Articles

TORTIOUS INTERFERENCE CLAIMS ARISING FROM VIOLATIONS OF RESTRICTIVE COVENANTS IN EMPLOYMENT AGREEMENTS

NEW JERSEY LAW

Thomas D. Rees, Esquire

INTRODUCTION

New Jersey case law divides tortious interference claims into two categories: (1) claims for tortious interference with contractual rights of economic advantage (in the case of an existing contract) or (2) claims for tortious interference with prospective economic advantage (in the case of a prospective contract). Only a very few reported decisions in the federal and state courts within New Jersey deal with tortious interference claims in the context of restrictive covenants. These cases have all been decided in the past 25 years. Fortunately, two of the decisions contain comprehensive analyses of the law.

I. WHAT ARE THE ELEMENTS OF A CLAIM FOR TORTIOUS INTERFERENCE IN THE CONTEXT OF RECRUITING OR HIRING AN EMPLOYEE WITH A RESTRICTIVE COVENANT (e.g., NON-COMPETE, NON-SOLICITATION, OR NON-DISCLOSURE)?

In New Jersey, the elements of the cause of action for tortious interference with actual or prospective economic advantage are:

1. the plaintiff's possession of a contract or reasonable expectation of economic advantage, i.e., the plaintiff's possession or pursuit of business;
2. interference and harm inflicted intentionally and with malice, not necessarily in the sense of ill will, but in the sense of conduct that is wrongful and without justification or excuse under all of the circumstances;
3. a loss of actual or prospective gain caused by the interference; and
4. damage caused by the loss or injury.

See, e.g., Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 305-306, 666 A.2d 1028, 1043 (1995). In addition, the plaintiff must show that if there had been no interference, there was a reasonable probability that the plaintiff would have received the anticipated economic benefits. Id. The question of "malice" or "improper means" is factual, to be determined on a case-by-case basis. Id. The ultimate question is whether a defendant's conduct is sanctioned by the "rules of the game." Id.

A. Old Employer Versus New Employer for Tortious Interference With the Restrictive Covenant Itself

In Platinum Management, Inc. v. Dahms, supra, the New Jersey Superior Court dealt with a tortious interference claim arising from the breach of a restrictive covenant covering a sales executive in the toy business. The plaintiff, Platinum Management, Inc. ("PMI"), was a manufacturer, designer, and mass market seller of plush toys. The restrictive covenant provided that, during the term of employment, and for one year after termination for reasons other than mere expiration, the sales executive (Dahms) would not solicit or accept business from any of PMI's customers for anyone other than PMI, and would not disclose the names of any such customers to any other person. The restrictive covenant defined customers to include both actual customers within one year of the employee's termination and also customers under solicitation during this period. Dahms' employment agreement also required the sales executive to devote his entire business time and attention to PMI's business, and to serve PMI faithfully.

In late 1991, Dahms resigned from employment with PMI. Dahms' resignation took place right before the Hong Kong Toy Fair, at which PMI usually made presentations to customers that provided over 50% of PMI's annual sales revenue. Before resigning, Dahms and PMI's marketing executive had met with representatives of PMI's principal competitor, Great American Fun Corp. ("GAF"); had discussed customers of PMI that could be brought to GAF; and been hired by GAF. GAF had recruited both individuals vigorously, and required Dahms to sign a confidentiality and non-compete agreement. Right after Dahms joined GAF, Dahms solicited his former customers to leave PMI, making negative comments about PMI's ability to ship product. Before leaving PMI, Dahms had set the stage for his effort by neglecting to try to retain these customers' business for PMI; specifically, Dahms had failed to schedule appointments for these customers at the Hong Kong Toy Fair.

Dahms diverted at least 45 customers from PMI to GAF. When PMI assigned customers to Dahms, at least 90% of Dahms' customers were (or had been) PMI's customers. The diversion of customers helped GAF to become a competitor of PMI's in the mass market toy business. A sizable portion of GAF's new business came from PMI's customers. Platinum Management, Inc. v. Dahms, supra, 285 N.J. Super. 274, 290-292, 296-299, 666 A.2d 1036-1037, 1039.

The Court then held that the corporate defendant/new employer, GAF, Dahms, and PMI's former marketing executive had all tortiously interfered with PMI's existing and prospective economic advantage. The Court found that PMI's former marketing executive and GAF tortiously interfered with Dahms' existing employment relationship with PMI. Platinum Management, Inc. v. Dahms, supra, 285 N.J. Super. 274, 308, 666 A.2d 1028, 1044. The Court noted that GAF recruited the former marketing executive from PMI, then used the former marketing executive to recruit Dahms, without disclosing the marketing executive's new affiliation to PMI. By acting in this deceptive manner, GAF deprived PMI of the opportunity to counteract GAF's hidden influence.

The federal trial and appellate courts covering New Jersey also dealt with a new employer's tortious interference with an old employer's restrictive employment covenant in Campbell Soup Co. v. ConAgra, Inc., 801 F. Supp. 1298, 1306 (D. N.J. 1991), vacated and remanded on other grounds, 977 F. 2d 86 (3d Cir. 1992). In Campbell Soup, ConAgra hired a Campbell's employee who was knowledgeable about Campbell's development and marketing of prepared chicken meals. The employee had signed a confidentiality and trade secret agreement with Campbell. The agreement covered such items as recipes, manufacturing processes, research results, and manufacturing layouts. Under the agreement, the employee was prevented from using any trade secrets, inventions, or business ideas which she conceived or to which she was exposed while working for Campbell. The agreement also required the employee to keep all Campbell trade secrets confidential. Campbell Soup Co. v. ConAgra, Inc., 801 F. Supp. 1298, 1300 (D. N.J. 1991).

The District Court held that, in order to prevail on a claim of tortious interference with the agreement, Campbell had to prove (1) that ConAgra had interfered with the employment relationship between Campbell and the employee, and (2) that ConAgra had done so with malice, i.e., the intentional doing of a wrongful act without justification or excuse. Campbell Soup Co. v. ConAgra, Inc., supra. The Court held that Campbell had met its burden of proving likelihood of success on the merits for a preliminary injunction. Campbell had shown that ConAgra had hired the employee with knowledge of her background at Campbell; assigned her to work on a similar product; and had clear notice of the employee's trade secret agreement with Campbell. Campbell Soup Co. v. ConAgra, Inc., 801 F. Supp. 1298, 1307. The Court of Appeals reversed, on the ground that Campbell had failed to show immediate and irreparable harm justifying a preliminary injunction. The Court of Appeals noted the trade secret's status within the public domain and the unlikelihood that a competing product would be marketed shortly. Campbell Soup Co. v. ConAgra, Inc., 977 F.2d 86 (3d Cir. 1992).

A tortious interference action against a new employer will fail if the old employer cannot show that the new employer both knew of the restrictive covenant and induced the old employer's employees to leave and breach the contract. The case of In re: Golden Distributors, LTD (Golden Distributors, LTD v. Weber), 128 B.R. 352 (Bankr. S. D. N.Y. 1991) (applying New Jersey law), illustrates this point. In In re: Golden Distributors, the new employer knew of the covenant but had done nothing to induce the breach, and therefore could not be held liable for intentional interference. The new employer (Middlesex) received unsolicited applications from the old employer's key employees, including Weber, after the old employer (Golden Distributors) filed for Chapter 11 reorganization and closed its distribution center in New Jersey. The Bankruptcy Court held,

[The fact that] Weber gave Middlesex a copy of his employment contract with Golden including the restrictive covenant, does not amount to an intentional or tortious interference with Golden's right of economic advantage.

B. Old Employer Versus New Employer for Tortious Interference With the Old Employer's Business Contracts or Expectancies

In Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 770 A.2d 1158 (2001), the New Jersey Supreme Court upheld a liability insurance adjuster's action for tortious interference against two former employees, only one of whom had a non-compete, and against the employees' newly formed business entity. The principal defendant, Walters, had signed a restrictive covenant with the old employer (Lamorte Burns), in which he agreed to maintain in confidence all client information, and agreed that for 12 months after termination of his employment, he would not solicit or accept any claim, case, or dispute handled by Lamorte Burns during his employment. Both Walters and the other departing employee (Nixon) worked in the old employer's branch office in New Jersey, which principally handled marine insurance claims. The two employees constituted the old employer's entire maritime protection and indemnity ("P&I") claims adjustment group in New Jersey. The action arose after the two employees left Lamorte Burns abruptly, formed their own business (the Walters Nixon Group), and aggressively (and successfully) solicited Lamorte Burns' customers.

In Lamorte Burns & Co., Inc. v. Walters, supra, the Trial Division of the New Jersey Superior Court granted summary judgment to the old employer on liability and awarded the plaintiff $232,684 in compensatory damages and an additional $62,816 in punitive damages covering counsel fees and costs. The Appellate Division of the New Jersey Superior Court upheld the trial court's ruling that the restrictive covenant had been breached, but reversed the trial court's grant of summary judgment on the tort claims, including the claim for tortious interference. The New Jersey Supreme Court (reversing the Superior Court Appellate Division in part), reinstated the trial court's summary judgment on liability and damages for breach of the restrictive covenant and allied tort claims, including tortious interference.

The evidence in Lamorte Burns showed that the two employees had planned their departure and diversion of customers for a long time. The two employees had incorporated the new business in 1996, well over a year before leaving Lamorte Burns. These two employees then secretly developed a target solicitation list from Lamorte Burns' clients containing clients' names, addresses, phone and fax numbers, file numbers, and claim information. The defendants transferred this information to Walters' home computer. In October 1997, the defendants leased space for new offices. On the weekend before Christmas 1997, Walters and Nixon resigned, faxing resignation letters to the company's president. The defendants then left the old employer's offices without any company property (other than the previously transferred client information) and proceeded to their new office. The two defendants immediately faxed solicitation letters and transfer authorization forms to many of Lamorte Burns' clients. The fax compared the new company's fees favorably with Lamorte Burns'. The transfer request form included a list of open files which the ex-employees said "we" had been handling for you. The makeup of the form was designed to facilitate transfer of the files. The information used to contact the old employer's clients came from confidential claim information in the old employer's files. Within two weeks, many of Lamorte Burns' clients had transferred their P&I claim files to the new entity, and by the time of the Court's hearing on Lamorte Burns' motion for summary judgment, 44% (153) of Lamorte Burns' 350 P&I clients had transferred their P&I claim files.

The New Jersey Supreme Court decided that the individual and business defendants had tortiously interfered with plaintiff's economic advantage by interfering with the plaintiff's clients. The Court first set forth the policy that underlies the tortious interference claim, "An action for tortious interference with a prospective business relation protects the right to pursue one's business, calling, or occupation, free from undue influence or molestation." 167 N.J. 285, 305, 770 A.2d 1158, 1170 (2001). The Court outlined the burden of proof that faced the old employer:

To prove its claim, plaintiff must show that it had a reasonable expectation of economic advantage that was lost as a direct result of defendants' malicious interference, and that it suffered losses thereby.

The Supreme Court in Lamorte Burns held that "malice" did not mean "ill will;" that malice was determinable on an individual basis, under a flexible standard viewing the defendant's actions in the context of the facts presented; and that a finding of "malice" involved an inquiry of whether the conduct was sanctioned by the "rules of the game." The Court stated that "[w]here a plaintiff's loss of business is merely the incident of healthy competition, there is no compensable tort injury." Lamorte Burns & Co., Inc. v. Walters, supra, 167 N.J. 285, 306, 770 A.2d 1158, 1170. Instead, to be actionable, the conduct had to be both "injurious and transgressive of generally accepted standards of common morality or of law . . . . The line clearly is drawn at conduct that is fraudulent, dishonest, or illegal and thereby interferes with the competitor's economic advantage." Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 306-307, 770 A.2d 1158, 1171 (2001). The Court then condemned the ex-employees' conduct:

Walters and Nixon gathered and used Lamorte's protected information to effect a surprise weekend coup, secretly soliciting Lamorte's clients at a time when Lamorte's knowledge of their competition was delayed, to put a best light on the tactic. That confidential and proprietary information was provided to defendants only for the purpose of servicing clients on behalf of Lamorte, not to solicit those clients away from Lamorte. At the time of defendants' 'weekend surprise', plaintiff enjoyed a relationship with over 30 P&I clients. Those clients were obtained on Lamorte's time and at its expense. Lamorte's clients were then solicited and acquired by defendants' secretive taking of plaintiff's protected client information, and their ensuing strategically timed resignation and solicitation campaign. Those acts clearly indicate malice. Defendants' conduct was not only unethical, but also unlawful in that it constituted the wrongful taking of Lamorte's property.

We respect the principles of free competition, but defendants' taking of plaintiff's confidential and proprietary property and then using it effectively to target plaintiffs' clients, is contrary to the notion of free competition that is fair.

1. the new employer's diligent pursuit of employment of the old employer's executives in order to seriously impair the old employer's business while increasing the new employer's business;
2. the employees' meetings with the new employer while the employees were still on the old employer's payroll, in order to discuss expanding the new employer's toy market and to identify the old employer's accounts that the new employees could bring with them;
3. the PMI sales executive's neglect of his duty to make necessary appointments for the old employer;
4. the employees' delay in announcing their resignations until it became very difficult for the old employer to contact customers and obtain substitute help; and
5. the immediate solicitation of the old employer's customers once the sales executive joined the new employer, using confidential customer information and employing false and misleading negative statements about the old employer, its financial condition, and its ability to ship product.

   The Court found that this pattern of conduct demonstrated "not only legal, but actual malice." The Court continued,

The acts of GAF to increase its business by intentionally seeking out and employing PMI's key sales employees, so that it could sell to PMI's existing customers by reason of the customer information they had, constituted intentional wrongful acts committed without justification or excuse. That conduct is not sanctioned by the rules of the game. It is not justified merely because [the new employer] is a competitor motivated by profit. Platinum Management, Inc. v. Dahms, supra, 285 N.J. Super. 274, 307, 666 A.2d 1028, 1044 (1995) (citations omitted). Additionally, the Court found that the new employer acted in a "predatory" manner, "out of ill will," and that these actions exacerbated the nature of the wrong. Id.

Courts in New Jersey will consider tortious interference claims separately from claims for violation of restrictive covenants. In Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 770 A.2d 1158 (2001), and Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 666 A.2d 1028 (1995), the Court found separately that the defendants had tortiously interfered with economic advantage after finding that the defendants had violated the restrictive covenants. The old employer who claims tortious interference must necessarily show a loss of customers. As the Court held in Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 306, 666 A.2d 1028, 1043 (1995):

Plaintiff must show that if there had been no interference, there was a reasonable probability that it would have received the anticipated economic benefits. Platinum Management, Inc. v. Dahms, supra.

The tortious interference findings in Platinum Management, Inc. v. Dahms, supra, were not accompanied by complete enforcement of the restrictive covenant. The Superior Court enforced the restrictive covenant only partially, and refused to award damages for the loss of customers whom the new employer could legitimately solicit. Platinum Management, Inc. v. Dahms, supra, 285 N.J. Super. 274, 298, 666 A.2d 1028, 1038-40 (1995).

Additionally, in the bankruptcy case of In re: Golden Distributors, LTD (Golden Distributors, LTD v. Weber), 128 B.R. 352, 365 (Bankr. S. D. N.Y. 1991), (construing New Jersey law), the Bankruptcy Court held that the fact that the employee gave the new employer a copy of his restrictive covenant before he joined the new employer, was not sufficient to establish liability for intentional interference, particularly when the old employer had breached its obligations under the employment agreement. In Golden, the Bankruptcy Court also found that any loss of customers by the old employer was at least partially the result of closing of facilities by the former employer.

II. TORTIOUS INTERFERENCE IN THE CONTEXT OF THE RESTRICTIVE COVENANT ITSELF

C. What Defenses to this Type of Tortious Interference Claim Generally are Available?

1. Invalidity or Unenforceability of the Restrictive Covenant

The unenforceability of the restrictive covenant would appear to provide a defense to an intentional interference claim. In Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 298, 666 A.2d 1028, 1040 (1995), the New Jersey Superior Court refused to enforce the restrictive covenant to the extent that the covenant would have prohibited solicitation of the old employer's prospective customers. The Court merely deleted the amount of business diverted from prospective customers of plaintiffs from the damages assessed against the defendants.

2. Breach of Contract by the Former Employer

The former employer's breach of contract will provide a basis for avoidance of the restrictive covenant, and resultant avoidance of a tortious interference claim. The courts will engage in a fact-specific analysis in weighing whether the breach is a possible defense. In the case of In re: Golden Distributors, LTD (Golden Distributors, LTD v. Weber), 128 B.R. 352 (Bankr. S. D. N.Y. 1991) (interpreting New Jersey law), the United States Bankruptcy Court for the Southern District of New York refused to enforce claims for injunctive relief involving an employee who had signed a three-year employment contract containing an agreement not to compete with the ex-employer for one year after his termination. The ex-employer had filed for bankruptcy; eliminated or severely reduced fringe benefits to the employee; and closed the division in which the employee worked and attempted to relocate the employee. The Bankruptcy Court held that the new employer "did not act unreasonably" in hiring the employee when the employee told the new employer that the reduction in his contractual benefits amounted to a breach of contract and that, therefore, he did not view himself as being contractually bound to the old employer. In re: Golden Distributors, LTD (Golden Distributors, LTD v. Weber), 128 B.R. 352, 363 (Bankr. S. D. N.Y. 1991).

A breach of contract by the former employer in Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 302, 666 A.2d 1028, 1041-1042 (1995), did not discharge the employee from obligations under a restrictive covenant, however. In Platinum Management, Inc. v. Dahms, the old employer failed to pay the employee a bonus override. The Court held that the failure to pay the bonus override was not so material a breach as to warrant the employee's failure to perform the covenant not to compete. Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 302, 666 A.2d 1028, 1042. The Court awarded the employee his incentive bonus as a counterclaim to the old employer's damage award for the employee's wrongful conduct. Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 313-314, 666 A.2d 1028, 1047 (1995).

3. Unclean Hands, Estoppel or Other Equitable Defenses

In Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 313, 666 A.2d 1028, 1047 (1995), the New Jersey Superior Court entered judgment in favor of the old employer's former vice president of marketing because of the old employer's shabby treatment and inequitable conduct toward this individual. This individual was not subject to a restrictive covenant. The old employer had failed to properly use this individual's talents, discounted his efforts for the company, and fired him and then re-hired him part-time at a substantially reduced salary after he had suffered a leg injury. Platinum Management, Inc. v. Dahms, supra, 285 N.J. Super. At 287, 666 A.2d at 1034. The Superior Court stated that although this employee had violated his duty of loyalty in disclosing customer information to the new employer and in assisting the new employer in recruiting the old employer's sales executive, and was a party to the tortious interference involved therein, the old employer's unfair treatment barred any relief against him for such wrongful conduct. Platinum Management, Inc. v. Dahms, 285 N.J. Super. at 313, 6661 A.2d at 1047.

D. What are the Parameters of the Affirmative Defense of Justification or the Competitor's Privilege?

In Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 306, 770 A.2d 1158, 1170 (2001), the New Jersey Supreme Court quoted an 1893 case that stated,

[W]hile a trader may lawfully engage in the sharpest competition with those in like businesses by holding out extraordinary inducements, by representing his own wares to be better and cheaper than others, yet when he oversteps that line and commits an act with the malicious intent of inflicting injury upon his rival's business, his conduct is illegal, and, if damage results from it, the injured party is entitled to redress.

Lamorte Burns & Co., Inc. v. Walters, supra (citation omitted).

Essentially, the test turns on the conduct of the new employer or departing employee. Healthy competition, and promotions and comparisons that are incident thereto, are permissible; conduct that is fraudulent, dishonest, or illegal is not permissible. Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 306-307, 770 A.2d 1158, 1170-1171.

Additionally, the defendant may show that the old employer is no longer able to serve certain customers. For example, in In re: Golden Distributors, LTD (Golden Distributors, LTD v. Weber), 128 B.R. 352, 365 (Bankr. S. D. N.Y. 1991), the Bankruptcy Court found that any loss of customers by the old employer was at least partially the result of closing of facilities by the former employer.

E. What Relief is Available to the Former Employer?

1. What Damages are Available, and how are They Measured?

a. Compensatory Damages - In Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 308-313, 666 A.2d 1028, 1044-1047 (1995), the Superior Court awarded the old employer damages equivalent to one year's net profits earned by the new employer, after computing a deduction of a reasonable amount for overhead. The Court refused to extend the award beyond the end of the sales executive's one-year non-compete. The Court also refused to award gross profits. The Court held that the new employer (GAF) and the ex-employee subject to the restrictive covenant (Dahms) were liable to the old employer for the damages.

In Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 770 A.2d 1158 (2001), the New Jersey Supreme Court (reversing the Superior Court Appellate Division) awarded the old employer $232,684 in compensatory damages for defendants' breach of the old employer's restrictive covenant, tortious interference with economic advantage, and commission of related torts. The defendants obtained the transfer of active claim files from all 33 of the plaintiff's active marine protection and indemnity ("P&I") clients. By the time that the trial court held a hearing on summary judgment, defendants had obtained about 44% of the old employer's 350 active P&I files.

b. Punitive Damages - In Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 770 A.2d 1158 (2001), the New Jersey Supreme Court reinstated the trial court's award of $62,813 in punitive damages covering counsel fees and costs.

2. What Type of Injunctive Relief is Available?

The test for a preliminary injunction in federal court is set forth in Campbell Soup Co. v. ConAgra, Inc., 801 F. Supp. 1298, 1303 (D. N.J. 1991), vacated on other grounds, 977 F. 2d 83 (3d Cir. 1992). To obtain an injunction, the movant must produce evidence sufficient to convince the court that the following four factors favor preliminary relief:

1. Likelihood of prevailing on the merits after a trial;
2. the extent to which the movant is being irreparably harmed by the alleged conduct;
3. the extent to which the defendants will suffer irreparable harm; and
4. the public interest.

No tortious interference case involving restrictive covenants decided by the New Jersey state court discussed the standard for injunctive relief; these cases involved damages only. In unfair business competition cases generally, preliminary injunctive relief is available in the New Jersey courts on a showing of (1) irreparable harm that cannot be compensated by damages; (2) a reasonable probability of success on the merits; (3) relief that is necessary to preserve the status quo; and (4) a balance of hardships that justifies granting injunctive relief. Temporary restraints are rarely available before a hearing on a preliminary injunction.

3. Are There Circumstances Where Attorneys Fees are Recoverable?

In Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 770 A.2d 1158 (2001), the New Jersey Supreme Court awarded the old employer attorneys fees as an element of a punitive damage award of $62,816.

F. What Similar Claims Does the State Recognize (e.g., Unfair Competition, Conspiracy, etc.)?

Examples of similar claims in tortious interference cases include the following: Breach of Duty of Loyalty - Under New Jersey law, an employee owes an employer a duty of undivided loyalty while still employed. Any action to solicit an employer's customers or other acts of secret competition breach this duty of loyalty. Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 303, 666 A.2d 1028, 1042 (1995). An employee must not while employed act contrary to the employer's interest. See Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 302, 770 A.2d 1158, 1168 (2001). Employees are under a duty not to compete with their employer while employees of their employer. New Jersey observes the Restatement (Second) of Agency's provision that unless otherwise agreed, an agent is ordinarily subject to a duty not to compete with the principal concerning the subject matter of the agency. Restatement (Second) of Agency, § 393. Lamorte Burns & Co., Inc. v. Walters, supra. Comment e. to Restatement § 393 states: [B]efore the end of his employment, the employee can properly purchase a rival business and upon termination of employment immediately compete. He is not, however, entitled to solicit such customers for such rival business before the end of his employment nor can he properly do other similar acts in direct competition with the employer's business.

In Lamorte Burns & Co., Inc. v. Walters, supra, the New Jersey Supreme Court held that, although at-will employees may prepare to compete with an employer before resigning, the employees in Lamorte Burns had gone much farther, having gathered client information by stealth and intentionally begun a process of subverting the employer's business while still employed. Lamorte Burns & Co., Inc. v. Walters, supra, 167 N.J. 285, 305, 770 A.2d 1158, 1170 (2001).

In both Platinum Management, Inc. v. Dahms, supra, and Lamorte Burns & Co., Inc. v. Walters, supra, the courts found that the employees had breached duties of loyalty by taking such actions as privately soliciting the employer's customers (Lamorte); gathering confidential and proprietary information regarding customers while still employed in order to seek an advantage in competition (Lamorte); neglecting to make appointments with customers of old employer during a critical period, in order to be in a position to solicit these customers for the new employer (Platinum); secretly meeting with the new employer before resigning from the old employer to discuss solicitation of the old employer's customers and the old employer's key sales employee before resigning from the old employer (Platinum); resigning immediately before an industry-wide sales event (Platinum); and then aggressively soliciting customers for the new employer and criticizing the old employer (Platinum).

In order to be actionable as a breach of the duty of loyalty, an employee's competitive activities must take place while still employed by the old employer. Thus, in Campbell Soup Co. v. ConAgra, Inc., 801 F. Supp. 1298, 1307 (D. N.J. 1991), reversed on other grounds, 977 F. 2d 86 (3d Cir. 1992), the United States District Court for the District of New Jersey refused to enjoin the individual defendant for breach of a duty of loyalty, finding that the "alleged misbehavior" took place after the end of the individual's employment.

2. Unfair Competition - The New Jersey Supreme Court found that the breakaway employees were guilty of unfair competition in Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 309, 770 A.2d 1158, 1171 (2001). The Court made no specific findings on this subject, however. Instead, the Court relied on its findings of tortious interference.

1. Is a Potential Employer Better Off Not Asking Whether a Prospective Employee Has a Restrictive Covenant?

No. In Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 298, 666 A.2d 1028 (1995), the New Jersey Superior Court stated that a new employer will not avoid liability for tortious interference or violation of a restrictive covenant by simply failing to inquire of the old employee about any restrictive covenant. The Court stated:

In view of [the new employer's] own employee restrictive covenants practice - [requiring employees to sign very restrictive agreements] the failure to ask can reasonably be interpreted as intentional or at least a form of recklessness - namely a desire to hire Dahms, irrespective of any such agreement with [the old employer]. It was a form of willful blindness.

In Campbell Soup Co. v. ConAgra, Inc., 801 F. Supp. 1298 (D. N.J. 1991), reversed on other grounds, 977 F. 2d 86 (3d Cir. 1992), the United States District Court for the District of New Jersey expressed similar (if muted) disapproval of ConAgra's failure to ask its new employee about trade secrets of Campbell Soup after receiving a trade secret notice in Campbell. The District Court held, "To promote an atmosphere of commercial morality and fairness, the court believes that ConAgra, with the knowledge it possessed with respect to Rosenthal's background and duties at Campbell, should have questioned Rosenthal regarding the notice letter sent by Campbell." Campbell Soup Co. v. ConAgra, Inc., supra, 801 F. Supp. at 1305. Compounding the new employer's problems in Campbell Soup was the employee's misleading statement to the new employer that she was not bound by any confidentiality agreement. Campbell Soup Co. v. ConAgra, Inc., supra, 801 F. Supp. at 1300.

2. If a New Employer Hires a New Employee Without Knowledge of a Restrictive Covenant, is the New Employer at Risk if it Continues to Employ the New Employee After Learning of the Restrictive Covenant?

Not always. In In re: Golden Distributors, LTD (Golden Distributors, LTD v. Weber), 128 B.R. 352, 365 (Bankr. S. D. N.Y. 1991) (applying New Jersey law), the Bankruptcy Court held that the new employer was not liable despite knowing of the restrictive covenant. The new employer was allowed to rely on the employee's statement that the old employer had breached the contract and that the employee was therefore no longer contractually bound to the old employer. A new employer may be chargeable with knowledge of the employee's restrictive covenant, however, if the new employer insists on a restrictive covenant when hiring the new employee, or if the new employer engages in predatory conduct. This was the case in Platinum Management, Inc. v. Dahms, supra.

3. Does Consultation With Outside Counsel Provide a Defense to a Claim of Tortious Interference?

No cases were found on this subject.

On the basis of holdings in Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 666 A.2d 1028 (1995), and in In re: Golden Distributors, LTD (Golden Distributors, LTD v. Weber), 128 B.R. 352, 363 (Bankr. S. D. N.Y. 1991) (construing New Jersey law), the new employer should take the following steps:

1. ask the prospective employee about the existence of any restrictive covenant, and ask that prospective employee show the employer the covenant;
2. review the restrictive covenant;
3. review any circumstances which may discharge the employee from obligations under the restrictive covenant, e.g., the old employer's breach (In re: Golden Distributors, LTD., supra);
4. if necessary, develop a strategy for using the new employee's abilities that does not depend upon a violation of the restrictive covenant.

No cases have been found on this subject in the context of tortious interference claims.

New Jersey corporations may indemnify corporate agents (including employees) in any action involving the corporate agent by reason of being a corporate agent, as broadly set forth under N.J.S.A. 14A: 3-5. The power to indemnify generally exists if the corporate agent acted in good faith and in a manner reasonably believed to be in the best interests of the corporation. Indemnification is mandatory if the corporate agent has been successful on the merits. N.J.S.A. 14A: 3-5(4). Indemnification is also possible through adoption of a by-law, by agreement, or by shareholder vote. N.J.S.A. 14A: 3-5(8).

No cases have been found on this subject in the context of tortious interference claims.

No case has been found that deals specifically with this subject. In one case, however, Hogan v. Bergen Brunswig Corp., 153 N.J. Super. 37, 378 A.2d 1164 (1977), the Appellate Division of the New Jersey Superior Court implicitly rejected an employee's claim that the restrictive covenant interfered with the employee's future business relationships. The covenant in question was an agreement not to solicit customers for 12 months following the termination of the employee's employment. The employee had signed the restrictive covenant after being employed for a number of years. The employee was employed for several years after signing the covenant, and was then fired. The Court did not resolve the intentional interference issue, but held simply that retention of the employee for three years after signature of the restrictive covenant constituted sufficient consideration for enforcement of the restrictive covenant. Hogan v. Bergen Brunswig Corp., supra, 153 N.J. Super. 37, 43, 378 A.2d 1164, 1167 (1977).