May 25, 2017

Good hiring practices: Make sure you check for non-competes (or else)

Posted in Employment Law by Gene Killian |

We (fortunately) don’t handle matters involving domestic violence at our firm, although long ago I worked as a counselor at a home for wayward youth, and often saw its effects. I remember, though, a police officer once telling me that the most useless piece of paper in the world was a restraining order.

Noncompetition agreements with key employees can often be similarly useless, although with far less horrible results.  We recently had a case in which a key employee left our client’s firm and tried to steal business.  The client believed that it had a valid noncompetition agreement in place, in part because signing such an agreement was a condition of employment at the firm. But when the CEO went into the file to retrieve the relevant agreement, one signature page was missing out of dozens and dozens of noncompetition agreements. You guessed it – it was the signature page from the noncompetition agreement for the employee who left and started competing with our client. The employee denied ever signing the agreement. We eventually settled.

Months later, the employee got fired by his new firm.  When the HR person at the new firm was cleaning out this fine fellow’s desk, guess what turned up? The missing signature page.  To the credit of our client’s competitor, they immediately contacted our client. We threatened legal action against our client’s former employee, this time for fraud, and the former employee, knowing we had him dead to rights, settled.

The problems with enforcing noncompetition agreements against former employees are myriad. Recently, in Acclaim Systems v. Infosys (which you can read here), the Third Circuit dealt with a battle between two IT service providers that had worked with Time Warner Cable on a project relating to Salesforce software. Time Warner decided to transfer the project from Company A (Acclaim) to Company B (Infosys). Four Acclaim employees then went to work for Infosys, either directly or as subcontractors. All four employees told Infosys (in response to direct questions) that they were not subject to any non-compete agreements.

I think you can see where this is going. The employees were, in fact, subject to non-competes, and, this being America, Acclaim sued.

In the suit, Acclaim contended (in part) that Infosys had tortiously interfered with Acclaim’s contractual relations.  One of the issues in the suit was whether Infosys knew of the noncompetition agreements.  Even though the record was clear that Infosys didn’t know, Acclaim argued that it could prove, based upon circumstantial evidence, “willful blindness” to the existence of the agreements, as well as the fact that Infosys had conducted insufficient due diligence, by asking the wrong questions.

Forget it, said the Third Circuit, writing in part: “Infosys did not shut its eyes but made numerous inquiries. While Acclaim asserts that those inquiries were not reasonable, there is….no record or evidence that Infosys had a conscious purpose to avoid learning the truth. The only evidence to that effect is [Acclaim’s] claim that Infosys conducted an unreasonable inquiry – which is once again speculative and circular.” The Court also ruled that “negligent” interference with contract was not a tort under Pennsylvania law  -- there has to be wrongful intent.  (“Negligent” interference with contract isn’t a tort under New Jersey law, either.)

What can you take away from all this? 

First, when hiring, always specifically ask whether prospects are subject to any noncompetition or nonsolicitation agreements. Prepare a statement verifying that no such agreements exist or apply, and have the employees sign. While you generally can’t contact the prospect’s current employer before hiring the employee, after hiring the employee, consider contacting the prior employer to confirm that no non-competes or nonsolicitation agreements exist. (As Reagan once said, “trust but verify.”) It’s true that Infosys avoided liability in this particular lawsuit, but it still had to spend money on legal fees, and it’s not difficult to foresee circumstances under which a company could be held to have had “knowledge” of prior non-competes based on circumstantial evidence. Why run that risk?

Second, make sure your files are under proper control.  Employees should not have access to personnel files without request, and paper files should be kept under lock and key.  All important documents such as contracts or non-competes should be scanned and saved digitally, with password protection.  Very few employees will be devious enough to sneak into files and remove signature pages like the guy in the case I described earlier in this post, but there’s no need to create the opportunity for fraud.  As the referee says before the match begins, protect yourself at all times. 

-- Gene Killian