iOver the past two years, employee mobility seems to be at an all-time high. In fact, the labor market is so fluid that pundits and experts often refer to it as the “Great Resignation.” Although employee mobility can be a great opportunity for both employees and prospective employers, employers hiring new employees should always beware of potential problems such as restrictive covenants, which may follow an employee to a new job.
For example, many employers do not know they may still be liable for interference with an unenforceable contract when hiring an employee subject to a restrictive covenant like a non-compete. The secret lies in the distinction between whether a contract is “void” or “voidable,” though some recent developments look at “validity.” An unenforceable contract may be voidable by a counter-party to the contract without being void and, thus, may be the subject of interference. This distinction is especially important now, as employers scramble to hire individuals despite lingering obligations under prior employment agreements. In particular, restrictive covenants may be at issue as employees look to jump to new employers. Therefore, it is especially important for employers to understand the distinction between a void contract and a voidable contract to make sure they may not be liable for a tortious interference claim.
Tortious interference with a contract deals with an actor’s interference with a third party’s performance owed on a contract. Generally, to state a claim for tortious interference with a contract, a plaintiff must prove the following: (1) a contract; (2) the defendant’s knowledge of the contract; (3) a breach induced or caused by the defendant’s intentional and improper interference; and (4) damages. On the causation front, the Restatement (Second) of Torts looks to whether a contract is void ab initio versus voidable by the other party to a contract. For its part, the Restatement (Third) of Torts focuses on whether a contract is valid.
A void contract is “[a] promise for breach of which the law neither gives a remedy nor otherwise recognizes a duty of performance by the promisor.” Restatement (Second) of Contracts § 7 cmt. a (1981). A void contract is not a contract at all and, thus, cannot be the subject of interference. Void contracts violate fundamental public policy and often involve a total absence of a protectable interest or are intended solely as restraints of trade. See Restatement (Second) of Torts § 774 (1979) (providing an actor who interferes with an illegal contract will not be held liable for pecuniary harm resulting from nonperformance of the contract); Isles Wellness, Inc. v. Progressive N. Ins. Co., (defining a contract as void where it is injurious to the interests of the public); Golden Pisces, Inc. v. Fred Wahl Marine Const., Inc., (noting a contract is void for lack of mutual assent); GPS Indus., LLC v. Lewis, (finding a contract is void if not supported by a legitimate business interest); Am. Fam. Life Assur. Co. v. Tazelaar, (clarifying a contract is void if not supported by a protectable interest).
Meanwhile, a voidable contract is one where a party has the power to avoid the contract. A voidable contract is valid until a party to the contract with the power to cancel it seeks to do so. Voidability typically relates to technical arguments on enforceability such as scope, breadth, and the like. For example, where fraud in the inducement is a defense to a contract, the defense will render the contract voidable. See Armstrong v. United States (finding a contract based on a mistake of fact is voidable); Hernandez v. Banks (discussing the effect capacity of a party to a contract has on whether a contract is voidable).
Simply, under the Restatement, an actor is not liable for interfering with a void contract because the contract could not have been “in force and effect at the time of the breach.” Restatement (Second) of Torts § 766 cmt. f (1979). However, where a party to a voidable contract has not avoided it, an actor may still be held liable for interfering with the voidable contract. Because courts sometimes use enforceability, validity and voidness interchangeably, the law on this nuanced issue is not terribly well-developed. However, the below two cases have analyzed this distinction in determining whether there is a meritorious tortious interference with a contract claim.
In CRST Expedited, Inc. v. TransAm Trucking, Inc., [1] the Eighth Circuit considered whether CRST’s non-competition covenant against its truck drivers was void ab initio under Iowa law such that any intentional interference with the contracts was not actionable. TransAm argued the contracts operated as lifetime bans from the trucking industry, causing them to be contrary to public policy and void. The non-competition provision within each contract limited a driver’s ability to work for a competitor “for a period equal to the greater of the Restrictive term and the duration of CRST’s employment of Employee.” The Restrictive Term was any period of the Term remaining after termination of the driver’s employment with CRST. For most of the drivers at issue, the Restrictive Term was ten months. TransAm interpreted this language to mean if a driver left with time remaining on his Restrictive Term, he would be barred from working for a competitor indefinitely or until he returned to CRST to finish out the remainder of his Restrictive Term. Id. However, the Eighth Circuit determined the covenant only restricted a driver from working for a competitor for the portion of the Restrictive Term that remained as of the date the driver left CRST. The Eighth Circuit, thus, found the non-competition covenant short and reasonable, and not void in violation of public policy. Therefore, CRST was able to maintain its tortious interference claim on its contracts. The Eighth Circuit’s decision here established two important points for employers: (1) an employer may be liable for tortious interference with a contract even if the agreement restricts low-level and/or low-earning employees[2]; and (2) even where an employee’s agreement with another employer appears void, that may not necessarily be the case. These points are particularly important in high-volume hiring industries where multiple agreements, such as in CRST, may be tortiously interfered with if found to be voidable rather than void, leading to increased liability and damages.
In Rail Switching Services, Inc. v. Marquis-Missouri Terminal, LLC, the Missouri Court of Appeals considered whether a contract between Rail Switching Services, Inc. (“RSSI”) and the Pemiscot County Port Authority (the “Port Authority”) was void ab initio. In 2012, RSSI and the Port Authority entered into an agreement allowing RSSI to store railcars on the Port Authority line and giving RSSI exclusive use over the Port Authority line. Disputes arose when the Port Authority provided Marquis-Missouri Terminal, LLC (“MMT”) use of the Port Authority line. The Port Authority filed suit seeking a declaratory judgment that the 2012 agreement with RSSI was void provided the Port Authority was a municipal corporation, the Missouri Revised Statutes Section 432.070 required contracts involving municipal corporations to be in writing, and the Port Authority never authorized an agent to sign the 2012 agreement. The trial court found the 2012 agreement void ab initio, and the court of appeals affirmed. Meanwhile, RSSI filed a tortious interference suit against MMT. After summary judgment was found in favor of MMT, RSSI appealed, arguing the 2012 agreement was not, indeed, void provided an agent of the Port Authority signed the agreement. The Missouri Court of Appeals affirmed the summary judgment ruling, finding the Port Authority never authorized its agent to enter into the 2012 agreement with RSSI. Therefore, the 2012 agreement was void and RSSI could not prevail on a claim of tortious interference with the 2012 Agreement against MMT. The Rail Switching Services decision, opposite but complementary to the decision in CRST, serves to warn employers that their restrictive covenants may be void and incapable of being tortiously interfered with by a third party. Therefore, employers should carefully review their employment agreements to ensure no deficiency or mistake causes their employment agreements to be void ab initio.
Both cases exemplify the important distinction between a void contract and a voidable contract within the context of a tortious interference claim. While a party may have a tortious interference claim where a voidable contract is at issue, the same cannot be said where the contract is void. Because voidability often involves enforceability arguments not technically available to defendants (as opposed to the contract counter-party), one can still be liable for interference with unenforceable contracts. The distinction may serve as an absolute defense to a tortious interference claim. For these reasons, as employers look to hire individuals during the “Great Resignation,” they should take special care to assess whether any agreements at issue may be void or voidable.
FOOTNOTES
[1] A companion case involving the same contract was decided differently on the issues of breach and inducement. See CRST Expedited, Inc. v. Swift Transportation Co. of Arizona, LLC, 8 F.4th 690 (8th Cir. 2021).
[2] There is some question in later cases as to whether there could be a protectable interest for a low-level and/or low-earning employee, such as a truck driver, but that issue has not been fully developed on the record.
