You Have No Non-Compete! Neither did the Opera Singer!

As a follow-up to my last article discussing the status of non-compete law, it should be noted there are other non-contractual actions which could trip up former employees if they are not careful. Ever heard of tortious interference with a contract? Tortious interference with business expectancy? These are a couple of legal actions, among others, a former employer could use in the absence of a non-compete to restrict the behavior of a former employee in the next job. These tools are in place to ensure the balance between fair competition and improper conduct. The line between the two is never clear, but the case law lays out the basics.??

THE OPERA SINGER

Once upon a time in the 1850s, there was a famous opera singer. Everyone wanted to hear Johanna Wagner sing. She was engaged by Benjamin Lumley to sing exclusively at Her Majesty’s Theatre for three months. But then, a chap named Frederick Gye got a little nutty and induced Johanna with more money to sing at his theatre, the Covent Garden Theatre. This was an English travesty! Lumley sued Gye, believing Gye’s behavior to be scandalous, perhaps immoral, but at the very least, downright wrong. It was 1853 when the case went to court. The court upheld Lumley’s claim against Gye for inducing Johanna to cancel her engagement by offering a higher offer. Ironically, one of the judges wrote if Gye, who was otherwise a friendly bloke, had just brushed the yellowy stains off his teeth once in a while and closed the spitting gap between his bicuspids they might have ruled in his favor (just kidding on this last part!) Anyway, the tort came into existence. Improperly enticing workers to leave a pre-existing employment contract eventually expanded over the generations to all prospective business relationships, including both those reduced to signed contracts and those without a contract.?

Below is an overview of what the interference claims look like today. Keep in mind such claims can be brought in conjunction with a breach of contract claim, or independently depending on the nature of the contract, if any.

TORTIOUS INTERFERENCE WITH CONTRACT/BUSINESS EXPECTANCY?

POSSIBLE FACTS

Say a former employee goes to work for a competitor. With no non-compete in play, the employee thinks the former employer’s clients are fair game. Armed with information about the business, the processes, the prices, and an understanding of how the former employer went about securing and maintaining clients, the former employee goes on the attack to grab market share. Most former employees won’t resort to any means whatsoever to get a former client (although some will). But that doesn’t mean they won’t embellish the facts to create a false image about the former employer to attract business to the new position. It also doesn’t mean they won’t use ‘trade secrets’ to get the business. Over time, the former employees discover the power of telling half-truths about their former company combined with knowledge of the old employer’s way of doing business (ie, contracts, prices, processes) is a potent weapon of mass economic destruction. And when the employees start to see the money roll in, improper conduct otherwise known as greed, will be redefined as fair play-at least by the former employees.?

The former employer will eventually learn of this activity, especially if enough money is involved. The question is how big the employer’s eruption will be, at least in the form of legal action. If you poke the bear hard and deep, there will be a resulting tsunami of legal claims starting with the benchmark, tortious interference.?

LAW

Tortious interference with a contract occurs when someone induces a breach of contract between your former employer and a third party. The elements are: (1) the existence of a contract; (2) the defendant's knowledge of the contract; (3) the defendant's intentional procurement of its breach; (4) the absence of justification; and (5) damages. Though determined state by state, the law generally doesn’t require an independent tort to have been committed for the conduct to be unjustified. Tortious interference with a prospective business advantage occurs when: (1) a business relationship or expectancy existed with probable future economic benefit to employer; (2) former employee knew of the relationship or expectance; (3) but for the former employee’s, the employer was reasonably certain to have continued the relationship or realized the expectancy; (4) former employee engaged in intentional misconduct and (5) the former employer sustained direct and proximate damages.?

APPLIED

At the outset, know that courts want to protect the rights to regular competition but not to the extent wrongdoing is involved. Litigation frequently focuses on whether the former employee justifiably caused the breach of the contract. Not all interference is illegal or improper. But it could be improper, not illegal, and still support the basis for a successful claim against the former employee. There are numerous variables which will be used to determine if the actions were improper. These include the former employee’s motive; how it happened; the former employer’s affected interests; did the former employee intend to cause interference; was the contract broken or affected, are there social reasons to preserve the contract; and what damages were suffered by the former employer.????????

????????????Using the possible facts described above, here are a few scenarios I think would prove to be improper:

????????????The employee bad mouths and/or lies about the credibility of her former company and its employees?

????????????The employee uses pricing information to gain an unfair advantage

????????????The employee calls on any existing or prospective clients he would have not known about but for his previous employer

????????????The employee steals and uses proprietary information such as customized coding, or say, ingredients in a secret sauce

????????????The employee arguably commits fraud by lying about the former employers’ products and services

????????????The employee commits fraud by falsifying information to entice employees to leave the previous employer

????????????The employee steals, whether by copying data or by duplicating it from memory, internal processes the employee knows are specific to the former employer

Each state has its own case law, however, the use of customer lists, prospect lists, pricing information, and information otherwise unknowable in the marketplace to one’s financial advantage will likely be considered improper. “Improper” is a very broad term which each person needs to consider when divulging esoteric information to gain an economic advantage.?

OTHER POTENTIAL CLAIMS

The tortious interference claims mentioned above form the basis for most employment interference claims in the absence of a non-compete. However, there are several more to be considered depending on the conduct in question. Such claims include breach of fiduciary duty, defamation, breach of an employment agreement, negligence, violating a non-disclosure agreement, theft, and destruction.

As I said last time, employees and employers alike should try to iron out any issues relating to subsequent competition. A non-compete arguably helps both parties. Without one, former employees may be left thinking they can do anything to compete. The former employer is left thinking it must keep an eye out for improper conduct. There’s just more clarity with a non-compete than without. Just think, if Johanna had signed a non-compete, maybe Mr. Gye wouldn’t have been chastised about his teeth!

#noncompete #tortiousinterference #employmentlaw