Restrictive Covenants; Interference with Contract: Quirky Question # 11

Quirky Question # 11:

Our firm uses non-competition agreements for a number of our key employees.  The non-competition agreement was drafted by our outside counsel who tells us that it is enforceable.  One of our managers who had signed such an agreement recently resigned.  We just learned that she will be starting employment at our primary competitor, in a role nearly identical to that which she performed for our company.  If I contact her new employer to inform it of our manager’s non-compete, and her new employer withdrew her job offer, could she sue us for interfering with her prospective employment relationship?

Dorsey’s Analysis:

Your fact pattern raises a number of issues.  Let me touch on a few basics before addressing the specific question you posed.

As a preliminary matter, you should understand that non-competition agreements, which constitute one type of “post-employment restrictive covenant,” are governed by state law.  There is no federal statute dictating whether non-competes are enforceable.  Rather, state law determines the enforceability of non-competes.  Some states enforce them; some states enforce them but only in limited circumstances; some states largely repudiate them.  In short, the first issue you need to resolve is whether the state where this dispute has arisen is one that will enforce a properly crafted non-compete.

Moreover, as the last sentence implied, even jurisdictions that recognize the validity of non-competes will evaluate whether they are crafted properly.  Typically, courts will assess the substantive, geographic, and temporal scope of the non-competes when evaluating their legitimacy.  There are other issues regarding non-competes upon which courts will focus but they are beyond the scope of my observations here.  Essentially, however, courts attempt to balance the employer’s legitimate business interests with the employee’s needs for job mobility and income.

For the purposes of your question, I will assume that your company is based in a state that recognizes the efficacy of non-competes and that the employee in question lives and works in that state.  (Even if your company was based in a state that generally accepted non-competes, if your employee lived and worked in a state that rejects them – e.g., California or North Dakota – you may have difficulty enforcing the agreement.)  Further, I will assume that your attorney’s assessment is accurate, i.e., that the non-compete is properly drafted and enforceable.

Although there is a legal theory for “tortious interference with contractual relations,” and although the action you are proposing could result in your former employee losing her new job, I do not believe those facts should deter you from taking the action you outline.  Even if your actions resulted in a change in the new employer’s perception of your former manager, your actions would not be “tortious.”

Like non-compete law, the law of tortious interference with contractual relations is dependent upon the common law of the relevant state.  Though there are differences in the various states’ approaches to this legal theory, in most jurisdictions, an element of the tort involves some type of “wrongful” conduct.  Some times that conduct is described as “malicious,” other times the element is described as “acting improperly,” and in some instances the element is described somewhat circularly as “wrongful” or “tortious.”  All of these formulations of the legal theory, however, encompass the notion that there has been some type of inappropriate or improper conduct or motive that caused the interference.

In the context you describe (enforceable non-compete, designed to protect your company’s legitimate interests), it is perfectly appropriate for you to notify both your ex-employee and her new employer that she would be in violation of her contractual agreements with your company were she to take a job with your competitor.  Your company has the right to do so, and can take this action without undue anxiety of potential litigation.  Indeed, if your company failed to take this step, your manager later might argue your company knowingly waived its right to enforce its contract with her.  Such inaction could have implications not just for the specific employee who recently left your employment but for your other employees who signed identical restrictive covenants.

If you wish to insulate your company further against the risk of litigation, you may want to have the communication to your former manager and her new employer drafted and sent by counsel.  Communications by counsel in anticipation of or in connection with litigation are, at a minimum, qualifiedly privileged.  Many of these communications are deemed absolutely privileged.  Therefore, by relying on counsel to convey this message, you reduce the already slim likelihood that your manager will ever be able to assert legitimate claims against your firm.

In addition, your manager’s new employer may well appreciate being apprised of her contractual breach.  Who knows what your former manager stated to the new employer.  Perhaps she represented that she had no restrictions on her employment.  If so, the new employer may be quite pleased to learn, early in the employment relationship, that it had been deceived.

Moreover, if the company retains her with knowledge of her pre-existing, post-employment restrictive covenants, it may be confronting increased risks of liability it would prefer to avoid.  On the other hand, the new employer may be fully cognizant of the non-compete and may have made the determination that it is willing to litigate the issue (or at least attempt to resolve the problem through negotiation) because of its interest in hiring your former manager.

As to the issue of whether your ex-employee ‘could’ sue you, my observation is simple.  There is always a risk of litigation when actions taken by a company have an adverse impact upon individuals, whether current or former employees, or members of the public.  It is critically important to distinguish, however, between a risk of “litigation” and a risk of “liability.”  Here, although your former employee may threaten suit, or possibly even initiate litigation, based on the limited facts you described, your risks of “liability” are not significant.

That does not mean a lawsuit will be cost free.  If the matter is litigated, you will incur attorneys’ fees and your management team will be distracted by the litigation.  But, both the fees and the distraction may well be justified by the important principle at issue in the lawsuit – enforcing your company’s legitimate non-competition agreements.  This principle may have ramifications far beyond the specific situation of your recently departed manager.  For that reason, you may wish to modify your analysis from your defensive posture (do we risk litigation by our former employee?) to a more aggressive stance.  Assuming you have a legitimate, enforceable non-compete, and that your employee has joined a competitor where she will be fulfilling the same job responsibilities she performed for your company, you may want to be the plaintiff and bring an action to enforce your contractual rights.  Again, such litigation may have benefits that extend well beyond your dispute with your recently departed employee.

Dorsey & Whitney

Dorsey & Whitney

Dorsey is a business law firm, applying a business perspective to clients' needs. We make it our first priority to know the context in which you do business - your market, your competitors, your industry.

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