Hiring a Person with a Non-Compete Agreement

Home , Integration clause, Tortious interference

SESSION 904

Jeffrey B. Oberman Oberman Thompson LLC Minneapolis

Upper Midwest Employment Law Estate Institute – May 20-21, 2019 Minnesota CLE’s Copyright Policy

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INTRODUCTION ...... 1

I. Discover the Agreement Before Making the Job Offer ...... 1 II. Evaluate All Defenses to the Non-Compete Agreement Before Making the Job Offer ...... 1 III. Prepare NEWCO’s Sysdyne Defense to Potential Tortious Interference Claims ...... 10 IV. Evaluate the Remedies Facing Employee and/or NEWCO ...... 14 V. Don’t Make Matters Worse by Creating Additional Legal Claims ...... 18 VI. Define the Job Offer to Enhance Defenses/Blue Pencil Odds, Decrease Likelihood of Injunctions/Defeat and/or Minimize Damages to OLDCO ...... 25 VII. Consider Proactive Negotiation Strategies ...... 25 VIII. Prepare for Quick Litigation ...... 26 CONCLUSION ...... 27

INTRODUCTION

Very few job applicants for key positions are free to accept new jobs without any competition restrictions. Potential new employers (“NEWCO”) often want to hire an employee who has a non-compete agreement and other restrictive employment covenants with a former employer (“OLDCO”). NEWCO may be able to make the hire and still avoid extensive and expensive litigation costs and risks; or it may have to take some risks to make good hires. This article and the related presentation will summarize steps and practice tips to help NEWCO make the hiring decision, avoid litigation and minimize its legal risks and exposure.

I. DISCOVER THE AGREEMENT BEFORE MAKING THE JOB OFFER.

Hiring employers often fail to determine in advance if they are hiring a person with protective covenants, and/or make the mistake of thinking that hiring the employee is not their problem. These employers fail to identify their exposure and take critical steps to avoid or minimize legal risks. They often make matters worse than they need to be and/or learn of their problems after the fact. Hiring employers who fail to take steps to avoid knowledge of an agreement, or to do due diligence, may be as liable for interference claims as those with knowledge. “It is enough if the defendant had knowledge of facts which, if followed by reasonable inquiry, would have led to complete disclosure of the contractual relations and rights of the parties.” 1

NEWCO should be proactive to ensure that it identifies and addresses its risks before, not after, they are triggered. Many of the legal violations and exposure discussed in this article can be avoided – or at least minimized – with careful pre-hire analysis, planning and implementation.

 PRACTICE TIPS:

o Ask about previous agreements during the application process. If there is an agreement, get it.

o If the applicant says there is no such agreement, confirm that representation in the offer letter, and that the offer is contingent on the applicant’s ability to perform duties without violating non-compete or other agreements with OLDCO.

o Also confirm that the employee may not use or share any of OLDCO’s property or confidential information with or on behalf of NEWCO.

II. EVALUATE ALL DEFENSES TO THE NON-COMPETE AGREEMENT BEFORE MAKING THE JOB OFFER.

The impact and enforceability of restrictive employment covenants is a critical part of the needed pre-hire analysis. Employees are incentivized to leverage their knowledge and contacts to seek employment at a competing employer, and competing employers may be willing to risk legal

1 McGrath v. MICO, Inc., A11-1087, 2012 WL 6097116 (Minn. Ct. App. Dec. 10, 2012), review denied (Feb. 19, 2013) (citing Kjesbo v. Ricks, 517 N.W.2d 585, 588 n. 3 (Minn.1994). 1 exposure. Hiring employers are increasingly willing to look at all potential defenses before passing on a candidate solely because that person has a non-compete agreement. There are many absolute defenses, which may prohibit the non-compete from being enforced at all; and others, which may restrict the enforcement to a reasonable and manageable level.

For purposes of this article, it is assumed that Minnesota law applies, and that Minnesota courts have jurisdiction. It should be noted, however, that non-compete agreements increasingly contain both choice of law and forum selection clauses, which generally enable OLDCO to sue the former employee – and often NEWCO as well – in OLDCO’s jurisdiction and venue. Generally, courts have enforced such provisions.2 Further, the Minnesota Court of Appeals concluded that a forum selection clause in a non-compete agreement binds not only the former employee but binds NEWCO as well, where NEWCO is “closely related” to the dispute between OLDCO and the employee.3 However, if an agreement provides a choice of law provision in order to benefit from a more favorable law, but the parties do not have the requisite connections to that state, the courts can, and will, elect not to enforce such a provision.4

A. Minnesota Courts Disfavor and Heavily Scrutinize Non-Competes.

Non-compete agreements in the employment context are generally disfavored.5 Minnesota courts consider them partial restraints of trade and construe them narrowly.6 More specifically, they have approached noncompetition agreements with “a concern for the average individual employee who as a result of his unequal bargaining power may be found in oppressive circumstances” because an employee is selling his labor and in certain circumstances “cannot well afford to raise any objection to any of the terms in the contract of employment offered him, so long as the wages are acceptable.”7

2 E.g., CH Robinson Worldwide, Inc. v. FLS Transportation, Inc., 772 N.W.2d 528 (Minn. Ct. App. 2009); Eagle Creek Software Servs., Inc. v. Jones, No. CIV. 14-4925 ADM/FLN, 2015 WL 1038534, at *3 (D. Minn. Mar. 10, 2015) (absent minimum contacts, due process “is satisfied when a defendant consents to personal jurisdiction by entering into a contract that contains a valid forum selection clause.” (citations omitted); Capsource Fin., Inc. v. Moore, 2012 U.S. Dist. LEXIS 88618, *9 (D. Minn. June 27, 2012) (a forum selection clause is enforceable unless it is invalid or enforcement would be unreasonable and unjust); Milliken & Co. v. Eagle Packaging Co., 295 N.W.2d 377, 380 n. 1 (Minn.1980); Bmc Software, Inc. v. Mahoney, No. 15-CV-2583 PAM/TNL, 2015 WL 3616069, at *5 (D. Minn. June 9, 2015). 3 CH Robinson Worldwide, Inc. v. FLS Transportation, Inc., 772 N.W.2d 528 (Minn. Ct. App. 2009); see also, e.g., ARP Wave, LLC v. Salpeter, 364 F. Supp. 3d 990 (D. Minn. 2019). 4 E.g., Menzies Aviation (USA), Inc. v. Wilcox, CIV. 13-2702 MJD/JJK, 2013 WL 5663187 (D. Minn. Oct. 17, 2013) (declining to apply more favorable Florida non-compete law where the record demonstrates no connection to Florida). 5 Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626 (Minn. 1983). Note, Minnesota law recognizes a difference between non-compete agreements associated with employment contracts and those arising as part of the sale of a business. Although the general rule is that non- compete agreements are strictly construed, the Supreme Court has noted that many of the reasons for that rule are not present when such an agreement is entered into in connection with the sale of a business. B & Y Metal Painting v. Ball, 279 N.W.2d 813, 815 (Minn.1979; see Sealock v. Peterson, No. A06-2479, 2008 WL 314146, at *4 (Minn. Ct. App. Feb. 5, 2008). The reasonableness of a non-compete agreement in the sale of a business is determined by a three-part test: (1) whether the restriction exceeds the protection necessary to secure the goodwill purchased; (2) whether the restriction places an undue hardship on the covenantor; and (3) whether the restriction has a deleterious effect on the interests of the general public. Kunin v. Kunin, No. CO-99-206, 1999 WL 486814, at *3 (Minn. Ct. App. July 13, 1999) (citing Bess v. Botham, 257 N.W.2d 791, 795 (Minn. 1977). 6 Bennett v. Storz Broad. Co., 134 N.W.2d 892 (Minn. 1965); Lemon v. Gressman, No. 08-00-1739, 2001 WL 290512 at *1 (Minn. Ct. App. Mar. 27, 2001); Gavaras v. Greenspring Media, LLC, CIV. 13-3566 ADM, 2014 WL 117557 (D. Minn. Jan. 13, 2014). The same principles apply to the sale of shares of a business. A non-compete agreement that is signed in connection with the sale of shares of a business is enforceable, even if no separate consideration was paid for the agreement. People's Cleaning & Dyeing Co. v. Share, 210 N.W. 397 (1926); Bess v. Bothman, 257 N.W.2d 791 (Minn.1977); Conway v. C.R. Bard, Inc., 76 F. Supp. 3d 826, 829-32 (D. Minn. Feb. 12, 2015); Yonak v. Hawker Well Works, Inc., No. A14-1221, 2015 WL 1514166 (Minn. Ct. App. Apr. 6, 2015). 7 Bennet, at 899. 2

In Minnesota, an enforceable non-compete agreement must be both necessary to safeguard the employer’s protectable interests and reasonable as between the parties.8 Courts will uphold non-compete agreements that are “for the protection of the legitimate interest of the party in whose favor [they are] imposed, reasonable as between the parties, and not injurious to the public.”9 The restrictive covenant is carefully scrutinized to see if it is “necessary for the protection of the business or good will of the employer,” and if the restriction on the employee is no greater than “necessary to protect the employer's business, regard being had to the nature and character of the employment, the time for which the restriction is imposed, and the territorial extent of the locality to which the prohibition extends.”10 Courts will analyze whether the non-compete agreement is reasonable as related to the business interest at stake and the employee’s ability to earn a living if the non-compete is enforced.11 Critically, the validity of the contract in each case must be determined on its own facts.12

B. Lack of Consideration.

Even if a non-compete agreement is by its terms reasonable, it may be totally unenforceable if OLDCO did not give the employee sufficient consideration.

1. Timing of Consideration. The validity of consideration can depend on when it was offered to the employee. The employee and NEWCO should carefully analyze the time frame in which the non-compete agreement was presented by OLDCO.

a. Non-Compete Offered at Time of Hire. Minnesota law treats an employee’s new job as sufficient consideration for a non-compete agreement so long as it is entered into at the commencement of the employment relationship. It is not enough for the employer to give the employee notice about the non-compete agreement without actually presenting it prior to or in tandem with the job offer.13 Even if an employee has not physically begun to work, but has already

8 Bennett, at 898; Medtronic, Inc. v. Sun, Nos. C7-97-1185, C9-97-1186, 1997 WL 729168, at *3 (Minn. Ct. App., Nov. 25, 1997). 9 Id; Anytime Fitness, LLC v. Edinburgh Fitness LLC, CIV. 14-348 DWF/JJG, 2014 WL 1415081 (D. Minn. Apr. 11, 2014); 10 Bennett, at 899-900. 11 E.g., Wells Fargo Ins. Servs. USA, Inc. v. King, No. 15-CV-4378, 2016 WL 299013, at *9 (D. Minn. Jan. 25, 2016) (finding that since the employee would suffer “potentially devastating” effects if the non-compete was enforced against him, the non-compete agreement was not enforceable). 12 Bennett, at 899-900. 13 Menzies Aviation (USA), Inc. v. Wilcox, 978 F. Supp. 2d 983 (D. Minn. 2013) (denying motion for TRO against former employee where employee had already started his employment when he signed agreement and received no new benefits under agreement); Drummond Am. LLC v. Share Corp., Civ. No. 08-5077, 2010 WL 3167326 (D. Minn. July 23, 2010) (summarizing Minnesota decisions regarding the independent consideration requirement and great example of the factual analysis needed); FSI Int’l, Inc. v. Shumway, Civ. No. 02-402, 2002 WL 334409 (D. Minn. Feb. 26, 2002) (denying motion for preliminary injunction or TRO on the basis that the mid-stream non- compete agreement was not supported by sufficient independent consideration and there was no evidence of a competing product); J. K. Harris & Co., LLC v. Dye & ABC Co., Civ. No. 01-2041, 2001 WL 1464728 (D. Minn. Nov. 16, 2001) (denying TRO because court found that covenant not to compete was entered into after employment began and was not supported by adequate consideration); Nat’l Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982); Davies, 298 N.W.2d at 133 (concluding that a non-compete agreement was not ancillary to the employment contract where the employee had been made aware of its existence during employment negotiations but was not given a chance to examine it despite requesting to see it); Midwest Sports Mktg. v. Hillerich & Bradsby of Canada, Ltd., 552 N.W.2d 254, 265–66 (Minn. Ct. App. 1996) (refusing to enforce an agreement whose terms were not presented to the employee until after he began work); see also Mid-America Bus. Sys. v. Sanderson, No. 17-3876 (JRT/DTS), 2017 WL 4480107 (D. Minn. Oct. 6, 2017) (plaintiff found not likely to succeed on the merits where non-compete was signed several months after employee started working, and therefore lacked consideration); Safety Ctr., Inc. v. Stier, 903 N.W.2d 896 (Minn. Ct. App. 2017) (non-compete presented on first day of work, following a previous offer letter that did not mention a non-compete, was not ancillary to the parties’ employment agreement and was not enforceable); AutoUpLink Techs., Inc. v. Janson, No. A17-0485, 2017 Minn. App. Unpub. LEXIS 986 (Minn. Ct. App. Dec. 4. 2017) (affirming decision to deny temporary injunction for lack of independent consideration where employee was presented with non-compete several days into job training and advised for the first time that he would be eligible to participate in 401(k) plan and would receive computer allowance and reimbursement for telephone usage); Mere knowledge that employment is contingent on signing a non-compete is not enough to make such an agreement ancillary to employment when its terms are not presented to the employee until after he has started work. Kato Eng'g, Inc. v. Hanley, 367 3 accepted an offer of employment, a non-compete agreement following the original offer and acceptance of employment cannot be enforced absent independent consideration.14 Notably, there are exceptions to this general principle in the case law such as where an employee knew of the implementation of the non-compete agreement, continued working, and continued to receive advance payments on unearned commissions,15 or where the employee had the opportunity to fully negotiate and discuss the non-compete, offered to draft the agreement, and filled in and typed up the terms of the agreement prior to employment, although he did not sign it until after he started working.16 Each case must be decided on its own facts.17

b. Mid-Stream Non-Compete Agreement. As discussed above, a non-compete agreement executed after an employee has commenced employment is unenforceable unless supported by “independent consideration.”18

2. Consideration Must Constitute “Real Benefits.” Independent consideration consists of real benefits that are bargained for between the employee and the employer. “Real benefits” mean more than those to which the employee is already entitled to by virtue of employee status or a separate contract.19 Continued employment is not sufficient consideration for a non-compete:20 even when an employee receives some amorphous long-term benefits as a result of signing the non-compete, the non-compete is still invalid if the employee is not aware that the benefits were in exchange for the covenant not to compete.21 Real benefits might include midstream (or post- termination) benefit agreements, promotions, or a cash payment.

a. Benefit-Related Agreements. In recent years, more employers are conditioning mid-stream or post-termination benefit agreements (for stock grants and options, bonuses, change of control benefits, severance benefits and other incentives) on the execution of non-compete agreements. To satisfy the independent consideration requirement, the critical step is distinguishing clearly between employees who sign non-compete agreements and those who do not. Otherwise, the alleged “independent consideration” may be illusory.22

F. Supp. 3d 918 (D. Minn. 2018), citing Prime Vest Financial Services, Inc. v. Ruxer, No. 05-1312, 2005 WL 1959505, at *1 (D. Minn. Aug. 15, 2005). 14 Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161 (Minn. Ct. App.1993); see also TestQuest, Inc. v. La France, No. C0-02-783, 2002 WL 196287 (Minn. Ct. App. Aug. 27, 2002) (upholding mid-stream agreement allowing the employee to continue working and obtain additional vested stock options, which constituted sufficient consideration). 15 Progressive Tech. Inc., v. Shupe, No. A04-1110, 2005 WL 832059 (Minn. Ct. App. April 12, 2005). 16 See also Tonna Heating Cooling, Inc., v. Waraxa, No. CX-02-368, 2002 WL 31687601, at *3 (Minn. Ct. App. Dec. 3, 2002). 17 E.g., Bennett v. Storz Broad. Co., 134 N.W.2d 892, 899-900 (Minn. 1965). 18 However, the Minnesota Court of Appeals held, in an unpublished decision, that the post-employment independent – consideration requirement that exists in the employment contexts does not apply to independent contractors. Thus, at least the “mid-stream” issues in the employment context appear not to apply in the independent contractor context. Schmit Towing, Inc. v. Frovik, No. A10-362, 2010 WL 4451572 at *3 (Minn. Ct. App. Nov. 9, 2010). 19 Sanborn, 500 N.W.2d 161, 164. 20 Nat’l Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982). 21 Northwest Publications, L.L.C. v. Star Tribune Company, No. C6-07-003489 (Ramsey Co. Dist. Ct. Sept. 18, 2007). But see Witzke v. Mesabi Rehabilitation Svcs., Inc., No. A07-0421, 2008 WL 314535, at *3 (Minn. Ct. App. Feb. 5, 2008), overruled on other grounds, 768 N.W.2d 127 (Minn. Ct. App. 2009) (finding that the employee’s rise within the company, continued employment for many years, training, and increased responsibility constituted sufficient consideration); TestQuest, Inc. v. LaFrance, No. C0-02-783, 2002 WL 1969287 (Minn. Ct. App. Aug. 27, 2002) (finding that access to an employer’s confidential information was adequate consideration for a non-compete agreement). 22 Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626 (Minn. 1983); BFI-Portable Services. Inc. v. Kemple, No. C5-89-1172, 1989 WL 138978 (Minn. Ct. App. Nov. 21, 1989); Nott Co. v. Eberhardt, No. A13-1061, 2014 WL 2441118 (Minn. Ct. App. June 2, 2014) (finding that a new compensation plan was not adequate consideration where one (of several) other salesman was allowed to participate in the plan without signing the non-compete agreement). 4

Also, a benefit plan that allows but does not require an employer to provide benefits to an employee may not be sufficient consideration for the non-compete agreement, because it was “unilateral” and could not be enforced.23 On the other hand, one Minnesota federal district judge has commented in dicta that whether an employee “actually received the stock options is of no moment. By signing the ... Agreement, [the employee] was made eligible for a benefit he could not have received without signing the Agreement. Thus, the . . . Agreement is valid.”24 This language appears to suggest that the decline in value of stock options, even to a point where they are “underwater,” would not affect the enforcement of a non-compete agreement.

b. Promotions. A promotion to a higher position with more authority and responsibility is generally viewed as adequate consideration.25 A promotion may even be adequate consideration even if the employee makes less money after the promotion.26 The timing of the promotion and the signing of the agreement are critical. If an employee is promoted prior to signing the non-compete agreement, then the promotion cannot serve as consideration for the agreement.27 The Minnesota Court of Appeals (applying Missouri law) addressed whether a promotion, offered informally at first and later in a writing that contained non-solicitation language, served as sufficient consideration for the non-solicitation agreement.28 The Court (applying Missouri law) held that a promotion serves as consideration for a non-compete agreement at the time when the terms of the promotion have been defined and the promotion has been formally offered and accepted in writing, reasoning that the “key inquiry is when the promotion provides the employee with ‘real advantages.’” In reviewing that decision, however, it seems that if the employee had actually received the increase in compensation, duties, and benefits prior to being provided the documents, the result would have been different.

c. Cash payments. Cash payments can be valid consideration for a mid-stream non-compete agreement. The adequacy of consideration is a fact issue particular to each case, and the ultimate question is whether the consideration was of “real benefit” to the employee. While the Minnesota Court of Appeals has held that $500 provided a “real advantage” to the employee, which under the specific facts of that case, constituted sufficient consideration,29 the case in no way suggests to this author that $500 is the new floor of reasonableness in Minnesota. Many would balk at the suggestion that $500 alone is a reasonable bargain for future employment restrictions.

23 Softchoice, Inc. v. Schmidt, 763 N.W.2d 660, at *4 (Minn. Ct. App. 2009) (applying Missouri law). 24 Universal Hosp. Servs., Inc. v. Hennessey, No. Civ.01-2072, 2002 WL 192564 (D. Minn. Jan. 23, 2002). 25 Guidant Sales Corp. v. Baer, No. 09-CV-0358, 2009 WL 490052, at *2 (D. Minn. Feb. 26, 2009); cf. Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127, 131 (Minn. 1980) (finding independent consideration where the employee continued his employment for ten years after signing the agreement and advanced to a position that would not have been open to him if he had not signed the contract). But see Sanborn, 500 N.W.2d, at 164 (finding no independent consideration because the employee received nothing more than what he was promised in his initial employment contract); Menzies Aviation (USA), Inc. v. Wilcox, CIV. 13-2702 MJD/JJK, 2013 WL 5663187 (D. Minn. Oct. 17, 2013) (finding no independent consideration where employee received no promotion, special training, or other benefit in return for signing the Non–Compete). 26 See Guidant Sales Corp., No. 09-CV-0358, 2009 WL 490052, at *3 (D. Minn. Feb. 26, 2009). (“[I]n deciding whether a non-compete agreement is supported by independent consideration, a court must consider the entire context, and not just the money”). 27 See Sheehy v. Bodin, 349 N.W.2d 353, 354 (Minn. Ct. App.1984) (stating that past consideration cannot support a future promise). 28 Softchoice, Inc. v. Schmidt, 763 N.W.2d 660 (Minn. Ct. App. 2009). 29 Tenant Const., Inc. v. Mason, No. A07-0413, 2008 WL 314515, at *2 (Minn. Ct. App. Feb. 5, 2008). From a careful reading of this case, the author infers that the court may have been concerned about deception by the employee regarding his departure to a competing employer. Had the employee been more straightforward with his employer before he terminated his job, it is possible that the court would have viewed the $500 consideration differently. Also, the employee received other consideration, in addition to the $500 payment. 5

C. Statute of Frauds.

Non-compete agreements that fail to recite the consideration in the agreement itself may be unenforceable under the Minnesota Statute of Frauds, which requires contracts that by their terms cannot be performed within one year to be in writing and to state the consideration. Ancillary documents may or may not be admissible to prove the consideration.30

D. Vague Non-Competes.

Non-compete agreements that are unclear, vague and incomplete are not enforceable.31 If the agreement is ambiguous, the court construes the ambiguities against the drafting party.32

E. The Agreement Is No Longer Binding.

It may not be clear that the non-compete obligations survive termination of the underlying employment agreement or the employment relationship. Post-termination obligations must expressly survive termination of employment.33

Non-competes are assignable in Minnesota.34 However, because non-competes are generally disfavored and therefore narrowly construed, the courts generally will not allow assignment of a non-compete absent explicit language permitting assignment.35 Also, the language in particular contracts may require the employee’s consent to an assignment, in order for the restrictive covenant to be enforceable by an assignee of the former employer.36 However, the courts have allowed successor entities to enforce non-competes in the context of corporate mergers where the acquiring entity succeeded to the acquired entity’s rights and obligations,37 and in corporate restructurings where the employee’s employment essentially stays the same under the new entity.38

In addition, employers often draft merger clauses in subsequent agreements — for example, a separation agreement or release of claims — which by their terms supersede and thus

30 Minn. Stat. §513.01(1); JAB, Inc. v. Naegle, 857 N.W.2d 254 (Minn. Ct. App. 2015) (two-year non-solicitation agreement, which failed to state the consideration and which contained an integration clause that forbid the plaintiff from using extraneous evidence was not enforceable due to the statute of frauds). 31 E.g., Gavaras v. Greenspring Media, LLC, CIV. 13-3566 ADM, 2014 WL 117557 (D. Minn. Jan. 13, 2014) (non-compete agreement between an employee and his former employer was unclear, vague, overly broad and incomplete, and thus was unenforceable, where the agreement, which lacked an effective date, was specifically conditioned on the terms of a written employment agreement, which did not exist); Marvin Lumber & Cedar Co. v. Severson, No. CV 15-1869 (MJD/LIB), 2015 WL 5719502, at *8 (D. Minn. Sept. 28, 2015) (agreement that prohibits the employee from working in any industry producing “products or services that are competitive with any products or services of the Employer” without defining the “competitive” products or services is likely overbroad and not sufficiently tailored to the employer’s legitimate business interests). 32 E.g., Ecolab, Inc. v. Gartland, 537 N.W.2d 291, 295 (Minn. Ct. App. 1995). 33 See, e.g., Burke v. Fine, 608 N.W.2d 909, 912 (Minn. Ct. App. 2000) (invalidating non-compete agreement where there was no explicit language stating that the non-compete survived the expiration of the contract) (review denied June 13, 2000). 34 Saliterman v. Finney, 361 N.W.2d 175, 178 (Minn. Ct. App. 1985). 35 Inter-Tel, Inc. v. CA Commc’ns, Inc., No. Civ. 02-1864PAMRLE, 2003 WL 23119384, at *4 (D. Minn. Dec. 29, 2003) (refusing to assign a non-compete agreement where the contract was silent on the assignability of the agreement). 36 Guy Carpenter & Co., Inc. v. John B. Collins & Assoc., Inc., No. 05-1623, 2006 WL 2502232, at *5 (D. Minn. Aug. 29, 2006) (refusing to assign a non-compete agreement to a new employer where the former employer failed to obtain consent from employees before assigning the non-compete to the new company, as specified in the employees’ contract). 37 QBE Americas, Inc. v. McDermott, No. 14-5020, 2015 WL 138082 (D. Minn. Jan. 9, 2015) (allowing the acquiring entity to enforce the non-compete agreement). 38 Ochsner v. Relco Unisystems, No. A13-2399, 2014 WL 4957617 (Minn. Ct. App. Oct. 6, 2014) (non-compete agreement was assignable where the transfer of assets amounted to “nothing more than a corporate name change” and the employee’s job did not change). 6 render unenforceable, an employee’s continuing non-competition obligations.39 In cases where the writing contains a merger clause, the Minnesota Supreme Court has noted that the merger clause “establishes that the parties intended the writing to be an integration of their agreement.”40 In other words, if there is a merger clause, integration is presumed. Even if there is not a merger clause, the court may find that integration was intended. “Where there is no written merger agreement, a determination of whether the written document is a complete and accurate “integration” of the terms of the contract is not made solely by an inspection of the writing itself, important as that is, for the writing must be read in light of the situation of the parties, the subject matter and purposes of the transaction, and the attendant circumstances.”41

F. OLDCO Breached Obligations to the Employee.

If one party breaches a contract, the other party is excused from performance.42 If OLDCO materially breached an employment contract with the employee, the non-compete agreement may be defeated.43 A failure of consideration occurs when a contract that was initially valid “becomes unenforceable because the performance bargained for has not been rendered.”44

In addition to defenses, the transitioning employee may have possible claims against OLDCO for OLDCO’s breach of contract or other legal violations. This may provide a springboard for negotiations and/or litigation positions. However, NEWCO should not give legal advice to the employee about claims against OLDCO. Have the employee get separate counsel to evaluate these issues.

G. OLDCO Waived.

If OLDCO failed to enforce non-compete agreements against other similarly positioned employees, OLDCO may have waived its right to future enforcement of the agreement.45 However, the waiver may need to be in writing in order for the statute of frauds to be satisfied.46

39 Cf. Western Form, Inc. v. Pickell, 308 F.3d 930 (8th Cir. 2002). (Merger clause in a one-year employment contract incorporated a non- compete agreement into the contract. When the contract expired, the non-compete began to run—and ran out—even though the employee was still working for the employer in a different capacity - and refused to sign a new non-compete agreement. When the employee eventually quit and started to compete with the employer, he was under no valid non-compete agreement.) 40 Alpha Real Estate Co. of Rochester v. Delta Dental Plan of Minn., 664 N.W.2d 303, 312 (Minn. 2003). 41 Great America Leasing Corporation v. Dolan, Civ. No. 10-4631 JRTJJK, 2011 WL 334829 (D. Minn. Jan. 31, 2011). (citing Arizant Holdings, Inc. v. Gust, 668 F.Supp.2d 1194, 1202 (D. Minn. 2009). 42 See, e.g., Associated Cinemas of America v. World Amusement Co., 276 N.W.2d 7, 10 (Minn. 1937). 43 See Marso v. Makato Clinic, Ltd., 153 N.W.2d 281, 290 (Minn. 1967); Webb Pub. Co. v. Fosshage, 426 N.W.2d 445, 449 (Minn. Ct. App. 1988) (holding that a wrongful termination may preclude enforcement of a restrictive covenant) (citing Edin v. Josten’s Inc., 343 N.W.2d 691, 694 (Minn. Ct. App. 1984)); Prow v. Medtronic, Inc., 770 F.2d 117, 121 (8th Cir. 1985) (holding that an employer does not breach its compensation obligations to an employee when it reduces an employee’s sales territory—and by extension his earnings—because the purpose of the reduction was to alleviate employee “burn-out” and encourage employees to remain with the employer); Hart Forms & Sys., Inc. v. Goettsch, No. C3-90-1791, 1990 WL 195473, at *3 (Minn. Ct. App. Dec. 11, 1990) (recognizing that wrongful termination can constitute a breach of an employment contract but concluding that the employer’s termination of the employee was not wrongful because it provided the employee with the requisite notice of poor performance prior to termination). 44 Franklin v. Carpenter, 244 N.W.2d 492, 495 (Minn.1976). “Where a promisor received what [s]he bargained for, however, there is no failure of consideration.” In re MJK Clearing, Inc., 408 F.3d 512, 515 (8th Cir.2005) (applying Minnesota law). In other words, the court will not inquire as to what will occur after an alleged breach of contract; it need only determine whether the promisor received that for which [s]he bargained. C.H. Robinson Worldwide, Inc. v. Rodriguez, CIV. 12-264 DSD/SER, 2012 WL 4856245 (D. Minn. Oct. 12, 2012) (denying motion to dismiss for failure of consideration where employee received restricted stock, and then subsequent divestment, due to an alleged breach of contract). 45 See Minn. Mining and Mfg. Comp. v. Kirkevold¸ 87 F.R.D. 324, 336 (D. Minn. 1980). 46 Northwest Publications, L.L.C. v. Star Tribune Company, No. C6-07-003489 (Ramsey Co. Dist. Ct. Sept. 18, 2007). 7

H. Other Contract Defenses.

Other legal contract defenses, such as fraudulent inducement and misrepresentation, can be asserted as defenses to non-compete agreements.47

I. Unreasonableness of the Restrictive Covenant; Blue Pencil Options

The reasonableness inquiry occurs on a case-by-case, fact-specific basis.48 Some states hold unreasonably restrictive covenants totally unenforceable,49 as a way to encourage employers to write more narrowly-tailored covenants.50 In other jurisdictions, the courts will modify invalid portions of the agreement under the “blue pencil” doctrine, and enforce the rest as written.51 Minnesota courts utilize a modified blue pencil doctrine and will, at their discretion, rewrite portions to make them reasonable.52 However, Minnesota courts have not, to date, applied the blue pencil doctrine to agreements that are invalid for reasons other than the reasonableness as to time, geography or other factors, such as a failure of consideration. Further, courts have discretion to decline to blue pencil any of the language in the agreement and simply rule that the agreement is not enforceable. 53

Minnesota courts have historically reviewed two types of restrictions for their reasonableness: temporal and geographical.54 A covenant whose restriction extends too far into the future or across too broad of a geographical area might be invalidated or modified.55

1. Time. Non-compete agreements must be reasonable in their temporal scope, or they will not be enforced.56 Courts consider a variety of factors in determining whether a restrictive covenant is reasonable from a temporal standpoint, including: (1) nature of the work; (2) time

47 See Empiregas, Inc. of Ardmore v. Vernon Hardy, 487 So.2d 244, 249 (Ala. 1985), cert denied, 476 U.S, 1116 (1986); Richardson v. Permacel Tape Corp., 244 F.2d 80, 83-4 (5th Cir. 1957). 48 Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127 (Minn. 1980). 49 See, e.g., Fields Found Ltd. v. Christiansen, 309 N.W.2d 125 (Wis. Ct. App. 1981). 50 Telxon Corp. v. Hoffman, 720 F. Supp. 657 (N.D. Ill. 1989). 51 BDO Seidman v. Hirshberg, 93 NY.2d 382, 394 (N.Y. 1999). 52 See Davies, 298 N.W.2d at 134; Dean Van Horn Consulting Assoc. v. Wold, 395 N.W.2d 405 (Minn. Ct. App. 1986); Ikon Office Solutions, Inc. v. Dale, 170 F. Supp.2d 892, (8th Cir. 2001); see also Klick v. Crosstown State Bank of Ham Lake, Inc., 372 N.W.2d 85 (Minn. Ct. App. 1985) (observing that courts are not required to modify non-compete agreements that appear unreasonable); 53 Guercio v. Production Automation Corporation, 664 N.W.2d 379, 384, N.2 (Minn. Ct. App. 2003); Gavaras v. Greenspring Media, LLC, CIV. 13-3566 ADM, 2014 WL 117557 (D. Minn. Jan. 13, 2014) (“Blue-penciling this restrictive covenant does not make sense. Modifying this agreement would require more than modifying the duration and territorial scope. The Court would need to rewrite the agreement wholesale, and rewriting would require the Court to divine the parties' intent at the time of contracting, seventeen years after the fact…”); Marvin Lumber & Cedar Co. v. Severson, No. CV 15-1869 (MJD/LIB), 2015 WL 5719502, at *8 (D. Minn. Sept. 28, 2015) ( “It is within the discretion of the trial court to determine whether to modify non-compete provisions in equitable situations; a trial court's decision not to blue-pencil a non-compete is reviewed for abuse of discretion.” (citations omitted); Oberfoell v. Kyte, No. A17-0575, 2018 WL 492629, at *6 (Minn. Ct. App. Jan. 22, 2018). 54 Metro Networks Comm. v. Zavodnick, No. Civ. 03-6198, 2004 WL 73591 (D. Minn. Jan. 15, 2004) (enforcing a one-year restriction on competition in the Twin Cities metropolitan area); Universal Hosp. Serv., Inc. v. Hennessy, No. Civ. 01-2072 (PAM/JGL) 2002 WL 192564, (D. Minn. Jan. 23, 2002) (restricting an employee from competing within a 100-mile radius of the employer for one year). 55 See, e.g., Ikon Office Solutions, Inc., 170 F. Supp.2d 892, at 895 (reducing time period of noncompetition from five years to three years, because five years was too long, placed undue hardship on the employee, and did not serve any legitimate business needs of the former employer); Dean Van Horn, 395 N.W.2d at 410 (modifying a three-year restriction to one year). 56 See, e.g., Webb Publishing Co. v. Fosshage, 426 N.W.2d 445, 448 (Minn. Ct. App.1988) (citing Dahlberg Brothers, Inc. v. Ford Motor Co., 137 N.W.2d 314, 321-22 (Minn. 1965)). 8

necessary to train new employees; (3) time necessary to allow customers to become familiar with new employees; and (4) time necessary to obliterate the identification between the employer and the employee in the minds of the employer’s customers.57

Although Minnesota courts have enforced non-compete agreements for periods of two or three years after the termination of employment, these cases are more likely the exception than the rule. In a traditional employment setting (as compared to a sale-of-business setting), courts generally are reluctant to enforce non-compete agreements for periods longer than one year.58 In contrast the Court “has consistently found one-year restrictions that are limited to a former employee’s sales area to be reasonable.” 59

2. Geographical territory. Employment-related covenants restricting competition must be reasonable from a geographic standpoint as well, or they will not be enforced.60 In the past, global restrictions have generally been unenforceable as unreasonably broad,61 but this is changing as the world marketplace develops. The factors courts take into account when judging the reasonableness of a geographical limitation include: (1) reasonable trade area; (2) area where employee actually performed duties; (3) employer’s actual business area; and (4) location of employer’s customers.62 Geographical restrictions should be clearly tied to the employer’s legitimate business interests, keeping in mind that the increased roles of telephones, emails, and the Internet can make geographic restrictions irrelevant in many industries. The employee and NEWCO should argue vehemently against an unreasonably restrictive covenant whose temporal or geographic limitations impose a greater restriction than necessary to protect OLDCO’s business interests.

However, the Court of Appeals has declined to enunciate a per se rule barring the enforceability of non-compete covenants that contained no territorial limitation. “Territorial limitations…are but one of several factors a [district] court is to consider in determining the reasonableness of a restrictive covenant.”63

3. Customer-Based Restrictions. Customer restrictions may substitute for or complement a geographic restriction. Often, these make far more sense than pure geographic restrictions since customers may be all over the county or even the world. Basing a territorial

57 AVI Sys., Inc. v. John McKitrick & Netrix, LLC, Civ. No. 16-2078, 2016 WL 4146087, at *4 (D. Minn. Aug. 4, 2016) (six months); Vital Images, Inc. v. Martel, No. 07-4195, 2007 WL 3095378, at *3 (D. Minn. Oct. 19, 2007) (18 months); Timm & Assoc., Inc. v. Broad, No. 05-2370, 2006 WL 3759753, at *4 (D. Minn. Dec. 21, 2006) (two years); Overholt Crop Ins. Serv. Co., Inc. v. Bredeson, 437 N.W.2d 698, 704 (Minn. Ct. App. 1989) (two years). 58See, e.g., Oberfoell v. Kyte, No. A17-0575, 2018 WL 492629, at *5 (Minn. Ct. App. Jan. 22, 2018) (five-year restriction was unreasonable because, based on the nature of the work, it would not take a significant period of time to train a replacement and the customers could become accustomed to the employee’s replacement quickly); Medtronic v. Hughes & St. Jude Medical, No. A10-998, 2011 WL 134973 (Minn. Ct. App. Jan. 18, 2011) (shortening non-compete from two years to one year, despite ruling in favor of the former employer on all other issues in the case). 59 Boston Scientific Corporation v. Kean, Civ. No. 11-419 (SRN/FLN), 2011 WL 853644 (D. Minn. March 9, 2011) (quoting Guidant Sales Corp v. Baer, No. 09-CV-0358 (PJS/FLN), 2009 WL 490052, at *4 (D. Minn. Feb. 26, 2009). 60 See, e.g., Ring Computer Sys. v. Paradata Computer Networks, No. C4-90-889, 1990 WL 132615 (Minn. Ct. App. Sept. 18, 1990). 61 See, e.g., Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 800 (Minn. Ct. App. 1993) (observing that a non-compete agreement with no geographical limit “will often be held to be unreasonable”). But see Medtronic v. Hedemark, No. A08-0987, 2009 WL 511760, at *3–5 (Minn. Ct. App. Mar. 3, 2009) (upholding a global restriction on competition for a multinational corporation, because the other restrictions in the non-compete were reasonable). 62 Overholt, 437 N.W.2d 698; Satellite Indus. Inc. v. Keeling, 396 N.W.2d 635 (Minn. Ct. App.1986). 63 Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 799 (Minn. Ct. App. 1993). (Instead of a per se rule, “[t]he covenant must be scrutinized as a whole to determine whether it is reasonable.” Id. at 800. Medtronic v. Hughes and St. Jude Medical, A10-998, 2011 WL 134973 (Minn. Ct. App. Jan. 18, 2011). 9 restriction on the presence of customers in a certain area enhances the reasonableness of a non- compete agreement.64

4. Product-Based Restrictions. Under the right circumstances, product-based restrictions may also substitute for or compliment a geographic restriction. Even a world-wide non-compete agreement may be deemed reasonable under the circumstances of the case, where the non-compete covenant prevents the employee from working on competitive products.65

 PRACTICE TIPS:

o If there is an agreement, evaluate all defenses and balance the risks before going forward with the hire. Are the potential benefits worth the risks? They often are.

o Have an “exit strategy” (at-will employment, etc.). If things do not work out, NEWCO does not want to have made promises that it cannot keep.

III. PREPARE NEWCO’S SYSDYNE DEFENSE TO POTENTIAL TORTIOUS INTERFERENCE CLAIMS.

The most obvious and frequent claim against employees is for breach of one or several restrictive covenants, including: a non-compete agreement,66 a customer non-solicitation agreement,67 an agreement not to solicit OLDCO’s employees,68 or a confidentiality agreement.69 NEWCO is not a party to such agreements; the most obvious and frequent claim against NEWCO is for tortious interference with the contract.70 That said, even if the contract is breached by the employee, NEWCO has defenses to the contract interference claim.

64 Cook Sign Co. v. Combs, No. A07-1907, 2008 WL 3898267, at *7 (Minn. Ct. App. Aug. 26, 2008) (enforcing a non-compete agreement restricting an employee from competing in three states in which the employer does business and has customers); Salon 2000, Inc. v. Dauwalter, No. A06-1227, 2007 WL 1599223, at *2 (Minn. Ct. App. June 5, 2007) (affirming a non-compete agreement restricting an employee from working as a stylist within a ten-mile radius of the employer’s business on the ground that customers will seek out the stylist rather than the services of the salon “if the stylist is sufficiently close” geographically to the salon); Madsen v. Spectro Alloys Corp., No. C7-98-225, 1998 WL 373067, at *2 (Minn. Ct. App. July 7, 1998) (concluding that a restriction from competing in “any market in which Spectro does business in the United States” was not unreasonably broad). 65 Medtronic v. Hughes and St. Jude Medical, A10-998, 2011 WL 134973 (Minn. Ct. App. Jan. 18, 2011) (world-wide scope was deemed reasonable because it was limited to certain cardiology products, and the confidential information that the employee obtained while working with the former employer would be potentially relevant to his sales of products at the new employer in any market). 66 See, e.g., Bennett v. Storz Broad. Co., 134 N.W.2d 892 (Minn. 1965). 67 See, e.g., Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 452 (Minn. Ct. App. 2001); Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 800 (Minn. Ct. App. 1993). 68 Frank B. Hall & Co., Inc. v. Alexander & Alexander, Inc., 974 F.2d 1020, 1025 (8th Cir. 1992). 69 See, e.g., Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890 (Minn. 1983); Tenant Const., Inc. v. Mason, No. A07-0413 2008 WL 314515 (Minn. Ct. App. Feb. 5, 2008). 70 See, e.g., Kallok v. Medtronic, Inc., 573 N.W.2d 356 (Minn. 1998); Nat’l Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 741 (Minn. 1982); United Wild Rice, Inc. v. Nelson, 313 N.W.2d 628, 632 (Minn. 1982); Bennett v. Storz Broadcasting Co., 134 N.W.2d 892, 897 (Minn. 1965); Ultra Lube, Inc. v. Dave Peterson Monticello Ford-Mercury, Inc., No. C8-02-658, 2002 WL 31302981 (Minn. Ct. App. Oct. 15, 2002); Medtronic v. Hughes and St. Jude Medical, A10-998, 2011 WL 134973 (Minn. Ct. App. Jan. 18, 2011); McGrath v. MICO, Inc., A11-1087, 2012 WL 6097116 (Minn. Ct. App. Dec. 10, 2012), review denied (Feb. 19, 2013). 10

A. Tortious Interference with Contract.

The elements of a cause of action for tortious interference with a contract are: (1) the existence of a contract; (2) the interfering party’s knowledge of the contract; (3) intentional procurement of a breach; (4) lack of justification; and (5) damages.71

To establish damages for lost profits in a claim for tortious interference with contract, a “plaintiff must establish by a preponderance of the evidence that (a) profits were lost, (b) the loss was directly caused by the breach of the covenant not to compete, and (c) the amount of such causally related loss is capable of calculation with reasonable certainty rather than benevolent speculation.”72 Under the right circumstances, damages may include the costs that OLDCO had to incur to replace the employee.73 NEWCO may also be required to indemnify OLDCO for attorney’s fees incurred by OLDCO in litigation to enforce the non-compete agreement. 74

B. General Defenses to Tortious Interference with Contract.

If NEWCO in fact does not have knowledge of the Non-Compete Agreement, then it cannot be interference because knowledge of the contract is one of the elements of the tort.75 However, if NEWCO takes steps to avoid knowledge, or if fails to do its own due diligence, that does not support the defense. “It is enough if the defendant had knowledge of facts which, if followed by reasonable inquiry, would have led to complete disclosure of the contractual relations and rights of the parties.”76

NEWCO may raise the “competitor’s privilege” to a claim that it wrongfully interfered with OLDCO’s contract if NEWCO asserts in “good-faith” a legally protected interest of its own believing that its interest may otherwise be impaired or destroyed by the performance of the contract or transaction.77 Competition is favored in the law, and can provide that justification if NEWCO proves that (1) the alleged interference concerned a matter of competition between NEWCO and OLDCO; (2) NEWCO did not employ wrongful means in the course of the alleged interference; and (3) NEWCO’s purpose was to advance their interest in competing with OLDCO.78

Justification is generally a factual question. In Select Comfort Corp. v. Sleep Better Store, LLC79, the U.S. District Court summarized the analysis needed as follows:

71 Kallok, at 362 (Minn. 1998). 72 St. Jude Med., S.C., Inc. v. Biosense Webster, Inc., No. CIV. 12-621 ADM/TNL, 2014 WL 6673664, at *2-4 (D. Minn. Nov. 24, 2014) (quoting B & Y Metal Painting, Inc. v. Ball, 279 N.W.2d 813, 816 (Minn.1979). 73 Id. 74 Kallok, at 363; Medtronic, A10-998, WL 134973 at *9 (affirming an award for attorney’s fees and expenses in the amount $615,958 against the new employer for procuring an anticipatory breach and then a breach of a non-compete covenant); St. Jude Med., S.C., Inc. v. Biosense Webster, Inc., supra, (affirming denial of motion to dismiss claims for recovery of attorney’s fees). 75 Kallok v. Medtronic, Inc., 573 N.W.2d 356 (Minn. 1998). 76 McGrath v. MICO, Inc., A11-1087, 2012 WL 6097116 (Minn. Ct. App. Dec. 10, 2012), review denied (Feb. 19, 2013) (citing Kjesbo v. Ricks, 517 N.W.2d 585, 588 n. 3 (Minn.1994). 77 Medtronic v. Hughes and St. Jude Medical, A10-998, 2011 WL 134973 (Minn. Ct. App. Jan. 18, 2011), citing Kjesbo v. Ricks, 517 N.W.2d 585, 588 (Minn. 1994) (quoting Restatement (Second) of Torts § 773 (1979)). 78 Viking Produce, Inc. v. Northstar Produce, LLC, A11-635, 2012 WL 171391 (Minn. Ct. App. Jan. 23, 2012). 79 Select Comfort Corp. v. Sleep Better Store, LLC, Civ. No. 11-621 (JNE/JSM), 2012 WL 716667 (D. Minn. March 2, 2012). 11

“Generally, a defendant's actions are justified if it pursues its legal rights via legal means.” Id. (citing Langeland v. Farmers State Bank of Trimont, 319 N.W.2d 26, 32–33 (Minn.1982)); Kjesbo v. Ricks, 517 N.W.2d 585, 588 (Minn.1994) (“There is no wrongful interference with a contract where one asserts in good faith a legally protected interest of his own * * * believ[ing] that his interest may otherwise be impaired or destroyed by the performance of the contract or transaction.” (internal quotation marks omitted)). “The general rule with which we are concerned is that one has the right to be secure in his contracts and to pursue his business ... free from the interference of others except where such others act in pursuance of a superior or equal right.” Noble Sys. Corp., 543 F.3d at 983 (quoting Bennett v. Storz Broad. Co., 270 Minn. 525, 134 N.W.2d 892, 897 (Minn.1965)); Bennett, 134 N.W.2d at 897 (“Liability for wrongful interference may be avoided by showing that the defendant was justified by a lawful object (sic) which he had a right to assert”). Interference with a contract is unjustified, however, “when it is done for the indirect purpose of injuring the plaintiff or benefitting the defendant.” Furlev Sales & Assoc., Inc. v. N. Am. Auto. Warehouse, Inc., 325 N.W.2d 20, 27 (Minn. 1982). “Ordinarily, whether interference is justified is an issue of fact, and the test is what is reasonable conduct under the circumstances.” Kjesbo, 517 N.W.2d at 588 (citing Bennett, 134 N.W.2d at 900).”

C. Sysdyne Defense to Tortious Interference with Contract.

One of the most interesting issues in recent years relates to advice by NEWCO’s lawyers. From time to time, hiring entities have alleged that they were advised by their attorneys that non- compete agreements were not enforceable and therefore they were justified in making the hire. The new employer in Kallok made this very argument, claiming that its interference was justified because it consulted with outside counsel to determine whether Kallok would violate his non- compete agreements by accepting employment with it.80 The Court rejected the new employer’s argument because it “did not utilize a reasonable inquiry in ascertaining whether Kallok's noncompete agreements with Medtronic prevented him from being employed by (the new employer).”81 Specifically, the new employer did not “candidly provide its attorneys with all relevant information” pertaining to Kallok's position and responsibilities at Medtronic, including his access to confidential information.82 The Court held that the new employer “may not rely upon an infirm consultation with counsel and the resulting advice as a justification for its action.”83

In 2015, the Minnesota Supreme Court reviewed this defense and concluded that, under Kallok - and the right circumstances - the justification defense to tortious interference with contract may encompass reasonable reliance on advice of counsel.84 In Sysdyne, the Court stated that a per se rule regarding the evidence necessary to establish justification would be inconsistent with the case-by-case, fact-based nature of the justification inquiry, and held that under the facts of that case, the trial court did not err in concluding that the defendant met its burden of proving the

80 Kallok v. Medtronic, Inc., 573 N.W.2d 356, 362 (Minn.1998). 81 Id. 82 Id. 83 Id. 84 Sysdyne Corp. v. Rousslang, 860 N.W.2d 347, 351-54 (Minn. 2015). 12

justification defense given the evidence supporting its reasonable inquiry with outside counsel and honest reliance on counsel's advice that the contract was not enforceable. 85

The employee in Sysdyne did not dispute that he breached the noncompete agreement, and the trial court awarded damages to Sysdyne on its breach of contract claim with respect to certain customers he brought with him from the former employer to the new employer, Xigent. The trial court ruled in favor of Xigent, however, on the tortious interference claim, concluding that Xigent's interference was justified because Xigent conducted a reasonable inquiry into the enforceability of the noncompete agreement and honestly believed, based on advice of outside counsel, that the agreement was unenforceable. The court of appeals affirmed.86

In its appeal to the Minnesota Supreme Court, Sysdyne raised the following issues: whether the justification defense to a claim of tortious interference with contract may be satisfied by reliance on incorrect advice of counsel; and, if so, whether the trial court's finding of honest reliance on the advice of counsel after a reasonable inquiry is supported by the record. The Court answered both questions in the affirmative.87

The facts in Sysdyne are very interesting. Outside counsel advised Xigent that the noncompete agreement was overbroad as to Rousslang's preexisting customers and that the entire agreement was unenforceable. Based on this advice, Xigent advised Rousslang that the noncompete agreement was unenforceable and offered him a position at Xigent, which Rousslang accepted on the condition that Xigent cover any legal fees associated with his move to Xigent.88 In support of its justification defense, Xigent presented an e-mail exchange between Xigent’s President and the outside lawyer regarding the attorney’s review of Rousslang's original offer letter and employment agreement. Xigent also introduced billing records indicating that the attorney billed 0.4 hours for review of the letter and agreement and 0.3 hours for a telephone conference with the President regarding “noncompete issues.” The President testified that he told the attorney that Rousslang would be doing similar work at Xigent as he had been doing at Sysdyne, with some added responsibilities, but did not describe Sysdyne's business. He also testified that he viewed the attorney as an expert on noncompete agreements, that the attorney had reviewed noncompete agreements for Xigent for 10 to 12 years, and that he relied on the attorney’s advice.89

Interestingly, prior to Sysdyne the Minnesota Court of Appeals had ruled that a defendant’s assertion of attorney-client privilege as the basis for refusing to disclose why it believed that a non- compete was unenforceable was “fatal” to its claim that it had a good-faith belief that the non- compete was unenforceable.90 This seems to mean that if an attorney is going to give advice on a non-compete issue, and the client relies on that advice to defend a claim for tortious interference, the attorney-client privilege will have to be waived.

Many questions remain after Sysdyne. What is “reasonable reliance?” How much is needed to prove "honest reliance on the advice of counsel after a reasonable inquiry?” Will employers carefully follow this case to inoculate themselves from tortious interference claims? If the attorney

85 Id. (citing Kjesbo v. Ricks, 517 N.W.2d 585, 588 (Minn.1994)). 86 Sysdyne Corp. v. Rousslang, No. A13–0898, 2014 WL 902713, at *4 (Minn. App. Mar. 10, 2014). 87 Sysdyne, supra, 349. 88 Id., 349-50. 89 Id., 347, 350. 90 Medtronic, Inc. v. Hughes and St. Jude Medical, No. A10-998, 2011 WL 134973, at *8 (Minn. Ct. App. Jan. 18, 2011). 13

is wrong, at what point is it malpractice? Will attorneys be willing to advise clients knowing that their communications may become the lead defense? How will the attorney-client privilege be impacted? How broad is the waiver? At what point is the attorney prohibited from representing NEWCO because he or she is a key witness?91

 PRACTICE TIPS:

o Get a legal opinion before making the job offer.

o Get the opinion from an attorney who will not be trial counsel, and who will not have attorney-client information and knowledge that may be subject to waiver.

o Consider whether in-house counsel should give the opinion and risk having to waive the attorney-client privilege.

o Provide opinion counsel with all relevant information.

o Follow opinion counsel’s guidance, knowing that it could be discoverable.

IV. EVALUATE REMEDIES FACING EMPLOYEE AND/OR NEWCO.

Knowing OLDCO’s potential remedies will greatly help the employee and NEWCO balance their potential benefits and risks, decide whether to go forward with the hire and agree in advance how to handle the risks.

A. Injunctive Relief.

OLDCO may try to enjoin the employee and NEWCO from violating a restrictive covenant. Minnesota state law considers the five Dahlberg Brothers factors to determine whether to grant injunctive relief: (1) parties’ relationship; (2) balance of harms between the plaintiff and the defendant; (3) likelihood of success on the merits; (4) public policy expressed in federal and state statutes; and (5) administrative burdens involved in judicial supervision and enforcement of the temporary decree.92 In a non-compete case, courts typically focus on the balance of harms and the likelihood of success on the merits.93 The federal courts in Minnesota generally refer to the Dataphase factors identified by the Eighth Circuit in evaluating whether to issue injunctive relief: (1) the threat of irreparable harm to the movant; (2) the balance of the harms between the parties;

91 For recent discussions on Sysdyne, see Qwest Commc'ns Co., LLC v. Free Conferencing Corp., No. CV 10-490 (MJD/SER), 2017 WL 4618277, at *27 (D. Minn. Mar. 31, 2017), aff'd, 905 F.3d 1068 (8th Cir. 2018); Riddle v. Geckobyte.com, Inc., No. CV 17-623 (PAM/LIB), 2018 WL 3104107, at *3 (D. Minn. June 22, 2018); Schumacher v. Swanson, No. A16-1224, 2017 WL 1436078, at *5 (Minn. Ct. App. Apr. 24, 2017), review denied (July 18, 2017). 92See Webb Publishing Co. v. Fosshage, 426 N.W.2d 445, 448 (Minn. Ct. App.1988) (citing Dahlberg Brothers, Inc. v. Ford Motor Co., 137 N.W.2d 314, 321-22 (Minn. 1965)). 93See Webb Publishing Co., 426 N.W.2d, at 448. 14

(3) the probability that the movant will succeed on the merits; and (4) the public interest.94 A preliminary injunction “is an extraordinary remedy never awarded as a matter of right.”95

Non-compete agreements have historically stated that injunctive relief would be appropriate in the event of a breach and that irreparable harm would result absent injunctive relief.96 “‘Irreparable harm occurs when a party has no adequate remedy at law, typically because its injuries cannot be fully compensated through an award of damages….’ The threatened harm must be ‘certain and great and of such imminence that there is a clear and present need for equitable relief.’” 97 In recent years, non- compete agreements have been upping the ante in many ways, some of which are discussed below.

B. Monetary Damages.

OLDCO might choose to sue for damages rather than or in addition to injunctive relief. Monetary damages can be recovered ancillary to equitable relief granted.98 The damages caused by a former employee’s breach of a non-compete agreement are measured by the business loss actually suffered as a consequence of the breach.99

C. Attorney’s Fees.

Generally, attorneys’ fees are recoverable only if a statute or contract authorizes such recovery.100 Non-compete agreements increasingly state that OLDCO can recover attorney’s fees. Even when that is not the case, Minnesota state courts have held that if OLDCO succeeds on a claim of tortious interference against NEWCO, NEWCO may be forced to pay OLDCO’s attorney’s fees under the “third-party exception” to the American rule, since NEWCO’s tortious interference directly causes OLDCO to enter litigation against its former employee to protect its rights under the non-compete agreement.101 Similarly, the Minnesota Uniform Trade Secret Act authorizes attorney’s fees to the successful party.102

94See Dataphase Sys., Inc. v. C.L. Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981); Boston Scientific Corporation v. Kean, Civ. No. 11-419 (SRN/FLN), 2011 WL 853644 (D. Minn. March 9, 2011). (recent U.S. District Court summary and analysis of the factors). 95 Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 129 S. Ct. 365, 376, 172 L.Ed.2d 249 (2008), as quoted by CHS, Inc. v. Petronet, LLC, Civ. No. 10-94RHK/FLN, 2010 WL 4721073 (D. Minn. Nov. 15, 2010) (which contained an extensive and informative analysis regarding the factors considered in granting injunctive relief). 96 See Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 68–69 (2d Cir. 1999) (holding acknowledgement of irreparable harm in the agreement could arguably be viewed as an admission by the employee that his former employer would indeed suffer irreparable harm should he breach the non- compete provisions). 97 Wells Fargo Ins. Servs. USA, Inc. v. King, No. 15-CV-4378, 2016 WL 299013, at *8 (D. Minn. Jan. 25, 2016) (finding that any harm that defendant could inflict on the plaintiff had already occurred, and therefore were monetary damages that precluded injunctive relief). (citing Gen. Motors Corp. v. Harry Brown’s, LLC, 563 F.3d 312, 319 (8th Cir. 2009); Novus Franchising, Inc. v. Dawson, 725 F.3d 885, 895 (8th Cir. 2013)); see also St. Jude Med., Inc. v. Carter, 913 N.W.2d 678 (Minn. 2018) (finding that a non-compete agreement that stated the employer would suffer irreparable injury upon breach by the employee was not enough to establish irreparable harm, and thus could not compel the court to grant equitable relief). 98 See, e.g., B & Y Metal Painting, Inc. v. Ball, 279 N.W.2d 813, 817 (Minn. 1979). 99 See Lemon v. Gressman, No. C8-00-1739, 2001 WL 290512 at *3 (Minn. Ct. App. Mar. 27, 2001) (citing Faust v. Parrott, 270 N.W.2d 117, 120 (Minn. 1978)). 100 See Tenant Const., Inc. v. Mason, No. A07-0413, 2008 WL 314515 (Minn. Ct. App. Feb. 5, 2008) (upholding grant of attorney’s fees to employer in non-compete agreement); Tonna Heating Cooling, Inc. v. Waraxa, No. CX-02-368, 2002 WL 31687601 at *5 Minn. Ct. App. Dec. 3, 2002) (denying an employer’s request for attorney’s fees, despite employee’s violation of the non-compete agreement, because the agreement did not provide for the payment of attorney’s fees); Barr/Nelson, Inc. v. Tonto’s, Inc., 336 N.W.2d 46, 53 (Minn. 1983). 101 Kallok v. Medtronic, Inc., 573 N.W.2d 356, 363 (Minn. 1998). 102 Minn. Stat. § 325C.04. 15

D. Liquidated damages.

A liquidated-damages clause is prima facie valid, based on the assumption that it does not represent a penalty for nonperformance but rather fair compensation for breach-related damages caused by a party’s nonperformance.103 Enforcement of a liquidated-damages clause is dependent on satisfaction of two elements: (1) the fixed amount is a reasonable forecast of just compensation for the harm caused by the breach; and (2) the harm is incapable of accurate estimation or is very difficult to estimate.104 Whether the liquidated-damages clause is “reasonable” must be determined “in light of the contract as a whole, the nature of the damages contemplated, and the surrounding circumstances.”105

An interesting question that arises is whether the existence of a liquidated-damages provision in a non-compete should preclude an employer from seeking injunctive relief. Arguably, an employee who breaches her non-compete agreement should not have to suffer the further damage of an injunction. In the author’s experience, this argument is very persuasive. For example, one court observed in dicta that the existence of a liquidated-damages provision obfuscated the need for a temporary injunction, since the damages clause indicates that the parties have already chosen a preferred remedy for any future breach of the non-compete agreement.106 The Minnesota Court of Appeals cited the existence of a liquidated-damages clause as proof that the employer would not suffer irreparable injury if a temporary injunction was not granted.107 However, the law is not entirely settled on the issue: other cases appear to conclude that a liquidated-damages provision does not preclude pursuit of injunctive relief.108

E. Forfeiture of Benefits.

Increasingly, employers are including provisions in benefit plans and agreements conditioning an employee’s retention of stock, stock options, or other benefits on not competing with the employer for a certain time period following the employee’s termination. Sometimes the plan/agreement states that the benefit will not be provided (e.g. the employee cannot exercise a stock option) if there is a violation of a non-compete agreement. Other plans/agreements contain claw-back provisions, requiring the violating employee to pay back any prior benefit received.

Minnesota courts have been willing to enforce forfeiture provisions if they pass a test of reasonableness. For example, a provision requiring an employee to forfeit cash or stock received within six months of the employee’s violation of a non-compete agreement was deemed to be reasonable and was upheld because the employee had complete control of the circumstances

103 Gorco Constr. Co. v. Stein, 99 N.W.2d 69, 74 (Minn. 1959). 104 Bellboy Seafood Corp. v. Nathanson, 410 N.W.2d 349, 352 (Minn. Ct. App. 1987). 105 Gorco, 99 N.W.2d 69 at 74. 106 Timm & Assocs., Inc. v. Broad, No. 05-2370, 2005 WL 3241832 (D. Minn. Nov. 30, 2005). 107 Bromen Office 1, Inc. v. Coens, No. A04-946, 2004 WL 2984374 (Minn. Ct. App. Dec. 28, 2004). 108 Frank B. Hall & Co. v. Alexander & Alexander, Inc., 974 F.2d 1020 (8th Cir. 1992) (arguing that the liquidated-damages clause in a Settlement Agreement between competing employers was not the sole remedy if one employer breached the agreement by inducing an employee to compete); H&R Block Enterprises, Inc. v. Short, No. Civ. 06-608, 2006 WL 3437491 (D. Minn. Nov. 29, 2006) (concluding that in cases where “money damages alone would be inadequate due to the recurring and uncertain nature of the harm,” a party to a non- compete agreement may seek injunctive relief notwithstanding the existence of a liquidated-damages provision). 16

generating the forfeiture.109 In contrast, a forfeiture provision that was “not limited as to time, harm to the employer, or geographical area” was found to be an unreasonable restraint of trade.110

 PRACTICE TIPS:

o Does OLDCO have exposure for damages and/or legal fees? If the “worst case” is an injunction, the potential benefits may well outweigh the risks.

o If liquidated damages are clear, it may be best to just pay them and move on.

o Determine who will carry the risk of forfeitures and claw backs.

o Consider ways to assure that OLDCO has no damages to seek.

o Maintain your “exit strategy” (at-will employment, etc.) in case things do not work out.

V. DON’T MAKE MATTERS WORSE BY CREATING ADDITIONAL LEGAL CLAIMS.

Regardless whether the employee has an enforceable non-compete agreement, or even no agreement at all, the employee (and NEWCO) can take actions that unnecessarily create legal claims by OLDCO. NEWCO can – and should – take affirmative steps to minimize this risk and limit its damages in the event the employee takes actions that create claims. As noted above, NEWCO should make it clear to the applicant, and confirm in the offer letter, that it does not want to interfere with OLDCO’s agreements or improperly receive or use OLDCO’s property or confidential information. Similarly, NEWCO should proactively avoid having the employee take improper actions with OLDCO’s customers, employees or others that may create legal claims that otherwise would not exist.

A. Violation of Trade Secret / Confidentiality Laws.

Minnesota courts have recognized that “[i]n the absence of a covenant not to compete or a finding of actual disclosure or an intent to disclose trade secrets, former employees ‘may pursue their chosen field of endeavor in direct competition’ with their employer.”111 However, the employee has a duty to protect the secrecy of OLDCO’s confidential information, and NEWCO cannot benefit from a violation of that duty. Regardless of the existence of agreements, the employee and/or NEWCO may also have direct or indirect liability to OLDCO for violations of trade secret and/or confidentiality laws. Hiring employers often fail to insulate themselves from OLDCO’S secrets, and many former employers are suing (and doing extensive discovery) to address these violations.

109 Medtronic v. Hedemark, No. A08-0987, 2009 WL 511760, at *3–5 (Minn. Ct. App. Mar. 3, 2009). 110 Harris v. Bolin, 247 N.W.2d 600, 603 (Minn. 1976). 111 I.B.M. Corp. v. Seagate Tech., Inc., 941 F. Supp. 98, 101 (D.Minn.1992) (citing Surgidev, 648 F. Supp., at 695). “[A] claim of trade secret misappropriation should not act as an ex post facto covenant not to compete.” I.B.M. Corp. v. Seagate Tech., 941 F. Supp. at 101 (citing E.W. Bliss Co. v. Struthers-Dunn, Inc., 408 F.2d 1108, 1112–13 (8th Cir. 1969)); see also Lexis-Nexis v. Beer, 41 F. Supp. 2d 950, 959 (D. Minn. 1999) (following Seagate and refusing to grant injunction allowing employer to “obtain, through the back door of trade- secret law, the kind of unreasonable restriction it could not obtain via its original non-compete agreement”). 17

1. Employees’ Common Law Duties to Maintain Confidentiality. Minnesota common law provides protection to employers from employees who misuse the employer’s confidential information or attempt to compete with the employer while still employed.112 NEWCO cannot benefit from a violation of that duty.

2. Trade Secret Misappropriation. The Minnesota Uniform Trade Secrets Act (“MUTSA”) displaces all conflicting tort law and serves to preempt the common-law tort of misappropriation.113 Misappropriation is defined as “improper acquisition, disclosure, or use of a ‘trade secret’”;114 the existence of a proven trade secret and a confidential relationship are prerequisites to an action for misappropriation. In addition to monetary damages, OLDCO can seek temporary or permanent injunctive relief; the critical question in such actions is whether OLDCO can demonstrate that it will likely “succeed on the merits” of its misappropriation claim.115 To qualify as a trade secret, the party asserting misappropriation must prove: (1) the information is not generally known or readily ascertainable; (2) the information derives independent economic value from its secrecy; and (3) the party makes reasonable efforts to maintain secrecy.116

B. Defenses to Common Law Confidentiality / Trade Secret Claims.

1. Industry and Public Information are not Trade Secrets. Generally known principles in an industry cannot be considered trade secrets and are not entitled to protection.117 Similarly, information that is readily ascertainable by proper means, or information that comprises general skills and knowledge acquired in the course of employment, do not constitute trade secrets.118 Further, information does not constitute a trade secret unless it “derives independent economic value,” and information that has or will quickly become obsolete does not have independent economic value to be considered a trade secret.”119

2. Customer Lists are Usually Not Trade Secrets. Minnesota federal courts frequently conclude that customer lists are not confidential or trade-secret information because such information is readily available through reasonably diligent research.120 An important exception

112 See Eaton Corp. v. Giere, 971 F.2d 136, 141 (8th Cir. 1992) cert. denied, 506 U.S. 1034 (1992). 113 See Minn. Stat. §§ 325C.01–08 (setting out the statutory definition of trade secret misappropriation). 114 Id. § 325C.01, subd. 3. 115 See Dataphase Sys., Inc. v. C.L. Sys. Inc., 640 F.2d 109, 113 (8th Cir. 1981) (providing the test for entitlement to injunctive relief in the Eighth Circuit); Dahlberg Bros., Inc. v. Ford Motor Co., 137 N.W.2d 314, 321–22 (Minn. 1965) (setting out the Minnesota state test for injunctive relief). 116 Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 899–901 (Minn. 1983). 117 See Guy Carpenter & Co., Inc. v. John B. Collins & Assocs., Inc., Civ. No. 05–1623, 2006 WL 2502232, at *2 (D. Minn. Aug. 29, 2006) (citing I–Sys., Inc. v. Softwares, Inc., Civ. No. 21951, 2005 WL 1430323, at *5 (D.Minn. Mar. 7, 2005)). 118 Id. (citing Lasermaster Corp. v. Sentinel Imaging, 931 F.Supp. 628, 637 (D.Minn.1996)); Minn. Stat. § 325C.01, subd. 5; e.g. WEG Elec. Corp v. Pethers, No. CV 16-471(DSD/LIB), 2016 WL 1441793, at *3 (D. Minn. Apr. 12, 2016) (customer lists that are publicly available in state register listings and prices that are easily attainable are not trade secrets. 119 Minn. Stat. § 325C.01, subd. 5; e.g. Equus Computer Sys., Inc. v. N. Computer Sys., Inc., No. 01-CV-657, 2001 WL 1636487, at *3 (D. Minn. May 4, 2001), WEG Elec. Corp v. Pethers, No. CV 16-471(DSD/LIB), 2016 WL 1441793, at *3 (D. Minn. Apr. 12, 2016); See E.g., Katch, LLC v. Sweetser, No. 15-CV-3760, 2015 WL 6942132, at *9 (D. Minn. Nov. 10, 2015) (customer lists, pricing lists, and operation strategies may lose their economic value over the course of a few months); Lexis–Nexis, 41 F. Supp. 2d at 959 (declaring four month old knowledge of corporate business policies and strategies to be of little value and thus not a trade secret); WEG Elec. Corp v. Pethers, No. CV 16-471(DSD/LIB), 2016 WL 1441793, at *3 (D. Minn. Apr. 12, 2016) (knowledge was likely obsolete, which minimizes its independent economic value). 120 See Harley Auto. Grp., Inc. v. AP Supply, Inc., CIV. 12-1110 DWF/LIB, 2013 WL 6801221 (D. Minn. Dec. 23, 2013 ( holding that list of car dealerships, account numbers, addresses, telephone numbers, and sometimes the name of a contact person are not trade secrets), citing Blackburn, Nickels & Smith, Inc. v. Erickson, 366 N.W.2d 640, 645 (Minn.Ct.App.1985); Lasermaster Corp., 931 F.Supp. at 637– 38 (holding a customer list, which included contact information for each customer, did not constitute a trade secret); NewLeaf Designs, 18 to this general rule emerged in Surgidev Corp. v. Eye Technology, Inc. 121 In that case, the court found that maintaining the secrecy of high-volume customers’ identities was a practice embraced by the entire industry in which the plaintiff and defendant did business. Therefore, such information would not be readily accessible and would likely be a trade secret. Surgidev also concluded that the identities of individual contacts at customers’ facilities can be a trade secret, since in the sales industry the goodwill of a customer frequently attaches to the employer’s sales representative personally.122 Several plaintiffs have argued, unsuccessfully, that Surgidev supports their claims of the trade-secret status of customer information.123 However, on a couple of occasions, the court has found an industry-wide practice of confidentiality toward customer lists and concluded that such information was a trade secret.124

In contrast to Minnesota federal court, state-court plaintiffs generally seek to protect their customer information by reference to Cherne Industries, Inc. v. Grounds & Associates rather than Surgidev to claim trade-secret protection.125 Regardless, Minnesota state courts frequently rely on federal precedent and reasoning to reject claims of trade-secret status over customer lists.126

3. OLDCO Must Maintain Secrets to Claim They are Trade Secrets. If OLDCO failed to make efforts to keep its alleged secrets private, they likely will not be considered trade secrets. Even if information is not readily available and has economic value, Electro-Craft demands that a plaintiff seeking trade-secret protection demonstrate that it took reasonable efforts to protect the secrecy of that information.127 The entity seeking protection of the trade secret must make a “reasonable effort under the circumstances” to maintain secrecy.128 Similarly, the employer-

LLC v. BestBins Corp., 168 F.Supp.2d 1039, 1043–44 (D.Minn.2001) (citing Lasermaster and holding that plaintiff's assertion that customer list was a trade secret failed at preliminary injunction stage). Cf. Surgidev Corp. v. Eye Tech., Inc., 648 F.Supp. 661, 682 (D.Minn.1986) (holding that identity of ophthalmologists who were high volume implanters was protectable as trade secret; considering testimony demonstrating that the identity of this category of ophthalmologists is considered confidential in the industry and not readily accessible to others); see also Fox Sports Net North, LLC v. Minn. Twins P’ship, 319 F.3d 329, 336 (8th Cir. 2003) (holding that obsolete information and knowledge of industry contact people are not trade secrets); Ad Associates, Inc. v. Coast to Coast Classifieds, Inc., No. 04-3418, 2005 WL 3372968 (D. Minn. Dec. 12, 2005) (holding that customers’ names and fax numbers are not trade secrets); Blackburn, Nickels & Smith, Inc. v. Erickson, 366 N.W.2d 640, 645 (Minn. Ct. App. 1985); see also Internet Inc. v. Tensar Polytechnologies, Inc., No. 05-317, 2005 WL 2453170, at *9 (D. Minn. Oct. 3, 2005) (“[C]ustomer lists, even with specific information about those customers attached to them, are generally not considered to rise to the level of a trade secret.”). 121 Surgidev Corp. v. Eye Technology, Inc., 648 F. Supp. 661 (D. Minn. 1986), aff’d 828 F.2d 452 (8th Cir. 1987). 122 Id. But see Lasermaster Corp. v. Sentinel Imaging, 931 F. Supp. 628, 637 (D. Minn. 1996). 123 See, e.g., id.; Guy Carpenter & Co. v. John B. Collins & Assocs., No. 05-1623, 2006 WL 2502232 (D. Minn. Aug. 29, 2006) (refusing to protect client identities, preferences, and purchasing history); Internet Inc. v. Tensar Polytechnologies, Inc., No. 05-317, 2005 WL 2453170, at *9 (D. Minn. Oct. 3, 2005) (“[C]ustomer lists, even with specific information about those customers attached to them, are generally not considered to rise to the level of a trade secret.”); United Prods. Corp. of Am. v. Cederstrom, No. A05-1688, 2006 WL 1529478, at *5 (Minn. Ct. App. June 6, 2006) (finding that the plaintiff's information on “customer lists, credit histories, and buying habits,” “pricing information, rebate programs, mark-ups, and margins,” and “long-term sales strategies” did not constitute trade secrets); WEG Elec. Corp v. Pethers, No. CV 16-471(DSD/LIB), 2016 WL 1441793, at *2 (D. Minn. Apr. 12, 2016) (discussing and following NewLeaf and Cederstrom). 124 See Cenveo Corp. v. S. Graphic Sys., Inc., No. 08-5521, 2009 WL 161210 (D. Minn. Jan. 22, 2009) (protecting job history information that included records of transactions and internal costs given by a former employee to Southern Graphic, a competitor of Cenveo); Equus Computer Sys., Inc. v. Northern Computer Sys., Inc., No. 01-657, 2002 WL 1634334 (D. Minn. July 22, 2002) (protecting the identity of “designated systems group” (DSG) customers—manufacturers who incorporate Equus computers into their products and systems—as well as information compiled by Equus about non-DSG customers’ buying, payment, marketing, and pricing history, though not their identities). 125 Cherne Indus., Inc. v. Grounds & Assocs., 278 N.W.2d 81, 90–91 (Minn. 1979). 126 See, e.g., Reliastar Life Ins. Co. v. KMG America Corp., No. A05-2079, 2006 WL 2529760 (Minn. Ct. App. Sept. 5, 2006); United Prods. Corp. of America, Inc. v. Cederstrom, No. A05-1688, 2006 WL 1529478 (Minn. Ct. App. June 6, 2006). But see Kratzer v. Welsh Cos., LLC, 771 N.W.2d 14 (Minn. 2009) (distinguishing the case from Fox Sports and Lasermaster and concluding that Welsh’s customer lists are trade secrets because they are not readily available and are considered by the relevant industry to be highly proprietary). 127 Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 899–901 (Minn. 1983). 128 Electro-Craft at 901 (quoting Minn. Stat. § 325C.01, subd. 5(ii)). 19

employee relationship creates a common law duty of confidentiality only as to information that the employer treats as secret.129

“Although absolute secrecy is not required, the confidential measures must be reasonable under the circumstances.”130 In Surgidev, the court provided a list of protective activities that indicate “reasonable efforts”: asking employees to sign confidentiality or non-disclosure agreements; restricting visitors to sensitive areas of a plant or manufacturing facility; separating sensitive departments or processes from the central facility; keeping secret documents in locked files; and distributing allegedly secret materials on a strictly “need-to-know” basis.131

4. The Defend Trade Secrets Act of 2016 (DTSA) requires that “any contract or agreement with an employee that governs the use of a trade secret or other confidential information” must include a notice of immunity for employees who disclose trade secrets for the purpose of protected whistleblowing activities.132 The consequence of not providing the required notice is that an employer will not be able to seek double damages and attorney’s fees in an action brought under the DTSA, although both remedies are still available under Minnesota state law.

5. Intent and the Inevitable Disclosure Doctrine. In Minnesota, generally a court may issue an injunction only where there is misappropriation or threatened misappropriation of trade secrets.133 Similarly, a common law claim of misappropriation of confidential information requires an affirmative showing that the employee intended to misappropriate the employer’s confidential information.134

Some courts have applied the “inevitable disclosure doctrine,” in which courts presume that certain departing employees will “inevitably” reveal trade secrets to a new employer, regardless of the employee’s intent to disclosure. Therefore, courts will enjoin such employees from working for a competitor, and may even grant damages.135 However, this doctrine is rarely applied. The doctrine applies only to those employees with “intimate familiarity with corporate policies and strategies.”136 Relief may be obtained under the doctrine only after a showing of a “high probability” of disclosure.137 Courts repeatedly emphasize that inevitable-disclosure doctrine “poses a high bar.”138

129 Electro-Craft at 903 (finding no misappropriation where employer never treated information as secret, despite existence of agreement prohibiting the taking of secrets). 130 Lasermaster Corp. v. Sentinel Imaging, 931 F. Supp. 628, 636 (D. Minn. 1996). 131 Surgidev Corp. v. Eye Technology, Inc., 648 F. Supp. 661, 663, 693–94 (D. Minn. 1986), aff’d 828 F.2d 452 (8th Cir. 1987). 132 18 U.S.C.§ 1833(b)(3)(A). 133 See I.B.M. Corp. v. Seagate Tech., Inc., 941 F. Supp. 98, 101 (D.Minn.1992); Minn. Stat. § 325C.02(a). 134 Conus Comm’cns Co. Ltd. P’ship v. Hubbell, No. C5-99-2131, 2000 WL 979133, at *3 (Minn. Ct. App. 2000) (refusing to find intent where employer did not provide notice that information was confidential, had no agreement with employee to that effect, and failed to implement adequate safety measures to protect confidential information). 135 See, e.g., PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995). 136 Lexis-Nexis v. Beer, 41 F. Supp. 2d at 955. 137 NewLeaf Designs, LLC v. BestBins Corp., 168 F. Supp. 2d 1039, 1044–45 (D. Minn. 2001). 138 Prime Therapeutics LLC v. Beatty, 354 F. Supp. 3d 957, 969 (D. Minn. 2018), citing, e.g., AVI Sys., Inc. v. McKitrick, No. 16-cv-2078 (JNE/HB), 2016 WL 4146087, at *3 n.9 (D. Minn. Aug. 4, 2016) (referencing the “high standard for ‘inevitable disclosure’ of trade secrets”); Katch, LLC v. Sweetser, 143 F.Supp.3d 854, 869 (D. Minn. 2015) (describing how inevitable disclosure “is a heavy burden” and the movant “stands little, if any, chance of establishing such disclosure”).

 PRACTICE TIPS:

o Keep OLDCO’s property and information away from NEWCO.

o Make it clear in the offer letter and all follow up communications that the employee is prohibited from bringing or using OLDCO’s property, trade secrets, or confidential information.

o NEWCO may already have properly obtained information that OLDCO might later claim to be its confidential information. Make sure it is in place, and that it did not come from the employee.

o Build the equivalent of “ethical walls” to ensure that others are not “tainted” with information from the employee.

C. Tortious Interference with Prospective Economic Advantage.

Even if there is no contract, or in addition to a contract interference claim, Minnesota courts have recognized that OLDCO may assert a claim for tortious interference with business expectancy.139 In 2014, the Minnesota Supreme Court reconfirmed that it is a viable claim in Minnesota, and clarified that the phrase “tortious interference with prospective economic advantage” most accurately describes the cause of action.140

To recover for tortious interference with prospective economic advantage, a plaintiff must prove the following five elements: (1) the existence of a reasonable expectation of economic advantage; (2) defendant's knowledge of that expectation of economic advantage; (3) that defendant intentionally interfered with plaintiff's reasonable expectation of economic advantage, and the intentional interference is either independently tortious or in violation of a state or federal statute or regulation; (4) that in the absence of the wrongful act of defendant, it is reasonably probable that plaintiff would have realized that economic advantage or benefit; and (5) that plaintiff sustained damages (which must be specific and real, not speculative, and must be more than damages to reputation).141

However, if the allegations supporting a claim for tortious interference with prospective economic advantage all relate to the defendant’s alleged interference with Plaintiff's rights under

139 Lamminen v. City of Cloquet, 987 F.Supp. 723, 731 (D. Minn.1997) (citing United Wild Rice, Inc. v. Nelson, 313 N.W.2d 628, 632–33 (Minn.1982)); Cool-Pak, LLC v. Larsen, CIV. 11-2182 JRT/TNL, 2012 WL 1933706 (D. Minn. May 29, 2012). In contrast, “[u]nfair competition is not a stand-alone tort with specific elements.” Cenveo Corp. v. S. Graphic Sys., Inc., 784 F.Supp.2d 1130, 1142 (D. Minn.2011). “[I]t describes a general category of torts which courts recognize for the protection of commercial interests.” Id. (internal quotation marks omitted). In order to pursue a claim for unfair competition, a plaintiff must identify the underlying tort that is the basis for the claim. Id. Where a plaintiff bases its claim of unfair competition on the same underlying factual allegations as its other independent claims, the unfair competition claim is duplicative of the independent claims and must be dismissed. Guy Carpenter & Co., Inc. v. John B. Collins & Assocs., Inc., No. 05–1623, 2006 WL 2502232, at *9 (D. Minn. Aug. 29, 2006). 140 Gieseke v. IDCA, Inc., 844 N.W.2d 210, 219 (Minn.2014), citing Witte Transportation Co. v. Murphy Motor Freight Lines, Inc., 291 Minn. 461, 193 N.W.2d 148 (1971); Wild v. Rarig, 302 Minn. 419, 234 N.W.2d 775 (1975); and United Wild Rice, Inc. v. Nelson, 313 N.W.2d 628 (Minn.1982). 141 Id.; See also Thomas v. UnitedHealth Grp., Inc., No. CIV. 12-47 DWF/JSM, 2014 WL 5307579, at *18 (D. Minn. Oct. 16, 2014). 21 an agreement, as compared to a separate business interest, the “breach of duty is indistinguishable from the breach of contract.”142

 PRACTICE TIPS:

o See Practice Tips in Section III.

D. Breach of Duty of Loyalty / Fiduciary Duty / Usurpation of Corporate Opportunity; and Aiding and Abetting / Respondeat Superior.

Regardless of the existence of agreements, during the recruiting and application phase, employees may “cross the line” and trigger a lawsuit for breach of duties. NWWCO may have exposure to these claims as well.

All employees owe a duty of loyalty to their employers.143 Among other things, the duty of loyalty prohibits an employee “from soliciting the employer’s customers for herself, or from otherwise competing with her employer, while she is employed.”144 This duty exists regardless whether the employee has a non-compete agreement with the employer.145

Partners in partnerships, and officers, directors, and shareholders in closely held corporations, owe fiduciary duties to their employers, which are higher than the duty of loyalty.146 For example, although offering a job to an at-will employee is not considered improper interference with an at-will employment contract, if the person offering the job has a fiduciary duty to OLDCO at the time of the offer, a different result is likely. Among other obligations, it would generally be considered a breach of fiduciary duty or tortious inference with contract if a fiduciary, while still employed, solicits other employees.147

Also, the fiduciary duty includes a duty not to usurp a corporate opportunity. When an opportunity related to OLDCO’s business is presented to an employee with a fiduciary duty, he or she may not take it for personal benefit, or direct it to another person without first making the opportunity available to OLDCO.148

142 Bio Med Technologies Corp. v. Sorin CRM USA, Inc., No. 14-CV-0154-WJM-CBS, 2015 WL 428580, at *3 (D. Colo. Jan. 30, 2015), quoting Hanks v. Hubbard Broad., Inc., 493 N.W.2d 302, 308 (Minn.App.1992) (citing Lopus v. L & L Shop–Rite, Inc., 430 N.W.2d 757, 760 (1988)). 143 See, e.g., Eaton Corp., 971 F.2d at 139; Sanitary Farm Dairies, Inc. v. Wolf, 112 N.W.2d 42 (Minn. 1961). 144 Marn v. Fairview Pharm. Servs., LLC, 756 N.W.2d 117, 121 (Minn.Ct.App.2008); see also Rehab. Specialists, Inc. v. Koering, 404 N.W.2d 301, 304 (Minn.Ct.App.1987) (an employee's duty of loyalty prohibits an employee from competing with the employer while still employed, but employees who wish to leave and start businesses should not be unduly hindered). “[A]n employee breaches the duty of loyalty, and thus engages in employment misconduct, by encouraging a third party to terminate a contract between the employer and the third party [through solicitation].” Schmidt v. Blue Lily Farms LLC, Civ. No. 08–1398, 2009 WL 2151135, at *2 (Minn. Ct. App. July 21, 2009); Hood Packaging Corp. v. Steinwagner, No. CIV. 14-02979 MJD, 2014 WL 4436105, at *5-6 (D. Minn. Sept. 9, 2014). 145 See Id. 146 See, e.g., Triple Five of Minnesota, Inc. v. Simon, 404 F.3d 1088, 1095 (8th Cir. 2005); Gunderson v. Alliance of Computer Professionals, 628 N.W.2d 173, 186 (Minn. Ct. App.2001). Although some Minnesota cases have referred to fiduciary-duty claims as equitable, other cases recognize a tort claim with the same elements as a negligence claim. McGrath v. MICO, Inc., A11-1087, 2012 WL 6097116 (Minn. Ct. App. Dec. 10, 2012), review denied (Feb. 19, 2013) (Comparing R.E.R. v. J.G., 552 N.W.2d 27, 30 (Minn.App.1996) (observing that “actions for the breach of a fiduciary duty generally sound in equity”) with Padco, 444 N.W.2d at 891 (explaining that fiduciary-duty claim requires proof of same elements as negligence claim). 147 Viking Produce, Inc. v. Northstar Produce, LLC, No. A11-635, 2012 WL 171391 (Minn. Ct. App. Jan. 23, 2012). 148 See, e.g., Matter of Villa Maria, Inc., 312 N.W.2d 921, 922 (Minn. 1981); Diedrick v. Helm, 14 N.W.2d 913, 919 (Minn. 1944); Nygaard v. Nygaard, A13-0276, 2014 WL 349647 (Minn. Ct. App. Feb. 3, 2014). Factors relevant to the “line of business” prong of the test include: (1) whether the corporation had an interest or expectancy in the opportunity growing out of a contractual right; (2) whether the opportunity 22

Even though the torts discussed above would be committed by the employee, NEWCO might also be liable for aiding and abetting the tortious conduct of the employee. This claim may be made if “(1) the primary tort-feasor must commit a tort that causes an injury to the plaintiff; (2) the defendant must know that the primary tort-feasor's conduct constitutes a breach of duty; and (3) the defendant must substantially assist or encourage the primary tort-feasor in the achievement of the breach.”149

In addition, OLDCO can argue that NEWCO is responsible for its employee’s improper activities under the doctrine of respondeat superior, which holds an employer “vicariously liable for the wrongful acts of its employees committed within the scope of their employment.”150 To establish that an employee’s acts occurred within his or her scope of employment, the conduct must be “in furtherance of the interests of the employer.”151 For example, NEWCO may be liable for the misappropriation of OLDCO’s trade secrets by one of its employees.152 NEWCO’s liability will depend on whether the wrongful conduct (1) is related to the employee’s duties; and (2) occurs within work-related limits of time and place.153 Under the doctrine of respondeat superior, the tortious conduct of a corporate employee can be imputed to a corporation, but that liability is joint and several and so the employee is not relieved of legal exposure.154

D. Defenses to Claims for Breach of Duty of Loyalty / Fiduciary Duty.

Although all employees owe a duty of loyalty to their employers, a current employee of OLDCO will not incur liability by merely preparing to enter into competition with OLDCO.155 While an employee may conceal his plans to compete with his employer, he may not, in preparing to compete, commit fraudulent, unfair, or wrongful acts, such as solicitation leading to a mass resignation of the firm’s employees.156 There is no bright line between prohibited competition and permissible preparation for competition.157 Instead, the courts conduct a balancing analysis between the employer’s and employee’s respective interests.158

was related to the corporation's current business purposes and activities; (3) whether the opportunity represented an area of logical and natural expansion for the corporation; (4) whether the opportunity raised the specter of unfair or prospectively harmful competition; (5) whether the corporation had the financial ability and resources to acquire or implement the opportunity; and (6) whether the opportunity included activities within the fundamental knowledge, experience, facilities, personnel, equipment, and abilities of the corporation. Miller v. Miller, 222 N.W.2d 71, 81 (1974). 149 Witzman v. Lehrman, Lehrman & Flom, 601 N.W.2d 179, 187 (Minn.1999); see Sorin Grp. USA, Inc. v. St. Jude Med., S.C., Inc., No. 14-4023 (JRT/JSM), 2016 WL 1301086, at *12-13 (D. Minn. Mar. 31, 2016). 150 Oelschlager v. Magnuson, 528 N.W.2d 895, 902 (Minn. Ct. App. 1995). 151 Hentges v. Thomford, 569 N.W.2d 424, 427 (Minn. Ct. App. 1997). 152 Hagen v. Burmeister & Assoc., Inc., 633 N.W.2d 497, 504 (Minn. 2001). 153 Id. at 505 (citing Fahrendorff ex rel. Fahrendorff v. North Homes, Inc., 597 N.W.2d 905, 910 (Minn. 1999)). 154Ransom v. VFS, Inc., 918 F. Supp. 2d 888, 895 (D. Minn. 2013). (Simply because a corporation may be vicariously liable for its employee's allegedly tortious conduct, it does not follow that the employee is not liable for her own conduct). 155 Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301, 304 (Minn. Ct. App.1987). 156 Benfield, Inc. v. Moline, No. Civ. 04-3513, 2006 WL 452903 (D. Minn. Feb. 22, 2006) (internal quotation marks omitted). 157 Id. 158 E.g., Sanitary Farm Dairies, Inc. v. Wolf, 112 N.W.2d 42, 47–48 (Minn. 1961). For an excellent example of a court’s balancing analysis, see Signergy Sign Group v. Adam, Nos. A04-70, A04-147, 2004 WL 2711312 (Minn. Ct. App. Nov. 30, 2004) (holding that an employee did not breach his fiduciary duty, because even though he contemplated starting his own business for several months and had spoken to two suppliers prior to his departure, the bulk of the work on the new business took place after he left); see also Reliastar Life Ins., Co. v. KMG Am. Corp., No. A05-2079, 2006 WL 2529760 (Minn. Ct. App. Sept. 5, 2006) (concluding that the employees had not breached their duty of loyalty). But see Workers’ Compensation Recovery, Inc. v. Marvin, No A03-1549, 2004 WL 1244404 (Minn. Ct. App. June 8, 2004) (upholding a temporary injunction after finding that an employer would likely succeed in proving that a former employee breached her duty of loyalty by notifying the employer’s biggest customer that she would soon be starting a business that would compete with the employer). 23

Generally, merely offering a job to the employee of another does not constitute improper interference with another’s contract.159 However, this general rule may not apply if the offeror owes a fiduciary duty to the employer. It is likely improper for a corporate fiduciary (while still a fiduciary) to offer the corporation’s employees competing jobs.160 However, once the fiduciary is no longer employed, absent an enforceable contractual obligation not to solicit employees, the former employee is entitled to the competitor's privilege discussed above with respect to the justification defense to interference claims.161

 PRACTICE TIPS:

o Assure that no property or arguably confidential information is shared.

o Assure that the employee does not improperly solicit OLDCO’s customers, employees, etc. while still employed by OLDCO.

o Do not have employment discussions during the employee’s working hours at OLDCO.

o Do not use OLDCO’s property (e-mails, phones, and computers) to communicate.

E. Equitable Defenses.

Since employers are usually seeking an equitable remedy from the courts (injunction, etc.), equitable defenses may apply, such as the equitable defense of “unclean hands.”162

F. Counterclaims.

Of course, the transitioning employee may have employment claims against OLDCO, which will benefit the employee and NEWCO in their negotiations or litigation with OLDCO. Increasingly, employees and their new employers are challenging the former employers for over- pursuit of their claims. 163

Another possible avenue for counter-attack may include a tort claim for abuse of process, which under Minnesota law has two elements: (1) the existence of an ulterior purpose; and (2) the act of using the process to accomplish a result not within the scope of the proceedings in which it was issued, whether or not the result might otherwise be lawfully obtained.164

In the right factual situation, a later malicious prosecution claim is also possible. To state

159 See, e.g. Hough Transit, Ltd. v. Nat’l Farmers Org., 472 N.W. 2d 358, 361 (Minn. Ct. App. 1991). 160 Viking Produce, Inc. v. Northstar Produce, LLC, No. A11-635, 2012 WL 171391 at 3 (Minn. Ct. App. Jan. 23, 2012). 161 Id, citing United Wild Rice, 313 N.W.2d at 633 (applying a substantially similar competitor's privilege to a defendant who was no longer employed by plaintiff and who began to compete after the parties' non-compete agreement had expired). 162 See H & R Block v. Majkowski, 410 F. Supp. 2d 1, 3 (D.D.C. 2006); Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438 (Minn. Ct. App.2001); Edin v. Jostens, Inc., 343 N.W.2d 691 (Minn. Ct. App.1984). 163 E.g., see Select Comfort Corp. v. Sleep Better Store, LLC, Civ. No. 11-621 (JNE/JSM), 2012 WL 716667 (D. Minn. March 2, 2012) (Defendant in a trade secret action alleged that the plaintiff’s cease-and-desist letter to a third party was an improper and unjustified demand, which intentionally procured the breach of (defendant’s) contract with (the third party). Although the defendant was unsuccessful in that case, the decision did not close the door on this type of claim if the demand letter was a “sham.”) 164 See Questar Data Systems, Inc. v. Service Management Group, Inc., 502 F.Supp.2d 960, 963 (D. Minn. 2007), citing, Hoppe v. Klapperich, 28 N.W.2d 780, 786 (1947). 24

a claim for malicious prosecution a plaintiff must demonstrate that: (1) the action was brought without probable cause or reasonable belief that the plaintiff would ultimately prevail on the merits; (2) the action must be instituted and prosecuted with malicious intent; and (3) the action must terminate in favor of the defendant.165

If the employee or NEWCO are successful in an abuse of process or malicious prosecution claim, they may be able to recover legal fees incurred in defending the wrongful proceeding.166

If OLDCO pursues litigation in bad faith, that also may lead to claims for bad faith under Rule 11 of the Federal Rules of Civil Procedure, Rule 11 of the Minnesota Rules of Civil Procedure and/or Minn. Stat § 549.211.

VI. DEFINE THE JOB OFFER TO ENHANCE DEFENSES/BLUE PENCIL ODDS, DECREASE LIKELIHOOD OF INJUNCTIONS/DEFEAT AND/OR MINIMIZE DAMAGES TO OLDCO.

NEWCO should take steps in advance to dissuade OLDCO from suing in the first place, enhance NEWCO’s negotiation positions, maximize NEWCO’s odds of avoiding a temporary restraining order and/or an injunction, and – worst case - minimize its potential exposure, both in terms of liability and the extent of damages.

 PRACTICE TIPS:

o If possible, consider defining and limiting the terms of the offer to ensure (or at least make a good faith effort to ensure) that activities will not conflict with the prior agreement.

o If the non-compete is likely too long and/or too broad, consider partially complying with it - to a “reasonable” extent, and then getting ready to defend that position with OLDCO or the Court.

o Consider framing the job in such a way that it will avoid OLDCO’s potential damages. (“During..., you may not…”)

VII. CONSIDER PROACTIVE NEGOTIATION STRATEGIES.

It is a small world, especially within any given industry. “Laying low” and hoping OLDCO does not notice is almost never a successful strategy. “Cover-ups” are even worse - usually increasing suspicion, making OLDCO angry and enhancing litigation expenses and exposure. If OLDCO is going to hear about the hire anyway, why not from NEWCO or its lawyer? It may open the door to a quick resolution. At a minimum, it should establish NEWCO’s good faith. If NEWCO makes reasonable proposals, OLDCO may agree to them. Even if OLDCO declines, a Court may view the concessions as a reasonable compromise under the circumstances and rule accordingly.

165 Kellar v. Von Holtum, et al., 568 N.W.2d 186, 192 (Minn. Ct. App. 1997). 166 See, Progress Aviation, A.G. v. Republic Airlines, WL 15157 (D. Minn. December 12, 1986); Dollar Travel Agency v. Northwest Airlines, 354 N.W.2d 880, 883 (Minn. Ct. App. 1984); Paidar v. Hughes, 615 N.W.2d 276, 281 (Minn. 2000). 25

 NEGOTIATION PRACTICE TIPS:

o Decide the employee’s involvement, if any, and who, if anyone, will represent the employee.

o Be Proactive. Don’t hide from OLDCO.

o Consider open, honest and good faith communications with OLDCO.

o Make reasonable proposals to make reasonable concessions.

o Even if no deal is reached, consider making reasonable voluntary concessions.

o Get the business people involved in the negotiations. Traditional “lawyer to lawyer” negotiations rarely succeed in resolving non-compete disputes.

 AGREEMENT PRACTICE TIPS:

o Document the commitments NEWCO is making.

o Honor the commitments NEWCO makes, and take steps to make sure that the employee does as well.

. Make sure no OLDCO information is shared or used.

. Keep the employee away from restricted customers as needed.

. Keep the employee away from recruiting and hiring as needed.

. Build the business equivalent of “ethical walls.”

. Avoid “indirect” violations.

VIII. PREPARE FOR QUICK LITIGATION.

Regardless of NEWCO’s settlement prospects, it should prepare for possible litigation. Anticipate a quick complaint, TRO motion, expedited discovery, and/or preliminary injunction hearing. The first decision by the court in a non-compete case typically drives the direction the parties take thereafter. It is critical for NEWCO to present its best case from the start.

 PRACTICE TIPS:

o If no agreement is reached with OLDCO and litigation is imminent, consider whether to start a declaratory judgment action. Sometimes the best defense is a good offense.

o Send a letter to OLDCO to ensure that all defenses and counter claims are fully reserved.

o Gather existing documentary and electronic evidence and know what key witnesses will say.

o Plan internal and external communications.

o As needed, get the pleadings ready.

CONCLUSION.

Before – rather than after – actions are taken, NEWCO should anticipate all issues, plan in advance, and then follow through with its agreements in order to maximize its legal rights and/or minimize its exposure. At every step, it should be reasonable, candid and act in good faith. This will make it easier to reach an agreement with OLDCO, and will make it easier (and less expensive) to explain and defend NEWCO’s positions if it ends up in litigation.