Three months ago, you, as President of Awesome Advertising LLC (“Awesome”) hired Calvin the Creative Director who worked for Dewy, Hatem & Howe (“Dewey”) an ad agency about 30 miles away. You checked references and you really felt you did a very thorough job before you decided Calvin was the real deal and had an impeccable reputation. You were very excited about Calvin joining Awesome, and things started off swimmingly–until yesterday, when you received a summons and complaint. Yep, you’ve been sued–by Calvin’s former employer, Dewey, You’ve never had any prior dealings with Dewey. So what’s with the lawsuit? There was one thing your due diligence didn’t include–and now as some might say, it could come back to bite you. Join The EmpLAWyerologist after the jump to find out more…
So what’s that one thing? Calvin’s employment agreement with Dewey included a restrictive covenant, aka a “noncompete”. The noncompete prohibited Calvin from accepting employment with a direct competitor located within a 50-mile radius of Dewey’s office for a period of two years after his employment with Dewey ends. Many of you may be thinking, “So what?” The noncompete is between Calvin and Dewey. Awesome is not a party to that contract. Awesome probably didn’t even know Calvin existed when he signed his employment agreement with Dewey. At most it should just mean that either: a) Calvin should pay some damages; or b) Calvin has to step down from his new position. That may be a bummer for Awesome, but it’s still not a lawsuit. Why should Awesome be dragged into a dispute between Calvin and Dewey? What’s up with that????
Yes, the non-compete is between Calvin and Dewey. The problem is that by hiring a candidate away from your direct competitor wheb there is a non-compete, you interfered with the contractual agreements and obligations between Calvin and your competitor, Dewey. You helped Calvin breach the contract; the breach causes likely damage to Dewey. Dewey sued Awesome for the interference and the damage caused by that interference. Now wait a minute. You didn’t know Calvin had a noncompete. Calvin never mentioned it to you. Why should Awesome be punished? What happens now? Dewey may get an injunction ordering you to fire Calvin or may get an award of money damages and maybe even their legal fees if it can show that Awesome knew or should have known of the existence of the non-compete when you either hired or retained the employee.
Yes, Calvin should have told you, but you should have asked as part of your due diligence. Now, some of your friends have used the tactic of just not asking about the non-compete. They figure if they don’t ask, they don’t know, and if they don’t know they can’t be liable right? Wrong! First, there are certain industries and professions where non-competes are very common. From that fact alone the employer has reason to know or suspect the existence of a non-compete. Second, employers who hire employees away from a competitor often get a letter from the competitor advising them of the existence of a non-compete. That would have been the right thing — and the smart thing for Dewey to have done, because up until that point, the new employer can claim ignorance. After such a letter, however, a new employer clearly cannot claim it doesn’t know! If it retains the employee and, particularly if the employee uses confidential information s/he received from his or her former employer, or goes after the former employers clients or customers the new employer can expect to find itself in hot water. So here is what I would say to you and your friends: Don’t try to be cute. It is unlikely to pay off for you. (Now, if you had asked and Calvin told you he did not have a noncompete, and if there was no other reasonable way for you to learn of its existence, then you might avoid liability–and you might have a claim against Calvin — and you might still have to let him go.)
Let’s look at some examples from real-life cases:
In St. Jude Med. S.C. v. Biosense Inc., et al, a 2014 Biosense hired Jose DeCastro, formerly employed by St Jude, with full knowledge of his non-compete. St Jude sued Biosense alleging a) breach of contract by DeCastro; b) tortious interference with contract against Biosense; c) breach of employment agreement and duty of loyalty against DeCastro; d) tortious interference with prospective economic advantage against Biosense; e) unjust enrichment against Biosense; f) civil conspiracy against Biosense. This is a pretty good example of what you and Awesome will be up against if you were to do the same. Now, you are thinking, anyone can sue, but that doesn’t mean they win. That’s true, but Biosense did. The case proceeded to trial. The jury awarded damages of $47,680.52 against DeCastro and against Biosense for replacement costs it incurred and another $550,952 in lost profits resulting from Biosense’s tortious interference. That’s not all though. The court also determined that Biosense’s conduct forced St Jude into litigation and ordered Biosense to pay St Jude’s attorneys’ fees.
In De Puy Synthes Sales Inc v Jones the court refused to dismiss a tortious interference case against an employer that also knowingly hired an employee with a non-compete. In Sulzer Carbo Medics, Inc. v. Oregon Cardio Devices, Inc the 5th Circuit Court of Appeals in 2001 upheld a US District Court award of $943,723 in compensatory damages when Oregon Cardo Devices knowingly hired Sulzer Carbo Medics’ independent sales representative in violation of the sales representatives’ exclusive contracts with Sulzer.
So, the moral of the story is: before you hire someone make sure: a) s/he is not subject to a restrictive covenant; or b) your niche does not directly compete with that of the prior employer; or c) you otherwise address any such restrictions.
Join me next week for a look at how non-competes and deferred compensation might impact each other. See you then!
Disclaimer: This post and all its contents are for educational/informational purposes only, are not intended as legal advice, do not create an attorney-client relationship, and are not intended to replace consultation with competent employment counsel in the state(s) in which you employ people.
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