It is not uncommon for an employee to leave one company to go to work for a competitor. Often, the former employee has relationships with customers and attempts to bring them along with him which can result in damages to the former employer. If the customer is large or if those damages are severe enough, the former employer may decide to sue the former employee. There are several potential claims, but the most common ones are tortious interference with contract, tortious interference with business relations and unfair competition. While there are similarities between these, they each have unique requirements as demonstrated in a recent New York case.
Stuart’s LLC, et. al. v. Edelman, et. al. involved a suit against a former employee (Defendant, Michael Hong) for tortiously interfering with the former employer’s contractual relationship with one client, tortiously interfering with prospective business relations with another and engaging in unfair competition. The lower court found in favor of the Plaintiff on these causes of action and awarded substantial damages. Hong appealed.
The New York Supreme Court, Appellate Division, Second Department agreed with some of Hong’s arguments. It modified and reduced the award to the Plaintiff finding that the Plaintiff had only established its claims for tortious interference with contract, but not the claims for tortious interference with business relations or unfair competition. As noted by the Court, while claims for tortious interference with contract and tortious interference with business relationship are similar, tortious interference with business relations requires proof of additional culpable conduct. The Plaintiff must prove that (i) it had a business relationship with a third party; (ii) the Defendant knew of the existence of such relationship and intentionally interfered with the same; (iii) the Defendant solely acted out of malice or used illegal or improper means which amounted to an independent tort or crime; and (iv) the Defendant’s conduct caused injury to the relationship with the third party. The Second Department found that no such evidence was contained in the record and the mere fact that the Defendant may have engaged in the conduct for purposes of his own financial gain, does not constitute sufficiently culpable conduct to establish a claim for tortious interference with a business relationship.
Similarly, the Court found that Hong’s conduct did not constitute unfair competition and vacated that portion of the award as well. The Court found that to establish such a claim, the Plaintiff was required to demonstrate that Hong wrongfully diverted the Plaintiff’s business to himself or for his benefit. Additionally, unless there is a restrictive covenant, a former employee can compete with his ex-employer as long as he or she does not utilize trade secrets in doing so. The Court found that the testimony of the customers whose businesses had been diverted from the Plaintiff and the uncontroverted testimony of Hong himself, established that he neither utilized any of the Plaintiff’s proprietary information nor was improperly involved in causing the customers to sever their ties with the Plaintiff.
Distinguishing these different types of claims can be confusing, but it is essential to bringing a viable lawsuit. If you have potential claims against a former employee or are a former employee being sued for misconduct, please contact one of our litigation attorneys.