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Is Ignorance Bliss When it Comes to Restrictive Covenants?

By Gillian McKean Bidgood

In Acclaim Systems, Inc. v. Infosys, Ltd, et al., the Third Circuit demonstrated that ignorance can sometimes be bliss when it comes to restrictive covenants. In that case, a large cable provider contracted with Acclaim Systems to provide information technology consulting services for a customer relations platform. Partway through the project, the cable provider transferred the work to Infosys. One Acclaim Systems employee and three subcontractors followed the project to Infosys. Each of the four workers had non-competes that prohibited them from working for another company on the cable project. Infosys never learned of those agreements despite asking the workers (including a question on the job application) and asking the staffing company providing the subcontractors. The Third Circuit affirmed summary judgment for Infosys because it could not intend to interfere with non-competition covenants of which it was unaware. This case highlights four important employment practices.

1.    Ask Questions When On-Boarding

As the decision in Acclaim Systems demonstrates, asking potential employees, contractors, and staffing companies whether a worker or contracting company has signed any restrictive covenants can be a key strategy to avoid tortious interference claims. In particular, a question on a job application and a covenant in a contract can be important evidence that the employer or contracting principal performed due diligence. Indeed, the decision in Acclaim Systems suggests that a company that does not ask about restrictive covenants to avoid claims of tortious interference could still be liable for tortious interference, particularly in industries like information technology consulting where restrictive covenants are common.

2.    Provide a Copy of Agreements at Departure

In addition to verbally reminding workers of any applicable restrictive covenants during exit interviews, companies that obtain restrictive covenants should provide the worker with a copy of the executed restrictive covenant agreement (and should document what was provided). This practice not only ensures that the worker can consult the actual terms (as opposed to his or her potentially faulty memory), but it also makes it possible for the worker to provide the agreement to potential employers and contracting principals. 

3.    Notify Subsequent Potential Employers and Contracting Principals

As explained in a prior blog post,  contacting potential and subsequent employers and contracting principals can be an important strategy in enforcing restrictive covenants. In addition to verbal contact, companies should consider sending a copy of the agreement containing restrictive covenants to potential and subsequent employers and contracting principals before or even after an alleged breach.

4.    Get Permission to Notify Potential and Subsequent Employers and Contracting Principals

A company obtaining restrictive covenants should consider including a provision permitting the company to notify potential and subsequent employers and contracting principals of the restrictive covenants. The company can make the new employer or contractor aware of the worker’s obligations while minimizing the risk of contractual interference or other claims from the worker.