It is that time of year again when we round up and review all of the state and federal court decisions from Minnesota from the last 12 months involving employment contracts, non-competes, or other restrictive covenants. Once again it appears that companies seeking injunctive relief to enforce non-competes are having a tough go at it, especially in federal court. Challenges to personal jurisdiction by out-of-state defendants and choice-of-law entanglements were also popular this past year, with mixed results. Finally, two separate decisions highlight the distinction between termination of employment and termination of an agreement when it comes to enforcing restrictive covenants.
Minnesota Supreme Court
Contract Disclaimer in Employee Handbook Held Ambiguous
One of the more notable decisions touching on employment contracts was issued in early 2021. In Hall v. City of Plainview, 954 N.W.2d 254 (Minn. 2021), the Minnesota Supreme Court held that whether a contract disclaimer barred an employee’s claim for paid time off (“PTO”) under an employee handbook was ambiguous and for a jury to decide. The origin of this case starts with Pine River State Bank v. Mettille, 333 N.W.2d 622 (Minn. 1983) in which the Minnesota Supreme Court held that an employee handbook with a progressive disciplinary policy could be enforced by a terminated employee as a unilateral contract. After that, Minnesota employers starting including contract disclaimers in their handbooks. Minnesota appellate courts repeatedly upheld these disclaimers, and they became a reliable standard practice for decades. Many employment attorneys, therefore, were surprised by the decision in City of Plainview. The distinction is that the City of Plainview dispute involved PTO, not wrongful termination. The Minnesota Supreme Court had separately held in Lee v. Fresenius Medical Care, Inc., 741 N.W.2d (Minn. 2007) that entitlement to vacation pay and PTO was a matter of contract law. These two concepts collided in City of Plainview.
The Court in City of Plainview seemed to endorse contract disclaimers limited to at-will employment, but it was more cautious when it came to employee benefits. The Court encouraged careful drafting, stating:
“well-drafted, specific, disclaimers can prevent the formation of contractual rights stemming from employee handbook provisions, including provisions concerning PTO. Employers can and should include more than boilerplate “no contract” disclaimers in their employee handbooks, both for their own benefit as well as for the benefit of their employees, who will have a clearer understanding of how they may rely on the terms of a handbook provided to them by their employer. A textbook example of such a disclaimer can be found in the City’s Handbook: the at-will disclaimer included at the end of the Handbook’s introduction. That disclaimer clearly states that the Handbook’s employee grievance and termination procedures do not alter the nature of the at-will employment relationship or provide any sort of for-cause termination protection. This level of drafting clarity avoids confusion for employers and employees alike.”
Id. at 268-269.
Minnesota Court of Appeals
Tortious Interference Claim Thrown Out for Lack of Personal Jurisdiction
The Minnesota Court of Appeals reversed a lower court’s decision denying a motion brought by a California-based fitness company, Xponential, to dismiss for lack of personal jurisdiction and improper service of process. Snap Fitness, Inc. v. Marshall, No. A19-1415, 2020 WL 1983226 (Minn. Ct. App. 2020). Xponential had hired a Minnesota-based employee of Snap Fitness (“Snap”) and Snap sued the employee for breach of a non-compete agreement. Snap then named Xponential as a co-defendant on a claim of tortious interference. The Court of Appeals ruled that “the number, nature and quality” of Xponential’s contacts with Minnesota were not sufficient to establish personal jurisdiction in Minnesota.
Eighth Circuit Court of Appeals
Resignation by Employee without Cause was not the Same as Termination Without Cause for Purposes of Eligibility for Post-Closing Payments
The Eighth Circuit Court of Appeals affirmed summary judgment granted in favor of the former president, Kohler, of a technology company, Milestone, who was sued by another former employee, Hampton, seeking his pro-rata share of post-closing amounts paid to Kohler after Milestone was sold to a company called Kudleski. Hampton v. Kohler, No. 19-2837, 2021 WL 683322, —F.3d —, (8th Cir. 2021). Although the two parties in this case were both individuals, this case centered on interpretation of a termination for “cause” provision in an employment agreement and the relationship of that agreement to a restricted stock agreement, a post-closing agreement (“PCA”), and a separation agreement. The PCA stated that Koehler would pay Hampton his pro-rata share of the sale price on a certain date if he was either still employed or terminated without “cause” as that term was defined in his employment agreement. After the sale of the company, Hampton kept working for Kudleski until he was told that he would have to make lengthy trips to Europe. Hampton protested that this would interfere with his family obligations in Minnesota. The Company wanted him to stay at least until the renewal of a key client contract, so it proposed a compromise. Hampton agreed that his employment would end, and he would receive a severance payment, but he then would serve as an independent contractor for another nine months or so to assist with the key client. The separation agreement stated that “the parties’ separation is without cause by either party.” Six months after his independent contractor term was over it was time for the post-closing payments to be made, but Koehler refused to pay Hampton. He pointed out that Hampton was neither still employed nor had he been terminated by Kudleski without cause. The district court concluded that a “termination without cause” under the PCA must be a scenario in which Hampton’s employment is ended by the action of one party and that the party making the decision was not Hampton. The Eighth Circuit Court agreed. This case shows the importance of understanding how key executive agreements and other contracts relate to each other. An earlier decision by the district court was notable in that the court initially declined to dismiss a claim for breach of the covenant of good faith and fair dealing which are usually not allowed in employment disputes.
U.S. District Court for the District of Minnesota
Termination of Employment is Different than Termination of an Agreement! (Also Reliance on a Sysdyne Letter Vindicated)
A recent District of Minnesota decision reminds us that termination of an employment “agreement” is not always the same thing as termination of employment. Interpreting Iowa law, Judge Schiltz declined to issue a preliminary injunction in Fulton v. Honkamp Krueger Financial Services, Inc., No. 20-CV-1063 (PJS/DTS), 2020 WL 7041766 (D. Minn. 2020). In Fulton, a former employee, Fulton, of Honkamp Krueger (“HKFS”), went to work for Mariner Wealth Advisors (“Mariner”), a competitor of HKFS. Fulton’s employment agreement included a clause stating, “the parties agree that either party may terminate the Agreement on written notice.” The agreement did not contain a “savings” clause providing that the non-compete provision would survive termination of the agreement. Fulton therefore provided written notice of the termination of his agreement and subsequently resigned. As the Court noted:
“Fulton and Mariner were aware of the restrictive covenants in Fulton’s contracts with HKFS and, with the help of counsel, they executed a carefully orchestrated scheme to terminate Fulton’s employment with HKFS in a manner that was intended to avoid triggering the non-compete clause. The key to the plan was the realization that Fulton’s employment agreement distinguished between the termination of the employment agreement and the termination of his employment. In other words, the agreement permitted Fulton to terminate the employment agreement and yet remain employed by HKFS. Fulton and Mariner also realized that nothing in the non-compete clause provided that it survived the termination of the employment agreement. This created a loophole: If Fulton first terminated the employment agreement and then later terminated his employment, the non-compete clause would not apply, because the agreement would not be in effect at the time that Fulton quit his job. . . .The distinction between the termination of the agreement and the termination of employment is critical because the non-compete does not survive the termination of the agreement. . . Many—perhaps most—restrictive covenants expressly provide that they survive the termination of the agreements in which they appear. Fulton’s own employment agreement expressly provides that some restrictions survive the termination of the agreement. For example, the confidentiality clause prohibits Fulton from disclosing confidential information “[d]uring the term of this Agreement and after.” But nothing in the agreement provides that the non-compete survives the agreement’s termination. And thus, if Fulton first terminated the agreement, and then terminated his employment, the non-compete would not apply to Fulton at the time that he quit his job.”
The Fulton case is also notable in that the Court explicitly found that a tortious interference claim against Mariner would not be likely to succeed on the merits because it had expressly relied on advice of counsel to interpret the agreement in its decision to hire Fulton pursuant to the holding in Sysdyne Corp. v. Rousslang, 880 N.W.2d 347 (Minn. 2015).
Termination of Employment is Different than Termination of an Agreement II; and Preemptive Suit in Wisconsin State Court for Declaratory Judgment Held not to Bar Second Lawsuit for Breach of Non-Compete in District of Minnesota
Dave Henshaw (“Henshaw”), a resident of Wisconsin, started as a salesperson with a printing company called Quality and Safeguard Business Systems, Inc. (“Quality”) in 1993 and signed an employment agreement (“Agreement”) with Quality containing a Minnesota choice-of-law provision, a non-compete provision and a non-solicitation provision. Brand Advantage Group, Inc. v. Henshaw, No 20-225 (JRT/HB), 2020 WL 1891772 (D. Minn. 2020). Quality was acquired by another company which in turn was acquired by Brand Advantage Group, Inc. (“BAG”). The Court in this case found that the Agreement, to the extent it was otherwise enforceable, was assigned to BAG. Henshaw resigned in 2019, went to a competitor and started soliciting clients. His activities were discovered when customers sent e-mails to his former BAG email account, which is a common tip off for former employers. BAG threatened litigation but tried to discuss resolution with Henshaw’s counsel. Henshaw’s attorney said he needed more time to respond then filed a suit for declaratory judgment in Wisconsin. BAG proceeded with filing its lawsuit in the District of Minnesota and sought injunctive relief. Henshaw moved to dismiss under the first-filed rule.
The Court found that an exception to the first-filed rule applied where the first-filing party (1) was on notice of a potential lawsuit and (2) the first-filed action seeks declaratory relief. The court therefore allowed the Minnesota federal court action to proceed. As for the motion for injunctive relief, however, the court pointed out that the 1993 Agreement was explicitly for a period of one year and expired on January 6, 1994, which was about 26 years before the litigation. Similar to the agreement in Fulton v. Honkamp Krueger, supra, one of the restrictive covenants (the non-solicit) stated that it applied for one year following termination of the “Agreement” but the other, the non-compete, applied for one year following termination of “employment.” The court had little difficulty holding that the non-solicitation provision expired in 1995. Somewhat confusingly, the court denied injunctive relief on the non-compete because BAG “disclaimed” any attempt to enforce the provision as to “competitors” and only sought to limit him from servicing customers, yet its complaint only alleged that Henshaw could not work for “competitors.” Brand Advantage Group stands as another example of the importance of distinguishing termination of an agreement from termination of employment when drafting restrictive covenants. It also throws cold water on attempts to rush to court in another state to stave off a lawsuit for breach of a non-compete.
Complex Trade Secrets and Non-Compete Case Untangles Trade Secrets Preemption and Choice-of-Law Issues
A battle over two employees in the ag-tech industry resulted in a detailed analysis of choice-of-law provisions, trade secrets preemption, and North Carolina law in Syngenta Seeds, LLC v. Warner, No. 20-cv-1428, 2021 WL 679289 (D. Minn. 2021). Syngenta Seeds, LLC (“Syngenta”) (a Delaware company based in Illinois) develops and produces seeds and crop protection innovations, including hybrid varieties and biotech crops. Two employees of Syngenta, Todd Warner (“Warner”) and Joshua Sleper (“Sleper”), both residents of Minnesota, reached out to a smaller competitor of Syngenta, Farmer’s Business Network (“FBN”), based in California, and held a series of meetings about helping FBN jump start an early-stage seed breeding program at FBN and shared PDFs and other information. Warner and Sleper both had employment contracts with a North Carolina choice-of-law provision. These contracts included non-compete and non-disclosure provisions. Syngenta sued Warner and then engaged in expedited discovery. It then amended the complaint to add FBN and Sleper. FBN and Sleper filed motions to dismiss the new claims of breach of contract, violation of the California Unfair Competition Law (“UCL”), misappropriation of trade secrets under both North Carolina law and the DTSA, tortious interference, and civil conspiracy.
The court granted part of the motion to dismiss without prejudice. First, it determined that the North Carolina choice-of-law provision was permissible because Syngenta’s primary seeds research facility was located in North Carolina and Warner and Sleper traveled there and worked with that facility (noting that “North Carolina law does not seem like the most natural choice to govern a contract between the Parties to this case, but that is a far cry from concluding that it is a fundamentally unfair one.”) Second, it determined that North Carolina law also applied to the misappropriation of trade secrets claim based on the language of the contracts. Third it noted that North Carolina law, unlike Minnesota or other states that have adopted the Uniform Trade Secrets Act, does not preempt or displace other tort claims or state law claims based on misappropriation. The court, however, dismissed the tortious interference claims under North Carolina law which appears to have a higher standard than Minnesota law for that particular tort. It also dismissed the UCL claim as preempted by the California Uniform Trade Secrets Act. The Syngenta decision provides a rich vein of analysis to be mined by practitioners involved in complex, multi-state litigation involving alleged misappropriation of trade secrets and breach of contractual obligations.
Request for Injunction Based on Amended Non-Compete Denied for lack of “Specific” Evidence of Use of Confidential Information or Sale to Customer
Virtual Radiologic Corp. v. Rabern, No. 20-CV-0445, 2020 WL 1061465 (D. Minn. 2020) involved a former employee, Rabern, of Virtual Radiologic (“vRad”) who negotiated an amendment to his non-compete agreement and then went to work for Nines, Inc. (“Nines”). vRad conceded that Rabern’s employment with Nines did not violate the non-compete provision “as amended.” vRad argued, however, that the amendment was void because the amendment had been induced by fraud. Specifically, vRad alleged that Rabern induced vRad to agree to the amendment by lying about the nature of Nines’s business.
vRad claimed that Rabern explicitly assured it that Nines was not engaged in teleradiology and that its business “did not overlap with vRad’s services.” vRad argued that the original non-compete provision only restricted Rabern from working for companies that compete with vRad—that is, companies that are involved in teleradiology. According to vRad, Rabern explicitly told vRad that Nines would not be involved in teleradiology. If that were true, however, the court concluded that Rabern would not have needed to request—and vRad would not have needed to provide—an amendment to his non-compete, because his employment with Nines would not violate the original non-compete. It found that vRad had no credible explanation for why it would agree to amend the non-compete of an employee who had assured it that nothing that he would be doing would violate the non-compete.
vRad said that Rabern asked vRad to confirm that Rabern’s employment would not violate his non-compete. The Court noted that “such requests from departing employees are not uncommon. Typically, the old employer will ask for written assurances from the new employer about the scope of the departing employee’s new duties, and then the old employer will affirm that, if the new employee performs only the duties described by the new employer, he will not be in violation of his non-compete.”
The Court also found that vRad had also failed to establish a threat of irreparable harm. vRad argued that Rabern’s continued employment at Nines would threaten vRad’s “unique business strategy and customer goodwill.” The court’s response was a bit of a zinger suggesting a weariness from the bench regarding these types of cases: “But employers always say this when a sales representative leaves. A risk of harm to customer goodwill stated in general, conclusory terms does not show a likelihood of irreparable harm that, in turn, would justify issuing a preliminary injunction.” (emphasis added.) The court noted that there was no evidence that he took or used confidential information and had not yet made any sales.
Claim Based on Term-of-Years Employment Contract Allowed to Proceed
Although the use of term-of-years agreements is still relatively rare, the former Minnesota-based medical device company St. Jude Medical (which was acquired by Abbott Laboratories in 2017) has successfully implemented these types of contracts, which commit employees to a certain period of employment, for some time, as shown in Minnesota case law. They are especially useful to bind employees in states like California which do not allow non-competes. In St. Jude Medical S.C., Inc. v. Suchomel, No. 19-CV-2400 (JRT/BRT), 2020 WL 1853653 (D. Minn. 2020), St. Jude filed an action against former employee Suchomel for breach of contract and damages in excess of $1.5 million because he resigned before the term-of-years expired and joined a competitor, Farapulse. Suchomel, a resident of California, moved to dismiss the action for lack of personal jurisdiction and for failure to state a claim under California law. The Court denied the motion, finding that there were minimum contacts for personal jurisdiction and that Minnesota law applied.
Motion for Preliminary Injunction Denied Based on Alleged Inevitable Disclosure of Trade Secrets After Two-Year Non-Compete Expired
Two manufacturers of quartz countertops kicked up some dust in a dispute over alleged secret processes, recipes, and formulas to produce quartz surface products. Cambria Company, LLC v. Schumann, No. 19-CV-3145 (NEB/TNL), 2020 WL 373599 (D. Minn. 2020). Adam Schumann (“Schumann”) worked at Minnesota-based Cambria for several years and had a two-year non-compete. He left and, the day after the non-compete expired, went to work for competitor Dal-Tile Tennessee, LLC (“Dal-Tile”). Cambria sued, alleging misappropriation of trade secrets under state and federal law and breach of the non-disclosure provisions of the employment agreement. It then moved for an injunction based in part on the theory of “inevitable disclosure.” The Court reiterated the position that neither Minnesota Courts or the Eighth Circuit have accepted or rejected this doctrine. The Court said it “assum[ed] without deciding that the inevitable-disclosure doctrine could be appropriately applied in the correct case. This is not the case.” The Court denied the motion for injunctive relief noting that Cambria had not described its alleged trade secrets with sufficient specificity and its definition was a “shifting target.” It also seemed to rely on the fact that Schumann did not take anything with him, and his memory of formulae was at least two-years old. This case shows the very high burden of obtaining an injunction based solely on knowledge of trade secrets.
Minnesota Payment of Wages Act does not Apply to Out-of-State Employee; Declaratory Judgment Claim Regarding Non-Compete Dismissed Without Prejudice
In Rao v. St. Jude Medical, No. 19-923 (MJD/BRT), 2020 WL 4059876 and 2020 WL 4060670 (D. Minn. 2020), Plaintiff Thomas Rao (“Rao”), who had been employed as a sales representative for St. Jude Medical (“St. Jude”) in Pennsylvania, sued St. Jude for age discrimination, unpaid wages, breach of contract and declaratory judgment after his employment was terminated. Rao’s employment contract had a Minnesota choice-of-law provision, so he sued in the District of Minnesota. St. Jude moved to dismiss several of Rao’s claims. The Court found that Minnesota Payment of Wages Act in Minnesota Chapter 181 did not apply to a plaintiff who was not a resident of Minnesota and neither lived nor worked in Minnesota. Rao’s request for declaratory judgment asserting that the non-compete provision in his employment contract was “overly broad in duration, scope, and geography, and not reasonably tailored to protect [St. Jude’s] legitimate business interests” was dismissed without prejudice because it was “conclusory” and insufficiently pled without any facts to support his contention that he does not know what products compete with those he sold.
Motion for Preliminary Injunction Denied for Failure to Show Irreparable Harm
H2I Group, Inc. v. Miller, No. 19-2870 (JRT/DTS), 2020 WL 618471 (D. Minn. 2020) involved a company, H2I, that designs, constructs, and renovates gymnasium spaces and athletic facilities. H2I sued a former project engineer, Miller, who formed a new company that did house remodeling and athletic installations, for breach of his non-compete. First, the court considered whether it had jurisdiction over Miller who did not live or work in Minnesota. His non-compete had a Minnesota choice-of-law provision but no choice-of-forum clause or consent to jurisdiction. The court held that his five-year employment relationship with the Minnesota business created minimum contacts with the state to establish personal jurisdiction. The Court then denied H2I’s motion for a preliminary injunction for lack of a demonstration of irreparable harm where “H2I [did] not allege that Miller had any proprietary or specialized knowledge that would allow him to irreparably harm H2I’s ability to bid for work” nor did it allege “the kind of conversion of customer goodwill or specific misappropriation of confidential information.” The court’s use of the word “specific” here is illuminating. Elsewhere it found the likelihood of success on the merits to be questionable given no “concrete” evidence that Miller was making use of confidential information. Clearly the court felt that a generalized assertion that Miller had and was using or would use confidential information to be an insufficient basis for injunctive relief. The court stated a claim of tortious interference with contract would not be successful because Miller could not interfere with his own contract. It found that a claim for tortious interference with prospective economic advantage was also unlikely to succeed because the plaintiff did not identify “specific third parties” with whom it claimed to have prospective economic relationships. It also held that claims for unjust enrichment and breach of duty of loyalty were not claims of “prospective” harm and therefore could not serve as the basis for a preliminary injunction.
Court Lacked Personal Jurisdiction Over Some Out-of-State Defendants
In Travel Leaders Leisure Group, LLC v. Cruise & Travel Experts, Inc. No. 19-CV-02871, 2020 WL 4604534 (D. Minn. 2020), another District of Minnesota judge held, in a lengthy opinion, that it lacked personal jurisdiction over individual defendants sued for breach of contract, unfair competition and misappropriation of trade secrets. The contracts contained Minnesota choice-of-law provisions but apparently not consent to jurisdiction provisions. The court’s conclusion in Travel Leaders was different than that in H2I Group, Inc. v. Miller and shows that these questions can be a close call where former employees have never worked in Minnesota.
Motion for Preliminary Injunction Against Executive Denied in Dispute Involving Health Insurance Giants
In United Healthcare Services, Inc. v. Louro, No. 20-2696 (JRT/ECW), 2021 WL 533680 (D. Minn. 2021), UnitedHealth Group (“UHG”) sued a former executive, Louro, for breach of his non-compete agreement and misappropriation under the Defend Trade Secrets Act (“DTSA”) and sought a preliminary injunction to prevent him from working for Anthem, a direct competitor. Louro was a Vice President of Underwriting for UHG based in Connecticut and had signed restrictive covenants in connection with grants of stock options and restricted stock. In response to UHG’s request for injunctive relief, Anthem assured the court that Louro would work in a different role than his previous position, that he would not use confidential information, and that he would specifically not work in certain business segments. The Court denied UHG’s motion based on the assurances and affirmations of Louro and Anthem and found that equitable relief was not necessary to protect a legitimate business interest. The Court also rejected an “inevitable disclosure” argument on the DTSA claim. This case demonstrates the effectiveness of limiting the role and duties of a prospective hire in order to make injunctive relief unnecessary.
Motion to Compel Certain Discovery Requests in Non-Compete Dispute Denied
Two sales employees of one regional I.T. company quit and went to a rival in Marco Technologies, LLC v. Midkiff, No. 190-CV-2323 (PJS/LIB), 2020 WL 44050339 (D. Minn. 2020). The former employer, Marco, sued for actual damages resulting from the loss of customers. In discovery, the defendants asked if engineers at Marco were required to sign non-competes. The magistrate judge found this question irrelevant as to claims against salespersons and the district judge agreed. Defendants also asked for documents related to “complaints” that the former employees had raised while at Marco. The court found this request also irrelevant. In a subsequent order, the District Judge held that the magistrate’s discovery limitation limited to the one-year non-compete period was not a ruling on the merits where Marco had argued that an extension clause served to extend the period. 2021 WL 62471 (D. Minn. 2021).
Judgment on the Pleadings not Appropriate to Determine Reasonableness of Non-Compete
In C. H. Robinson Worldwide, Inc. v. Tu, No. 19-1444 (MJD/BRT), 2020 WL 2733787 (D. Minn. 2020), C.H. Robinson, a Minnesota-based logistics company, sued a former employee, Tu, for breach of non-compete. Tu filed a motion for judgment on the pleadings arguing that the non-compete was overly broad. The Court denied the motion, sating that the “validity of a non-compete agreement depends on a factual analysis that is generally not appropriate for a Rule 12 (c) motion.
Conclusion
If you have questions about employment agreements, non-competes or restrictive covenants under Minnesota law, contact the employment law attorneys at Trepanier MacGillis Battina P.A.
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Trepanier MacGillis Battina is a business law firm. Their employment attorneys can be reached at 612.455.0500.