Employer Cannot Be Liable for Interfering with Non-Compete It Doesn’t Know Exists, Third Circuit Holds

Ethan Simon

simonRestrictive covenants are common in many industries. Under New Jersey and Pennsylvania law, a defendant may be liable for tortious interference with a restrictive covenant only if it has actual knowledge of the contract with which it allegedly interferes. In Acclaim Systems, Inc. v. Infosys, Ltd.,[1] the Third Circuit reaffirmed this rule in the context of IT consulting non-competes and expressed its reluctance to recognize any exceptions.

In Acclaim Systems, Time Warner Cable (“TWC”) was looking to cut costs on its Sales Force Dot Com (“SFDC”) project by switching providers for certain IT services. When TWC switched from Acclaim to Infosys, TWC asked Infosys to consider retaining four individuals who were already working on SFDC on behalf of Acclaim. All of these individuals had non-competes with Acclaim that prohibited them from working on SFDC on behalf of Infosys.

Infosys ultimately hired these four individuals—one as an employee and three as subcontractors. During the hiring process, Infosys asked all of them if they were subject to non-competes, but they represented that they were not. After they began working on SFDC, Acclaim filed suit in state court for breach of contract and tortious interference against several defendants involved in the hiring process, including the individual hired as an Infosys employee. Acclaim did not yet sue Infosys, which first learned of the non-competes when Acclaim initiated the state court action. After Infosys became aware of the non-competes, the four IT consultants were directed to cease working on SFDC. TWC then cancelled Infosys’s involvement in SFDC.

Several days later, Acclaim brought a tortious interference and other claims against Infosys in federal court. All of the claims were ultimately dismissed. On appeal, the Third Circuit limited its review to whether Acclaim could establish the intentionality element of its tortious interference claim, that there was purposeful action by Infosys, specifically intended to harm Acclaim’s contractual relationships.

For a defendant to have a specific intent to harm a contractual relationship, it must have actual knowledge of the contract. Here, the court found that Infosys had no such knowledge. Acclaim argued that Infosys could have made a stronger inquiry about the non-competes during its hiring process, but the court found that issue irrelevant as to whether Infosys had actual knowledge of the non-competes. Acclaim also argued that Infosys should be “presumed” to have knowledge of the non-competes because restrictive covenants are standard in the IT consulting industry, but the court concluded that the fact “[t]hat these individuals might likely have been subject to non-competes is not the same as knowledge that they were subject to non-competes.” Finally, Acclaim attempted to substitute willful blindness for knowledge, but the court found that based on Infosys’s inquiries about the non-competes, there was insufficient evidence to establish willful blindness.

The Third Circuit noted that Acclaim’s arguments served as an attempt to satisfy the “actual knowledge” standard by relying on Infosys’s negligent failure to ascertain the existence of the non-competes. The court rejected this approach, holding that whether Acclaim “should have conducted better due diligence and should have made certain assumptions about industry practice” is not the same inquiry as whether Acclaim “in fact knew about the contracts.” The court thus declined to recognize any exceptions to or substitutions for the “actual knowledge” component of a tortious interference claim.

Because restrictive covenants are common in so many fields, employers must remain cognizant of non-competes when making hiring decisions, for both employees and subcontractors. Under Acclaim Systems, so long as an employer asks a new hire whether he is subject to a restrictive covenant, the new hire states that he is not, and the employer does not otherwise know that the new hire is under a non-compete, the employer is unlikely to be subject to liability for a tortious interference claim in the event that the new hire actually is under a non-compete.

When an employer learns after hiring an individual that he is actually subject to a restrictive covenant, however, the employer may need to act. In Acclaim Systems, any interference with the non-competes presumably stopped when Infosys became aware of them—the consultants were removed from SFDC and Infosys was terminated from the project. Hypothetically, if Infosys continued working on SFDC using the four IT consultants subject to the non-competes, its liability may have turned on the length of the non-competes. If Infosys became aware of the non-competes while they were still in effect, Infosys would have had knowledge of the non-competes and would have risked legal exposure if it continued to employ the four consultants on SFDC.

The upshot for prior employers in these cases is that as soon as they become aware of a potential violation of a non-compete, they should immediately put the new employer on notice of the agreement and any potential dispute. But the prior employer cannot sit silently on its rights and then sue the new employer for tortious interference after the restrictive covenant lapses or, as in Acclaim Systems, any interference with the restrictive covenant ceases.

[1] — F. App’x —, 2017 WL 530531 (3d Cir. Feb. 9, 2017).

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