be involved in some type of hearings of some nature, proceedings of some nature in the near future regarding their status of an employer as opposed to an independent business entity or there can be a settlement. I hope that’s the way we go. [Emphasis added.]
A few days after the proposed settlement cratered, Weston terminated the plaintiffs’ distribution agreements on the basis of section 8.2 of the agreement, which gave Weston a right to terminate immediately, without an opportunity to cure, if the route-holder’s actions “involve[] criminal activity or fraud, threaten[] public health or safety, or threaten[] to do significant harm” to Weston.
Each termination notice referred to the voice mail message, and Weston proceeded to assume control of the plaintiffs’ routes.
Weston argued that the “threat” transgressed section 8.2 of the agreements, quoted above, because it constituted extortion (and, thus, constituted a breach that involved criminal activity).
Under California law, obtaining property from another person by a threat to accuse that person of a crime can constitute extortion. Penal Code §§ 518, 519. Thus, in some cases, a threat by one party to “go to the cops” or “to turn you in to the Feds” unless the other party complies with a demand can be criminal. In Waldron, the court found that the threat made by the lawyer did not constitute extortion under Maine law.Maine’s definition of extortion differs from California’s, however, and the case might have turned out differently had California law applied.
Lessons Learned
First, parties to a contractual dispute should have counsel carefully review the contract so they don’t unintentionally give the other party a right to exercise remedies under the contract.
Second, parties should be leery of making a threat to go to the authorities to get leverage over the other party to a dispute. UnderCalifornialaw, and the law of many other states, such a threat can indeed constitute the crime of extortion. But it is always legitimate for a party to threaten to pursue its civil remedies in court.
