Facts: Texaco and Pennzoil agreed to settle

Facts: Pennzoil agreed to purchase Getty Oil for S
110 per share. Although the companies entered into no formal agreement, they
both issued a press release indicating their “agreement in
principle.” Subsequently Texaco offered to buy Getty Oil for S 125 per
share, after which Getty withdrew from its agreement with Pennzoil and agreed
to merge with Texaco. Pennzoil sued for interference with contractual
relations, and a jury found Texaco liable, assessing damages at$ 7.3 billion
and awarding punitive damages of $3 billion. Although at trial Texaco denied
having any knowledge of the agreement between Pennzoil and Getty, both the jury
and the appeals courts found sufficient evidence to conclude that Texaco had
actively sought to acquire Getty by inducing its breach with Pennzoil. After
the court of appeals affirmed the jury’s verdict, Texaco and Pennzoil agreed to
settle for $3 billion.

Issue: Is the defendant’s belief that no legally
enforceable contract exists an affirmative defense to the tort of tortious
interference with a contractual relationship?

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Rule:  No. To
be subject to liability the actor must have knowledge of the contract with
which he is interfering. It is not necessary that the actor appreciate the
legal significance of the facts giving rise to the contractual duty. If he
knows those facts, he is subject to liability even though he is mistaken as to
their legal significance and believes that the agreement is not legally binding.

Holding: The court followed the principle elaborated
above which is consistent with the Restatement (Second) of Torts. The court
issued an order to plaintiff oil company to file a punitive damages remittitur
of two billion dollars. The judgment would then be reformed to show one billion
dollars in punitive damages and would be affirmed as reformed. If plaintiff
failed to file the remittitur, the judgment would be reversed and remanded.
Punitive damages of three billion dollars constituted a confiscation assets
rather than punishment for past action.

Analysis: This is a very important landmark case in
which many issues beyond the one highlighted in this case brief are raised, a
few of which are highly relevant to ordinary business lawyers (as opposed to
M&A specialists). These points, and a fascinating behind the scenes look at
the Getty family dynamics and board-room tactics worthy of several episodes of
“Dallas”, are reviewed here: Lloyd, R.M., 2004. Pennzoil v. Texaco, Twenty
Years After: Lessons for Business Lawyers. Transactions: Tenn. J. Bus. L., 6,
p.321.

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