June 18, 2021

Employment Law

Employee Loyalty and Non-Compete Agreements in Minnesota: What You Need to Know

All employees working in Minnesota owe their employer a common law duty of loyalty. Non-competes, by comparison, apply only to employees who sign them in connection with a job offer or during employment in exchange for some additional consideration, such as a raise, bonus or promotion. Under the duty of loyalty, employees must refrain from (1) competing with their employer during the employment or (2) soliciting an employer’s business for future work, either on behalf of the employee or a competitor. What an employee may lawfully do while still employed is prepare to compete with his or her employer in the future. Examples include filing articles of incorporation with the Secretary of State, signing an office lease, printing business cards, obtaining a web domain, designing a website, etc. The line between preparation and solicitation is not always clear, however, and situations must be evaluated on an individualized, fact-sensitive basis. Although normally present, personal benefit is not a necessary element of a duty of loyalty claim. An employee violates the duty of loyalty also by interfering with an employer’s contracts or by disparaging/sabotaging its business, even where he or she does not profit from the activity. Marn v. Fairview Pharmacy Servs. LLC, 756 N.W.2d 117 (Minn. Ct. App. 2008) (employee breached duty of loyalty by encouraging a third party to stop doing business with employer).

Most employment agreements contain boilerplate language requiring the employee to devote his or her full time and efforts to company.  Sample language includes the following: “During your employment with XYZ Company, you will devote your full business time and efforts to the business of XYZ Company and you will not accept employment with, or otherwise directly or indirectly perform services for, any other person, corporation, partnership, firm, or other business entity engaged in any business competitive with XYZ Company business in any country or geographical area in which XYZ Company does business, as set forth in this Agreement.” Other agreements bar moonlighting altogether unless agreed to in advance by employer, regardless of whether doing so is on behalf of a competitor. Does a best efforts or anti-moonlighting clause, without more, create a duty of loyalty under Minnesota law? The employee sued by his former employer in NICE Sys., Inc. v. Becquer, Civil No. 16-1759 (DWF/DTS) (D. Minn. Nov. 22, 2017) learned the hard way that the answer is probably yes.

In the NICE case, a high-ranking sales employee signed a contract of employment at the onset of his employment with the company that provided that he “devote [his] full business time and energies to the business and affairs of the Company.” Sometime later, the defendant employee took a full time position with another company in California as an account representative while working as a full time employee of his Minnesota employer. He had taken the California job following a change in his job with NICE from a “healthcare vertical”, with the title “Strategic Account Executive,” to “bank vertical”, with the title “Global Account Executive.” In both roles, the defendant employee supervised junior sales personnel. Although he only had that dual employment for a few months, and then quit the California job, he was fired by NICE when they caught wind of his moonlighting. (The employee didn’t help his cause by lying about it, when confronted). In the subsequent lawsuit, NICE took the position that the employee’s transfer was a lateral move, permitted under his existing employment agreement. The employee, by contrast, argued it was a new job, therefore wiping out the old contract he had signed, including its anti-moonlighting clause.

In the employee’s motion seeking dismissal of the claims, the court ruled that disputed fact issues preclude entering judgment for the employee. Whether the job was a new one or a permitted lateral move required a trial. The court also ruled that the common law duty of loyalty is not subsumed by the breach of contract claim, because it is potentially broader in scope and thus falls outside the economic loss rule, which provides that parties are limited to contract remedies where a contractual duty is co-extensive with a common law tort duty.

What’s not clear from the reported decision is whether plaintiff in NICE has a viable claim for damages. That is, can it show that it suffered financially, in any provable way. There appears to be no argument that the employee diverted business or directed business opportunities to the California company. It’s not even clear from the reported decision that the other company was a competitor; the failure in the case to say that it was certainly suggests it wasn’t. Which if true, makes one wonder why a business would sue a former employee caught moonlighting, not being content to just fire him (which was certainly within its right). Was the plaintiff just acting out of vengeance, in disregard of the economics of litigation? Was it trying to make an example of the employee? Normally lack of damages precludes litigation, although not always. The recent case Roach v. Lapp, Libra, Thomson, Stoebner & Pusch, Chartered, No. A20-1013, 2021 WL 2070521 (Minn. Ct. App. May 24, 2021) involved a lawyer sued by his former firm for, among other things, failing to disclose an ethics charge that had been filed against him by a former client. Although this concealment breached the lawyer’s duty of loyalty, no damages were awarded because the law firm failed to attribute any financial injury to it. (The court did award damages connected to other acts of wrongdoing: writing off billable work and failing to record time for work on behalf of a client he intended to take with him upon leaving the firm.)

In any event, the NICE case provides a cautionary note for employees who might engage in moonlighting without first obtaining their employer’s consent. Stated differently, it’s not NICE to moonlight in the dark.