Every employee owes his or her employer a duty of loyalty, even in the absence of a non-compete agreement or other restrictive covenant. But what constitutes a breach of the common law duty of loyalty can be a murky question and depends on the facts. As the Minnesota Court of Appeals noted in Rehabilitation Specialists, Inc. v. Koering, “[t]here is no precise line between acts by an employee which constitute prohibited ‘solicitation’ and acts which constitute permissible ‘preparation.’ Because of the competing interests, the actionable wrong is a matter of degree. Whether an employee’s actions constituted a breach of her duty of loyalty is a question of fact to be determined based on all the circumstances of the case.” Id. at 404 N.W.2d 301, 305. Over the past fifty seven years, a number of Minnesota state and federal courts have weighed in on the scope of an employee’s duty of loyalty restricting an employee’s ability to solicit clients, start a competing business, or recruit co-workers. The following is a chronological list of court decisions examining the common law duty of loyalty in Minnesota:
Sanitary Farm Dairies, Inc. v. Wolf, 112 N.W.2d 42 (1961). Sanitary Farm Dairies was the genesis of modern duty of loyalty law in Minnesota. In that case, a driver-salesman of dairy products, Donald Wolf, solicited customers on his business route in contemplation of starting his own distribution business, including handing customer’s brochures announcing his new business. Wolf’s former employer brought a motion for a temporary restraining order and injunction. The motion was granted by the District Court but then ultimately denied following a change of venue. On appeal, the Minnesota Supreme Court reinstated the restraining order, holding that Wolf’s actions constituted “unfair competition,” and that “an employee may not feather his own nest at the expense of his employer while he is still on the payroll.” Id. at 48. Wolf had advised customers he would return later in the week to solicit their business on his own behalf. The Court ruled that an employee does not further his employer’s interest by suggesting that its customers should transfer their business elsewhere in the immediate future.
Jostens, Inc. v. National Computer Sys. Inc., 318 N.W.2d 691, 702 (Minn. 1982) In Jostens, the Court held that a duty of employer/employee confidentiality can arise at common law if the employee is given notice of what material is to be kept confidential. The Court in that case found a duty as to accounting software program because employees signed “confidentiality agreements [which], whether supported by consideration or not, put [employees] on notice that all [of employer’s] information was confidential.” The Court held that employees have a common law duty not to wrongfully use confidential information or trade secrets obtained from an employer. (Note that this case pre-dated the enactment of the Minnesota Trade Secrets Act.)
Saliterman v. Finney, 361 N.W.2d 175, 179 (Minn. Ct. App. 1985). In Saliterman, a dentist, Mark Finney, was alleged to have breached his non-compete agreement by opening a competing dental business within three miles of his former employer’s facility. Finney also actively solicited patients by using his former employer’s confidential patient lists. Finney’s former employer brought a motion for a temporary injunction. The district court granted the motion, enjoining Finney from soliciting persons on the patient list, but concluded that the non-compete covenant was not assignable and denied the motion to restrain Finney from practicing at his new location. The Minnesota Court of Appeals affirmed, finding Finney breached his duty of loyalty by wrongfully using the confidential patient list for his own profit.
Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301 (Minn. Ct. App. 1987). Koering is arguably the second most important Minnesota decision on the common law duty of loyalty. Nancy Koering, a former business administrator, was responsible for soliciting business and negotiating contracts on behalf of her employer, Rehabilitation Specialists. In a meeting with a major customer, Koering stated she was thinking about starting her own business and inquired about future business opportunities. The customer was supportive and offered Koering contracts with five of its business locations which did not do business with Rehabilitation Specialists. Koering accepted the contracts before she resigned a few days later. Prior to her resignation, Koering also met with a bank to obtain financing, applied for business insurance, filed incorporation documents, and took her former employer’s policy and procedure manual, list of employees, and sample contracts. Koering’s former employer sued for breach of duty of loyalty, but the trial court granted summary judgment in Koering’s favor. The Minnesota Court of Appeals reversed and remanded, finding a fact issue of whether Koering’s conduct crossed the line from preparation to solicitation. Koering is often cited by defendants embroiled in duty-of-loyalty litigation for the Court’s holding that, “[a]n employee’s duty of loyalty prohibits her from soliciting the employer’s customers for herself, or from otherwise competing with her employer, while she is employed. Employees who wish to change jobs or start their own businesses, however, should not be unduly hindered from doing so. An employee has the right, therefore, while still employed, to prepare to enter into competition with her employer.” Id. at 304. (emphasis added). As noted in the introduction, the Koering Court also stated, “there is no precise line between acts by an employee which constitute prohibited ‘solicitation’ and acts which constitute permissible ‘preparation,’” but “whether an employee’s actions constituted a breach of her duty of loyalty is a question of fact to be determined based on all the circumstances of the case.” Id. at 304-305.
Stiff v. Associated Sewing Supply Company, 436 N.W.2d 777 (Minn. 1989). Stiff was not a typical wrongful competition dispute. A former salesman, David Stiff was terminated for embezzling company funds and conspiring to dismantle the company’s business. Stiff sued his former employer seeking to collect unpaid commissions. The trial court denied Stiff any unpaid commissions, finding his embezzlement of company funds precluded him to the money owed. The Supreme Court affirmed, holding that a breach of the duty of loyalty by means of embezzlement results in the forfeiture of all wages earned, not just the amount that the employer can prove was stolen by the employees.
Eaton Corp. v. Giere, 971 F.2d 136 (8th Cir. 1992). A former product engineer, David Giere, developed a new transaxle, which he marketed to one of his employer’s main clients, the Toro Company, before submitting his resignation. He subsequently started his own business and continued to correspond with The Toro Company about the price of his device. Giere’s former employer filed suit, and the trial court entered a final judgment permanently enjoining Giere from marketing and selling his device. The Eighth Circuit affirmed, holding that Giere breached his duty of loyalty by soliciting The Toro Company before his resignation, as well as breaching the terms of his employment contract. Eaton is a good example of a case showing that even a relatively low-level employee owes a duty of loyalty. Id. at 141. Note that the duty of loyalty claim was intermixed with breach of contract and trade secrets claims as well.
Griep v. Yamaha Motor Corp., 120 F. Supp.2d 1196 (D. Minn. 2000). In Griep, a former mechanic for the Yamaha snowmobile race team pulled down his pants and indecently exposed himself at a public awards banquet while representing the Yamaha company and brand. The mechanic sued for breach of contract, alleging his termination violated his written employment agreement, which required 60 days’ notice before termination. The District Court granted summary judgment in favor of the employer, holding that fundamental principles of contract law and the “common law duty of loyalty” afforded Yamaha the legal right to terminate the mechanic’s employment based on his outrageous behavior. This case stands for the proposition that actions potentially constituting a breach of duty of loyalty fall into a wide spectrum, and are not always related to competition.
Workers Comp. Recovery, Inc. v. Marvin, No. A03-1549, 2004 WL 1244404, at *6 (Minn. Ct. App. June 8, 2004) In Marvin, a program manager, Robin Marvin, was terminated for soliciting business from her employer’s major customer, Benedictine Health Systems (BHS). Soon after, Marvin started her own business. BHS canceled its contract with Marvin’s former employer, communicating its intent to work solely with Marvin. Marvin’s former employer brought a motion for a temporary restraining order against Marvin. The District Court granted the motion, enjoining Marvin from conducting business with BHS. The Minnesota Court of Appeals affirmed, holding the evidence of Marvin’s solicitation and competition with her former employer supported a claim for breach of duty of loyalty.
Signergy Sign Group, Inc. v. Adam, No. A04-70, A04-147, 2004 WL 2711312 (Minn. Ct. App. Nov. 30, 2004), rev. denied (Minn. Feb. 23, 2005). Robert Adam contemplated leaving his employer for several months before submitting his resignation. During this time, Adam spent approximately two hours a week planning his new business and spoke to at least two suppliers of equipment and material. Adam did not solicit any customers or interfere with any customer relationships. Nor did Adam incorporate his new business, recruit employees from his former employer, or execute his first job until months after he had resigned. Adam’s former employer brought suit and the District Court granted the employer’s motion for judgment notwithstanding the verdict, finding Adam liable for breach of his duty of loyalty. The Minnesota Court of Appeals reversed, holding that “we are unwilling to uphold a verdict that interprets an employee’s legitimate attempts to ensure a continuing livelihood as a breach of loyalty to his employer.” Id. at *2.
Storage Technology Corp. v. CISCO Systems, Inc., 395 F.3d 921 (8th Cir. 2005). Storage Technology Corp. (“STC”) alleged that CISCO misappropriated trade secrets, tortuously interfered with its business, and induced a number of its former employees to breach their fiduciary duties to STC when CISCO hired away those employees and then allegedly used the information from those employees to develop a new technology. The District Court entered summary judgment in favor of CISCO for failure to show damages and the 8th Circuit Court of Appeals affirmed on the same basis.
Benfield, Inc. v. Moline, Civ. 04-3513 (MJD/SRN), 2006 WL 452903, at *9 (D. Minn. Feb. 22, 2006). A senior vice president, David Moline, resigned and immediately began working for a rival firm, violating his confidentiality and non-compete agreement (effective for one year after termination). Moline’s former employer sued and brought a motion for a temporary restraining order seeking to enforce the employment contracts. The trial court granted the motion, enjoining Moline from soliciting the business of any of his former customers. However, the trial court granted summary judgment in Moline’s favor on the count of breach of duty of loyalty, finding Moline did not solicit clients or disclose confidential information. The court held, “an employee may conceal his plans to compete with his employer and may prepare to engage in a competing enterprise without breaching his fiduciary duty…” Id. at *9.
Reliastar Life Ins. Co. v. KMG Am. Corp., No. A05-2079, 2006 WL 2529760 (Minn. Ct. App. Sept. 5, 2006). Two years after resigning from Reliastar, a senior insurance executive, Kenneth Kuk, acquired his own insurance company. Kuk then consulted with several long-time employees of Reliastar about his business, asking them to review his business plan and other business documents. He also recruited two senior managers to join his company after its public offering. Reliastar sued and filed for a temporary injunction to enjoin the recruited employees and Kuk’s new company from misappropriating trade secrets. The District Court denied the motion and the Minnesota Court of Appeals affirmed, finding that the former employees did not use or misappropriate confidential information or breach their duty of loyalty in the promotion of their new business.
NeoNetworks, Inc. v. Mark U. Cree, et al, No. A07-0729, 2008 WL 2104161 (Minn. Ct. App. May 20, 2008). Former corporate officers Mark Cree and W. Clinton Jurgens started a competing business after the termination of their employment. Their former employer brought suit, alleging the officers breached their duty of loyalty (among other claims) by seizing a business opportunity similar to their former employer’s existing business activities. The District Court granted the officers’ motion to dismiss and awarded costs and disbursements. The Court held that the officers did not violate their duty of loyalty as they did not use confidential information or solicit former customers. The Minnesota Court of Appeals affirmed.
Marn v. Fairview Pharmacy Servs., LLC, 756 N.W.2d 117, 121–22 (Minn. Ct. App. 2008). Michael Marn was discharged for acting against his employer’s best interest by contacting a major customer and telling the customer that his employer was unfit to handle the customer’s business and was likely violating Minnesota regulations. Marn allegedly encouraged the customer to terminate its business contract, although not for his personal financial gain. The Minnesota Department of Employment and Economic Development determined Marn’s actions disqualified him from receiving unemployment benefits. An unemployment judge affirmed the disqualification, holding that Marn violated his duty of loyalty by interfering with his employer’s business contract. The Minnesota Court of Appeals affirmed, dismissing Marn’s defense that he acted in a whistleblower capacity.
Schmidt v. Blue Lily Farms, LLC, No. A 08-1398, 2009 WL 2151135 (Minn. Ct. App. July 21, 2009). A facilities manager and company board member, Ronald Schmidt, voted to terminate the company’s 30-year lease at a company board meeting. Schmidt was discharged for acting against the company’s best interests and voting to terminate the lease agreement. Schmidt applied for and was awarded unemployment benefits. On appeal, an unemployment law judge reversed the determination of eligibility, finding Schmidt was discharged for employment misconduct, including breach of the duty of loyalty, making him ineligible for benefits. The Minnesota Court of Appeals affirmed, holding Schmidt’s conduct exceeded the conduct in Marn, and fell well below “the standards of behavior the employer has the right to reasonably expect.” Id. at *2.
Hot Stuff Foods, LLC v. Dornbach, 726 F. Supp. 2d 1038 (D. Minn. 2010) Hot Stuff alleged breach of fiduciary duty by a former executive employee after he covertly arranged to enter into an independent business relationship with the employer’s customers prior to his resignation. The Court denied a motion to dismiss, finding Hot Stuff had stated a plausible breach of fiduciary duty claim based on its allegations that the former Senior Vice President of Sales had solicited the business of one of its largest customers prior to his resignation.
Cenveo Corp. v. S. Graphis Sys., Inc., 784 F.Supp.2d 1130 (D. Minn. 2011). Former sales representatives of Cenveo solicited employees and customers, including Target Corp., to join a competing business, SGS, prior to their resignation. One sales representative, Mike Austin, had several meetings with his contacts at Target, obtaining assurances from Target that it would follow him to SGS when he moved. The trial court denied the defendants’ motion for summary judgment on breach of duty of loyalty, concluding Austin crossed the line from preparation to competition while still employed.
DeSmet v. FMT Servs., Inc., 2012 Minn. App. Unpub. LEXIS 132, at *8-9 (Minn. Ct. App. 2012). The Court in DeSmet held that engaging in seasonal employment in an unrelated industry does not breach the employee duty of loyalty under Minnesota law.
Menzies Aviation (USA), Inc. v. Wilcox, 978 F. Supp. 2d 983, 999 (D. Minn. Oct. 17, 2013) The Court in Menzies denied a motion for injunctive relief brought by Menzies based on allegations of breach of contract, misappropriation of trade secrets, and breach of duty of loyalty because evidence that Menzies had threatened to fire the employee if it lost a contract and then told the employee to go to work for a competitor seeking that contract “undercut a claim that [the employee] violated a duty of loyalty by doing just that.”
St. Jude Med. S.C., Inc. v. Hanson, No. 13-2463 (D. Minn. 2015). St. Jude sued a former employee, Hanson, for breach of contract and “breach of fiduciary duty of loyalty.” Hanson argued there is no such thing as a “fiduciary duty of loyalty” in Minnesota, identifying two distinct claims: (1) fiduciary duty and (2) duty of loyalty. The Court held that it was “apparent” that St. Jude was arguing about the duty of loyalty. The court held that facts from which a jury could conclude that Hanson contacted a “key decision maker” at a Kansas City medical center about the purchase of medical devices for a competitor’s benefit while still employed was enough to deny Hanson’s motion to dismiss.
Sorin Group USA, Inc. v. St. Jude Medical, S.C., No. 14-4023 (JRT/JSM), 2016 WL 1301086 (D. Minn. 2016), Sorin Group sued St. Jude Medical for, inter alia, aiding and abetting a former sales manager to breach her duty of loyalty by soliciting a sales representative to move with her to St. Jude. The District Court declined to dismiss the claim on summary judgment.
Hearing Associates, Inc. v. Downs, No. A16-1317, 2017 WL 2414852 (Minn. Ct. App. 2017). Two audiologists, while still employed, allegedly took steps to prepare to compete with their employer, including the creation of a business plan, the scouting of clinic locations, and discussions regarding financing. A jury found the employees liable for breach of contract and breach of duty of loyalty, despite evidence that the employees never solicited any customer, client, or patient before the termination of their employment. The Minnesota Court of Appeals affirmed, finding the audiologists used confidential information from their former employer to start their own business. This case is currently under review by the Minnesota Supreme Court.
Breach-of-duty of loyalty cases are fact intensive and the summaries above do not include a discussion of all alleged facts or procedural details.
Minnesota breach of duty of loyalty attorney V. John Ella has represented both plaintiffs and defendants in breach of duty of loyalty cases at the trial court and the Minnesota Court of Appeals. He is the author of Duty-of-Loyalty Claims in Minnesota published by Bench & Bar Magazine in October 2011. He can be reached at 612-455-6237 or at firstname.lastname@example.org