Bass, Berry & Sims attorney Chris Lazarini outlined a case exploring the economic loss rule. The court found that a party suffering only an economic loss from the breach of an express or implied contractual duty may not assert a tort claim for the breach, absent an independent duty of care under tort law.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.

Swan Global Investments, LLC vs. Young, No. 18-cv-03124 (D. Colo., 2/25/20)

Under the economic loss rule, a party suffering only an economic loss from the breach of an express or implied contractual duty may not assert a tort claim for the breach, absent an independent duty of care under tort law.

In 2013, Plaintiff, a registered investment adviser, hired Defendant to enhance its relationships and goodwill with others in the financial services industry. Defendant was given access to Plaintiff’s business methods, some of which Plaintiff considered confidential and proprietary. In 2016, Plaintiff allegedly discovered Defendant was not performing his contractual duties, terminated him, and sued him for breach of contract, unjust enrichment, and fraud. In 2018, Plaintiff filed a related suit against Brookstone Capital Management where Plaintiff allegedly discovered facts supporting additional claims against Defendant.

Plaintiff amended its complaint to add claims for misappropriation of trade secrets, intentional interference with contractual and prospective business relationships, and civil conspiracy. The crux of those claims was that Defendant had disclosed Plaintiff’s proprietary information to Brookstone, and induced Brookstone to breach its contract with Plaintiff and launch a mutual fund company in direct competition with Plaintiff. Defendant moved to dismiss all claims, and the matter was referred to the Magistrate Judge who recommended denial of the motion.

Defendant objected to the Magistrate’s recommendations on the statutes of limitations, the economic loss rule, and collateral estoppel. The Court reviews the challenged recommendations de novo. On statute of limitations, the Court concludes the claims accrued at two times and were timely filed under the applicable two- and three-year statutes of limitations. The original claims accrued when Plaintiff investigated Defendant’s alleged failure to perform his contractual duties and were filed within the applicable time limits. The later claims, the Court finds, would not necessarily have been discovered, nor should they reasonably have been discovered, during the initial investigation, and did not accrue until facts were developed in the related Brookstone case. Because they did not accrue until they were discovered, the Court finds them timely as well.

On the economic loss rule, the Court notes the contract is vague as it imposed on Defendant only the duty to “enhance [Plaintiff’s] growth and goodwill.” Because the contract was largely silent on Defendant’s duties, the legal duties underlying Plaintiff’s tort claims arose outside of the contract and are not precluded by the economic loss rule. On collateral estoppel, Defendant argued the claims for intentional interference with contractual and prospective business relationships and conspiracy were barred, because the issues had been favorably resolved in a prior arbitration against Brookstone. The Court disagrees, because it could not find the issues raised in the arbitration were identical to those to be decided here. The arbitrators may have determined that Defendant and Brookstone did not violate confidentiality obligations; however, it is plausible Defendant may still have misappropriated proprietary information and used it to his advantage.

(C. Lazarini: The Court also examines the claims under the standard “failure to state a claim” analysis and finds them sufficient to overcome the FRCP 12(b)(6) challenge.)