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Unlawful Competition Negates Any Justification

Where a business convinced its competitor’s employee to take the competitor’s trade secrets before coming to work for the business, any justification for tortiously interfering with the employee’s contract was lost.  Mechanical Systems and Services, Inc. v. Howard, 2021 NCBC 48 (J. Conrad). As a result, Plaintiff’s claim that Defendants tortiously interfered with its former employee’s non-disclosure contract survived dismissal.

Plaintiff and its subsidiary companies provide an array of maintenance and construction services, including HVAC.  In 2018 Defendant Howard resigned as Plaintiff’s president.  In 2020, Howard acquired Climate Systems, LLC (“Climate Systems”), a business that competed directly with Plaintiff.  Howard then began soliciting Plaintiff’s employees, including Defendant Drinkwater.  Drinkwater had an employment agreement with Plaintiff that precluded Drinkwater from soliciting the customers and employees of Plaintiff or its subsidiaries and further restricted his use and disclosure of Plaintiff’s trade secrets.   Plaintiff alleged Howard and Climate Systems knew the terms of Drinkerwater’s employment agreement but induced him to violate it anyway. Specifically, after Drinkwater came to work for Howard, Howard allegedly encouraged Drinkwater to use his knowledge about Plaintiff’s trade secrets to compete against Plaintiff.  Plaintiff sued asserting, inter alia, Howard tortiously interfered with the non-disclosure portion of Drinkwater’s employment agreement.  Howard moved to dismiss, contending that because he and Climate Systems were Plaintiff’s competitors, they were justified in interfering with any of Drinkwater’s employment agreement.

The Business Court disagreed.  While recognizing that competition can constitute justifiable interference with another business’ contracts, the Business Court nonetheless held that the interference must be by lawful means.  Because Howard’s method of competition was not lawful (i.e., convincing Drinkwater to misappropriate Plaintiff’s trade secrets), Defendants’ actions were not justified.  Absent justification, the Business Court held Plaintiff’s remaining allegations were sufficient to allow the tortious interference claim to survive.

 Based upon this decision, a business should understand that while competition may justify interfering with a competitor’s contracts, any justification will be lost if the competition is done unlawfully.

      Additional legal points:

  • Employment agreements that extend restrictions to a company’s subsidiaries are likely overly broad and unenforceable, especially when the employee never worked for the subsidiary.  (Opinion, ¶20).

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