A few months ago, a three-member Third Circuit appellate panel in Acclaim Systems, Inc. v. Infosys, upheld a district court decision, which dismissed tortious interference claims against an employer for engaging with four individuals subject to non-compete agreements, because the employer had no knowledge of the non-competes at issue when it on-boarded them. While the Third Circuit designated this opinion as persuasive and therefore not binding precedent, the decision applies a commonsense approach to a legal claim very familiar to employment law practitioners—tortious interference with contractual relations.
Background
The Acclaim decision arose from a dispute between IT vendors, Acclaim and Infosys, who competed for a project with a major cable company. Acclaim serviced the project initially, but Infosys managed to take over the project after a period time. As this project transitioned from Acclaim to Infosys, one Acclaim employee and three Acclaim subcontractors transferred to Infosys to service this project. All four individuals had non-compete agreements with Acclaim. Acclaim sued Infosys for, among other claims, tortious interference with Acclaim’s non-compete agreements with the four individuals.
While Infosys knew that the four individuals previously worked at Acclaim, it was not aware of their non-compete restrictions until the commencement of litigation. Indeed, during the on-boarding process at Acclaim, one of the individuals affirmatively stated in an email and on an application that he did not have any contractual restrictions. The other three individuals orally stated that they were not subject to any non-compete agreements. The District Court granted summary judgment in favor of Infosys because Acclaim did not know the individuals had agreements to interfere with, and Acclaim appealed to the Third Circuit.
Acclaim Decision
The Third Circuit in Acclaim affirmed the District Court’s opinion, finding that under Pennsylvania law, Infosys could not tortiously interfere with contracts of which it had no knowledge. Acclaim’s first main argument was that Infosys simply asked the wrong questions of the individuals and that with the right kind of specificity, Infosys could have presumably extracted the necessary information about the existing non-competes. The Third Circuit saw this as a distinction without a difference—the answer that Infosys received from all four individuals was that they were not bound by any non-compete restrictions. Second, Acclaim argued that given the prevalence of non-competes in the IT industry, Infosys should have known that the four individuals must have been subject to restrictive covenants. The Third Circuit also rejected this argument, reasoning that such a standard would endorse claims for negligent interference with contractual relations, a claim not recognized under Pennsylvania law. The Acclaim court also refused to decide whether a standard of “willful blindness” might apply to tortious interference claims, noting, however, that even under this standard, Infosys had not shut its eyes. Instead, it made numerous inquiries concerning the individuals’ obligations.
Takeaways
- Again while the Acclaim decision is not binding (even in the Third Circuit), employers and practitioners alike should be attentive to the practical approach taken in the decision, as tortious inference is a typical claim in litigation over non-compete agreements because they offer a way to draw the new employer into the lawsuit.
- Companies should ask prospective employees whether they have existing non-compete agreements or other restrictive covenants. Recall from above, Infosys asked the four Acclaim-affiliated individuals whether they were subject to contractual restrictions and they all said no. Infosys was entitled to rely on those statements, and therefore could not be liable for tortious interference. But if Infosys had not asked these individuals about their potential restrictions, the Acclaim decision suggests that could be regarded as willful ignorance that could have exposed Infosys to liability.
- On the flip side, employers looking to protect their talent pools and goodwill should take appropriate steps with departing employees subject to restrictive covenants, including, without limitation: (1) reminding them of their ongoing obligations during their exit interviews; (2) providing them with an extra copy of their agreements containing restrictive covenants upon their departure; (3) including provisions in non-compete agreements requiring the employee to tell a new employer about their non-compete and other restrictions and authorizing the ex-employer to do so; and (4) where appropriate, providing a copy of restrictive agreements to the new employer (this tactic is easiest employed when the agreements themselves authorize this action).
