In Sysdyne Corp v. Rousslang, 860 N.W.2d 347 (Minn. 2015), the Minnesota Supreme Court held that an employer did not unlawfully interfere with a non-compete agreement when it hired an employee because the employer reasonably relied on advice from its legal counsel that the agreement was not enforceable. The Supreme Court held that employers may be justified in interfering with a candidate’s previous non-compete agreement if the employer relied on the advice of counsel, provided that the legal advice is obtained through a reasonable inquiry.
Sysdyne Corporation (“Sysdyne”) and Xigent Soluctions, LLC (“Xigent”) both provide staff augmentation services to companies in the engineering and information technology industries. Sysdyne hired Brian Rousslang (“Rousslang”) in 2006. Rousslang signed an employment agreement containing a non-compete provision. The non-compete provided that, for a period of twelve months following the termination of his employment with Sysdyne, Rousslang would not “accept employment, consult with, or otherwise become associated or affiliated with . . . any business competitor” of Sysdyne that provides similar services in seven specific Twin Cities metro area counties. Rousslang also agreed that he would not “in any manner contact, solicit or cause to be solicited, customers or former or prospective customers” of Sysdyne within the same seven-county area.
In early 2010, Rousslang began exploring the possibility of a position with Xigent. Rousslang provided Xigent with a copy of his 2006 offer letter and employment agreement with Sysdyne. Xigent’s president and co-owner, Bob Bernu (“Bernu”), sent the letter and employment agreement to outside legal counsel for review. The attorney advised Bernu that the non-compete’s provision regarding Rousslang’s preexisting clients was overbroad and that the entire agreement was unenforceable. Based on this advice, Xigent advised Rousslang that the non-compete agreement was unenforceable and offered him a position, which Rousslang accepted.
Sysdyne sued Rousslang for breaching the non-compete agreement and sued Xigent for tortious interference with contract. Following motions for summary judgment, the trial court found the non-compete to be enforceable except for the provision relating to Rousslang’s preexisting clients.
Lower Courts Find Xigent Justified in Interfering with the Non-Compete
To establish a cause of action for tortious interference with contract, a plaintiff must prove: (1) there was a contract, (2) the defendant knew of the contract, (3) the defendant intended to procure a breach, (4) the defendant was not justified in its actions, and (5) damages resulted. Xigent’s arguments focused on whether its actions were justified.
Xigent argued that any interference with the non-compete agreement was justified because Xigent acted on advice of its outside legal counsel. To support its defense, Xigent presented e-mails between Bernu and its outside attorney regarding the attorney’s review of Rousslang’s offer letter and employment agreement. Xigent also presented evidence of hours billed by the attorney for reviewing the letter and agreement and for a telephone conference with Bernu regarding non-compete issues. Bernu also testified that he viewed the attorney as an expert on non-compete agreements, that the attorney had reviewed non-competes for Xigent for 10 to 12 years, and that Bernu relied on his advice.
The trial court found that Rousslang breached his contract with Sysdyne, but Xigent was justified in interfering with the non-compete agreement because Xigent conducted a reasonable inquiry into the enforceability of the non-compete agreement, and, based on its attorney’s advice, honestly believed the agreement was unenforceable. The Minnesota Court of Appeals affirmed the trial court’s decision.
Minnesota Supreme Court Holds Interference with Non-Compete Agreement May be Justified by Reasonable Reliance on Legal Counsel’s Advice
Sysdyne appealed to the Minnesota Supreme Court and argued that the justification defense can be used only when the interfering party acts to further a legally protected interest of its own, and the defense cannot be satisfied by a defendant’s honest but erroneous belief, based on the advice of counsel, that a contract is unenforceable.
The Minnesota Supreme Court rejected Sysdyne’s argument that the justification defense is limited to situations in which defendants have asserted, in good faith, a legally protected interest of their own. The court noted it had never held that interference with a contract is justified only when a defendant asserts, in good faith, a legally protected interest that would be impaired or destroyed by performance of the contract. The court further explained that justification lacks a precise definition, and the appropriate test for justification is whether the conduct is reasonable under the circumstances, which courts evaluate with a fact-based, case-by-case approach. Finally, the court stated that in Kallok v. Medtronic, Inc., it had implied interference with a contract may be justified by reliance on the advice of counsel. Because of the fact-based nature of the justification defense and the court’s reasoning in Kallok, the Supreme Court concluded that the lower courts did not err when they determined the justification defense may be satisfied by a defendant’s reliance on advice of outside counsel when that reliance is reasonable.
Sysdyne also challenged the trial court’s finding that Xigent conducted a reasonable inquiry into the enforceability of the non-compete. Sysdyne claimed that Xigent’s belief was not based on a reasonable inquiry because Xigent provided “virtually no factual information to [the attorney] that would have allowed him to give a reasoned opinion” and that nothing in the record confirmed the basis for the attorney’s legal advice.
The Minnesota Supreme Court rejected this argument, holding there was evidence to support the trial court’s finding of a reasonable inquiry based on the following facts: Xigent provided its outside counsel with Rousslang’s Sysdyne employment agreement and offer letter, and Xigent informed counsel that Rousslang would be essentially doing the same work as he did for Sysdyne. Xigent produced billing records confirming that outside counsel reviewed and discussed the non-compete agreement with Xigent’s president and co-owner, who testified that he viewed the attorney as an expert in noncompete agreements and had regularly reviewed non-compete agreements for Xigent over a 10– to 12–year period. The Court found that these facts, collectively, supported the trial court’s finding that Xigent engaged in a “reasonable inquiry.”
The Minnesota Supreme Court also held that a defendant is not required to establish the legal analysis underlying an attorney’s advice in order to prove justification. Kallok suggested that the appropriate focus of the justification is the reasonableness of the defendant’s consultation with counsel and reliance on the resulting advice, not the attorney’s legal analysis. The Court compared this to other legal contexts, where an advice of counsel defense similarly requires the defendant to establish that he or she fully disclosed all material facts to the attorney, received advice that his or her conduct was legal, and acted in good-faith reliance on that advice.
Lessons for Employers When Hiring an Employee Bound by a Minnesota Non-Compete Agreement
Based on the decision in Sysdyne, an employer considering hiring a candidate who is subject to a non-compete agreement should consult with a Minnesota non-compete attorney and provide that attorney with information necessary for the attorney to conduct a reasonable inquiry into the enforceability of the agreement, including the candidate’s previous employment agreement, the candidate’s previous offer letter, a description of the two employer’s businesses, and the employee’s past and potential job duties. Employers should also keep records, including billing statements, establishing that they received a legal opinion regarding the enforceability of the non-compete agreement. Employers should understand, however, that by pointing to an outside legal opinion to establish that the employer was justified in interfering with a non-compete agreement, the employer will likely waive the attorney-client privilege, and communications between the employer and its legal counsel will become discoverable.
If you have any questions about Minnesota non-compete law or are involved in litigation over a Minnesota non-compete agreement, please contact one of the Minnesota non-compete attorneys at Trepanier MacGillis Battina P.A. The firm can also assist you in drafting or negotiating your non-compete agreement. The firm can also serve as special counsel to employers to render an opinion regarding the enforceability of a non-compete agreement.
About the Author:
Minneapolis non-competition lawyer Craig W. Trepanier represents both employers and employees in a variety of non-competition matters, including negotiation of non-compete agreements and litigating non-compete disputes in Minnesota federal and state courts. Craig may be reached at 612.455.0502 or email@example.com. Trepanier MacGillis Battina P.A. is a Minneapolis non-competition law firm located in Minneapolis, Minnesota.