Tortious Interference Involving Non-Competition Agreements

posted by Neil Klingshirn  |  Dec 9, 2009 4:22 PM [EST]  |  applies to Ohio

In most states, a third party cannot interfere with the contractual or prospective business relationships between two other parties, absent a proper purpose. This claim is known as “tortious interference with contractual or prospective business relations.”

"Tortious" refers neither to delicious chocolate cakes nor the tortured description of this claim that follows.  Rather, a tortious interference derives from the body of law known as “torts,” which impose common law duties of reasonable care on the general public.  In the employment context, an employer can bring a tortious interference claim against a competitor who entices an employee to work for it in violation of the employee’s non-competition or non-disclosure agreement, with improper means or for an improper purpose.  

Elements of the Tort of Interference with a Contractual Relationship

To recover for a claim of intentional interference with a contract, a party must prove:

1. the existence of a contract,
2. the wrongdoer's knowledge of the contract,
3. the wrongdoer's intentional procurement of the contract's breach,
4. lack of justification, and
5. resulting damages.

If a new employer hires an employee in violation of the employee’s non-competition agreement, the employee may be liable for a breach of contract. While the new employer is not also liable for breaching the contract, since the new employer was not a party to it, the new employer may nonetheless face liability for tortious interference with the non-competition agreement.  However, unlike the employee, the new employer may have a “Fair Competition” defense or other justification, such as a “proper” reason for hiring the employee.

Fair Competition Defense

In some states, if the contract at issue is terminable at will, a new employer can use the privilege of fair competition to defeat a claim of tortious interference with a non-competition agreement. (Restatement of the Law 2d, Torts [1979], Section 768). The privilege of fair competition requires that:

1. the relation concerns a matter involved in the competition between the former employer and the new employer;
2. the new employer does not employ wrongful means
3. the new employer does not create or continue an unlawful restraint of trade
4. the new employer’s purpose is at least in part to advance his interest in competing with the other.

For example, under the Fair Competition doctrine, an auto dealer could hire a competitor's salesman in violation of the salesman's non-competition agreement, if the auto dealer hired the salesman to sell cars, which is the matter in competition with the former employer.  If the auto dealer merely accepted the salesman's application and did not entice the salesman to extract the competitor's trade secrets as a condition of employment, then the Fair Competition doctrine will allow the auto dealer to employ the salesman to sell its cars.  While the former employer can still pursue a breach of contract claim against the employee, the Fair Competition defense will protect the new employer.  Importantly, the Fair Competition defense is not available unless the non-competition agreement is terminable at will.

A new employer will defeat a tortious interference claim outright if it proves fair competition. Thus, once a competitor proves fair competition, a court should not examine whether the new employer lacked justification for hiring the employee in violation of the non-competition agreement.

If the contract is not at-will or the new employer fails to prove fair competition, the old employer can recover for tortious interference if it proves that the new employer’s interference with the non-competition agreement was improper. 

Improper Interference

To determine improper interference, courts should consider:

1. the nature of the competitor’s conduct,
2. the competitor’s motive,
3. the interests of the former employer with which the competitor’s conduct interferes,
4. the interests sought to be advanced by the competitor,
5. the social interests in protecting the competitor’s freedom of action as well as the contractual rights of the original employer; and
6. the proximity or remoteness of the competitor’s conduct to the interference.

Restatement of the Law 2d, Torts (1979) 26, Section 767. 

Boiled down to laymen's terms, a new employer improperly interferes with the employee's non-competition agreement by enticing the employee to break the agreement for the wrong reason or in a wrong way. A wrong reason is to obtain the former employer's trade secrets. A wrong way is to provide false assurances that a court will not enforce a valid non-competition agreement. 

Other Defenses

If the competitor's employment of the employee does not breach the employee's non-competition agreement, the former employer cannot maintain a tortious interference claim against the competitor. That is, tortious interference requires an actual breach of the underlying contract. Similarly, most states do not hold a competitor liable for interfering with a non-competition agreement where the courts of that state would not enforce the part of the non-compete that the competitor interfered with. For example, if a competitor hires an employee under a five year non-competition agreement in year number four but a court declares the non-competition agreement enforceable only for the first three years, the court will not hold the competitor liable for interference.

Intentional Interference with Prospective Contractual Relationships

A party can improperly interfere with a business relationships that have not yet become actual contracts.  Intentional interference with prospective contractual relations occurs where the interference consists of:

• inducing or otherwise causing a third person not to enter into or continue a prospective relation or
• preventing the other from acquiring or continuing the prospective relation.

The type of relations protected from interference includes potential customer accounts that an employee prospected for an employer. If a competitor induces the employee to leave the employer and bring the prospective customer accounts to the competitor, the competitor may be liable for interfering in the prospective relationship between the customer and the original employer.  The employee who brought the potential customer account to the competitor could be liable as well.  Note that, in this example, the underlying contract interference is with a potential customer, not a former employee subject to a non-competition agreement.  Thus, the competitor could be liable for tortious interference in this context whether or not the employee has a non-competition agreement.

Damages for intentional interference with a prospective contractual relationship includes:

• the pecuniary loss of the benefits of the contract or the prospective relation;
• consequential losses for which the interference is a legal cause; and
• emotional distress or actual harm to reputation, if they are reasonably to be expected to result from the interference.

Thus, when the interference was with a prospective contract, the plaintiff can recover the lost profit expected to be made under the contract.

Civil Conspiracy

A claim closely related to tortious interference is a “Civil conspiracy,” which has been defined as “a malicious combination of two or more persons to injure another in person or property, in a way not competent for one alone, resulting in actual damages.” In the non-competition context, a civil conspiracy typically requires proof of an improper interference with the underlying contract.

posted by Neil Klingshirn  |  Dec 9, 2009 4:22 PM [EST]  |  applies to Ohio