Once again, we review Minnesota caselaw and other legal developments regarding non-competes and employment agreements from the previous year (January 2021 through March of 2022). 2021 proved to be another tough year for plaintiffs (employers) seeking to enforce non-competes through injunctions, especially in federal court. In two cases, however, one from state court and one from federal court, Rule 12 motions to dismiss non-compete claims were unsuccessful. Choice-of-law provisions also came into question, as federal courts declined to follow the law of the designated forum and opted instead for the more employee-friendly law of the employee’s residing forum (e.g. South Dakota and California).
A politically divided Minnesota Legislature again failed to pass a law limiting non-competes in 2022. Representative Jennifer Schultz (DFL – Duluth) sponsored a bill (HF 999) to limit the use of non-competes in early 2022. The bill would have prohibited non-competes unless the employee earned an annual salary of at least the amount of the median family income for a four-person family in Minnesota and unless the employer agreed to pay the employee at least 50 percent of their salary during the restricted period. It also would have outlawed choice-of-law and choice-of-venue clauses mandating the venue or law of another state for an employee working in Minnesota. The bill passed in the House but went nowhere in the Senate. The session has now ended so we will see what happens next year.
Minnesota Supreme Court
The Minnesota Supreme Court did not issue any significant non-compete decisions in 2021.
Minnesota Court of Appeals
Dismissal of Non-Compete Claim under Rule 12 Reversed
In Amano McGann, Inc. v. Klavon, No. A21-0237, 2021 WL 5442339 (Minn. Ct. App. Nov. 22, 2021), the Minnesota Court of Appeals reversed the dismissal of a breach-of-contract claim based on a non-compete provision. The former employee moved to dismiss the count pursuant to Rule 12.02(e) arguing that the complaint failed to state a claim upon which relief could be granted because the terms were overbroad and unenforceable and because the former employer failed to properly allege damages. The district court granted the motion to dismiss, finding the non-compete “facially overbroad” and the employer appealed.
The Court of Appeals reversed, finding that language prohibiting the employee from working for a competitor or customer of the employer directly, indirectly, or in any capacity was not “always unenforceable under Minnesota law.” The Court noted that the language of the non-compete was similar to that in Bennett v. Storz Broad. Co., 134 N.W.2d 892, 898 (Minn. 1965), a Minnesota Supreme Court case which considered a non-compete provision that included prohibitions on directly or indirectly accepting employment or working with local competitors in the industry (radio and TV). The Court observed that courts must focus not just on the language of the agreement, but also the attendant circumstances, to determine whether an employer has sufficiently pled enforceable noncompete provisions.
The Court also noted that the Respondents urged it to consider a number of recent federal court decisions concluding that employment in any capacity is overbroad and unenforceable as a matter of law. The Court said it was not persuaded by the federal court decisions, noting that they were not binding on Minnesota state courts and almost all of the cases cited addressed non-compete provisions in the context of preliminary injunction proceedings, which is a different standard of review. As the Court stated, “[t]he question before us is not whether Amano is likely to prevail on its breach-of-contract and tortious-interference claims. Rather, the question the Court must decide is whether the complaint states a claim that the noncompete provisions entitle Amano to relief based on the particular circumstances.” The only federal decision that involved a dismissal under Rule 12 was an Eighth Circuit decision involving Arkansas law and therefore was distinguishable.
Amano McGann is an important decision. It is becoming more difficult for employers to prevail in non-compete enforcement lawsuits, and counsel for former employees defending such claims may feel emboldened to move to dismiss these claims out of the gate. Amano McGann means that such tactics are not likely to succeed under Minnesota’s “liberal pleading standards.” It also suggests that plaintiffs may have better odds in state court instead of federal court.
Order for Temporary Injunction Reversed and Remanded Because Order Improperly Ordered Compliance with the Terms of the Employment Agreement Instead of Stating Specific Terms, Even Though Injunction Had Already Expired
The Court of Appeals held that the interlocutory appeal of a temporary injunction was not moot even though the injunction had expired prior to the Court issuing its ruling in Pilot Air Freight, LLC v. Trenberth, No. A21-0058, 2021 WL 4059315 (Minn. Ct. App. Sept. 7, 2021). The Court of Appeals held that the district court failed to consider the requirement of a bond or other security as required by Minn. R. Civ. P. 65.03(a) and that the injunction failed to satisfy the specificity requirements of Minn. R. Civ. P. 65.04.
Minnesota Rule 65.04 states in part that an order for an injunction, “[s]hall set forth the reasons for its issuance; shall be specific in terms; shall describe in reasonable detail, and not by reference to the complaint or other document, the acts sought to be restrained.” (emphasis added.) In this case, the district court’s order stated, in part, “Defendants are enjoined and restrained from continuing Trenberth’s employment with [Anderson] as Vice President of Sales and from further violating or participating in the violation of the non-competition term in paragraph 5(e) of [ ] Trenberth’s December 15, 2015 Employment Agreement.” (emphasis added.) The Court of Appeals found that the order granting the injunction improperly incorporated by reference terms from the employment agreement in a manner that is specifically prohibited by Minn. R. Civ. P. 65.04.
The Court of Appeals also held that the district court abused its discretion by issuing an order granting an injunction without addressing the requirement of providing security pursuant to Minn. R. Civ. P. 65.03(a). Minnesota law allows a court to waive the requirement of a bond or other security, but the court must at least address the topic and explain why a bond or other security is not required.
Finally, although the temporary injunction granted by the district court had expired prior to the appellate court’s ruling, the Court held that because the appellants intended to seek recovery from the bond, the validity of the temporary injunction remained an active dispute between the parties and held that the appeal was not moot.
Trenberth is an important reminder that the language of Rule 65 imposes certain restrictions on how an order for an injunction should be written. This not just important for judges and their clerks — plaintiffs’ attorneys should also pay attention to the proper drafting of their proposed orders.
[Note: Trepanier MacGillis Battina P.A. represented the Appellants in the Trenberth case.]
Jury Verdict on Breach-of-Contract Claim under Consulting Agreement Affirmed, Verdict on Fraud Claim Reversed.
In Berg v. Brown, No. A20-0587, 2021 WL 1604691 (Minn. Ct. App. Apr. 26, 2021), review denied (July 20, 2021) the Court of Appeals concluded that there was sufficient evidence to support a jury’s verdict on a breach-of-contract claim but that there was insufficient evidence to allow a reasonable jury to find liability for fraud.
A jury awarded the two plaintiffs in this case a total of $117,431 on their fraud and breach-of-contract claims. On the breach of contract claim, the Court of Appeals found that a contract had in fact existed between Berg’s consulting company and Brown’s company A.W. Companies. The Court of Appeals affirmed the finding that Berg met his contractual obligations under the contract by providing consulting because the contract did not specify the quantity or type of consulting Berg was required to provide. The Court also agreed that by the time Brown attempted to amend Berg’s consulting contract to take effect only if A.W. became profitable, Berg had already provided consultation in the months prior. Finally, it ruled that the Statute of Frauds was not implicated because this argument was not brought before the district court nor instructed to the jury to consider.
The Court of Appeals did not concur with the jury’s conclusion that fraud had occurred when the Browns represented to Berg that “he would receive profit sharing and phantom stock benefits from A.W.” but did not actually convey such benefits to him, however. The Court reversed the lower court ruling, finding there was no evidence that the Browns represented to Berg that A.W. would pay him any fixed amount, but rather that the Browns represented to Berg that he would receive only a phantom-stock interest in A.W. Further, at the time of Berg’s termination from A.W., his phantom-stock interest in A.W. was worthless. This evidence it found was insufficient to prove that the Browns made a false representation to Berg concerning a then-past or then-present fact, as required to prove the first element of a claim of fraudulent misrepresentation. Because the Brown’s representation only concerned a then-future event, this was not a misrepresentation as a matter of law and the holding on the fraud claim was reversed.
This case is informative because plaintiffs’ attorneys are often asked to pursue claims on behalf of employees for vague and unfulfilled promises of phantom stock, stock options, equity, or bonuses. Such claims depend on the facts, but Berg suggests these claims can be difficult to prove on a theory of fraud.
Summary Judgement in Favor of Hospital Affirmed in Breach-of-Employment Agreement Suit
The Minnesota Court of Appeals affirms the district court’s grant of summary judgment in favor of respondents dismissing appellant’s claims for breach of contract, breach of the covenant of good faith and fair dealing, defamation, violation of the Health Care Quality Improvement Act of 1986 (HCQIA), and vicarious liability in Harper v. Tessmer-Tuck, No. A21-1130, 2022 WL 1298123 (Minn. Ct. App. May 2, 2022).
Harper worked as a Nurse Practitioner for North Memorial Health Care (“NMHC”). NMHC had concerns about her actions involving and performed an investigation. It found that her actions did not conform to the standard of practice and reported her to the Board of Nursing and the National Practitioner Data Bank (“NPDB”), but the Board did not find discipline was warranted. Harper sued, arguing that NMHC breached its contract with her by failing to notify her of the investigation which prevented her from invoking safeguards under her employment agreement and NMHC’s bylaws. Harper had a generic employment agreement with a non-compete, that addressed compensation, duties, professional standards and termination but did not specifically address notice of an investigation. The Court dismissed the breach of contract claim on summary judgment and the dismissal was affirmed.
Minnesota State District Court
State Court Judge Dissolves Temporary Restraining Order, Finds No Irreparable Harm
A 2021 order from Anoka County bears mention in this year’s survey. A familiar party to non-compete disputes, Medtronic obtained a temporary restraining order only to have it dissolved a month later in Medtronic, Inc. v. Boykin, No. 02-CV-21-4383, 2022 WL 135821 (Anoka County District Court, Jan. 07, 2022). Defendant Charles Boykin was a Senior Customer Service Manager in Medtronic’s Diabetes Operating Unit until he was let go in December of 2020. He then accepted a position with a company called Dexcom that makes products to monitor glucose levels for persons with diabetes. Medtronic sued, claiming this was a violation of Boykin’s two-year non-compete agreement.
Medtronic filed its complaint on September 10, 2021, along with a request for an emergency judge assignment and a motion for a temporary restraining order (“TRO.”) A judge signed Medtronic’s proposed order granting a TRO on September 14, 2021. The case was then re-assigned to a new judge. Confusingly, the new judge stated that the initial motion for a TRO was “not an ex parte Motion for TRO.” Based on the speed of events, it appears that the TRO was signed without a hearing, but this is not explicitly clear from the court’s memorandum. Regardless, the Defendants filed a motion to dissolve the TRO on October 1, 2021, which was heard in a Zoom hearing.
The new judge dissolved the TRO, finding that Medtronic had failed to show irreparable harm. The Court considered both actual and threatened irreparable harm and noted that threatened harm cannot be sustained merely by having a former employee begin employment with a competitor. It acknowledged that Medtronic relied on the similarities between its former employee’s job and its new position with its competitor, arguing that it is unrealistic to expect employees to not use the confidential information they obtained working for former employers at new and similar competitors based on the holding in other cases.
The Anoka County judge found factual dissimilarities between the cases Medtronic cited to support its position and this one. The Court pointed out that “[e]ach employee in those cases had gained particular patentable or marketing and sales strategy information from their prior work that they were using with their new employers to combat the rival’s patented devices or marketing and sales strategies. There is no evidence Boykin has such information in this case. Because of this, the Court considers Boykin’s allegations of harm to be not real, substantial, or irreparable, but rather a ‘mere possibility of future harm’.”
Plaintiffs in non-compete cases do not typically seek a true TRO but rather a temporary injunction. Most judges will not entertain an ex parte TRO in these kinds of cases without a hearing, but Boykin suggests there may be some judges willing to sign off on such requests. TROs are short-lived by nature, however, and all courts will require a full hearing within days or weeks.
Injunction Vacated Under South Dakota and Iowa Law
The 8th Circuit Court of Appeals reversed and vacated a preliminary injunction from the District of South Dakota enjoining a former employee from breaching her non-compete and non-solicitation provisions in her employment contract in Miller v. Honkamp Krueger Fin. Servs., Inc., 9 F.4th 1011, 1013 (8th Cir. 2021). The employment contract contained an Iowa choice of law provision, but the former employee, working in South Dakota, argued that South Dakota law applied because the non-competition restrictions violated South Dakota public policy.
Reviewing the non-compete provision, the Circuit Court applied Iowa law and found there was nothing in the provision to suggest that the parties intended it to survive the termination of the Employment Agreement. Thus, when the Employment Agreement in this case was terminated in writing, the non-compete provision became inoperable. The Circuit Court declined to rewrite an “unambiguous” contractual term, and found that under Iowa law, the Court would construe the Employment Agreement in favor of the employee.
The Circuit Court reversed the district court’s application of Iowa law to the non-solicitation provision and found that South Dakota law should apply because the provision contravened with South Dakota public policy. The Court found that while South Dakota’s general prohibition on contracts that restrain trade has an exception for non-solicitation agreements, this exception does not extend to agreements not to accept unsolicited business.
This case is an interesting example of how a choice of law provision can be superseded by state law and public policy. As state laws and public sentiment toward non-compete restrictions shift, it could become more difficult for employers to enforce non-compete restrictions, especially in the forum of their choosing.
Trial Verdict for Trucking Company on Tortious Interference Claim Reversed under Iowa Law.
A trucking company, CRST, sued a competitor, Swift, for tortious interference for hiring away its drivers in the case of CRST Expedited, Inc. v. Swift Transportation Co. of Arizona, LLC, 8 F.4th 690 (8th Cir. 2021). CRST prevailed at trial, but the 8th Circuit reversed. This is a useful decision for wrongful competition litigators practicing in Iowa, which does not have quite as robust a body of law regarding tortious interference with contract claims involving non-competes as Minnesota does.
U.S. District Court for the District of Minnesota
Federal Court Applies California Law in Case Involving California Residents Despite Minnesota Choice-of-Law Provision
In C.H. Robinson Worldwide, Inc. v. Traffic Tech, Inc., No. CV 19-902 (MJD/DTS), 2021 WL 4307012 (D. Minn. Sept. 22, 2021), the Court held that California law applied to the interpretation of non-compete and non-solicitation restrictions despite Minnesota choice of law provision, rendering the restrictions unenforceable. Here, five employees of C.H. Robinson Worldwide (“CHR”) who worked in California left and went to work for Traffic Tech, a competitor. CHR sued the former employees for breach of contract in the District of Minnesota. CHR’s employment agreements stated, “the law of the State of Minnesota shall govern as to the interpretation and enforceability of this Agreement” and “any claim or dispute . . . shall be adjudicated or arbitrated exclusively in the State of Minnesota. . .”
Based on the Agreements, CHR argued that Minnesota state law should control. The individual Defendants argued that California state law should apply because they are California residents and worked for CHR primarily in California. (California law prohibits all restrictive covenants in employment agreements whereas Minnesota law does not.)
The Court noted that a federal court sitting in diversity applies the choice of law rules of the forum state and that in Minnesota, courts generally honor the parties’ contractual choice of law provisions. It found that this principle will generally be applied unless doing so would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issues.
The Court then applied a four-factor test: 1) whether the parties agreed in advance to the law to be applied in future disputes; 2) whether the contacts between the parties were fairly evenly divided between the state selected in the contract and the state that has enacted the anti-waiver statute; 3) the parties’ relative levels of bargaining power; and 4) whether application of the law chosen in the contract is repugnant to the public policy of the state that has enacted the anti-waiver statute.
The Court concluded that the parties had uneven levels of bargaining power, and, more importantly, that California enacted a law as of January 1, 2017 to prohibit contracts requiring a resident to adjudicate employment agreements outside of California or to deprive the employee of the protection of California law. The Court found that the agreements were either entered into or modified after January 1, 2017 and therefore the California provision applied.
It appears this decision was appealed to the Eighth Circuit but no decision on that has been issued. This case demonstrates the strong protection for residents of California against any attempt to enforce restrictive covenants.
Court Denies Injunctive Relief in Company-Versus-Company Non-Compete Case
A Federal District Court Judge denied a motion for a preliminary injunction in a case between two companies in Click Boarding LLC v. SmartRecruiters, Inc., No. 21-CV-210 (NEB/BRT), 2021 WL 6424909 (D. Minn. April 27, 2021). SmartRecruiters sell software to recruit candidates for jobs and Click Boarding sells software for on-boarding new recruits. The two companies entered into a contract which allowed SmartRecruiters to sell Click Boarding’s product. The Contract included a provision stating, that SmartRecruiters will not “promote, market, sell, provide or deal with any product or service that competes, directly or indirectly,” with the Click Boarding’s “Onboarding Solution” during the contract and for a period of one year following its termination. The contract also included a liquidated damages provision. The Court denied the motion for lack of irreparable harm because “the fee schedule that is part of the Agreement quantifies the amount of money that Click Boarding may or will lose as a result of SmartRecruiters’ actions.”
The decision is an interesting example of a non-compete between two businesses which does not implicate the same policy considerations as an employment dispute. It also reminds us that liquidated damages provisions are a useful alternative to injunctive relief, and it is unclear why Click Boarding even attempted to seek an injunction when the contract contained a formula for damages.
Federal Court Denies Rule 12 Motion to Dismiss in Another Business-to-Business Breach of Non-Compete Claim
A federal judge denied a Rule 12 motion to dismiss a claim premised on a business-to-business non-compete provision in TENA Companies, Inc. v. Ellie Mae, Inc., No. 21-CV-1814 (NEB/JFD), 2022 WL 624644, (D. Minn. Mar. 3, 2022). TENA alleged that Ellie Mae breached the non-competition provision of their TENA agreement by working with a direct competitor to supply copycat products and were thusly unjustly enriched. Ellie Mae filed a motion to dismiss TENA’s claim, arguing that the non-competition provisions were invalid and unenforceable.
The Court first noted that the standard for enforceability of a non-compete relating to an ordinary commercial transaction is different than that for non-competes that related to employment contracts entered into by wage earners. The court found that the breach of contract claim plausibly stated a claim for relief under the standard for commercial transactions as set forth in Bess v. Bothman, 257 N.W.2d 791, 795 (Minn. 1977).
The Bess test considers non-compete provisions under a general fairness standard: “[f]irst, whether the restriction exceeds the protection necessary to secure the goodwill purchased; second, whether the restriction places an undue hardship on the covenantor; and third, whether the restriction has a deleterious effect on the interests of the general public.” Based on this standard, the Court found that Plaintiff had stated a claim upon which relief could be granted and denied the motion to dismiss.
Federal Court Denies Injunction Based on Defendant’s Argument that He Would be Working in a Different Role and in a Different Business Segment at Competitor
A former executive at UnitedHealth Group (“UHG”) was allowed to go work for Anthem, a competitor of UHG in the health insurance space, after the court denied injunctive relief in United Healthcare Servs., Inc. v. Louro, No. CV 20-2696 (JRT/ECW), 2021 WL 533680, (D. Minn. Feb. 12, 2021). The executive, Louro, managed underwriting for national accounts at UHG as Vice President of National Accounts. He then accepted a position at Anthem as Vice President of Local Accounts Underwriting. UHG sought an injunction and Anthem argued that the position and duties were so different that injunctive relief was not appropriate. Anthem submitted evidence that it analyzed the noncompete to “structure a position that would honor the non-compete and avoid overlap with the business segments Louro worked in at [UHG]”.
The Court determined that UHG was unlikely to prevail on the merits for the non-compete claim. The non-compete agreement specifically prohibits competition with activities, products, and services that Louro engaged in, participated in, or had confidential information about, but Anthem tailored their position for Louro specifically insulating him from business segments that he was responsible for, but did not insulate him from all activities he had engaged in at UHG. The non-compete agreement did not specifically define the terms “engaged in” or “activities”, meaning the agreement could be construed to constrict and widely restrict any direct or indirect competition with Louro’s previous work for United. The court held that to find that Louro’s employment would be a breach it would have to read the covenant so broadly as to render it unenforceable. The Court also found that UHG’s trade secrets claim did not meet the high bar for inevitable disclosure required to succeed on its claim.
This case provides a possible roadmap for employers who wish to hire an employee with a non-compete and want to proactively create a role that does not violate the restriction, even if the two companies are competitors. The holding in Louro was based in part on the actual language of the agreement, however, so its applicability may be limited.
Court Finds Sufficient Amount in Controversy to Establish Federal Jurisdiction in Declaratory Judgment Action to Declare Rights Under Non-Solicitation Agreement
A narrow issue regarding determination of the amount in controversy in a declaratory judgment action involving a restrictive covenant in order to establish federal diversity jurisdiction was decided in the case of Young v. Arthur J. Gallagher & Co., No. CV 21-1408 (JRT/KMM), 2022 WL 37470 (D. Minn. Jan. 4, 2022). The Court found that the amount the plaintiff could potentially earn from her customers but for the non-solicitation agreement was over the $75,000 threshold, both relying and distinguishing similar cases involving non-competes.
The Court addressed the question as follows:
Gallagher attempts to distinguish this case by pointing out that, unlike the case currently before the Court, Retail Tech also involved a non-competition agreement. Gallagher argues that considering an employee’s previous compensation is appropriate in the context of prohibiting competition but not in the context of a non-solicitation agreement because the plaintiff is prohibited from earning a salary under a non-competition agreement but is not similarly prohibited under a non-solicitation provision. The Court is not persuaded. Gallagher does not offer a reason why the past performance with the exact same customers cannot guide the Court’s analysis when determining the value of a declaratory judgment allowing Young to solicit said customers. Under both a non-competition provision and a non-solicitation provision, an employee is prohibited from activity that would otherwise earn compensation and Gallagher’s distinction fails to recognize this. Past performance with the same customers can accurately measure the value of Young’s claim and that the value of a declaratory judgment from Young’s perspective in the current case is most accurately measured by analyzing the compensation that Young would earn if the non-solicitation provision did not prohibit her from soliciting previous clients.
The Young case is potentially useful for plaintiffs wishing to be in federal court on diversity grounds, although recent trends suggest that state court may be a more friendly forum.