Third parties interfering with contracts - a primer

Recognizing a Litigious Reality serves as a good reminder of things businesses should not do and applies more widely than its original audience of accountants.

Intentional interference with contractual relations is a business tort that is especially prevalent in the field of intellectual property. A third party may be liable for this tort by inducing an employee to breach a contract (restrictive covenant) with an employer and encouraging the use of confidential information, such as customer lists. Since customer lists have been held to be trade secrets in some jurisdictions, the third party could also face liability for misappropriation of trade secrets.

The article proceeds to discuss how hiring employees with non-compete agreements can lead to a claim of tortious interference. While the employee gets sued for violating the non-compete, the new employer finds itself sued for tortious interference.

The writer proceeds to some good advice here:

Accounting firms should study the state laws carefully and narrowly tailor their noncompete clauses to an employee’s activities within their organization. Firms should take several factors into consideration:

* The specific language of the clause is very important, and thus a specialized attorney should draft the contract.
* Restrictions must be reasonable and no broader than necessary to protect legitimate interests of the firm. Be specific as to which clients are covered. In states like New York, make sure the noncompete specifies clients with whom the accountant is given direct, substantive work.
* Require recruitment efforts to be firm-driven and consider implementing a client development plan that includes paying employees’ membership dues in community organizations where business may be developed.
* Consult state law for reasonable limitations in time, geography, clients, and scope of activities, and stay within these limits.
* Practice bans are more onerous than reimbursement provisions. It is appropriate to limit the enforcement of these covenants to very narrowly defined time frames, classes of clients, or activities.
* Reasonable-reimbursement clauses based on formulas related to the anticipated loss have greater public policy support than practice bans. An unbiased objective formula commonly used for practice sales to third parties is advisable.
* The employer should exercise good faith in implementing and enforcing covenants.
* It is advisable with existing employees to tie a noncompetition agreement to a raise or promotion.
* Do not require all employees to sign noncompete clauses. Instead, select only those employees who will have the opportunity or ability to unfairly compete.
* Avoid requiring employees or partners to sign noncompetition agreements without allowing time to review them.

Taken together, these steps will show a court that an employer is attempting to protect only the firm’s legitimate interests, while keeping the burden on the employee and the clients to a minimum.

I am far more blunt about non-compete agreements: get a lawyer to draft the non-compete agreement, discuss fully what information and positions need protection with that lawyer, and be sure to have the employee sign them.

I am a bit leery of the advice to tie a non-compete agreement to a raise but only because it is much better to have had one signed at the outset of the employment relationship. Remember I am writing from the perspective of Indiana law,. Our courts will enforce non-compete agreements, but that enforcement is conservative.

As for employers hiring employees with non-compete agreements, always get a copy of the agreement and have it reviewed by counsel.

Remember, if you want more information about retaining me for a case, please give me a call at 765-641-7906.