Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Pa.: Tortious Interference suit between rival space-heater distributors can proceed, (Dec 14, 2023)

By Donielle Tigay Stutland, J.D.

Suit alleging tortious interference with supply agreement survives a motion to dismiss, as the court rejected an argument that a competitor was privileged to interfere.

A federal court in Pennsylvania has denied a motion to dismiss in a case brought by a distributor of space-heaters against a competitor alleging that the competitor tortiously interfered in its exclusive supplier contractual relationship with the manufacturer. Reecon North America, LLC (“NA”) brought suit against Enerco Group, Inc. (“Enerco”) alleging that Enerco tortiously interfered with its Exclusive Supply Agreement with Reecon M&E Co., Ltd. (“M&E”). Enerco moved to dismiss the complaint, arguing that the Exclusive Supply Agreement was no longer enforceable at the time of any alleged interference and that, even it was, Enerco was “privileged” to interfere because it is in competition with NA. Enerco additionally argued that if the claims survived, the court should stay the litigation pending a state court proceeding related to the case. The court rejected arguments that the Exclusive Supply Agreement was not a valid contract, finding that although the enforceability of the supply agreement was the subject of related litigation, it was premature to conclude it was not enforceable. The court also rejected the argument that the rival space-heater distributor was privileged to interfere, finding that there is only privilege with respect to prospective contractual relationships or existing contractual relationships that are terminable at will. Finally, the court denied the request to stay the proceedings due to the related state court proceedings. The court noted that the related case was a suit for breach of contract brought by the supplier M&E against NA, and Enerco was not a party in that case. The court found that Enerco did not establish either the existence of a parallel state-court action or extraordinary circumstances to warrant a stay or abstention (Reecon North America, LLC v. Enerco Group, Inc., December 8, 2023, Ranjan, J.).

Background. NA developed a space-heater brand called “Thermablaster” and registered a trademark for that name. In 2013, NA entered into an Exclusive Supply Agreement with M&E, pursuant to which M&E would design and manufacture Thermablaster products and NA would distribute the products.

In 2016 and 2017, Enerco and NA were discussing the possibility of Enerco’s purchase of NA. NA asserts that during due diligence related to those discussions, Enerco learned of NA and M&E’s relationship, and then formed its own distribution agreement with M&E during the term covered by the Exclusive Supply Agreement. NA also averred that it only discovered M&E’s dealings with Enerco through a separate court case that M&E filed against NA. In that case, which is currently pending in state court, M&E alleges that NA breached the Exclusive Supply Agreement.

NA brought suit against Enerco alleging tortious interference with the Exclusive Supply Agreement and Enerco moved to dismiss. In the alternative, Enerco asked the court to stay the proceedings pending the state court breach of contract suit.

Tortious Interference. The court began its analysis by looking at the claim alleging that Enerco tortiously interfered with NA’s Exclusive Supply Agreement with M&E.

The court laid out that the elements of tortious interference with an existing contract are: (1) the existence of a contract between the plaintiff and a third party; (2) purposeful action by the defendant specifically intended to harm the existing relationship; (3) the absence of privilege or justification; and (4) damages.

Enerco argues that there wasn’t an enforceable agreement between NA and M&E to interfere with, because M&E sued NA for breach of the Exclusive Supply Agreement before Enerco ever entered into its agreement with M&E. The court found that to be a premature argument, as the litigation between NA and M&E has not been resolved, and thus there has not been any finding that NA breached the Exclusive Supply Agreement or that NA and M&E’s agreement was not enforceable.

With respect to the competitor’s argument that it was privileged to interfere because it is in competition with NA, the court also rejected that argument. The court highlighted that under Pennsylvania law, any privilege only “applies to interference with prospective contractual relationships or existing contractual relationships that are terminable at will.” Here, the court concluded that the alleged interference was with an existing relationship and that the Exclusive Supply Agreement between the parties was not terminable at will, as the agreement contained a definitive term. The court denied the motion to dismiss the case.

Motion to Stay. The court next turned to Enerco’s argument that the federal court should abstain and stay the action, given the state court litigation over the Exclusive Supply Agreement.

Enerco base its argument on the Colorado River doctrine, which allows a federal court to stay or dismiss a pending action when there is a parallel state-court proceeding and “extraordinary circumstances” warrant abstention. However, first the court stressed that the state court proceedings were not parallel, as they were between NA and M&E and Enerco is not a party. Next, the court determined that there were no extraordinary circumstances that would warrant abstention. The court decided it would not stay the case.

The Case is No. 2:23-cv-00890-NR.

Attorneys: Ronald L. Hicks, Jr. (Nelson Mullins Riley & Scarborough LLP) for Reecon North America, LLC. Alexander Nemiroff (Gordon Rees Scully Mansukhani, LLP) for Enerco Group, Inc.

Companies: Reecon North America, LLC; Enerco Group, Inc.

Cases: FranchisingDistribution PennsylvaniaNews