Law Firm Faces Adverse Attorney’s Fee Award Following Hire of IT Technician Subject to Restrictive Covenant

The Superior Court of New Jersey, Appellate Division, recently issued an interesting opinion upholding claims against a New York law firm stemming from its employment of an IT support technician contrary to the terms of a restrictive covenant with his former employer. Notably the court also awarded the plaintiff, Accounteks.Net, Inc., attorney fees in the amount of $175,000. 

Accounteks, an IT consulting firm catering to small and medium sized businesses in New Jersey and New York, employed Christian Montes as an IT support technician.  Plaintiff assigned Montes to provide regular on-site tech support to CKR Law LLP. In the meantime, CKR began searching for an in-house IT technician. Montes had left the plaintiff’s employment and CKR reached out directly to him for help with an IT matter. CKR later advised plaintiff that it intended to hire Montes over plaintiff’s objection due to the noncompete.

Of particular interest to law firms, the law firm that hired the IT technician in the face of the non-compete agreement faced a series of claims, including tortious interference. The trial court held a bench trial, finding that the law firm engaged in conduct that was “intentional, malicious[,] and in wanton disregard of [plaintiff’s] contractual rights[.]”  The trial court awarded $72,000 in damages against the firm, representing two years’ worth of monthly fees under the IT services agreement as between plaintiff and the law firm. The judge also found the defendants jointly liable for breach of the implied covenant of good faith and fair dealing, and the firm for intentionally causing the IT technician to breach his ongoing duty to his former employer. At a separate hearing, the court awarded plaintiff counsel fees against the law firm defendant of over $175,000.

The Appellate Division largely rejected the law firm’s appeal points, and of particular interest here, upheld the award of attorney’s fees solely against the law firm despite the lack of an articulated basis in the trial court’s opinion for its departure from the “American Rule,” which generally holds each party responsible for its own attorney’s fees absent a contractual or other recognized basis for such an award. See Rendine v. Pantzer, 141 N.J 292, 322, 661 A.2d 1202 (1995).

The Appellate Division recognized an exception to the American Rule for third-party litigation:

One who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover reasonable compensation for loss of time, attorney fees and other expenditures thereby suffered or incurred in the earlier action.

2023 WL 3311577 *5, citing DiMisa v. Acqaviva, 198 N.J. 547, 554, 969 A.2d 1091(2009)(quoting Restatement (Second) of Torts § 914(2) (1979)). The court noted that the plaintiff’s claims for payment for services rendered were subject to the American Rule, and therefore no attorney’s fees would be awarded for pursuit of those claims. The court remanded the attorney’s fee award for a recalculation consistent with the contractual non-compete language at issue.

The Accounteks ruling is sobering not only for law firms but also for any business looking to bring IT expertise in house. The court had no difficulty enforcing the restrictive covenant precluding the IT technician from working for any customer for two years after his separation from employment, notwithstanding the general burden on the employer to establish the agreement’s enforceability and the national trend to scrutinize such restrictions more closely.  The court did acknowledge, however, that an employer may not simply employ such a restriction to prevent competition from a former employee. More importantly, the court imposed attorney’s fees against the law firm, a non-party to the IT technician’s employment agreement and fee shifting provision attached to his restrictive covenant, on the basis that the firm had tortiously interfered with his employment contract and that fees were recoverable as reasonable compensation for the tortious conduct.

In light of the Bureau of Labor Statistics May 2023 jobs report that employers added 339,000 jobs to the already tight labor market, law firms and industry alike are well advised to familiarize themselves with this decision and be vigilant about hiring practices in this competitive labor market.  Finding skilled employees is particularly difficult in the current tight labor market. While it may be tempting to consider poaching a vendor’s employees who have proven their skills and usefulness, Accounteks stands as a stark warning to refrain from doing so until and unless the new employer has performed appropriate due diligence.  A law firm considering directly hiring employees of a vendor may benefit from directly addressing with the vendor agreeable terms and conditions for direct hires.

Unlike Pennsylvania, New Jersey also imposes attorney’s fees against lawyers and law firms in legal malpractice actions. E.g., Innes v. Marzano-Lesnevich, 136 A.3d 108 (2015); Saffer v. Willoughby, 143 N.J. 256 (1996); DiStefano v. Greenstone, 357 N.J. Super. 352, 815 A.2d 496 (App. Div. 2003).  This added risk can alter the settlement calculus for law firm defendants, particularly where their available professional liability insurance coverage erodes with the expenditure of attorney’s fees incurred in defending the malpractice action. Law firms facing that additional risk of exhausting their coverage may be more anxious to settle a marginal liability claim at an earlier time.

Another lesson of Accounteks is to consider whether a potential litigation matter could trigger fee shifting. If those considerations are at play, the litigant needs to factor that exposure into its calculus of the cost of the litigation.  

For additional background and takeaways from the Accounteks decision, please review the excellent post authored by Abigail Green below.

A Third Party in New Jersey May be Unable to Avoid Fee Awards Under an Exception to the American Rule

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Last modified: July 5, 2023

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