Freedom to Contract?

The Case

Dr. S. subsequently filed a complaint against the hospital alleging a litany of claims including tortious interference with prospective economic relations. At bottom, he alleged that the hospital had “forced” the Group to fire him, thereby interfering with his expectation of continued employment. The trial court eventually dismissed all counts except the one for tortious interference with prospective economic relations and following discovery, it granted the hospital's motion for summary judgment. The court began by noting that the evidence of interference by the hospital was scant, but it assumed for the sake of argument that the hospital had demanded Dr. S.'s termination as a condition to renewing its contract with the Group. The court then held that the hospital enjoyed a qualified privilege to interfere in the relationship between Dr. S. and the Group to protect its own legitimate interests. So long as there was no evidence of “malice” on the part of the hospital, ie, intent to harm Dr. S. through action unrelated to the hospital's interests, the privilege provided a defense to Dr. S.'s claim and since Dr. S. had provided no evidence of malice, his claim must fail.

Limit to a Party's Freedom

On review, the Appellate Court for the Second District affirmed the ruling, but its analysis suggests that there is a limit to a party's freedom to tell its service provider whom it can and cannot employ.

The court first explained that in order to establish a claim for tortious interference with prospective economic relations, a plaintiff must prove: 1) the existence of a valid business relationship or expectancy; 2) that defendant had knowledge of it; 3) purposeful interference by the defendant that prevented the plaintiff's legitimate expectation or caused the termination of the relationship; and 4) damages. Rather than applying a qualified privilege, however, the court upheld the summary judgment on slightly different grounds.

'Purposeful' Interference

The court opined that because tortuous interference is an intentional tort, a plaintiff must provide facts showing that the defendant acted with the purpose of injuring the plaintiff. “Purpose-ul” interference, in turn, refers to “some impropriety committed by the defendant in interfering with the plaintiff's expectancy,” although the court did not explain what constitutes “impropriety.” The court then offered three different grounds for finding that the hospital did not wrongfully interfere in Dr. S.'s employment relationship: 1) the hospital was a n intended third-party beneficiary of Dr. S.'s employment agreement, so the Group had a duty to enforce the employment agreement for the hospital's benefit; 2) tortious interference is intended to address cases of “outsiders intermeddling maliciously in the contracts or affairs of other parties,” and the hospital was not an outsider; and 3) the hospital was the party for whom the services contemplated in Dr. S.'s employment agreement were to be provided, so the hospital should have a say in who would provide them. Notably, the court did not simply state that a party may tell its service provider whom it can employ to provide the services. And its three-pronged analysis creates some question about far this right extends.

First, the concept that the oncology Group had a duty to enforce its employment agreement with Dr. S. for the benefit of the hospital shifts the focus from the rights of the hospital to the duties of the Group. It also avoids the question of how the hospital's conduct would be treated if it were not a third-party beneficiary of the employment contract. If the hospital could choose whether or not to sign the contract for another term, why should its right to demand the firing of a particular physician as a condition to signing the contract depend on it being an intended third-party beneficiary of the employment contract? The court's discussion of third-party beneficiaries is useful because it provides guidance to companies that want to give themselves the ability to tell their providers who can provide the services. However, it sheds little light on what constitutes tortious interference.

Second, while the court's statement that the hospital was not an outsider to the relationship between Dr. S. and the Group comes closer to the sort of freedom referenced at the top of this article, it falls noticeably short. In finding that the hospital was not an “outsider,” the court noted that Dr. S.'s employment agreement recognized the Group's exclusive contract with the hospital. The court also noted that the employment agreement required Dr. S. to live within such travel time as the hospital mandated, and that it specifically allowed the Group to terminate Dr. S.'s employment if he jeopardized the relationship with the hospital. In this regard, the court referred to evidence that Dr. S. was seen as abrasive, that at least one hospital physician refused to send patients to him, and that another described him as “high-handed.” But why should any of this matter? If the hospital decided for any reason that it would not renew the contract with the Group so long as Dr. S. worked there, did it need “evidence” of some bad behavior by him in order to overcome his claim for tortious interference? As with the first prong of its analysis, by focusing on the provisions of Dr. S.'s employment contract and the evidence of his negative behavior, the court suggested that the hospital's right to walk away from the contract with the Group might not be sufficient, standing alone, to permit the hospital to demand Dr. S.'s firing as a condition to renewing the contract.

In the third and final prong of its analysis, the court cited Lusher v. Becker Bros., Inc., 155 Ill. App. 3rd, 866 (2nd Dist. 1987), a case relied upon heavily by the hospital. In Lusher, the plaintiff was employed by a sheetrock subcontractor and during contract negotiations, the defendant told plaintiff's employer that it would not get the contract if plaintiff were involved in the work. After plaintiff was fired, he sued the defendant for tortious interference. In dismissing the claim, the court explained that “The party charged with tortious interference is also the party for whom the work is to be performed, [and] certainly that party ought to have a say as to who will be doing the work.” The court in Dr. S.'s case noted that although “Lusher did not spell out its analytical underpinnings in announcing this rule … we believe the rule is a salutary one, grounded in common sense.”

If this is true, the question becomes why the court took pains to discuss the Group's duty to the hospital, the hospital's status as a third party beneficiary of Dr. S.'s employment contract, the provision in Dr. S.'s employment contract allowing for his termination if he jeopardized the relationship, and the evidence of his negative behavior. Why not just hold that because the hospital was free to walk away from its relationship with the Group, it was also free to demand Dr. S.'s termination as a condition to renewing the contract? Perhaps the reluctance is grounded in some unarticulated notion of “fair play,” ie, that someone's job ought not be subject to the whims of one particular client. Or that such unfettered power might breed abuse. In any event, we will have to await another day for clarification of how far the freedom to contract (or to not contract) runs when it comes to telling your provider that a certain employee cannot be involved in providing the services. In the meantime, the court's discussion provides valuable guidance on how service and employment contracts can be drafted to help defend against claims for tortious interference.

How much freedom does a party have to tell its service provider not to use a given employee to provide the services? Although the freedom to contract (or not contract) might suggest that this liberty is unfettered, a recent decision by the Second District Appellate Court of Illinois suggests that the answer is not so clear.

In this case, Dr. S. was a member of an oncology group at a prominent Chicago-area hospital. While he was respected for his medical acumen, Dr. S. did not always get along with his peers in the Group or with the rest of the hospital staff, some complaining that he was abrasive and condescending. The Group's leadership informed the hospital that Dr. S. was undermining them and disrupting their relationship with the hospital. All of this was particularly troubling because the Group was the hospital's exclusive provider of oncology services and was required to dedicate its full time to the hospital's oncology needs.

As the Group's contract with the hospital came up for renewal, the hospital expressed concerns with the Group's performance and notified it that unless certain changes were made, it would be replaced. Although hospital representatives denied that firing Dr. S. would solve the problems, the Group believed that it would go a long way toward guaranteeing the renewal of the contract. In the final days leading up to the expiration of the contract, the Group sent Dr. S. a letter terminating his employment for cause, based on a provision in his employment agreement that allowed him to be terminated if he engaged in conduct that jeopardized the Group's relationship with the hospital. On the same day that his termination became effective, the hospital agreed to extend the Group's exclusive contract for another term. Dr. S. thereafter negotiated a voluntary resignation from the Group, which included a substantial severance payment and the withdrawal of his prior notice of termination for cause.

The Case

Dr. S. subsequently filed a complaint against the hospital alleging a litany of claims including tortious interference with prospective economic relations. At bottom, he alleged that the hospital had “forced” the Group to fire him, thereby interfering with his expectation of continued employment. The trial court eventually dismissed all counts except the one for tortious interference with prospective economic relations and following discovery, it granted the hospital's motion for summary judgment. The court began by noting that the evidence of interference by the hospital was scant, but it assumed for the sake of argument that the hospital had demanded Dr. S.'s termination as a condition to renewing its contract with the Group. The court then held that the hospital enjoyed a qualified privilege to interfere in the relationship between Dr. S. and the Group to protect its own legitimate interests. So long as there was no evidence of “malice” on the part of the hospital, ie, intent to harm Dr. S. through action unrelated to the hospital's interests, the privilege provided a defense to Dr. S.'s claim and since Dr. S. had provided no evidence of malice, his claim must fail.

Limit to a Party's Freedom

On review, the Appellate Court for the Second District affirmed the ruling, but its analysis suggests that there is a limit to a party's freedom to tell its service provider whom it can and cannot employ.

The court first explained that in order to establish a claim for tortious interference with prospective economic relations, a plaintiff must prove: 1) the existence of a valid business relationship or expectancy; 2) that defendant had knowledge of it; 3) purposeful interference by the defendant that prevented the plaintiff's legitimate expectation or caused the termination of the relationship; and 4) damages. Rather than applying a qualified privilege, however, the court upheld the summary judgment on slightly different grounds.

'Purposeful' Interference

The court opined that because tortuous interference is an intentional tort, a plaintiff must provide facts showing that the defendant acted with the purpose of injuring the plaintiff. “Purpose-ul” interference, in turn, refers to “some impropriety committed by the defendant in interfering with the plaintiff's expectancy,” although the court did not explain what constitutes “impropriety.” The court then offered three different grounds for finding that the hospital did not wrongfully interfere in Dr. S.'s employment relationship: 1) the hospital was a n intended third-party beneficiary of Dr. S.'s employment agreement, so the Group had a duty to enforce the employment agreement for the hospital's benefit; 2) tortious interference is intended to address cases of “outsiders intermeddling maliciously in the contracts or affairs of other parties,” and the hospital was not an outsider; and 3) the hospital was the party for whom the services contemplated in Dr. S.'s employment agreement were to be provided, so the hospital should have a say in who would provide them. Notably, the court did not simply state that a party may tell its service provider whom it can employ to provide the services. And its three-pronged analysis creates some question about far this right extends.

First, the concept that the oncology Group had a duty to enforce its employment agreement with Dr. S. for the benefit of the hospital shifts the focus from the rights of the hospital to the duties of the Group. It also avoids the question of how the hospital's conduct would be treated if it were not a third-party beneficiary of the employment contract. If the hospital could choose whether or not to sign the contract for another term, why should its right to demand the firing of a particular physician as a condition to signing the contract depend on it being an intended third-party beneficiary of the employment contract? The court's discussion of third-party beneficiaries is useful because it provides guidance to companies that want to give themselves the ability to tell their providers who can provide the services. However, it sheds little light on what constitutes tortious interference.

Second, while the court's statement that the hospital was not an outsider to the relationship between Dr. S. and the Group comes closer to the sort of freedom referenced at the top of this article, it falls noticeably short. In finding that the hospital was not an “outsider,” the court noted that Dr. S.'s employment agreement recognized the Group's exclusive contract with the hospital. The court also noted that the employment agreement required Dr. S. to live within such travel time as the hospital mandated, and that it specifically allowed the Group to terminate Dr. S.'s employment if he jeopardized the relationship with the hospital. In this regard, the court referred to evidence that Dr. S. was seen as abrasive, that at least one hospital physician refused to send patients to him, and that another described him as “high-handed.” But why should any of this matter? If the hospital decided for any reason that it would not renew the contract with the Group so long as Dr. S. worked there, did it need “evidence” of some bad behavior by him in order to overcome his claim for tortious interference? As with the first prong of its analysis, by focusing on the provisions of Dr. S.'s employment contract and the evidence of his negative behavior, the court suggested that the hospital's right to walk away from the contract with the Group might not be sufficient, standing alone, to permit the hospital to demand Dr. S.'s firing as a condition to renewing the contract.

In the third and final prong of its analysis, the court cited Lusher v. Becker Bros., Inc., 155 Ill. App. 3rd, 866 (2nd Dist. 1987), a case relied upon heavily by the hospital. In Lusher, the plaintiff was employed by a sheetrock subcontractor and during contract negotiations, the defendant told plaintiff's employer that it would not get the contract if plaintiff were involved in the work. After plaintiff was fired, he sued the defendant for tortious interference. In dismissing the claim, the court explained that “The party charged with tortious interference is also the party for whom the work is to be performed, [and] certainly that party ought to have a say as to who will be doing the work.” The court in Dr. S.'s case noted that although “Lusher did not spell out its analytical underpinnings in announcing this rule … we believe the rule is a salutary one, grounded in common sense.”

If this is true, the question becomes why the court took pains to discuss the Group's duty to the hospital, the hospital's status as a third party beneficiary of Dr. S.'s employment contract, the provision in Dr. S.'s employment contract allowing for his termination if he jeopardized the relationship, and the evidence of his negative behavior. Why not just hold that because the hospital was free to walk away from its relationship with the Group, it was also free to demand Dr. S.'s termination as a condition to renewing the contract? Perhaps the reluctance is grounded in some unarticulated notion of “fair play,” ie, that someone's job ought not be subject to the whims of one particular client. Or that such unfettered power might breed abuse. In any event, we will have to await another day for clarification of how far the freedom to contract (or to not contract) runs when it comes to telling your provider that a certain employee cannot be involved in providing the services. In the meantime, the court's discussion provides valuable guidance on how service and employment contracts can be drafted to help defend against claims for tortious interference.