Executive Summary: An employer hiring an individual known to be subject to a non-compete contract can expect to be accused of tortiously interfering with that contract. On the other hand, the hiring employer should be innocent of wrongdoing if it has no idea the new hire is bound by a restrictive covenant. In Acclaim Sys. v. Infosys, Ltd., 2017 U.S. App. LEXIS 2325 (3d Cir. 2017), the Third Circuit recently affirmed this common-sense approach by holding an employer lacking actual knowledge of a restrictive covenant cannot be liable for tortious interference with that covenant.
Factual Background
Here, Infosys, an IT services company, assumed control over a cable project for a large company previously handled by a competitor, Acclaim. To support the project, Infosys hired away an Acclaim employee and three Acclaim subcontractors. All four had non-compete agreements which purportedly prohibited them from working for any other company on the cable project. Despite its due diligence, including explicitly asking the employees and the staffing company providing the subcontractors about restrictive covenants, Infosys was unaware of the restrictive covenants until Acclaim sued Infosys for tortious interference with contractual relations and other claims. All claims against Infosys were eventually dismissed.
Actual Knowledge Required
On appeal, the Third Circuit examined—and rejected—Acclaim’s position that Infosys could intentionally interfere with non-compete covenants of which it had no knowledge. First, Acclaim argued Infosys failed to ask the “right” questions of the new hires during the onboarding process. The Court rejected this position because Infosys asked each hire, specifically and directly, if they were subject to a non-compete, and the answer received from each was an unequivocal “no.”
Second, Acclaim argued Infosys should have presumed the existence of the non-competes because such restrictive covenants are standard in the IT industry. Yet the Court maintained that a belief or suspicion that workers might be subject to a non-compete is not actual knowledge. Third, Acclaim argued Infosys turned a willfully blind eye toward the post-employment obligations owed by the new hires. The Court rejected that argument on the facts presented, namely that Infosys made adequate inquiries regarding whether the workers were subject to non-competes.
The Bottom Line: Employers should conduct reasonable due diligence during the onboarding process to determine whether a new hire (or even a subcontractor) is bound by a non-compete agreement or other restrictive covenant. Only by examining the candidate’s post-employment restrictions under the applicable state’s law may the new employer fully measure the risk of continuing the recruiting discussions.
Mark Saloman is Co-Chair of FordHarrison’s Non-Compete, Trade Secrets and Business Litigation practice group. If you have any questions regarding this decision, please feel free to contact Mark at msaloman@fordharrison.com, or Chelsey Lewis, cmlewis@fordharrison.com. You may also contact any member of the practice group or the FordHarrison attorney with whom you usually work.