Rock and Hard Place: Non-competes for new employers


Non-compete and non-solicitation provisions have been in my mind lately.  Almost like I had a presentation on them recently.

Usually, I get asked by employees about the limitations placed on them and by employers how they can use this tool to be fair to employees and contractors but still protect the company’s assets.  A question I hear less frequently, but is just is important is:  What liability do I have regarding new hires with non-competes?

One claim thatcomes up in many cases brought by a former employer against a new employer is tortious interference with a contract.  The theory goes the employee or contractor has a contract with the former employer.  The new employer knowingly hires the employee to do a job that violates that contract.  Because the new employer should know better and helped the employee breach the contract with the former employer, the new employer should be liable.

The elements of tortious interference with a contract are:

(1) the plaintiff had a contract or prospective contractual relationship with a third party;

(2) the defendant interfered with the relationship;

(3) the interference was intentional;

(4) a causal connection exists between the interference and the damages;

(5) the defendant was not privileged to interfere.

The first step that a former employer has to show:  There is, in fact, a valid contract in place.  As we have said, those non-compete and non-solicitation provisions are disfavored by courts.  That means that often former employers stumble right out of the gate.

Second, the former employer has to show the new employer actually interfered with the relationship.  The non-compete and non-solicitation provisions have to be narrowly tailored, which means that even if the contract is valid and enforceable, what is happening may not actually interfere with the contract.  Perhaps the employee or contractor is doing actions outside of the geographical area designated in the contract or a different role?

Third, the interference has to be intentional.  The employee never says that they have a non-compete?  Well, maybe the new employer is off the hook.  But, maybe not.   Every case is fact specific, but there are a few things that could be bad for the new employer.  What if the new employer knew that every other employee coming from that former employer had these provisions and stuck its proverbial head in the sand regarding this specific employee?

Scarier yet, a court in Virginia found that the intent to interfere may be established in cases where the defendant “does not act for the purpose of interfering with the contract, or desire it but knows that the interference is certain or substantially certain to occur as a result of his action.”  Now, the Virginia law is worded differently than Wisconsin’s, and there is still the fact that the new employer has to have at least a sniff of something off.  Therefore, it isn’t a killer, but Wisconsin courts have said that in determining intent, courts may consider an individual’s actions and statements. Ordinarily, it is reasonable to infer that a person intends the natural and probable consequences of his or her actions.

Fourth, there has to be an actual cause and effect connection between the interference by the new employer and the former employer.  If the former employer can’t show that they were actually damaged because of the new employer’s actions, then the claim fails.  To prove causation, a former employer must prove that the new employer’s actions are a “substantial factor” in producing the harm to the former employer.

Finally, the new employer can’t be privileged to interfere.  If the former employer says, “Hey, Mr. Employee, you can go work there in that role; we don’t care about that rinky-dink company” (preferably in writing).  Then after the employment, the former employer says, “Uh, never mind. I do mind if you work there,” the former employer is going to have some explaining to do.

So what to do?  The most conservative thing to do is ask, and maybe even make a prospective employee sign something saying no contract is in place if they say there isn’t.  If there is one in place, make sure you see it.  Or if you contact the former employer as a reference, perhaps you ask them if there is one in place.  You aren’t automatically sunk if you don’t

As a former employer, if someone calls for a reference, besides confirming dates of employment, consider being proactive and let them know a non-compete is in place and offer to send the provision their way.

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