Category Archives: Non-Competition and Confidentiality
What is Tortious Interference with Contract?
Tortious interference with contract is a legal claim that allows a party to a contract to sue a third-party who knowingly interferes with and causes a breach of a contract. Under Minnesota law, a plaintiff must prove five elements to succeed on a claim for tortious interference with contract:
- The existence of a contract;
- The alleged wrongdoer’s knowledge of the contract;
- Intentional procurement of its breach;
- Without justification; and
- Damages.
See Kallok v. Medtronic, Inc., 573 N.W.2d 356, 362 (Minn. 1998).
With respect to employment law, tortious interference with contract claims often arise in the context of non-compete agreements. If a competitor hires an individual subject to a non-compete agreement and employs him or her in a manner that violates the non-compete agreement, the former employer may be able to sue both the employee (for breach of contract) and the competitor (for tortious interference with contract).
Takeaways: Tortious interference with contract claims can be important tools for employers who utilize non-compete or non-solicit agreements to prevent unfair competition. When determining how to enforce a non-compete or non-solicit agreement, determining whether a tortious interference with contract claim is available should be a key consideration. The potential of a claim for tortious interference with contract should also be considered when hiring an employee subject to a non-compete or non-solicit agreement.
Proposed Legislation Threatens to Ban Most Non-Competes in Minnesota
A bill has been introduced in this session in the Minnesota Legislature that would make most non-compete agreements in Minnesota void, including those between employers and employees. The bill, HF 506, contains exceptions for certain business transactions, but even those exceptions are very limited. The proposed bill would be codified at Minn. Stat. § 325D.72 and provide as follows:
NONCOMPETE AGREEMENTS VOID.
A contract that prohibits a party to that contract from exercising a lawful profession, trade, or business is void with the following exceptions:
(1) a seller of a business’ goodwill can agree to refrain from carrying on a similar business in a specified county, city, or part of one of them if the buyer carries on a like business in that area;
(2) partners dissolving a partnership can agree that one or more of them will not carry on a similar business in a specified county, city, or part of one of them where the partnership transacted business; and
(3) a member, when dissolving or terminating their interest in a limited liability company, can agree that the member will not carry on a similar business in a specified county, city, or part of one of them where the business has been transacted if another member or someone taking title to the business carries on a like business in that area.
The authors of the bill are Representatives Joe Atkins (District 52B) and Alice Hausman (District 66A). The bill has been referred to the Committee on Labor, Workplace and Regulated Industry.
Under current law in Minnesota, while courts scrutinize non-compete agreements carefully, employers and employees can agree to reasonable restrictions on a departing employee’s ability to compete with the employer. To be enforceable, such agreements must be: (i) supported by consideration; (ii) reasonable as to time and geographic scope; and (iii) limited so as to be reasonably calculated to protect the employer’s legitimate business interests.
Many businesses in Minnesota rely on non-competes to protect their investments in research, confidential information, relationships, training, and goodwill, and to prevent departing employees from turning around and using those assets to compete against the company. HF 506, if passed, appears to ban that practice, although it is not entirely clear what the bill’s language concerning “exercising” a trade or business means.
The proposed bill’s exceptions for certain business transactions are extremely narrow. For example, they only allow a seller of a business to agree not to compete in a specified county or even smaller area. Presumably, an agreement prohibiting a seller from competing regionally or nationally would be void, even if the company does business regionally or nationally.
Takeaway: If passed, HF 506 would arguably prohibit employers from entering into non-competes with their employees and, potentially, make current non-competes void. Even in the sale-of-business context, the proposed legislation may restrict a buyer’s ability to protect newly acquired goodwill and relationships. Employers should keep a close eye on this bill. We are happy to discuss with you the potential effects on your business.
NLRB Rules Non-Disclosure and Non-Disparagement Provisions are Unlawful
It is fairly common for an employment agreement to require that an employee maintain confidentiality of employer information, and refrain from making critical or defamatory comments about the employer. Recently, an NLRB Administrative Law Judge (ALJ) found these kinds of provisions to be unlawful in an employment agreement.
In Quicken Loans, Inc., 28-CA-75857, JD(NY)-03-13 (Jan. 8, 2013), an employee worked for the employer as a mortgage banker. The employee resigned in 2011. Shortly after the employee resigned, the employer sued the employee for violating the company’s “no contact/no raiding” and non-compete provisions of the employment agreement. Part of the agreement contained a prohibition on disclosing confidential information, which was defined to include “non-public information relating to or regarding the Company’s business, personnel, customers, operations, or affairs,” and further was defined to include “personal information of co-workers, managers, executives, and officers, handbooks, personnel files, personnel information such as home phone numbers, cell phone numbers, addresses, and email addresses.”
The employment agreement also included a non-disparagement clause which required that employees “not publicly criticize, ridicule, disparage, or defame the Company through any written or oral statement.” In response to being sued, the mortgage banker filed an unfair labor practice charge with the NLRB, claiming that the confidentiality and non-disparagement clauses were unlawful. After a trial, the ALJ agreed.
The ALJ found that the confidentiality restrictions were unlawful because the restrictions would have a chilling effect on employees’ Section 7 rights to discuss the names, wages, addresses, or telephone numbers of other employees with their coworkers or union representatives.
The ALJ also found that the non-disparagement clause was unlawful. Because Section 7 of the NLRA allows employees the right to criticize their employers, the ALJ reasoned that the non-disparagement clause could be viewed by an employee as restricting the Section 7 right to engage in protected concerted activities.
Takeaway: While the ALJ’s decision is not binding precedent unless it is appealed to and upheld by National Labor Relations Board, it is a good example of the NLRB General Counsel’s expansive view of the NLRA. Employers should consult their labor counsel whenever they intend to limit disclosure of information by employees or restrict employee comments about the employer or coworkers as part of an employment agreement or policy to ensure compliance with the NLRA.
Hiring an Employee Who Has a Non-Compete: Proceed With Caution!
An employer has a “hot prospect” hire, perhaps coming through a placement agency, and all seems perfect until the prospect mentions something about a non-compete. “It’s no problem, they never enforce it, and if they do it’s my issue to deal with.” Employer beware! The former employer may move to enforce and it may very well be your legal problem.
The prospective employer generally cannot rely upon an applicant’s assurances alone and can potentially be drawn into legal liability for hiring an employee under a non-compete pursuant to the tort of “tortious interference with contractual relations.”
Essentially, this tort provides that when a post-employment constraint exists, and the new employer has knowledge of its existence and procures a breach without justification, the new employer can be liable to the former employer for damages. Such damages even may include the former employer’s attorneys’ fees in enforcing the non-compete. The liability may extend to the procured breach of a non-solicitation, non-compete, or confidentiality agreement.
It is a somewhat complicated tort in its elements and often many defenses are possible, but tortious interference is very real and very important. It requires careful independent legal analysis and consideration of the enforceability of a non-compete, non-solicitation, or confidentiality agreement as a critical component of a hiring decision. Sometimes, independent legal analysis will result in a round of negotiations with the former employer or perhaps even the abandonment of a hire. Legal counsel can provide protection to the employer in this difficult complication.
Takeaways: When you know of a non-compete, stop the process and refrain from the natural inclination to rely upon the prospective hire’s representations and perspective – it could be wishful thinking and downplaying. By knowing of the post-employment restraint, you have the “hot potato” and need a legal analysis of the next steps to take in analyzing and mitigating risk or avoiding the prospective liability of a tortious interference with contractual relations claim.
What is a Trade Secret?
A “trade secret” is defined as information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
- Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
- Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
An employee does not need to be expressly informed that certain information is a trade secret if, under all the circumstances, the employee knows or has reason to know that the owner intends or expects the secrecy of the type of information comprising the trade secret to be maintained. See Minn. Stat. § 325C.01, Subd. 5. If an employer’s trade secrets are misappropriated by an employee or another person or company, the employer may bring a cause of action to obtain injunctive relief or damages.
Takeaway: Employers who rely on valuable secret information should take reasonable steps to maintain the secrecy of that information so that it will be protected as a trade secret under Minnesota law. While it is not necessary to give express notice to employees that certain information is a trade secret, it is helpful to do so to prevent any misunderstandings.
Truth is a Defense to Tortious Interference – Why the Johnny Northside Case Matters To Employers
On August 20, 2012, the Minnesota Court of Appeals issued an opinion that reversed a $60,000 jury verdict for tortious interference claims against North Minneapolis blogger, Johnny Northside. At the trial court, the jury determined that Johnny Northside tortiously interfered with Jerry Moore’s employment contract with the University of Minnesota by suggesting on his blog that Moore had some involvement with a fraudulent mortgage in North Minneapolis. The jury awarded $60,000 in damages to Moore. The jury also found that the statement regarding Moore’s alleged involvement with the fraudulent mortgage was not false.
The Minnesota Court of Appeals reversed the jury verdict against Johnny Northside and held that truth is “a defense to a claim for tortious interference with a contract arising out of an allegedly defamatory statement.” Because the jury found that the statement about Moore on the Johnny Northside blog was true, it could not serve as a basis for Moore’s claims for tortious interference with contract or prospective business advantage. The court also found that there was insufficient evidence of other tortious conduct, apart from Johnny Northside’s constitutionally protected speech, to sustain the jury’s verdict.
The Court of Appeals’ decision in the Johnny Northside case is a good decision for employers because there are some contexts in which protection of an employer’s business may require informing third-parties about irresponsible conduct by an ex-employee. For example, it may be necessary to alert a former employee’s new employer that the former employee has violated a non-compete agreement or misappropriated confidential information or trade secrets. The Johnny Northside case makes clear that as long as the statements made to the new employer are true, they cannot form the basis for a tortious interference claim.
Takeaways: In most situations, it is advisable for employers to limit disclosures about former employees to the information protected by Minnesota’s employment references statute. However, there may be other situations, such as non-compete disputes, when additional disclosures may be necessary. In these cases, employers can reduce potential liability by making sure that any information provided about the former employee is factually true. In some contexts, it may be helpful to consult with counsel to avoid factual misstatements.
What is an Employee’s Duty of Loyalty?
Employees owe a duty of loyalty to their employers under Minnesota law. The general principle underlying the duty of loyalty is the idea that an employee should not “feather his own nest” at the expense of the employer while still on the payroll. The most common context in which duty of loyalty claims arise is with respect to an employee who solicits the employer’s customers for his or her self or for another company while still employed.
Pre-Departure Solicitations: Minnesota courts have held that an employee’s duty of loyalty prohibits an employee from soliciting the employer’s customers for the employee’s own benefit, or from otherwise competing with his or her employer, while still employed. On the other hand, an employee may “prepare to compete” with his her employer while still employed. There is no precise line between acts by an employee that constitute prohibited “solicitation” and acts that constitute permissible “preparation.” Whether a violation has occurred depends heavily on the facts of the case. See Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301 (Minn. Ct. App. 1987).
Takeaway: Even if an employee does not have a Non-Compete Agreement, an employer may still have a viable legal claim against an employee who violates the duty of loyalty by engaging in pre-departure solicitations. Whether an employer has an actionable claim against the employee for breach of the duty of loyalty depends significantly on the facts of the case.
Is A Non-Compete Agreement Enforceable in Minnesota?
Your best sales representative tells you at 5:00 p.m. on a Friday that she is quitting immediately and going to work for your direct competitor. “But you have a non-compete agreement,” you sputter. “That won’t hold up,” she retorts. “It’s been real, it’s been fun, but not real fun,” she exclaims, then walks out.
Is the sales representative right about the non-compete agreement not holding up? That depends on the facts. But contrary to myth, Minnesota courts enforce non-compete agreements routinely. They can and will hold up. What should you do to protect your business? Contact an attorney experienced in enforcing non-compete agreements in court.
The attorney will ask you threshold questions to test the validity of the agreement. Was the non-compete agreement made ancillary to the sales representative’s initial employment with your company or, if not, was independent consideration paid? Is there a legitimate interest to protect through enforcement – for example, the former employee’s ability to deflect customer business to the competitor or to use or disclose of confidential information? Are the temporal, geographic, or customer-based restrictions in the non-compete covenants reasonable?
If a good faith basis exists to seek judicial enforcement of the non-compete, and you choose to do so, you and your attorney have got a lot of work to do in a short amount of time. The longer a party waits to seek enforcement, the less likely a court will enforce the agreement. You will need the following:
- Complaint – A pleading that states the general factual allegations and lists the legal causes of action.
- Affidavit(s) – A formal, sworn witness statement, verifying facts based on personal knowledge.
- Motion for Temporary Restraining Order – A formal request for a temporary restraining order (or “TRO” for short).
- Notice of Hearing – A short document stating the date, time, and place of the hearing on the motion.
- Memorandum of Law – A brief applying applicable law to the facts.
- Proposed TRO – The factual findings and conclusions of law that you want the court to make.
- Attorney Affidavit – Your attorney’s affidavit addressing any necessary information, such as whether the opposing party was served or notified.
- Summons – A formal document to serve on the opposing party with a copy of Complaint.
- Court Forms
- Filing Fee Check
- Cover Letters
A TRO request may be necessary to protect your business from irreparable harm. Reasonable non-compete agreements can be, and will be, enforced through this process.
*This post was originally written by Steve Wilson.
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