Hiring an applicant who has a non-compete or non-solicit agreement with a prior employer creates risk for the both the individual and the new employer. The prior employer can sue both the applicant for violating the contract and the new employer for inducing that violation. Lawyers call this tortious interference with a contract.
A successful tortious interference claim requires proof that the new employer’s interference was without justification. In Minnesota and other jurisdictions, a new employer can establish a “justification” defense by proving it reasonably relied on advice from counsel that the contract was unenforceable, or that the applicant’s planned conduct would not be a breach of the contract. In other words, if an attorney reviews the restrictive covenant at issue, informs the new employer it is okay to hire the applicant, and the new employer reasonably relies on that advice, then the new employer is completely safe from liability on this claim. This liability limitation can be critical, because at least in Minnesota, if the justification defense is not attainable, the damages the prior employer can obtain from the new employer on the tortious interference claim include the so-called Kallock attorneys’ fees (based on the Kallok v. Medtronic decision) the prior employer spends enforcing the contract against the applicant—even when the underlying contract contains no fee-shifting provision.
The problem many new employers face, though, is missing the boat on getting a lawyer’s opinion. They may not be aware of a restrictive covenant agreement until late in the hiring process (when the business folks want to onboard right away), or they may not be aware of the advice-of-counsel justification defense until it is referenced by litigation counsel, after the prior employer has sued.
Is the new employer out of luck? Maybe not. While no Minnesota court decisions have expressly endorsed the idea, nothing in existing case law prevents a new employer from obtaining a justification opinion after the applicant has started employment (and therefore after the alleged contract breach has started and after litigation has commenced), and thus aimed at limiting prospective liability.
The critical concept of using a post-hire justification opinion is the determination of when a contract breach occurs (and consequently when inducement of that breach occurs), and what damages flow from the wrongdoing. In the non-compete context, a breach obviously can occur when the new employer commences employment of the applicant. But the breach is a continuous one—as the applicant remains employed and is competing with the prior employer in violation of a non-compete. Damages flowing from the breach can similarly be continuous, as the prior employer suffers new harms from the ongoing unfair competition. The concept applies even more strongly to a customer non-solicit, where each breach can occur every time the applicant solicits a customer, and new damages can accrue for each new customer acquisition. Finally, asserting the advice-of-counsel opinion in a post-hiring setting should also cut off ongoing Kallok fees, since the new employer’s prospective conduct in employing the applicant should then be considered justified and not the cause of the prior employer incurrent fees to enforce the underlying contract.
New employers should therefore consider obtaining advice from an opinion counsel, separate from litigation counsel, on the enforceability of a restrictive covenant even if litigation has commenced over any restrictive covenants. For considerations in getting such an opinion, take a look here.
