Employees who leave a company for greener pastures sometimes recruit their former colleagues to join them. Employment agreements designed to prevent this type of recruiting through the use of post-employment restrictions on soliciting employees are common in many states, including Minnesota. Employers typically include a non-solicitation of employee provision (also known as a “non-recruitment” of employees, “anti-raiding” or “non-poaching” provision) in conjunction with a prohibition on the solicitation of customers and a non-disclosure of confidential information provision. An increasing number of companies utilize a version of this triad in lieu of, or along with, a pure covenant not to compete. Surprisingly, however, there is a paucity of case law in Minnesota regarding non-solicitation of employee provisions. A recent Wisconsin Court of Appeals decision (discussed below) highlights the dearth of legal guidance in Minnesota.
General Principles
No Minnesota appellate court has squarely addressed the enforceability of non-solicitation of employees covenants in a reported decision. It is generally assumed, however, that post-employment restrictions on recruiting employees are lawful in Minnesota and should be analyzed under the same legal framework as any other restrictive covenant. In order to be enforceable, therefore, the employer would have to demonstrate that it has a legitimate protectable interest, that the restriction is reasonably necessary to protect that interest, and the employee received adequate consideration, among other factors. See, e.g. Webb Publishing Co. v. Fosshage, 426 N.W.2d 445, 449-450 (Minn. Ct. App. 1988).
In Schwan’s Consumer Brands North America, Inc. v. Home Run Inn, Inc., No. 05-2763 (DWF/JJG), 2005 WL 3434376 (D. Minn. 2005), a judge in the U.S. District Court for the District of Minnesota denied a motion for an injunction by a plaintiff alleging, in part, breach of a 12-month non-solicitation provision by two former employees. The court found that the agreements did not appear to be supported by adequate consideration under Minnesota law, essentially applying the same analysis used for non-compete agreements. (In Schwan’s the defendant company apparently voluntarily agreed at oral argument that it would not hire any further Schwan’s employees for a period of 12 months.) In Frank B. Hall & Co. v. Alexander & Alexander, Inc., 974 F.2d 1020, 1024, n.5 (8th Cir. 1992), the Eighth Circuit Court of Appeals appeared to assume that an “anti-raiding” agreement was enforceable under Minnesota law and observed that the non-solicitation clause “did not prohibit the parties from merely hiring an employee of the other without solicitation.” It is probably safe to assume, therefore, that Minnesota courts will analyze a claim of breach of a non-solicitation of employee restriction in the much same way they look at other restrictive covenants.
Application of Injunctive Relief and Recovery of Damages
An important question regarding the litigation of claims involving an alleged breach of a non-solicitation of employee provisions under Minnesota law is what type of equitable remedies are permissible in the event of a breach. For example, if Employee A with a non-solicitation provision from Acme Company quits and then recruits Employee B to join him at Widget Company, can Acme Company seek an injunction to prevent Employee B from working at Widget Company? Is that outcome fair to Employee B who herself did not agree to any contractual restriction? (Often employee B in this situation also has a non-compete, which changes the potential equities in play.)
The Minnesota Court of Appeals touched on this issue in ReliaStar Life Insurance Co. v. KMG America Corp., No. A05-2079, 2006 WL 2529760 (Sept. 5, 2006). In ReliaStar, two executives resigned from ReliaStar. After their resignation, they solicited and made offers to eight other ReliaStar employees to join KMG, and successfully hired seven. The original two executives were subject to a prohibition on soliciting “employees, agents, and customers” for a period of 12 months. The trial court denied Reliastar’s motion for an injunction and ReliaStar appealed. The Court of Appeals affirmed, noting:
“ReliaStar sought to enjoin KMG . . . from continuing to employ anyone employed by ReliaStar on December 14, 2004. . . As the district court emphasized, these employees (with the sole possible exception of Gibb) were not subject to non-competition agreements. A broad injunction whereby . . . the sales representatives who formerly worked for ReliaStar would all lose their jobs would have substantially harmed the employees and KMG.” Id. at *6.
In another employee solicitation dispute, this time involving the freight-brokerage industry, a court in Hennepin County, Minnesota, issued an injunction prohibiting “all” employees who used to work at one company (XPO) and who were still subject to a two-year non-solicitation provision with their former company (C.H. Robinson) “from soliciting or initiating contact regarding employment with any C.H. Robinson employee for the period of their non-solicitation agreement.” C.H. Robinson Worldwide, Inc. v. Kratt, No. 27-CV-1216003, 2013 WL 6222078 (Henn. Co. Dist. Ct., 4th Judicial Dist. of Minn., Jan. 17, 2013.) Again, the court did not prevent anyone who had already been solicited from continuing their employment. The court in C.H. Robinson emphasized the protected interest at stake, noting, “Plaintiff’s . . . [a]greements are properly read as preventing former employees from leveraging their relationships with current employees, whom they were exposed to as a result of their employment with Plaintiff, in an effort to misappropriate the goodwill that Plaintiff’s employees have developed with Plaintiff’s customers.” Id. at *24.
If a plaintiff does not seek injunctive relief, or if it is not available, Minnesota courts have provided little guidance as to the measure of damages in the case of a breach of a non-solicitation agreement. Lost damages might include cost of recruiting and training a replacement, and possibly something more. See, e.g. St. Jude Medical, S.C., Inc. v. Biosense Webster, Inc., 818 F.3d 785 (8th Cir. 2016) (affirming damages for “lost profits” arising from tortious interference by hiring employee with “term of years” contract.)
Breach of Duty of Loyalty and the “Pied Piper” Rule
The solicitation of employees may also be unlawful in Minnesota if an executive solicits colleagues before she resigns her previous employment in violation of her common law duty of loyalty. In Sorin Group USA, Inc. v. St. Jude Medical, S.C., No. 14-4023 (JRT/JSM), 2016 WL 1301086 (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. Id. See also RESTATEMENT (SECOND) OF AGENCY § 393 cmt. e (1958) (an employee is liable if, before or after leaving the employment, he causes fellow employees to break their contracts with his employer).
In Central States Indus. Supply, Inc. v. McCullough, 279 F.Supp.2d 1005 (N.D. Iowa 2003), a federal court in Iowa, analyzing an allegation of breach of fiduciary duty under Iowa law, described the “Pied Piper” rule as the “principle that, before he terminates his employment, a top managerial employee may not solicit the departure of employees to work for a competitor[.] The rule is most clearly applicable if the supervisor-manager, as a corporate pied-piper, leads all of his employer’s employees away, thus destroying the employer’s entire business.” Id. at 1043-1044 (citing Massachusetts law).
Manitowoc Company v. Lanning and Wisconsin Law
In The Manitowoc Company v. Lanning, No. 2105-AP-1530, 2016 WL 4370181 (Wis. Ct. App. Aug. 17, 2016), plaintiff was awarded $97,844.78 in damages, along with $1 million in attorneys’ fees at trial in a case alleging a breach of an employee non-solicitation agreement. The Wisconsin Court of Appeals reversed the verdict. As an initial matter, the court held that provisions purporting to restrict solicitation of employees are governed by Wis. Stat. § 103.465 because they are a type of “covenant . . . not to compete.” Having decided that the provision was governed by the Wisconsin statute on non-competes, the court went on to hold that the provision was unenforceable under Wisconsin law because it was over-broad.
The provision at issue in Manitowoc read as follows:
“I agree that during my Employment by Manitowoc and for a period of two years from the date my Employment by Manitowoc ends . . . I will not (either directly or indirectly) solicit, induce, or encourage any employee(s) to terminate their employment with Manitowoc or to accept employment with any competitor, supplier, or customer of Manitowoc.”
In analyzing this provision, the Wisconsin Court of Appeals found that:
“[th]e NSE provision also extends to contacts that seem loosely connected, if at all, to Manitowoc’s competitive interests. It restricts Lanning from encouraging a Manitowoc friend to take a job with a noncompetitive employer simply because that employer happens to be a Manitowoc customer. This provision would seemingly prohibit Lanning from serving as a job reference for a former colleague who applies to work for a competitor, supplier, or customer of Manitowoc, or maybe who seeks to change industries altogether. The restriction even prohibits Lanning from encouraging a former colleague and friend to retire (“terminate their employment with Manitowoc”) to spend more time with his family. . . . Manitowoc’s stated interest—protecting itself from Lanning’s specialized knowledge of its talent base and his relationships with employees—does not justify the broad ban on the solicitation, inducement, or encouragement of any employee. Manitowoc is a large company with two divisions. Lanning worked in the crane division; his expertise and connections would not extend to all of Manitowoc’s employees. With respect to at least some of Manitowoc’s employees, Lanning posed no greater threat to Manitowoc than any other competitor or employer. To meet its burden, Manitowoc would also need to show that the provision serves some legitimate and unique competitive interest by prohibiting the encouragement, solicitation, or inducement of any employee to accept employment not only with competitors, but also customers or suppliers. Starbucks, for example, is one of its customers. Lanning’s non-solicitation provision would be violated if he encouraged a young former colleague to leave Manitowoc and work part time as a barrista at Starbucks to pursue graduate studies. Manitowoc must show how such a provision is reasonably necessary for its protection.” Id., pp. 13-14.
Minnesota, unlike Wisconsin, does not have a statute on enforceability of non-competes. (The State of Missouri has a specific statute regarding any “covenant in writing promising not to solicit, recruit, hire or otherwise interfere the employment of one or more employees.” Mo. Rev. Stat. § 431.202. Interestingly, the Missouri statute prohibits the use of such restrictions against “employees who provide only secretarial or clerical services.” See H & R Block Enterprises, Inc. v. Short, No. Civ. 06-608 (JNE/JJG), 2006 WL 3437491 (D. Minn. 2006) (applying Missouri law)) Wisconsin law is less forgiving than Minnesota law. Wisconsin courts will invalidate any non-compete that is unreasonable at all, in any aspect, and will not allow judicial modification, also known as blue-penciling. The outcome of the Manitowoc case, therefore, would not necessarily be the same under Minnesota law. The take-away for Minnesota employers, employees, and legal practitioners, is more general: that these types of restrictions are analyzed under the same state-specific analysis used for other restrictive covenants. Notably, the court in Manitowoc did not invalidate the agreement on a larger public-policy basis that such agreements, even if narrowly fashioned, could never be enforceable. It merely held that the specific clause in question was over-broad under the Wisconsin statute.
Conclusion
Many of these unanswered questions will likely be addressed at some point by a Minnesota appellate court, but in the meantime, employers, employees and their counsel should tread carefully in situations involving covenants not to recruit employees.
About the Author
Trepanier MacGillis Battina P.A. is a Minnesota non-compete law firm located in Minneapolis, Minnesota. Their attorneys can be reached at 612.455.0500.