Matthew Savage Aibel

In Acclaim Systems, Inc. v. Infosys, the U.S. Court of Appeals for the Third Circuit recently rejected a claim for tortious interference with a non-compete, because the plaintiff introduced no evidence of actual knowledge that the individuals in question were covered by non-competes.

Infosys, an IT services company, bid on a job from Time Warner Cable (“TWC”) that had been serviced by a competitor, Acclaim. TWC decided to transfer the project over to Infosys, but wanted Infosys to hire four contractors who previously worked with Acclaim on the project.

Infosys acceded to TWC’s request, but first reached out to the contractors to inquire about any possible non-competes in their contracts with Acclaim. One contractor affirmatively stated in an email, “I do not have a non-compete clause with Acclaim.”  That same contractor also represented on an employment application that he did not have any contractual restrictions, including non-compete covenants.  The other three contractors verbally represented that they were not subject to any non-compete agreements, and their subcontractor employer, when asked, also did not inform Infosys of any non-compete.  In fact, all four contractors had non-competes in their contracts with Acclaim.

Acclaim filed suit against Infosys for tortious interference with these non-competes (i.e., intentional interference with contract).  The District Court granted summary judgment to Infosys.

The Court of Appeals found that to have “intent” to harm a contractual relationship, a party must have knowledge of that relationship. Here, the Court found that Infosys did not have knowledge of the non-competes, so it could not have had the intent necessary to commit tortious interference.  Acclaim argued, based on circumstantial evidence and the industry custom of non-competes in IT services, that the existence of the non-competes could be inferred.  Acclaim also argued that by asking the contractors themselves, Infosys did not ask the correct parties and instead should have asked the subcontracting employers.  Acclaim alleged that Infosys conducted a “sham” due diligence process such that it was willfully blind to the existence of the non-competes.

The Court of Appeals found that by asking multiple times about the non-competes, Infosys could not be held to be “willfully blind,” and further found that Acclaim’s arguments regarding asking questions to the wrong party were an improper attempt to imposed a negligence standard of care on an intentional tort.

This case shows that when onboarding employees, companies should exercise due diligence in ascertaining the existence of a possible non-compete. Steps that can be taken as part of such due diligence include having counsel review any existing contracts to which a potential new hire is subject and having potential hires and contractors sign certifications regarding the existence of non-competes or other contractual restrictions on their ability to perform the duties of their proposed new position.

When an individual threatens to disclose a company’s confidential information gained during employment at the company to a new employer, the common first reaction by the company is to send a “cease and desist” letter to the individual, and also a similar letter to the new employer. Yet before sending such a cease and desist letter to the new employer, the company may wonder whether it is opening itself up to potential liability — on a tortious interference claim by the individual — if the new employer should turn around and fire the individual on the basis of the allegations in the letter.

Companies with such concerns received a bit of reassurance in a January 21, 2014 opinion and order in Rick Bonds v. Philips Electronic North America, issued by the U.S. District Court for the Eastern District of Michigan, Southern Division. In that case, Rick Bonds had been employed with Philips Electronic North America or its predecessors (“Philips”) since 1996 as a field service engineer who maintained and repaired medical imaging equipment. He was subject to at least two confidentiality agreements concerning Philips’ confidential information. According to the opinion and order, in early 2009, Mr. Bonds surreptitiously began working for Philips’ competitor Barrington Medical Imaging, LLC as a field service engineer — while still employed by Philips! Mr. Bonds continued his dual employment until July 2009, when Philips discovered what was going on and terminated Mr. Bonds’ employment.

A month after terminating his employment, Philips sent a cease and desist letter to Mr. Bonds, reminding him of his continuing obligations to Philips with respect to its confidential information. Philips sent a copy of this letter via fax to Barrington, and less than a week later, Barrington terminated Mr. Bonds’ employment.

Over two years later, on January 27, 2012, Mr. Bonds sued Philips, asserting a single claim for tortious interference with his business relationship with Barrington. Philips asserted counterclaims for breach of the confidentiality agreements, unfair competition and misappropriation of trade secrets. After discovery, Philips moved for summary judgment dismissing Mr. Bonds’ tortious interference claim.

In granting summary judgment dismissing Mr. Bonds’ claim, the court noted that to meet the elements of a tortious interference with business relationship claim, the plaintiff must demonstrate that the defendant “acted both intentionally and either improperly or without justification.” The court held that Mr. Bonds failed to present any “specific, affirmative acts that corroborate an improper motive of interference,” and that Philips’ actions to protect its confidential information were not improper because they were motivated by legitimate business reasons. Indeed, the court went so far as stating “concern about potential disclosure is exactly the kind of legitimate business reason that insulates [Philips] from liability.”

So companies should rest easy when sending a cease and desist to an individual’s new employer, provided that letter avoids defamatory comments and is sent in furtherance of the company’s legitimate business interests (which might include confidential information and/or customer relationships) and is not a malicious attempt to get the employee fired.
 

By Nancy L. Gunzenhauser and Ian Carleton Schaefer.

How can an employee of a national employer not “work” where her employer works? How can such an employee not be subject to suit in the corporation’s backyard?

According to a recent New Jersey state court decision, a technology consultant for a New Jersey corporation who worked in Illinois and provided no services to New Jersey based clients could not be subject to suit in New Jersey. This decision is instructive for technology companies with a significant national workforce (particularly if they leverage remote/agile workers) in how to structure the employment relationship to gain home-field advantage in litigation.

In Baanyan Software Services Inc. v. Hima Bindhu Kuncha, Kuncha began working as a computer systems analyst for Baanyan in February 2011. While Kuncha was an employee of the New Jersey-headquartered technology company, she never actually worked within the state. Instead, she performed work on behalf of several of Baanyan’s clients, including her subsequent employer Halcyon, from her home state of Illinois or Ohio. None of Kuncha’s work was in New Jersey, nor did she ever travel to headquarters or perform work for any of Baanyan’s New Jersey-based clients. When Kuncha left to work for Halcyon, Baanyan brought a lawsuit in New Jersey alleging breach of contract, tortious interference with business relationships, and fraud, among other claims.

When a party brings a lawsuit, the defendant must have personal jurisdiction, meaning some minimal contact with the state or federal district in which she is being sued. The New Jersey appellate court found that Kuncha did not have sufficient “contacts” with New Jersey to be sued there, even though her employer was headquartered in the state, she received payment from the New Jersey corporation, and submitted timesheets and reports to the home office. The court noted that subjecting the former employee to a lawsuit in New Jersey would “offend traditional notions of fair play and substantial justice.” The court further determined that any contacts the former employee may have had with New Jersey were “attenuated at best,” and were insufficient to subject Kuncha to personal jurisdiction.

So — how can a technology employer, with a global (and often remote or agile) workforce, manage its ability to bring suit against former employees where it chooses (especially if it chooses to sue in the headquarters’ backyard)? As the Baanyan case instructs, in order to gain personal jurisdiction over a former employee, the employee must have “purposefully availed” herself to the state. Employers may employ a variety of approaches to hail its former employees to its corporate backyard, including requiring employees to make periodic trips to the company headquarters to attend meetings, engaging employees with headquarter-clients, and setting up reporting relationships with HQ managers. Employers may also consider including contractual provisions in employment or confidentiality agreements in which the employee consents to submit to personal jurisdiction in the state courts where headquarters are situated.

Finally, the case also serves as a reminder to employers: before bringing in action to enforce a restrictive covenant in a particular jurisdiction, due consideration should be given as to whether the employee in question had sufficient contacts with the contemplated state. Otherwise, the court may dismiss the action with the order: “Not in My Backyard.”
 

On Monday, June 4, 2012, the Seventh Circuit Court of Appeals issued its decision in James Nation v. American Capital, Ltd. Nation was previously the CEO of The Spring Air Company. He left Spring Air in 2007 and received a severance package worth about $1.2 million payable over a period of 15 months. Spring Air subsequently paid Nation about $836,000 under that agreement. However, before it could pay Nation the remainder of the severance payments, Spring Air ran into financial trouble. As a result, it suspended Nation’s severance payments (as well as those of several other former company executives) in order to preserve cash for operations. In response, Nation sued Spring Air’s majority shareholder and primary creditor, American Capital, for directing the suspension of his severance payments and thereby tortiously interfering with his severance agreement.

The Seventh Circuit observed that “Illinois recognizes a conditional privilege to interfere with contracts ‘where the defendant was acting to protect an interest which the law deems to be of equal or greater value than the plaintiff’s contractual rights.’” The Court explained that “[t]he basis for the privilege is the business-judgment rule. Because the interests of corporate officers, directors, and shareholders are sufficiently aligned with those of the company, they generally cannot be liable in tort where they interfere with the company’s contracts for the benefit of the company.” Applying this rationale, the Court held that “[a]s Spring Air’s majority shareholder with control of a majority of its directors, American Capital was conditionally privileged to interfere with the company’s contracts, including its severance agreement with Nation.” The Court also held that “There is no evidence that would permit a reasonable jury to conclude that American Capital induced the breach of Nation’s severance agreement to further its own interests or to injure him, or that doing so was contrary to Spring Air’s interests.” Notably, the Court also recognized that “[a]part from its status as a majority equity holder, American Capital’s actions may also be privileged based on its status as a creditor of Spring Air” because “a creditor ‘competing for payments from the same cash-strapped debtor’ can use reasonable means to obtain payment on its contract, including conduct that induces the debtor to breach its contract with another.” As a result, the Court affirmed the District Court’s decision granting American Capital’s motion for summary judgment.

In Western Blue Print Company, LLC v. Myrna Roberts et al., the Missouri Supreme Court recently affirmed a tortious interference verdict against a manager who left to join a competitor, largely because the manager engaged in inappropriate conduct when departing one employer for another.

Tortious interference claims are commonly raised in disputes with former employees who leave to join a competitor. However, actual determinations of the merits of such claims are not common, and state supreme court parsings of such claims are even less common. Accordingly, this decision is worth reviewing.

As set forth in the opinion, Western Blue Print Company (“Western Blue”) is a document printing and management service. Myrna Roberts (“Roberts”) was one of its managers. She did not have a non-compete, and resigned without notice to join a competitor that she had helped form. After she did so, the University of Missouri chose not to renew a contract with Western Blue that Roberts had previously managed for it; rather, the university awarded the contract to Roberts’ new employer. The loss of that contract was the basis for a tortious interference claim by Western Blue against Roberts.

As a threshold matter, the Court held that even though this contract was “up for grabs” because it was subject to a competitive bid process, Western Blue “had a reasonable, valid business expectancy that it would win” the contract before Roberts’ resignation. As summarized by the Court, “Western Blue successfully bid on the contract the previous two times the university solicited bids and performed well fulfilling its obligations.” Moreover, just a few months before leaving Western Blue, Roberts purportedly told other Western Blue employees that she had the contract “locked up” for Western Blue. Accordingly, the Court found that Western Blue satisfied the threshold requirement of a reasonable, valid business expectancy.

The Court then turned its attention to whether Roberts used “improper means” to obtain the contract on behalf of her new employer, ultimately concluding that she did. In so finding, the Court noted that while she was still employed by Western Blue, Roberts “convinced other Western Blue employees to leave their jobs and work for [her new employer], instructing them to stagger their departures without notice” and “assur[ing] these employees she would be able to procure the university contract” for her new employer. Additionally, the Court noted that before resigning, Roberts deleted certain documents, and in so doing “hindered Western Blue’s ability to bid successfully” on the contract and impacted its ability “to complete its current contractual obligations to the university such that it negatively reflected on its bid.”

In sum, Western Blue prevailed on its tortious interference claim in large part because the Court found that Roberts engaged in misconduct when leaving Western Blue. Departing employees and their new employers should take heed.
 

When a former employee is in violation of a non-compete agreement, the former employer often files suit not just against the former employee for breach of contract, but also against the new employer for tortious interference. Under Florida law, the elements of a tortious interference claim are as follows:

(1) the existence of a business relationship; (2) knowledge of the relationship on the part of the defendant; (3) an intentional and unjustified interference with the relationship by the
defendant; and (4) damages to the plaintiff as a result of the breach of the relationship.

The Second District Court of Appeals’ recent decision in Fiberglass Coatings v. Interstate Chemical, Inc., Case No. 2D-08-1847 (Fla. 2d DCA, February 27, 2009), illustrates an interesting defense to a tortious interference claim.

Fiberglass Coatings, Inc. (FCI) had a non-compete agreement with its salesman Robert Hutchens. Hutchens left FCI to work for a competitor, Polymeric. Hutchens left Polymeric after a short time to work for another competitor of FCI’s, Interstate Chemical, Inc. While at Interstate, Hutchens allegedly solicited FCI’s customers. FCI filed suit against Interstate for tortious interference. On a motion for summary judgment, Interstate argued that FCI could not meet the causation element of its tortious interference claim because Hutchens was predisposed to breaching his non-compete agreement, as evidenced by Hutchens’ employment with Polymeric. The trial court agreed with Interstate, concluding that Interstate did not cause or induce Hutchens to breach his non-compete agreement.

The Second DCA affirmed, citing Florida case law and the Restatement (Second) of Torts:

Causation requires a plaintiff to “prove that the defendant manifested a specific intent to interfere with the business relationship.” [Chicago Title Ins. Co. v. Alday-Donalson Title Co. of Fla., Inc. 832 So. 2d 810, 814 (Fla. 2d DCA 2002) (citing Tamiami Trail Tours, Inc. v. Cotton, 463 So. 2d 1126, 1127 (Fla. 1985))]. No liability will attach unless it is established “that the defendant intended to procure a breach of the contract.” Id. ” ‘One does not induce another to commit a breach of contract with a third person under the rule stated in this Section when he merely enters into an agreement with the other with knowledge that the other cannot perform both it and his contract with the third person.’ ” Martin Petroleum Corp. v. Amerada Hess Corp., 769 So. 2d 1105, 1107 (Fla. 4th DCA 2000) (quoting Restatement (Second) of Torts § 766 cmt. n (1977)). As noted by the Fourth District, Florida follows this section of the Restatement in these circumstances. Id.

Under this prevailing case law, we conclude that the circuit court did not err in granting summary judgment under the “employment” theory of liability set forth in paragraph 29 of the amended complaint. As explained by comment n of the Restatement (Second) of Torts, section 766, Interstate merely entered into an employment agreement with Hutchens knowing that he could not honor his covenant not to compete with FCI and at the same time work for Interstate.

The takeway from this case is that, absent evidence that the new employer induced the former employee to violate his non-compete agreement, merely hiring an employee whom the employer knows to be in violation of a non-compete agreement may not be sufficient to sustain a tortious interference claim under Florida law.

Having said that, it should be noted that the Second DCA did not let Interstate completely off the hook. Because Hutchens had allegedly solicited FCI’s customers, the court held that Interstate could be held liable for tortious interference under a “solicitation of customers” theory. In other words, although Interstate may not have crossed the line in hiring Hutchens despite his non-compete agreement, it may have crossed the line by inducing him to solicit FCI’s customers in violation of that agreement. The court therefore affirmed in part, and reversed in part, the trial court’s summary judgment order.