Trepanier MacGillis Battina P.A. 8000 Flour Exchange Building 310 Fourth Avenue South Minneapolis, MN 55415 612.455.0500
Trepanier MacGillis Battina P.A. 8000 Flour Exchange Building 310 Fourth Avenue South Minneapolis, MN 55415 612.455.0500

Count of Breach of Implied Covenant of Good Faith and Fair Dealing Survives Dismissal in Claim for Payment for Stock Ancillary to Employment Agreement

A recent decision from U.S. District Court in the District of Minnesota provides some guidance as to when a plaintiff may assert a claim of breach of implied covenant of good faith and fair dealing under Minnesota law even if the claim is tangential to an employment relationship. In Hampton v. Koehler, No. 18-541 (DWF/TNL) (D. Minn. June 6, 2018), the plaintiff signed an Employment Agreement and a Restricted Stock Agreement (“RSA”) in 2002. Both agreements were signed by the defendant, Koehler, in his capacity as the President of Milestone Systems, Inc. (“Milestone”) at the time.

On April 29, 2016, plaintiff entered into an Agreement with Respect to Post-Closing Amounts (“Post-Closing Agreement”) with the new president of Milestone. On May 3, 2016, Milestone was acquired by Kudelski Security, Inc. (Kudelski). In August of 2016, Kudelski terminated plaintiff’s employment without cause to be effective September 30, 2016. In November of 2017, defendant Kohler took possession of $4 million from the acquisition of the stock that had been held in escrow and made disbursements to various employees but did not pay plaintiff his claimed portion in the amount of $164,903.

The Post-Closing Agreement stated in part:

“In order for an Employee to receive its pro rata portion of any Post-Closing Amounts, the Employee must be employed by the Company at the time of payment. Notwithstanding the foregoing, however, an Employee remains eligible to receive its pro rata portion of Post-Closing Amounts (if any) if the Company terminates the Employee’s employment without cause (as described in the Employee’s employment agreement).”

Hampton filed suit for breach of contract, breach of implied covenant of good faith and fair dealing, and unjust enrichment. Defendant moved to dismiss the counts of unjust enrichment and breach of the implied covenant of good faith and fair dealing.

The Court granted the motion as to the unjust enrichment claim. A plaintiff is sometimes permitted to plead unjust enrichment in the alternative, even if the claim is inconsistent with his breach of contract claim. See, e.g., Segelbaum, Inc. v. MW Capital, LLC, 673 F. Supp. 2d 875, 880 (D. Minn. 2009) (explaining that, at the motion to dismiss stage, plaintiff is permitted to pursue alternative theories that would provide remedies at law and equity). Claims for breach of contract and unjust enrichment are mutually exclusive, however, and a party seeking relief for conduct that is clearly governed by a contract cannot succeed on an unjust enrichment claim. See Roth v. Life Time Fitness, Inc., Civ. No. 15-3270, 2016 WL 3911875, at *3 (D. Minn. July 14, 2016) (citations omitted). Accordingly, the allegation of unjust enrichment was dismissed without prejudice.

The Court declined to dismiss the second count of breach of implied covenant of good faith and fair dealing. Under Minnesota law, there is an implied covenant of good faith and fair dealing on the part of both parties in most contracts. Earle R. Hanson & Associates v. Farmers Coop. Creamery Co., 403 F.2d 65, 69 (8th Cir. 1968). See also 5 Williston on Contracts § 670 (3d Ed. 1961) and Restatement of the Law of Contracts (Second) § 231. And, unlike unjust enrichment, the implied covenant can supplement a breach of contract claim. In re Hennepin Cty. 1986 Recycling Lit., 517 N.W.2d 63, 68 (Minn. App. 1984). Minnesota courts have long held, however, that implied covenants of good faith and fair dealing are not read into employment contracts. Hunt v. IMB Mid Am. Emps. Fed. Credit Union, 384 N.W.2d 853, 858-59 (Minn. 1986) (“[W]e have not read an implied covenant of good faith and fair dealing into employment contracts.”). It is generally understood that the rationale for this holding is that if the covenant were allowed in the employment context, every termination of employment could potentially give rise to a claim of bad faith or unfairness, which would undermine the at-will employment doctrine and clog the court system. As the court stated in Hunt:

“To imply into each employment contract a duty to terminate in good faith would seem to subject each discharge to judicial incursions into the amorphous concept of bad faith. We are not persuaded that protection of employees requires such an intrusion on the employment relationship or such an imposition on the courts.”

Id. at 858.
Here, the Plaintiff contended, and the court agreed, that just because there at one point was an employment contract between the parties does not mean that the court should apply the holding in Hunt at the motion to dismiss phase, because the core claim for payment of stock arises under the Post-Closing Agreement, even if resolution of the claim might hinge on the interpretation of the employment agreement. The Court found that “it is too early to determine whether Plaintiff has stated a viable claim for breach of good faith and fair dealing because it is not clear that the operative agreement is, indeed, an employment agreement.”

Minnesota courts will continue to throw out claims of breach of the implied covenant of good faith and fair dealing when such claims target the termination of employment itself. They have on other occasions, however, as in Hampton, suggested that such variations on this claim might survive dismissal if the plaintiff is seeking a specific payment and alleges bad faith on the part of the employer to purposefully time the termination to deny the employee a payment such as a bonus, commission, or vesting in stock options. See e.g., Bley v. ClickShip Direct, 2001 U.S. Dist. LEXIS 21147 (D. Minn. 2001) (denying a motion to dismiss a claim for payment of a bonus and stating, “[i]n this case, Plaintiffs allege that Defendants terminated them when they did so to avoid the payout – which may be construed as bad faith. Accordingly, dismissal is not warranted.”)
If you have questions about the terms of an employment agreement, contact the Minnesota employment attorneys of Trepanier MacGillis Battina P.A.

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Trepanier MacGillis Battina P.A. is a Minnesota employment law firm located in Minneapolis, Minnesota. Their employment law attorneys can be reached at 612.455.0500.