(Note: this content was originally prepared for the Minnesota State Bar Association’s Labor & Employment Law E-Newsletter, Vol. 32)
Several notable decisions in Minnesota state and federal courts regarding restrictive covenants and employment agreements were issued in 2019 and the overall trend continues to be increasing difficulty for plaintiffs to obtain injunctive relief or to prevail on claims of breach of a non-compete restriction. This trend is bolstered by increasing political attention focused on potential regulation of restrictive covenants.
Minnesota Supreme Court
Minnesota Court of Appeals
Back-Dated Non-Compete Ancillary to New Employment Does Not Require Independent Consideration
The Minnesota Court of Appeals, in Wells Fargo Insurance Services USA Inc. v. Galioto, A19-0175, 2019 WL 4409414 (Minn. Ct. App. Sept. 16, 2019), determined that a restrictive covenant ancillary to the employee’s offer of new employment did not require independent consideration, despite being retroactively dated. The Court of Appeals reversed the district court’s grant of summary judgment in favor of the employee (finding independent consideration was required) and remanded the case for further proceedings.
In May 1999, Angelo Galioto became employed by W.A. Lang Co. subject to a non-compete covenant. On January 13, 2000, W.A. Lang sold its assets to Acordia of Minnesota, Inc., with a retroactive effective closing date of January 1, 2000. On January 14, 2000, Acordia provided Galioto with a new employment agreement containing a restrictive covenant, similar to his covenant with W.A. Lang, and a retroactive provision, stating that his employment with Acordia commenced January 1, 2000. Galioto executed the agreement and received his paycheck from Acordia for the preceding two weeks.
In 2017, Galioto resigned and went to work for a competitor. Wells Fargo (the successor of Acordia) sued. The district court dismissed the claims on summary judgment for lack of consideration and Wells Fargo appealed.
The Court of Appeals rejected Galioto’s argument that the employment agreement required independent consideration since it was effective January 1 but not provided to him until January 14. The Court held that Galioto only received the benefits of employment with Acordia upon signing the employment agreement on January 14, despite the retroactive provision.
The unpublished decision in Galioto raises a few questions. When the assets of one company are acquired by another, often the selling company simply assigns non-competes to the purchaser. Indeed, the Court’s decision makes clear that restrictive covenants were assigned in the asset sale yet makes no reference to any argument enforcing the agreement on this basis. Second, the opinion suggests that Galioto would not have been entitled to be paid for the two weeks if he did not sign, which is not the case. He clearly would have had the right to be paid regardless of whether he signed the agreement. Third, employers might try to characterize the decision as allowing back-dated non-competes for any current employee but that would be an over-extension of the narrow holding. The court distinguished the facts here, stating, “[w]e are not convinced that this situation is analogous to cases where an employee worked for a company for weeks before receiving a noncompetition agreement.”
The court likely considered extenuating circumstances such as (1) Galioto already had a non-compete before the sale; (2) employees were notified before the sale; and (3) Galioto chose to sign and stay with the company for seven more years after signing.
Nevertheless, the case stands as a rare exception to the strict attitude that Minnesota appellate courts have taken regarding offers of employment as consideration for restrictive covenants in recent years.
Summary Judgment on Employment Agreement Claim Reversed
In Pomije v. Digitaltown, Inc., No. A18-0942, 2019 WL 143228 (Minn. Ct. App. April 1, 2019), the Minnesota Court of Appeals reversed the trial court’s grant of summary judgment in favor of the plaintiff-Chief Executive Officer, finding there were genuine issues of material fact regarding the validity of the CEO’s employment agreement. The court held that reasonable persons could draw different conclusions from the evidence presented regarding the date the employment agreement was signed by the executive on behalf of the employer, and whether the executive had authority from the employer to enter into the agreement. The Court of Appeals also reversed the dismissal of the defendant-employer’s counterclaims alleging breach of fiduciary duty, fraudulent misrepresentation and conversion, finding disputed facts and the trial court’s improper determination of credibility prevented summary judgment.
8th Circuit Court of Appeals
Summary Judgment on Behalf of Buyer of Business for Breach of Non-Compete Affirmed
In H & R Block Eastern Enterprises, Inc. v. Sanks, 766 Fed. Appx 428 (8th Cir. 2019), the Eighth Circuit applied Missouri law to determine that a purchaser of a business could bring claims against the seller for breach of noncompetition and non-solicitation provisions in the asset purchase agreement (“APA”), despite the purchaser’s conditional release of certain existing claims in the APA. The Court affirmed summary judgment in favor of the purchaser on all counts by the U.S. District Court for the Western District of Missouri.
Denial of Motion for Preliminary Injunction Affirmed
In Management Registry, Inc. v. A.W. Companies, 920 F.3d 1181 (8th Cir. 2019), the Eighth Circuit affirmed a decision by the U.S. District Court for the District of Minnesota to deny a motion for a preliminary injunction. The case involved what the court characterized as a “contentious business deal” concerning the acquisition of staffing companies. The appellate court’s decision rested in part on a finding below that the Plaintiff had not met its burden of showing irreparable harm. The appellate court suggested that there was evidence that “an award of money damages would fully compensate it because its losses are quantifiable.” The Court also noted that the Plaintiff failed to “explain” how it was likely to prevail on the merits of its claims but instead devoted its memorandum to “chronicling” the Defendants’ misdeeds. In that regard the decision highlights the importance of explaining how the alleged facts support the elements of each claim in a motion for injunctive relief in order to show likelihood of success on the merits.
U.S. District Court for the District of Minnesota
Non-Compete Claim Held Not Likely to Succeed Where Employer did not Sign Agreement, Agreement had Expired (Despite Survival Clause) and Non-Disclosure Provision Questioned for Lack of Specific Duration
The decision in Maxim Defense Industries, LLC v. Kunksy, No. 19-1225 (PAM/LIB), 2019 WL 2232592 (D. Minn. May 23, 2019) raises a number of interesting questions for non-compete practitioners. The individual defendant, Kunsky, signed a consulting agreement in “2017.” The plaintiff, Maxim, did not sign. The agreement contained a non-compete that lasted for one year after the contract’s termination. The agreement also contemplated that Kunsky would become an employee after a year. In May of 2018, Kunksy became an employee of Maxim. He did not sign a new contract. In January of 2019, Kunksy was fired after refusing to sign a new consulting agreement with a non-compete. He also refused to sign a severance agreement with a non-compete.
The Court found that the consulting agreement “expired in November of 2018.” It is not clear whether this is one year from when Kunsky signed it since, arguably, it terminated when he became an employee in May of 2018. Taking the court’s finding, however, the one-year post termination restriction was still in play as of the decision in May of 2019. The court noted that the consulting agreement contained a “survival clause” but stated that Maxim had provided “no legal authority” for the proposition that the survival clause made the claim likely to succeed. Essentially, the court seemed to say the non-compete expired when the agreement expired. The survival clause read as follows:
“The representations, warranties, indemnities and other obligations which by their nature or context are intended to survive payment and/or termination of this Agreement shall survive.”
Most Minnesota lawyers would assume that a survival clause like this would be both effective and enforceable. Without access to the entire agreement It is unclear if the court’s decision was influenced by the fact it was a consulting agreement for a specific period and not an employment agreement, whether it found the language of the survival clause too vague, or whether it actually intended to measure termination from May 2018 when Kunsky became an employee. Regardless, the court’s analysis appears inconsistent with how most non-competes are understood to function under Minnesota law.
The court also, surprisingly, noted that “the signature line for Maxim is blank” and “there is no evidence Maxim ever signed the consulting agreement.” Again, most lawyers would not assume that the failure of the employer to sign a non-compete makes it unenforceable because the parties accept the offer through performance and contracts need only be signed by the party against whom enforcement is sought according to the statute of frauds. Since many situations involve non-competes unsigned by the employer, litigators may want to pay attention this decision, keeping in mind it is an un-published district court decision which is still in active litigation.
Another interesting part in this case is footnote 1, which states in part, “the confidentiality and non-disclosure provision in the Consulting Agreement have no duration. . . But a restrictive covenant without any temporal limitation is usually considered overbroad and unenforceable.” For decades most Minnesota lawyers have understood that non-disclosure agreements can survive in perpetuity (unlike the law in some other states) so the court’s suggestion to the contrary is uncharted territory. If appellate courts follow this lead, it could also have ramifications for non-disparagement clauses which also often fail to include a temporal limitation.
Two-Year Non-Compete Agreement Plausible to Support Breach of Contract Claim Under Judgment on the Pleadings Standard
In a case alleging the breach of an executive’s two-year non-competition and non-solicitation provisions, the court found a breach of contract claim sufficient to survive a motion for judgment on the pleadings. In C.H. Bus Sales, Inc. v. Geiger, No. 18-cv-2444 (SRN/KMM), 2019 WL 1282110 (D. Minn. Mar. 20, 2019), the employer alleged the executive accepted employment with a direct competitor and then solicited one of its long-term employees, causing the employee to resign. The court, however, dismissed the employer’s claims for tortious interference, breach of fiduciary duties, unjust enrichment, unfair competition, and violation of state and federal trade secrets acts, for lack of specificity as to defendants’ unlawful conduct and plaintiff’s resulting damages.
Injunctive Relief Denied Because Agreement Lacked “Qualifying Contractual Language”
The court in Andersen Windows, Inc. v. Barbaro, 19-CV-679 (NEB/LIB), 2019 WL 1409360 (D. Minn. Mar. 28, 2019) denied an employer’s motion for injunctive relief pending arbitration, because the agreement did not contain sufficient qualifying contractual language to allow the Court to grant relief without reaching the merits of the arbitrable dispute. The court dismissed the case brought solely for injunctive relief, stating the agreement’s intention that the court issue an injunction without addressing the merits of the dispute, could not “supersede the Agreement’s language allowing injunctive relief ‘in the event that [employee] fail[s] to comply fully with’ the Agreement.”
Court Denies Injunctive Relief Finding Provision Overly Broad and Lacking Territorial Restriction, Declines to Blue-Pencil Non-Compete Provision
In Midwest Sign & Screen Printing Supply Co. v. Dalpe, 386 F.Supp.3d 1037 (D. Minn. 2019), the court denied an employer’s motion for a preliminary injunction against its former employee, finding the non-compete agreement overbroad and insufficient evidence to establish irreparable harm. The defendant, Dalpe, left Midwest Sign & Screen Printing Supply Co. (“Midwest”) to join Laird Plastics, Inc. (“Laird”). The Court found that Midwest and Laird sold some of the same products but that each company also sold some products that the other did not. It also noted that the two companies had differing geographic footprints although, again, there was some overlap. Dalpe was responsible for the Pacific Northwest region of the United States when he was with Midwest. Laird hired him to run an operation in Portland, Oregon. Laird asserted that of about 350 customers in the Portland market only ten overlapped with Midwest. The dispute was litigated Minnesota pursuant to a choice-of-venue clause.
The court found the broad restrictions on the scope of competition were unreasonable because they prohibited the employee “from working for a remarkably broad array of potential employers.” Id. at 1049. The court also rejected a provision of the agreement requiring the employee to acknowledge that any breach of the non-compete restrictions “would seriously harm [employer’s] business and cause monetary loss that would be difficult, if not impossible, to measure” as evidence of the company’s irreparable harm.
The one-year non-compete agreement appears to have contained no geographic or territorial limitations whatsoever. The court noted that some blue pencil modifications to the scope of the agreement may have been reasonable, had the motion otherwise succeeded on the merits, but expressly declined to blue-pencil the agreement. The court noted that there is “no per se rule under Minnesota law that a restriction is unenforceable if it lacks as geographic limitation” but said that it was difficult to understand the absence of a territorial limitation in this case. The 21-page decision by Judge Eric C. Tostrud, one of the newer judges in the District of Minnesota, was closely studied as one of his first non-compete rulings on the bench. The judge cited a number of other decisions for the principle that a court is not required to blue-pencil an overly broad restriction and also delved into an analysis of what it means to actually “compete” which could be useful dicta for future litigants.
The decision is also notable because the defendant, Dalpe, admitted sending several e-mails form his Midwest work account to his personal account attaching Midwest documents, including “annual profit and loss statements,” “daily margin reports,” “account lists and contact information for over 2,700 Midwest customers”, and copies of an offer letter and employment agreement for a recently-hired Midwest sales representative. Usually when a former employee sends business information of this nature to their personal e-mail account courts view this as bolstering a claim of unfair competition. In Midwest, however, there was no evidence Dalpe shared the information with his new employer and he had deleted it by the time of the decision. This case, along with the Management Registry decision above, suggests that showing irreparable harm in federal court is becoming more challenging.
Third-Party Subpoena Enforced in Part in Non-Compete Arbitration
In Neo Ivy Capital Management LLC v. Savvysherpa LLC, No. 18-mc-0094 (SRN/DTS) (D. Minn. 2019), the district court granted in part and denied in part, issued in the form of a report and recommendation, an employer’s motion to compel compliance with two third-party subpoenas that the employer had issued in a AAA non-compete arbitration. In the underlying arbitration, the employee filed a claim for an unpaid bonus and the employer counterclaimed for breach of his noncompete restrictions after the employee accepted employment with a competitor. The court held that the subpoena requests to the competitor and its parent company for documents and communications related to the employee’s hiring and work responsibilities were relevant to the breach of contract and misappropriation of trade secrets arbitration claims. The court, however, denied the subpoena requests related to the competitor’s intellectual and proprietary information, as well as requests for all computer code or software created by the employee, finding the employer had not shown why such confidential information was necessary to the arbitration.
Motion to Transfer Venue of Non-Compete Dispute Denied
In C.H. Robinson Worldwide, Inc. v. Tu, No. 19-1444 (MJD/BRT), 2019 WL 7494686 (D. Minn. 12/20/2019), the court recommended the denial of defendants’ motion to dismiss and/or transfer venue in a breach of non-compete action, finding Defendants waived any objection to venue by agreeing to a forum-selection clause contained in the former employee’s employment agreement.
In 2019, the regulatory scrutiny of non-competes reached the public eye and non-competes stepped into the political realm. On November 15, 2019, Minnesota Attorney General Keith Ellison, joined by 18 State Attorneys General from across the country, submitted a letter to the Federal Trade Commission (“FTC”), urging the FTC to use its rulemaking authority to classify non-compete clauses in employment contracts as an “unfair method of competition” and to eliminate this “abusive” practice impacting a wide range of American workers. Ellison described non-compete clauses as a burden on the free market, inhibiting innovation, increasing consumer costs, and suppressing rival competition. It remains to be seen whether the FTC, the Minnesota legislature, or Congress will limit non-competes by regulation or law in 2020 or beyond.
Anna. M. Koch is a Minnesota non-compete attorney with the law firm Trepanier MacGillis Battina P.A. She can be reached at 612.455.0991 or email@example.com.