A U.S. District Judge denied a request for preliminary injunctive relief by the former employer of an executive whom the employer alleged had violated his common law duty of loyalty in a decision issued last week.
The Lawsuit and the Request for Injunctive Relief
In Wilmington Trust, N.A. v. Nelson, No. 18-CV-3299 (PJS/DTS) (December 28, 2018), the defendant, Nelson, worked as a Client Development Officer for the plaintiff, Wilmington Trust. In November 2018, Nelson left Wilmington Trust to join SRS Acquiom, one of Wilmington Trust’s customers. Wilmington Trust sued Nelson alleging that, while still employed by Wilmington Trust, he violated his duty of loyalty, misappropriated trade secrets, breached his contractual obligations and committed fraud. (The contractual terms are not described in the court’s written decision, but it can be inferred that the contract was not a pure non-compete but rather a non-solicitation of customers agreement.)
Wilmington Trust brought a motion seeking a preliminary injunction to prevent any future violations of Nelson’s covenants under his employment agreement. The court denied the motion. The judge’s decision, although not binding precedent, is interesting as it relates to the breach of duty of loyalty claim, for two reasons: (1) it suggests injunctive relief may not be available even in the face of clear evidence of breach of duty of loyalty because the harm has already occurred, and (2) it suggests in dicta that there may be a difference between solicitation of a customer and solicitation of a referral source.
Breach of Duty of Loyalty Claims and Injunctions
Although claims of breach of an employee’s duty of loyalty are asserted quite often in Minnesota, there are not many court decisions analyzing a request for injunctive relief based on this particular cause of action. The Wilmington Trust decision is not a pure example because the plaintiff also asserted contractual claims and a claim of misappropriation of trade secrets, which more typically serve as the basis for a motion for injunctive relief. Nevertheless, the judge focused much of his analysis on the duty of loyalty claim, noting that:
“it is possible – perhaps even likely – that Wilmington Trust will succeed in showing that Nelson violated the duty of loyalty. But the evidence submitted by Wilmington Trust supports only its claims involving Nelson’s past conduct – that is its claims regarding allegedly unlawful acts that Nelson committed while still working for Wilmington Trust.”
The court went on to conclude that “without any evidence that Nelson has done anything unlawful since joining SRS – or that Nelson is planning or threatening to do anything unlawful in the future – Wilmington Trust cannot show that it will suffer irreparable harm absent injunctive relief.”
Solicitation of Referral Sources
To bolster its argument that injunctive relief was necessary because Nelson was continuing to engage in impermissible behavior after leaving its employment, Wilmington Trust alleged that Nelson was still soliciting clients. The court disagreed with plaintiff’s characterization of the evidence, however, stating, “There is no evidence that this is true. Wilmington Trust cites a meeting that Nelson had with a law firm that refers clients to Wilmington Trust, but that law firm is not a client, and there is not evidence that, in the course of the meeting, Nelson did or said anything that violated a restrictive covenant.” Solicitation of referral sources is a question that arises from time to time in both breach of loyalty and breach of non-solicitation agreement disputes, so the judge’s distinction is one that may be pointed to in future cases.
The court basically concluded that the evidence presented so far in the case showed that Nelson may have solicited customers before he resigned, but since then he had not solicited customers and had not taken trade secrets. As the judge explained, because Wilmington argues that Nelson engaged in devious behavior while in its employ it further argues that “thus he is a devious guy and likely to continue to engage in devious behavior.” But that was not enough to justify an injunction. The Wilmington Trust case serves as an example of the reluctance of courts to grant injunctive relief without strong evidence of ongoing or future irreparable harm and provides a some additional insight as to how courts view breach of duty of loyalty cases.
About the Author:
Minnesota breach of duty of loyalty attorney V. John Ella has represented both plaintiffs and defendants in breach of duty of loyalty cases at the trial court, the Minnesota Court of Appeals, and the Minnesota Supreme Court. He is the author of Duty-of-Loyalty Claims in Minnesota published by Bench & Bar magazine in October 2011. V. John Ella may be reached at 612.455.6237 or firstname.lastname@example.org.