(Note: this content was originally prepared for the Minnesota State Bar Association’s Labor & Employment Law E-Newsletter, Vol. 32)
Introduction
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
None.
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The unpublished decision in Galioto raises a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.
Political Activity
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.
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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 akoch@trepanierlaw.com.