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Bar Journal - September 1, 2001

National v. Olsten: An Analysis of Restrictive Covenants and Intentional Interference with Contractual Relations in NH

By:

INTRODUCTION

Parties who enter into contract are the masters of that contract. The parties who enter into an agreement are permitted to construct their contract in a way that they see fit. Occasionally, a contract or certain provisions of a contract are found unenforceable because, although the parties structured the agreement the way they wanted the structure of the agreement offended public policy. The public policy of New Hampshire favors of free trade and, therefore, the courts discourage the use of restrictive covenants in contracts.1 New Hampshire courts have held that an unlimited restrictive covenant is unreasonable and offends public policy.2

A second principle underlying contract law is that parties are permitted to defend and advance their contractual relations and economic well being. In doing so, however, these parties must not wrongfully and intentionally interfere with the contractual relations or economic well being of other persons. It is permissible to apply lawful means of competition to advance one's contractual relations or economic well being, however, it is not permissible to use improper means to advance the same goals. There is no bright line between what is proper and what is not in pursuing these goals.

This article addresses covenants not to compete and intentional interference. More specifically, the article addresses how the New Hampshire Supreme Court, in National Employment Service Corporation v. Olsten Staffing Service, Incorporated, analyzed the restrictive covenant and intentional interference issues and how this decision compares with previous New Hampshire case law. Also, this article discusses case law from several jurisdictions throughout the United States that apply varying standards for restrictive covenants and intentional interference with contractual relations.

I. NATIONAL EMPLOYMENT - ROCKINGHAM COUNTY SUPERIOR COURT

A. The Case

1. Facts

National Employment Service Corporation (National) and Olsten Staffing Service Incorporated (Olsten) are temporary employment agencies that supply temporary employees to industry. Prior to August 1994, National, Olsten and several other companies supplied laborers to Watts Fluid Air Corporation (Watts) at its facility in Kittery, Maine. National required its employees to sign an employment contract prior to starting employment. This employment contract contained a restrictive covenant prohibiting employees from accepting "employment directly or indirectly at client company for a period of ninety working days following the termination of employment with National."3 In August 1994, Olsten and Watts negotiated an agreement that made Olsten the exclusive temporary employee provider for Watts. Watts and Olsten agreed to permit National employees to continue their assignments at Watts.

In January 1995, Olsten and National discussed a potential layoff of National's employees. National and Olsten disagreed whether the layoffs of National employees were valid. National warned Olsten that National's employees had signed a restrictive covenant prohibiting agency jumping. On March 3, 1995, Olsten posted a bulletin at Watts informing employees that Watts was no longer affiliated with National and National employees who wished to remain at Watts could apply for a position through Olsten.4 After Olsten posted the bulletin, seven National employees applied to Olsten and were hired.5 National then initiated an action against Olsten under breach of contract, intentional interference with contractual relations and quantum meruit.6

2. Superior Court Decision

The Rockingham County Superior Court entered judgment in favor of National. Though jury returned a verdict for the defendant on the breach of contract claim, they awarded National $11,882.01 on its quantum meruit claim and $8,750 on its claim for intentional interference with contractual relations.7 Olsten's motion to set aside the verdicts and motion for a new trial were denied.8

II. NATIONAL EMPLOYMENT - NEW HAMPSHIRE SUPREME COURT

A. Appeal

1. Issues On Appeal

On appeal, Olsten argued that the Superior Court erred in: 1) determining that the restrictive covenant was reasonable and enforceable; 2) failing to direct a verdict in Olsten's favor on National's claim of intentional interference on contractual relations; and 3) refusing to overturn jury verdicts that were conclusively against the weight of the evidence. 9

2. Olsten's Key Arguments

Olsten argued that the court should apply a three-prong test, used in previous decisions in New Hampshire, to determine the reasonableness of National's restrictive covenant. The test states that a restraint on employment is reasonable only if it is no greater than necessary for the protection of the employer's legitimate interest, does not impose undue hardship on the employee, and is not injurious to the public interest.10 Olsten argued that National's restrictive covenant was not valid because National failed to show that there was any legitimate interest to protect. National argued that the covenant protected legitimate economic interests by keeping down costs associated with recruiting and placing new employees.11 Olsten countered that even if there was a legitimate interest to be protected, the covenant was not narrowly tailored to protect that interest.

Olsten's next argument was that the trial court erred when it refused to direct judgment in its favor because National failed to prove that Olsten improperly interfered with its employment contracts.12 Olsten's final argument was that the trial court erred when it refused to overturn jury verdicts that far exceeded any amount that a reasonable juror could have calculated based on the jury instructions and the evidence given at trial.13 For the purposes of this article, only the covenant not to compete and intentional interference issues are discussed. Because the New Hampshire Supreme Court decided that the restrictive covenant was unenforceable, and that Olsten did not intentionally interfere with National's employment contract, the issue of quantum meruit became moot.14

3. Court Holding and Law Applied

a) Covenant not to Compete

In holding the National Employment covenant not to compete unenforceable, the New Hampshire Supreme Court stated "that although there may be valid reasons to restrictive covenants, the mere cost associated with recruiting and hiring employees is not a legitimate interest protectable by a restrictive covenant in an employment contract."15 The court applied a three-prong reasonableness test adopted from previous New Hampshire case law, which states, "a restraint on employment is reasonable only if it is no more limiting than necessary for the protection of the employer's legitimate interest, does not impose undue hardship on the employee, and is not injurious to the public interest."16 A covenant's reasonableness is considered as a matter of law, and if a covenant violates any prong of the reasonableness test it is unreasonable and unenforceable.17

The New Hampshire Supreme Court explained in its decision that the public policy of New Hampshire encourages free trade and discourages covenants not to compete.18 The public policy that discourages restrictive covenants is embedded in New Hampshire case law dating back to the 1800s. The court in Eastern Express Company v. Meserve stated that, "the law does not look with favor upon contracts in general restraints of trade, because they tend to discourage industry and enterprise, prevent competition, and expose the public to the evil of monopolies, for which reasons they are construed strictly."19 Also, the comment to the Restatement of Contracts 514 states that restrictive covenants, if unreasonable, are illegal at common law and under many state statutes.20 New Hampshire courts generally will uphold limited restraints only if they are reasonable to the particular circumstances. 21

In this case, the court found that National's restrictive covenant failed to meet the first prong of the reasonableness test and therefore, did not examine the second and third prongs of the reasonableness test.22 By failing to meet the first prong of the test, the court found the covenant unreasonable and unenforceable.23 The court reasoned that National failed to meet the first prong because National's interest in retaining employees for a sufficient period to recoup cost associated with recruiting, interviewing, checking references, qualifying, insuring and placing its employees was not a legitimate interest.24 Further, the court stated that legitimate interests of an employer that may be protected by a restrictive covenant include things such as trade secrets, confidential information and contacts developed during the duration of employment.25 The court found that the interests National's restrictive covenant attempted to protect did not pertain to confidential information, trade secrets or good will and therefore, was not legitimate. The court stated that National's employees were industrial laborers and in no position to obtain trade secrets or confidential information.26 Notably, the court reasoned that such restrictions on at-will employees place an undue hardship on the employees and are against public policy. 27

b) Intentional Interference

In holding that Olsten did not intentionally interfere with National's employment contracts, the court stated, "the mere fact that a competitor induces an at-will employee to leave his employer and work for that competitor does not in and of itself constitute interference with contractual relations."28 The court applied a three-prong test, also adopted from earlier New Hampshire case law, to determine the presence of intentional interference with contractual relations. Under this test, to prove intentional interference, the plaintiff must show a contractual relation with its employee, that the defendant knew of that relation, and that the defendant wrongfully induced the employee to breach that contract.29 The court looked to the Restatement (Second) of Torts 768(1) to define improper interference with an at-will contract. The court determined that an employer must demonstrate that the competitor or employee acted with an improper purpose, beyond lawful competition.30

Because the contract at issue did not provide a term, the court determined that an at-will employment relationship existed. The court based its rationale on the comments of Restatement (Second) of Torts 768 which says, "a competitor may offer better contract terms as by offering an at-will employee of the plaintiff more money to work for him . . and he may make use of persuasion or other suitable means all without liability."31 According to the court, to restrict a non-professional employee from leaving his or her current employer when he or she could do better elsewhere, is unreasonable.32 The court found that Olsten did not employ wrongful means by posting the bulletin and acted to advance its interests in competing with National.33 For the court to determine that Olsten employed wrongful means, National needed to demonstrate that Olsten attempted to advance an improper purpose, beyond that of lawful competition.34

B. Implications of Holding

The general public policy of New Hampshire remains unchanged in light of the National Employment holding. The public policy is to encourage free trade and discourage covenants not compete, and this decision will help to enforce that policy. Courts in New Hampshire generally uphold restrictive covenants if they are limited in scope and are reasonable. This decision in no way curtails that practice. It is settled law that a restrictive covenant is considered reasonable and limited only if it is narrowly constructed to protect only the employer's recognized legitimate interests.35 Also, to avoid the threat of monopoly, the restrictive covenant must in no way restrain the public's freedom of choice.

The courts of New Hampshire have generally applied the principle that only improper interference is considered intentional interference, and the ruling in National Employment reinforces this general view. The court in National Employment applied the Restatement of Torts definition for improper interference, which is the same standard applied by previous New Hampshire courts. The National Employment decision has not altered the views or ideals of New Hampshire law, therefore no inconsistencies have been created. There is nothing presented in the National Employment decision to justify altering the long standing policies of New Hampshire and, therefore, the New Hampshire Supreme Court was prudent in following the general principles and standards applied in the past.

III. HOW DOES NATIONAL EMPLOYMENT COMPARE TO OTHER DECISIONS IN BOTH NEW HAMPSHIRE AND OTHER STATES AROUND THE COUNTRY?

A. Covenant not to compete

1. New Hampshire

To determine the consistency of the holding in National Employment, it is instructive to compare the analysis by the New Hampshire Supreme Court to that in previous case law. The New Hampshire Supreme Court decision holding the restrictive covenant in National Employment unreasonable is consistent with previous case law in New Hampshire. Although the New Hampshire Supreme Court had not previously decided the issue of reasonableness of a restrictive covenant in an at-will employment contract, the issue of reasonableness relating to restrictive covenants in general has been addressed.36

Technical Aid v. Allen, deals with the reasonableness of restrictive covenants in employment contracts. In Technical Aid, Allen entered into an employment contract with Technical Aid that contained restrictive covenants pertaining to confidential information and agreements not to engage in competitive business for a limited period of time in a limited geographic area.37 Allen became dissatisfied with his future at Technical Aid and decided to leave to form a competing corporation with another former Technical Aid employee, Redman. Technical Aid filed a bill in equity seeking money damages against Allen and Redman for violations of the restrictive covenant.38 The court held that the restrictive covenant was unenforceable.39

The New Hampshire Supreme Court applied a covenant not to compete standard from previous New Hampshire case law. The three-prong standard the Technical Aid court applied states that, "a restraint on employment is reasonable only if it is no greater than necessary for the protection of the employer's legitimate interest, does not impose undue hardship on the employee, and is not injurious to the public interest." 40 The covenant was found unenforceable because it failed the first and second prongs of the reasonableness standard.

The New Hampshire Supreme Court stated that for a restrictive covenant to be narrowly tailored to a legitimate interest, the geographic scope and duration of the restriction must be reasonable.41 For the geographic scope to be reasonable, the court established that the area must be limited to where the former employer had client contacts.42 Further, the court reasoned that if a restriction in a contract is greater than necessary to protect the legitimate interest of the employer, then any adverse effect caused by the restriction is an undue hardship on the employee.43 In analyzing the third prong of the reasonableness test, the court stated that before a restrictive covenant is considered to be injurious to the public interest it must unreasonably limit the public's right to choose. 44 The public's right to choose is an important policy and must be sustained in order to avoid the emergence of monopolies.

The court in Technical Aid was presented with slightly different facts from those involved in National Employment, however, the court applied the same standard to determine the reasonableness of the restrictive covenant. Even though the court in Technical Aid relied on different rationale, application of the Technical Aid standard to the facts in National Employment results in the same outcome. While the situation in National Employment meets the second and third prongs of the Technical Aid standard, it fails to meet the first prong. The second prong, dealing with undue hardship on the employees, is met because the restrictive covenant does not place an undue hardship on the National employees because the restriction is no greater than necessary to protect the interests of the employer. Also, the third prong of the standard, dealing with injury to the public interest, is met because in National Employment, as in Technical Aid, there is no injury to the public. There is no injury to the public because the public's choice is not affected by restricting National's employees from working for competitors.

The first prong from Technical Aid, however, is not met by the restrictive covenant in National Employment. The restrictive covenant fails the first prong because the interest being protected is not a legitimate interest. To be considered a legitimate interest the employer must attempt to protect confidential information, trade secrets or goodwill.45 In Technical Aid, the restrictive covenant failed the first prong of the test as the geographic limit of a 100-mile radius was unreasonable46 because Allen had not contacted employees in that entire area while working for Technical Aid.47 In National Employment, the covenant restricted former employees from working for any of their former employer's clients. This is not an unreasonable restriction because it does not prevent the former employees from working with other similar employers in the area, assuming there are any. Therefore, the decision in National Employment is consistent with previous New Hampshire case law, because it meets the requirements set forth in those cases.

2. Other Jurisdictions

The National Employment decision is not only consistent with previous case law of New Hampshire, but also with case law from other jurisdictions. Different states apply various standards to determine the reasonableness of restrictive covenants. The cases below from Indiana, Texas and Pennsylvania examine restrictive covenants in employment contracts, using different standards. Applying these standards to the facts of National Employment illustrates that regardless of the standard employed, the New Hampshire Supreme Court reached a decision that is consistent with other jurisdictions throughout the country.

The Supreme Court of Indiana applied a reasonableness standard in Century Personnel, Inc. v. Brummett.48 In this case, Brummett was employed as a recruiter by Century Personnel, Inc. (Century), a licensed employment agency. Brummett was not under contract with Century and left to work for one of Century's competitors. While working for the competitor, Brummett recruited Century employees.49 Brummett later returned to work for Century and entered into a contract with the agency that prevented Brummett from working for a competitor in the surrounding counties.50 Later, Brummett left Century again and began working for Resource Group, Inc., a licensed employment agency. Century filed a complaint for breach of an employment agreement and intentional interference and filed for a temporary restraining order.

The Court of Appeals of Indiana held that the trial court did not err when it decided that Century was not harmed by Brummett, that Century was not entitled to enforce its restrictive covenant and that Brummett did not breach the covenant.51 In reaching this decision, the court stated that covenants not to compete are not favored in law.52 The court emphasized that the covenant must be drafted to meet a reasonableness standard based upon duration, geographic area, and the interest being protected.53 Finally, the court stated that restrictive covenants are reasonable only when the restraint is necessary to protect the employer, not unreasonably restrictive of the employee and does not violate public policy.54

The standard applied by the Court of Appeals of Indiana uses slightly different language then the New Hampshire Supreme Court three-prong test for reasonableness. The New Hampshire standard states that the restrictive covenant is only reasonable where it is limited to protecting a legitimate interest of an employer.55 The Indiana Supreme Court applies the same principle, that for a restraint to be reasonable, it must be necessary to protect the employer.56 While the Indiana standard asserts that a restrictive covenant cannot violate public policy, the New Hampshire Supreme Court requires only that a restrictive covenant cannot injure the public. Finally, the New Hampshire three-prong test does not allow undue hardship to be placed on an employee, while the Indiana standard does not allow a covenant to unreasonably restrict an employee. Both New Hampshire and Indiana determine reasonableness of a restrictive covenant by examining the duration, geographical limitation and interest being protected. While the two standards vary in language defining reasonableness, they both apply the same principles.

The restrictive covenant in National Employment would not meet the reasonableness standard applied in Century. In National Employment, the covenant was reasonable as to duration because it lasted only 90 days. The geographic area was reasonable because the covenant was limited to clients of National; it did not restrict contact with all possible clients in a certain area. The interest National sought to protect, protecting itself from the cost of hiring new employees, however, is not reasonable. Since National did not have a legitimate interest to protect, there was no way to reasonably tailor a restraint to protect that interest. As for the employees, the covenant was not unreasonably restrictive because they were still able to work for other companies, just not client companies of National. Because there was no legitimate interest to protect by the covenant, the covenant was an unreasonable restraint of trade. Therefore, the decision of the New Hampshire Supreme Court is consistent with the Indiana standard.

The Court of Appeals of Texas addressed a similar situation in Ad Com, Inc. v. Helms.57 Helms began working for Ad Com as an advertiser, working primarily on behalf of Johnson and Johnson.58 After Helms resigned as an executive and became an independent contractor for Ad Com, he continued to work on the Johnson and Johnson account.59 In October 1994, Helms executed a covenant not to compete with Ad Com.60 Helms later resigned from Ad Com and began working at another agency. Johnson and Johnson hired Helm's new agency and Helms began working on the new Johnson and Johnson account. Ad Com became aware of this and sued to enforce the covenant not to compete.61

The Court of Appeals of Texas, held that the restrictive covenant was not enforceable because it was not "ancillary to or part of an otherwise enforceable agreement."62 In reaching this conclusion the court stated that:

a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or the other business interests of the promisee.63

The court emphasized that an at-will employment relation does not constitute an enforceable contract because it is not binding on either of the two parties. There is no consideration in an at-will employment contract because either party can end the contract at any time. Further, the court noted that an at-will employment relation may give rise to an enforceable agreement, but only if there is independent consideration that is not illusory, or not based on a false impression.64

The court explained that a covenant not to compete will be ancillary to, or part of, an enforceable agreement if the consideration gives rise to the employer's interest in restraining the employee from competing and the covenant is designed in a manner that will enforce the employee's consideration.65 When Helms agreed to the covenant, he made a non-illusory promise not to disclose information relating to Johnson and Johnson acquired while working at Ad Com. The court found that there was no consideration given by Ad Com in the language of the covenant. The court concluded that Ad Com's promise was illusory because it depended on a period of continued employment.66 Since Ad Com could fire Helms at anytime, therefore no consideration existed.

The standard applied by the Court of Appeals of Texas, is slightly different than the standard applied in New Hampshire. Both standards base the reasonableness of a restrictive covenant on duration, geography and the scope of the interest being protected. Also, both standards are concerned with the hardship placed on the employee. However, the Texas standard does not have a public interest element as in the New Hampshire three-prong test. Instead, Texas places an extra limitation that the restrictive covenant cannot be a separate agreement, it must either be ancillary to or part of the original contract.67 Other than the last requirement, the two standards support the same principles. With the additional requirement that the covenant be ancillary to or part of the original agreement, the Texas standard is slightly more limiting than the New Hampshire three-prong test.

Applying the Texas reasonableness standard to the facts in National Employment results in the same decision as that found by the New Hampshire Supreme Court. The National court was presented with a similar issue as that presented in Ad Com concerning at-will employees. There was no consideration for National's restrictive covenant because National's promise was illusory because National could fire its employees at any time. Because the covenant is not ancillary to or part of an enforceable agreement, the restrictive covenant in National Employment would not meet the reasonableness standard applied by the Court of Appeals of Texas. Therefore, the conclusion reached by applying the Texas standard would be the same as that reached by the National court.

The Superior Court of Pennsylvania addressed the issue of the enforceability of restrictive covenants in Bell Fuel Corp. v. Cattolico.68 Bell sought a preliminary injunction to restrain Cattolico from soliciting Bell's customers, using Bell's confidential information and retaining Bell's business records in alleged violation of Cattolico's employment contract with Bell. 69 Bell's restrictive covenant read, "employee covenants and agrees that Employee will not, during the term of Employee's employment or thereafter, contact or solicit customers of the Company except on behalf of the Company or solicit employees to leave the company."70 Bell entered into an employment contract with Cattolico, and ancillary to that agreement, entered into a restrictive covenant that prohibited Cattolico from contacting or soliciting customers of Bell except on behalf of Bell either during of after his employment. The covenant was not limited as to time or territory.71 Cattolico left Bell and began working for a competitor and while working for the competitor, Cattolico contacted Bell's customers to solicit their business.72

The Superior Court of Pennsylvania reversed the trial court's decision that the covenant was void on its face and unmodifiable and remanded the decision.73 The court stated that in order for a covenant not to compete to be enforceable, it must: relate to either a contract for the sale of goodwill or other subject property or for a contract of employment; be supported by adequate consideration; and the application must be reasonably limited to both time and territory.74 If a restriction is broader than necessary, a court can alter the restriction to limit its scope. Case law empowers Pennsylvania courts to grant partial enforcement of an overly broad covenant not to compete either by excluding or adding to portions of the covenant. 75

The court reasoned that while was no explicit geographic limitation existed in the restriction, a limitation could be implied because Cattolico was only prohibited from soliciting customers of Bell. Therefore, implicitly the geographic scope was limited to the territory in which Bell had customers.76 If this geographic limitation is too broad, the court could modify it. The court went on to say that "the question is overall reasonableness, to be judged against the employer's needs and the impact on the employee."77 In reversing the trial court's conclusion that the restrictive covenant could not be modified, the superior court remanded to conduct a hearing to appropriately limit the time and geographic scope of the covenant.78

While the Superior Court of Pennsylvania uses different language than the New Hampshire Court, the standards of the two courts apply the same basic principles. Both standards determine the reasonableness of a restrictive covenant by examining the duration and geography of the covenant and by analyzing the interest that is being protected. The Pennsylvania standard does not, however, compare the interest of the employer to the interests of the employee and the public. Unlike the New Hampshire test, the Pennsylvania standard requires that the restrictive covenant must be supported by adequate consideration.79 Also, unlike the other standards discussed in this article, the Superior Court of Pennsylvania will allow a restrictive covenant to be modified if the court determines that the scope of the covenant to be over broad.

The restrictive covenant in National Employment would probably fail to meet the standard applied by the Superior Court of Pennsylvania. The covenant meets the first prong of the Pennsylvania standard because it relates to an employment contract. However, the second prong is not met because there was no consideration for the covenant. The covenant is part of an at-will employment contract, which on its own does not provide adequate consideration. There was no consideration given by National for future employment because National's promise was illusory in that National could fire its employees at any time. The covenant was reasonable as to time and territory, but fails because the employer's interested being protected is not legitimate as to outweigh the employee's interest in seeking competitive employment. The covenant can not be partially enforced or modified because it is not the amount of time or area that is the problem, it is the lack of a legitimate interest. Since the covenant in National's agreement would probably fail both prongs two and three, it would be unreasonable under the Pennsylvania standard and, therefore application of the Pennsylvania standard supports the decision of the New Hampshire Supreme Court.

B. Intentional Interference

1. New Hampshire

The National Employment decision concerning intentional interference is consistent with previous case law in New Hampshire.80 The fair and consistent nature of the decision reinforces the reliability of National Employment as sound precedent for future New Hampshire cases.

The use of a three-prong test to determine intentional interference is specifically set forth in Heritage Home Health, Inc. v. Capitol Region Heath Care, Corp.81 In this case, the plaintiff, Heritage, is a New Hampshire corporation that provides nursing services to patients in their homes. Heritage alleged that patients with whom it had established some form of business relationship were intentionally diverted to the defendant for their health care needs once they were discharged from the hospital.82 The court's reasoning was based on the application of the elements found in Restatement (Second) of Torts 766.83 The Restatement elements require: (1) an intentional act; (2) improperly done; that (3) interferes with the performance of a contract.84 This is essentially the same test that the court applied in National Employment. Also similar to National Employment, the court based its reasoning on the Restatement (Second) of Torts 768 to determine whether the actions were wrongful or improper.85 The similarity of the tests applied illustrates that the law followed by the court in National Employment conforms to earlier New Hampshire case law. In addition, the consistent analysis applied in each case demonstrates that the Superior Court's judgment in favor of National on its claim for intentional interference was not arbitrarily overturned.

2. Other Jurisdictions

Indiana, Texas and Pennsylvania apply a variation of the New Hampshire three-prong test to prove intentional interference with employment contracts. Although the laws in Indiana, Texas and Pennsylvania differ, the New Hampshire Supreme Court decision in National Employment remains consistent when the various state tests are applied to the facts.

The Indiana test for recovery of intentional interference can be seen in Winkler v. V.G. Reed & Sons, Inc.86 In this case, Winkler entered into an employment contract with the general manager of Typoservice, a printing and type setting business. About two years later, Typoservice began negotiating with the defendant, Reed & Sons, for the sale of Typoservice.87 The asset purchase agreement excluded Winkler's employment contract.88 When the deal became finalized, Winkler was discharged. Winkler filed a three-count complaint, with one count alleging that the defendant and Typoservice intentionally interfered with Winkler's employment contract.89

In Winkler, the Indiana court stated a five-element test to recover for intentional interference with a contractual relation. The elements include: (i) existence of a valid and enforceable contract; (ii) defendant's knowledge of the existence of the contract; (iii) defendant's intentional inducement of breach of the contract; (iv) the absence of justification; and (v) damages resulting from defendant's wrongful inducement of the breach.90 After reviewing the necessary elements, the Supreme Court of Indiana agreed with both the Trial Court and the Court of Appeals that element (iv) was not met.91 The supreme court found that the defendant's acts were justified. In arriving at this conclusion the court relied on Restatement (Second) of Torts 767 to determine justification of the defendant's conduct.92 Among the factors to determine justification are the defendant's motive, the interest sought to be advanced by the defendant, the social interest in protecting the freedom of action of the defendant, and the contractual relation of the plaintiff.93 Based on these factors, the court found Typoservice was justified in its actions because the company was in serious financial trouble and the defendant believed it could return the business to profitability by selling to Reed & Son's.94

The Indiana five-element standard is very similar to the three-prong test applied by the New Hampshire Supreme Court. One difference between the two tests is that the Indiana test only requires that the action of the interfering party be intentional, while the New Hampshire examination of the interfering party's actions is not as strict. The New Hampshire Supreme Court does not punish all intentional inducements, only those that are considered wrongful under the standard set forth in Restatement (Second) of Torts 768(1). While the Indiana standard does not differentiate between intentional inducement and wrongful inducement, the standard allows for certain actions of an interfering party to be considered justified.95 The justification element of the Indiana standard applies the same principle as New Hampshire's wrongful inducement element. The two different requirements each allow for certain intentional actions of an interfering party to be protected from a claim of intentional interference with contractual relations. While the two courts use different language in their respective standards, the tests are very similar in principle.

Applying the Indiana five-element test to the facts in National Employment results in the same decision as that found by the New Hampshire Supreme Court. The test used in National Employment includes the first three factors of the Indiana standard. The New Hampshire Supreme Court decided that National had, (i) a valid contract with its employees and that (ii) Olsten knew of that contract. As for element (iii), the court decided that Olsten did not wrongfully induce National's employees to breach their employment contracts when the company posted the bulletin. The court in National Employment found no improper inducement because Olsten's purpose in posting the bulletin was found at least in part to advance its own interest in competition, by advancing its interest in employment. Therefore, out of the first three elements mentioned in the Indiana standard, the element of wrongful inducement is not met.

Although elements (iv) and (v) are not outlined in the New Hampshire standard, the ideas are still considered by the New Hampshire Supreme Court. In Indiana, the justification of element (iv) is determined by examining the factors of Restatement (Second) of Torts 767.96 If the 767 factors are applied to the facts in National Employment, the court would probably determine that Olsten had justification based upon the court's finding that Olsten was acting to advance its own economic interests. As for the damage element of prong (v), National was injured because it lost future profit by losing employees. After considering all five-elements of the Indiana standard, the New Hampshire Supreme Court would probably determine that there was no intentional interference because elements (iii) and (iv) are not met. Therefore, applying the Indiana standard to the facts in National Employment results in the same decision as that reached by the New Hampshire Supreme Court under its own standard.

The National Employment decision concerning intentional interference also remains supported when the Texas standard is applied. The test applied by Texas to prove intentional interference is demonstrated in Wardlaw v. Inland Container Corp.97 In this case, Wardlaw, an employee of Inland Container Corporation (Inland), expressed interest in acting as a consultant for Stone Container Corporation (Stone), an Inland competitor. Wardlaw disclosed Anheuser Busch (Anheuser) account information to Stone. To verify the account information, Stone contacted Anheuser.98 In return, Anheuser contacted Inland, expressing concern over release of its account information. Inland then terminated Wardlaw for violating its antitrust compliance policy and for offering to use customer contacts to conduct business with a competitor.99 Wardlaw soon filed suit alleging that Anheuser intentionally interfered with Wardlaw's employment contract with Inland.

The Texas court applied a four-factor test to determine whether intentional interference existed. The factors include (1) the existence of a contract subject to interference; (2) willful and intentional interference with that contract; (3) whether intentional interference was a proximate cause of plaintiff's damage; and (4) actual damage incurred by the plaintiff.100 In Texas, however, a defendant can interfere in the contractual relations of another if the interference is done in a good faith exercise of the defendant's own rights, or if the defendant has a superior right in the subject matter of the contract.101 As long as the party can establish that it was legally justified to interfere with the contractual relations, this privilege will be an affirmative defense to intentional interference.102

When the Texas court applied this standard, it found that Anheuser had intentionally interfered with Wardlaw's contract. The court later stated that although Anheuser interfered, the interference was legally justified in order to protect its own interests.103 In Wardlaw, the court focused on intent and proximate cause. The court stated that, "intentional interference does not require an intent to injure, only that the actor desires to cause the consequences of his act or that he believes that the consequences are substantially certain to result from it."104 The court defined "substantially certain" to be incidental to the interfering party's purpose, but known to be a necessary consequence of the action.105 The court stated that proximate cause requires cause in fact and foreseeability.106 By informing Inland of Wardlaw's activities, the court found that Anheuser knew its actions would have detrimental effects on Wardlaw, and therefore satisfied the elements of intent and proximate cause.107 After coming to this conclusion, the court found Anheuser's interference was justified because they had a bona fide interest in protecting their confidentiality. Therefore, Anheuser was entitled to privilege against a finding of intentional interference.108

The standard applied by the Texas court is similar to the New Hampshire Supreme Court's intentional interference standard. The only real difference between the two standards is that the Texas standard does not specifically require that the defendant have knowledge of the plaintiff's contractual relations. The Texas standard, however, implies knowledge by the defendant because it states that the interference must be intentional and willful. While the language of the standards vary, the application of the two tests is very similar.

Applying the Texas standard to the facts in National Employment demonstrates that the New Hampshire Supreme Court's decision is consistent with decisions in Texas case law. Factor one is met because National had a contract with its employees. Factor two is met because Olsten was "substantially certain" that its actions would cause the resultant consequences. When Olsten posted the notice for National's employees, it had to be "substantially certain" that National's employees would terminate their contracts with National. Factor three is met because Olsten's notice was a proximate cause of National's employees terminating their contracts with National. Factor four is also met because losing its employees to its competitor damaged National. Therefore, in applying the Texas standard, the New Hampshire Supreme Court would probably decide that Olsten intentionally interfered with National's contract. Just like in Wardlaw, however, Olsten's intentional interference may be privileged because Olsten had a superior right over National in the subject matter. The superior right arises because Watts signed a contract with Olsten which stated that only Olsten employees could work at National, therefore National had no rights in its employees working at Watts once their assignments were over. Olsten, being the new sole employer of labor at Watts, acted in a bona fide manner when it posted the notice, and the intentional interference would probably be privileged. Therefore, the theoretical application of the Texas standard would be consistent with the New Hampshire Supreme Court's finding of no intentional interference.

The consistency of the National Employment decision with that of other states is also demonstrated through application of the Pennsylvania intentional interference standard. The standard applied by Pennsylvania is outlined in Spencer v. General Telephone Company of Pennsylvania.109 In this case, Spencer was assigned by his company to do work for the defendant, General Telephone. Before beginning any work, Spencer was required to fill out an Employee Information Sheet. Spencer agreed to both fill out the form and make a verbal protest.110 Spencer then filed a complaint alleging that signing the employee information sheet for General Telephone was an intentional interference with his employment contract with his company.111

The intentional interference standard applied by the Pennsylvania court is taken from Restatement (Second) of Torts 766, which analyzes the tort by considering three elements. The test requires: (1) an intentional act; (2) improperly done; (3) which interferes with the performance of a contract.112 The court stated that, "since interference with contractual relations is an intentional tort, it is required that in any action based upon 766, the injured party must show that the interference with his contractual relations as either desired by the actor or known by him to be a substantially certain result of his conduct."113

The court examined each element to determine whether General Telephone's actions constituted intentional interference. The court found that the act was intentional, as required in element one, and there was interference, as required in element three. The court stated that the act was intentional because any employer who places conditions on an employment contract can always foresee some potential interest, therefore, General Telephone could have been substantially certain that the interference would result.114 Although elements one and three were satisfied, the court held that the plaintiff failed to show facts to support the second element, that the act was improperly done. The court came to this conclusion by examining Restatement (Second) of Torts 767, which lists the factors that are used to determine whether interference was improper, in addition to comment (c) of that section.115 The court found that it was not legally possible for Spencer to show that the actions of General Telephone were improper.116 The defendant did not use physical violence, misrepresentation or threats of criminal prosecution.117 General Telephone had a reasonable interest in employee security, which it advanced through use of the information sheet.118 Therefore, element two was not met and, accordingly, the court found no intentional interference by General Telephone because all three elements were not satisfied.

The Pennsylvania standard is nearly identical to the standard applied by the New Hampshire Supreme Court. The two standards apply the same principles, the only difference being that they use varying language. Therefore, application of the Pennsylvania standard to the facts in National Employment results in a similar ruling as that of the New Hampshire Supreme Court. Element one of the standard is met because Olsten intentionally acted when it posted the notice at Watts. Olsten purposely placed the notice at Watts, which can be considered an intentional act. Element three is met because Olsten's act did interfere with National's employment contracts. Olsten's notice caused National's employees to terminate their employment contracts. Element two is not met because Olsten did not use improper conduct. Olsten did not use physical violence, misrepresentation or threats of criminal prosecution. Since all three elements are not met, the result is no intentional interference. Therefore, the New Hampshire Supreme Court ruling in National Employment appears to be consistent with the outcome based on a theoretical application of the Pennsylvania standard.

CONCLUSION

The decision in National Employment supports the general principles and public policy of New Hampshire. The court's holding in National Employment is not only consistent with previous New Hampshire case law, but the rules applied and the court's analysis is consistent with the rationale and rules of other courts throughout the United States. The New Hampshire Supreme Court's decision concerning the restrictive covenant upholds the public policy that free trade should be encouraged and the decision also upholds the general principle in New Hampshire that any improper interference is considered intentional interference.

ENDNOTES

1. National Employment Serv. Corp. v. Olsten Staffing Serv., Inc., ___ N.H. ___, 761 A.2d 401, 404 (2000).
2. See Id.
3. Id. at 404.
4. Id.
5. Id.
6. Id.
7. Id.
8. Id.
9. Id. at 403.
10. Brief for Appellant at 7, National Employment Service, Corp. v. Olsten Staffing Services, Inc., 761 A.2d 401 (2000) (No. 98-701).
11. National Employment Serv. Corp., 761 A.2d at 406.
12. Brief for Appellant at 8, National Employment Service, Corp. v. Olsten Staffing Services, Inc., 761 A.2d 401 (2000) (No. 98-701).
13. Id. at 11.
14. National Employment Serv. Corp., 761 A.2d at 406.
15. Id. at 405.
16. Id. at 404 (quoting Concord Orthopaedics Prof. Assoc. v. Forbes, 142 N.H. 440, 442-443 (1997)).
17. See Id.
18. Id.
19. Eastern Express Company v. Meserve, 60 NH 198 (1880).
20. Restatement of Contracts 514 (1982).
21. National Employment Serv. Corp., 761 A.2d at 404.
22. Id. at 405.
23. Id.
24. Id.
25. Id. at 404.
26. Id. at 405.
27. Id.
28. Id. at 406.
29. Id. at 405 (citing Montrone v. Maxfield, 122 N.H 724, 726 (1982)).
30. National Employment Serv. Corp., 761 A.2d at 406.
31. Id.
32. Id.
33. Id.
34. Id.
35. Id. at 404.
36. See, e.g., Technical Aid Corp. v. Allen, 134 N.H. 1 (1991); Concord Orthopaedics Prof. Assoc., 142 N.H. 440 (1997) (Professional Association sued terminated physician, seeking to enforce agreement not to compete); Allied Adjustment Serv. v. Heney, 125 N.H. 698 (1984) (Former employer brought action to enforce covenant not to compete after former employee opened his own firm competing in the same business); Moore v. Dover Veterinary Hospital, Inc., 116 N.H. 680 (1976) (Suit was brought by veterinarian for declaratory judgment that restrictive covenant in agreement with former employer was unenforceable).
37. Technical Aid Corp. ,134 N.H. at 2.
38. Id.
39. Id.
40. Id. at 8.
41. See Id. at 10.
42. Id.
43. Id. at 10-11.
44. Id. at 11.
45. Id. at 10.
46. Id.
47. Id.
48. See Century Personnel, Inc. v. Brummett, 499 N.E. 2d 1160 (Ind. Ct. App. 1986).
49. Id. at 1161.
50. Id.
51. Id. at 1164.
52. Id. at 1163.
53. Id.
54. Id.
55. National Employment Serv. Corp., 761 A.2d at 404.
56. Century Personnel, Inc., 499 N.E. 2d at 1163.
57. See Ad Com, Inc. v. Helms, 2000 Tex. App. LEXIS 484 (2000).
58. Id. at 2.
59. Id.
60. Id.
61. Id. at 3.
62. Id. at 8.
63. Id. at 6.
64. Id. at 7.
65. Id.
66. See Id. at 9.
67. Id. at 9.
68. See Bell Fuel Corp. v. Cattolico, 544 A.2d 450 (Pa. Super. Ct. 1988).
69. Id. at 451.
70. Id. at 452.
71. Id. at 453.
72. Id.
73. Id. at 459.
74. Id. at 456.
75. Id. at 457.
76. Id. at 458.
77. Id. at 459.
78. Id.
79. Id. at 456.
80. See e.g., Heritage Home Health, Inc. v. Capitol Region Heath Care, Corp., 1996 WL 655793 (1996); Noyes v. Moccia, 1999 WL 814376 (1999) ( Plaintiff brought this action after she was fired from her position with Alton Central School alleging that employer intentionally interfered with her contractual relations); Demetracopoulos v. Wilson, 138 N.H. 371 (1994) (Corporate manager brought suit against accountant for intentional interference of contractual relations in interfering with manager's employment contract).
81. See Heritage Home Health, Inc. v. Capitol Region Heath Care, Corp, 1996 WL 655793 (1996).
82. Id. at 4.
83. See Id. at 3.
84. Restatement (Second) of Torts 766 (1979).
85. See Restatement (Second) of Torts 768 (1979) ((1) One who intentionally causes a third person not to enter into a prospective contractual relation with another who is his competitor or not to continue an existing contract terminable at will does not interfere improperly with the other's relation if: (a) the relation concerns a matter involved in the competition between the actor and the other; and (b) the actor does not employ wrongful means; and (c) his action does not create or continue an unlawful restraint of trade; and (d) his purpose is at least in part to advance his interest in competing with the other).
86. See Winkler v. V.G. Reed & Sons, Inc., 638 N.E.2d 1228 (Ind. 1994).
87. Id. at 1230.
88. Id.
89. Id.
90. Id. at 1234.
91. Id.
92. See Id. at 1235.
93. Restatement (Second) of Torts 767 (1977) (In determining whether a defendant's conduct is tortious interference with a contact is justified or not, the Restatement suggests that the following factors be considered: (a) the nature of the defendant's conduct; (b) the defendant's motive; (c) the interests of the plaintiff with which the defendant's conduct interferes; (d) the interests sought to be advanced by the defendant; (e) the social interests in protecting the freedom of action of the defendant and the contractual interests of the plaintiff; (f) the proximity or remoteness of the defendant's conduct to the interference; and (g) the relations between the parties. As the comments to 767 indicate the weight to be given to each consideration may differ from case to case depending upon the factual circumstances, but the overriding question is whether the defendant's conduct has been fair and reasonable under the circumstances).
94. Winkler, 638 N.E.2d at 1236.
95. Id. at 1235.
96. Id.
97. See Wardlaw v. Inland Container Corp., 76 F.3d 1372 (5th Cir. 1996).
98. Id. at 1374.
99. Id.
100. Id. at 1375.
101. Id. at 1378.
102. Id.
103. Id. at 1378.
104. Id. at 1375.
105. Id.
106. Id. at 1376.
107. Id. at 1378.
108. Id. at 1379.
109. See Spencer v. General Telephone Company of Pennsylvania, 551 F.Supp. 896 (D. C. Pa. 1982).
110. Id. at 897.
111. Id.
112. Id. at 900.
113. Id.
114. See Id.
115. See Id.
116. Id. at 901.
117. Id.
118. Id.

The Author
Allison Bowles, Class of 2002,
Franklin Pierce Law Center,
Concord, New Hampshire.
The Author
Scott Tulino, Class of 2002,
Franklin Pierce Law Center,
Concord, New Hampshire.

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