Jo is a Partner in Dorsey’s Labor & Employment Group. Jo represents large and small corporations in employment litigation involving race, gender, national origin, religion, disability, and age retaliation and discrimination; sexual harassment; and wage and hour claims. Jo frequently represents employers and employees in claims involving enforcement of post-employment restrictive covenants (non-competition, non-disclosure, and non-solicitation), as well as tort disputes such as breach of fiduciary duty, misappropriation of trade secrets, and defamation claims.
Today’s workforce is more mobile than in past generations. Long gone are the days when an employee started and ended a career at the same company. Knowing how to protect your company’s confidential information when a trusted employee leaves can have a lasting impact on your ability to compete. So, what can you do when a former employee goes to work for a competitor? Is having an irreparable injury provision in your non-compete agreement enough to obtain a court order prohibiting that individual from working at his/her new job?
In Minnesota, courts want to see more than just words in a contract before they will grant injunctive relief against a former employee.
This week, the Supreme Court of Minnesota issued a decision in St. Jude Medical, Inc. v. Carter. The case arose after Heath Carter left his employer to work for a competitor. The employer filed suit against Mr. Carter and the competitor, alleging violations of Mr. Carter’s non-compete agreement. The employer did not seek money damages but asked the court for injunctive relief; specifically, an order enforcing the terms of the non-compete agreement and prohibiting Mr. Carter from working for a competitor in his then-current position. The case went to a jury, which ultimately found that Mr. Carter had breached his non-compete agreement. But the court refused to enter an injunction, finding that the employer failed to establish that it had been harmed.
The case made its way to the Supreme Court, where the question became what to do about specific language in the non-compete agreement that addressed the issue of whether and how the former employer was harmed. The language at issue is commonly included in many non-compete agreements:
In the event Employee breaches the covenants contained in this Agreement, Employee recognizes that irreparable injury will result . . . that [the Employer’s] remedy at law for damages will be inadequate, and that [the Employer] shall be entitled to an injunction to restrain the continuing breach by Employee.
At first glance, the provision appeared to resolve the issue of whether the employer suffered irreparable harm—Mr. Carter agreed that it had. But the Supreme Court disagreed. The court noted that “[a] private agreement is just that: private,” and concluded that such contractual language does not, by itself, entitle an employer to an injunction after proving the breach of a non-compete. The court emphasized that regardless of what the parties agree to, the burden will always fall on the employer to show that: (1) legal remedies (i.e., money damages) are inadequate; and (2) “great and irreparable injury” will result without an injunction. Because the employer did not offer proof of an irreparable injury, the court held that the employer was not entitled to an injunction.
So what now? Are provisions like those quoted above meaningless? Should employers scramble to re-write their non-compete agreements? The short answer is “probably not.”
Minnesota aligns with a number of states in which mere contractual language about irreparable harm is not enough to win injunctive relief. Nevertheless, these provisions are still worth including in non-compete agreements because courts can consider them as one of many factors that bear on whether an employer has suffered irreparable harm. Other factors will usually be more persuasive, often including evidence of some or all of the following:
The departing employee took confidential information when he or she left (e.g., client lists, marketing plans, and pricing information).
The departing employee disclosed confidential information to the competitor or put confidential information to use in the new job.
The departing employee solicited business from former clients or customers and used confidential information to solicit such business.
The former employer lost client or customer goodwill because of the departing employee’s breach of the non-compete agreement.
Ultimately, Carter serves as a useful reminder to employers on both sides of an employee’s job change. Former employers should carefully consider how they have been harmed by an employee’s departure (and what evidence they anticipate being able to present as proof of that harm). Hiring employers should understand and reinforce to their new employees the importance of complying with prior non-compete agreements. And for employers on both sides, consulting with experienced employment attorneys even before these types of cases go to litigation can be the key to a successful outcome.
Some of the trickiest employment decisions can involve employees who have made accusatory complaints against the company they work for. Many state and federal laws protect “whistleblowers” who try to bring to light illegal behavior by their employers. But in many instances employers legitimately wonder whether the complaint was made in “good faith,” or just to stir up trouble, or even to give a soon-to-be-fired employee who was about to be fired for some other reason, an excuse to bring a lawsuit.
So, is the employee’s complaint of employer wrongdoing really whistleblowing if the company already knows about the alleged wrongdoing? How can the employee really “blow the whistle” if someone else has blown it already?
An opinion issued by the Minnesota Supreme Court on August 9, 2017, answers this question favorably to the employee, expands the type of complaints that will be regarded as good faith whistleblowing, and may become the basis for more lawsuits by employees accusing employers of retaliating against them for reporting alleged wrongdoing.
Previously, under Minnesota’s Whistleblower Act, Minn. Stat. §§ 181.931-.935 (2016), an employee terminated for making a complaint of illegal conduct had to demonstrate that his complaint had been made in good faith, which meant not only that the employee believed in the report he was making, but also that his purpose was to “expose an illegality.” Since the you can’t “expose” something which is already known, Minnesota law did not protect employees who complained of illegal (or allegedly illegal) conduct that the employer already knew about.
But in 2013, the Minnesota Legislature amended the statute to provide a specific definition of “good faith,” which focused on the employee’s belief that his report was true, but said nothing about intending to expose an illegality. In Friedlander v. Edwards Lifesciences, LLC, et al., A16-1916 (Minn. Aug. 9, 2017) (“Friedlander”), the Minnesota Supreme Court held that the Legislature intended to get rid of the requirement of exposing an illegality, and that whistleblowing activity is protected even if it is just the same old tune that the employer had heard before.
Although the statute was amended in 2013, until Friedlander it was not clear whether the “expose an illegality” requirement remained part of the law, as that mandate did not appear in the text of the 2013 Whistleblower Act. In Friedlander, an employee sued his former employer in the federal court under the Minnesota Whistleblower Act, claiming that his superiors had been engaged in legal violations, which the employee had reported directly to the superiors prior to his termination. The employer moved to dismiss the lawsuit, arguing that because the employer reported the allegedly wrongful conduct to people who already knew about the conduct, he had not “exposed” the allegedly illegal conduct to anyone. The success of the employer’s motion therefore turned on whether the 2013 amendments eliminated the Whistleblower Act’s “expose an illegality” requirement. Because no court had yet addressed that issue, the Minnesota District Court referred the question to the Minnesota Supreme Court, which ruled unanimously in favor of the employee. In Friedlander, the Minnesota Supreme Court concluded that the 2013 amendments eliminated the “expose an illegality” requirement. Following Friedlander, a whistleblower’s report is made in “good faith” if the report is “not knowingly false or made with reckless disregard of the truth.”
Friedlander therefore simplifies what an employee has to prove in order to sue under the Whistleblower Act. It serves as a reminder to employers that firing an employee who has complained about possibly illegal activities at the company must be addressed with care. It remains perfectly legal to fire such employees for other, legitimate reasons, but not because their whistleblowing. Employers should therefore take care to ensure that any termination, demotion, pay cut, or other personnel action being considered for an employee who has reported actual or suspected illegal conduct is taken for legitimate business reasons, not because of the employee’s report.
Question: We operate a financial services firm that employs account executives who execute investment trades on behalf of clients. One of our brokers recently resigned to move to a competitor firm. With his resignation letter, he included a list of clients he plans to solicit at his new firm. This list includes clients with whom the broker may have had some association, but it’s not clear he ever executed commission-generating trades for them. The broker signed a non-solicitation agreement with us when he started. Can we stop him from soliciting these clients at the new firm?
By Joel O’Malley and JoLynn Markison
Enforcement of restrictive covenants like non-compete, non-solicit, and non-disclosure agreements is highly dependent upon the industry in which the covenant is sought to be enforced. Nowhere is that more true than in the financial services industry. As a result of an agreement initially signed a dozen years ago by a handful of the largest financial firms and now having over 1,000 firm signatories, there exists an established methodology for a financial advisor or broker to depart a firm which, if followed, protects the broker and the new firm from litigation over the departure while protecting client privacy. The methodology is found in the Protocol for Broker Recruiting, which applies only to broker moves between Protocol signatories. (The Protocol applies to “registered representatives” – we’ll use the shorthand “broker” here.) Frequently, however, brokers and firms either mistakenly or deliberately disregard the Protocol, so financial firms must remain vigilant in protecting their valuable confidential information, client relationships, and goodwill. Thus, the first necessary piece of information to answer your question is whether you and the competitor are Protocol signatories.
The Protocol itself is rather simple. A broker transitioning between signatory firms may take only the following information: “client name, address, phone number, email address, and account title of the clients that they serviced while at the firm.” The broker is prohibited from taking any other information or documents. To gain protection under the Protocol, the broker must resign in writing, deliver the resignation to local branch management, and include with the resignation letter a copy of the client information that will be taken, including account numbers. The broker’s compliance with the Protocol need not be perfect – s/he need only exercise “good faith” and “substantially comply” with the requirements.
The Protocol also places obligations upon the broker after leaving the prior firm, and upon the new firm. The information taken by the broker may be used only for solicitation of the former clients by the broker, and only after the broker has actually joined the firm. In other words, the broker may not start soliciting clients to move to the new firm while the broker is still engaged with the old firm (but planning to move), nor may client information be shared at the new firm for solicitation by other brokers. The Protocol also contains requirements regarding the movement of broker teams or partnerships and governing trailing commissions.
Many brokers have executed agreements with firms containing terms prohibiting solicitation of customers or retention of customer lists. So long as the old and new firms are signatories to the Protocol and the broker substantially complies in good faith with its terms, the Protocol protects the broker from liability to the old firm for retaining the information identified in the Protocol or soliciting clients on behalf of the new firm. But if a broker or new firm violates the Protocol, the former firm may be in a good position to file suit and seek immediate injunctive relief barring the broker and the new firm from irreparably damaging the former firm’s business.
There are several points to consider when analyzing potential legal action when the Protocol is at play.
First, not all firms are Protocol members. Over 1,000 firms have joined the pact, including almost all of the major financial services companies, but many smaller brokerages are not. And those smaller brokerages frequently seek to poach successful brokers from more established signatory firms. If the new firm is not a Protocol signatory, then a broker taking client information, even under the Protocol’s methodology, could violate the broker’s non-compete or non-solicitation obligations and subject the broker and the new firm to liability. Firms should beware of the situation of a broker claiming she acted in “good faith” because she thought the new firm was a Protocol signatory. If the new firm misled the broker into that mistaken belief, liability may lie against the new firm for claims like tortious interference with contract or misappropriation of trade secrets.
Second, only “good faith” compliance with the Protocol provides protection. There continue to be examples when brokers purport to comply while secretly violating the Protocol, often by stealing confidential client or firm information beyond the information disclosed with the broker’s resignation letter (e.g., detailed client account history). This theft can occur in any number of ways – emailing a personal email account, copying information to thumb drives, or simply walking out the door with confidential hard copy documents. Firms should establish best practices for when brokers depart, including review of the broker’s email activity in the months preceding the resignation. If the firm suspects wrongdoing, further investigation may be warranted, such as forensically examining the broker’s computer for electronic evidence of wrongdoing, reviewing office copy machine electronic records, or even watching building surveillance tapes.
Third, and more specifically to your question, client information that permissibly may be taken covers only clients that were actually serviced by the broker at the former firm. This issue recently was litigated before a Connecticut federal court in Westport Resources Management v. DeLaura (June 23, 2016), with the broker arguing that client “service” included any efforts the firm made on behalf of the clients. In that case, the broker was employed by two related entities, and when he resigned both to move to a new firm, he included with his resignation letter clients of one entity even though the services he provided were through the other entity. The former entity sued under the broker’s non-solicit agreement. The court held that “services” under the Protocol meant “what clients pay registered representatives to do on their behalf” – in other words, something for which the broker normally would receive a commission. The court held that because the broker had not received any commissions from the entity with which the clients were associated, they were not clients that the broker serviced at that entity. Applied to your question, you may have a claim against your former broker since it sounds like he never performed work for certain clients he included with his resignation letter.
Fourth, solicitation of former clients is permissible only after the broker has joined the new firm. Brokers are often tempted to start priming the pump before they depart, either secretly or overtly (and increasingly through social media) telling clients of their plans to move firms and inviting the clients to follow. This sort of pre-move solicitation is explicitly prohibited under the Protocol, is typically forbidden under non-solicitation agreements, and should be investigated by firms in the same manner described above.
Fifth, the Protocol does not immunize corporate raiding, i.e., one firm targeting another firm to steal a group of employees. Raiding claims can be challenging to prove, and often rely on some evidence that the new firm used the former firm’s confidential information or trade secrets to aid in its improper recruitment, or that the new firm has undertaken a deliberate pattern of soliciting a competitor’s key employees with the purpose of damaging the competitor’s ability to compete. Firms may therefore have reason to be concerned when several brokers move to another firm, even when the competitor is a Protocol signatory.
Finally, whether the Protocol is implicated or not, firms must be mindful that legal claims will be governed by applicable state or federal laws. States take a variety of approaches to enforcement of non-compete, non-solicit, and non-disclosure agreements, and both state and federal law may apply to a trade secret misappropriation claim. In addition, agreements frequently contain clauses dictating where litigation may occur and what law applies. These issues should be fully investigated before a firm decides whether to bring suit against a former broker or competitor firm.
Question: There has been a lot of news coverage lately on restroom policies related to transgender employees. Can you provide some guidance on how to structure our restroom-use policies to be both lawful and respectful of all employees? More generally, can you help me understand the appropriate, respectful terminology in this area? I certainly don’t want to offend anyone on purpose, and I also don’t want to do so by mistake. Answer→
Question: Our employee regularly uses a service dog in our office, which helps him with stability and maintaining balance around the office, which can be challenging for him due to several medical conditions he has. However, yesterday he came in and said he would like to use a miniature horse as a service animal instead of the dog, because it is preferable given his tall stature, among other reasons. We were fine with the dog – who doesn’t love an office dog? But a horse, really? Do we have to accommodate this?
On March 18, 2015, NLRB General Counsel Richard Griffin published a Report concerning recent case developments arising in the context of employee handbook rules and policies. The thirty-page Report concludes that many commonly-used policies, if not phrased carefully, may have a chilling effect on Section 7 rights to engage in concerted activity. The policies critiqued by General Counsel Griffin include, among others, confidentiality policies, employee conduct policies, media policies, trademark and copyright use policies, and conflict of interest policies. The Report’s broad interpretation of potential “reasonable” understandings of handbook provisions concludes that policies such as “be respectful of others and the Company” violate the NLRA. Given the NLRB’s increased focus on handbook policies and this Report’s conclusions regarding a number of frequently utilized policies, employers – even those with employees not represented by labor unions – should carefully review their handbooks to avoid NLRB scrutiny.
Dorsey is a business law firm with more than 550 attorneys across the United States, Canada, Europe and Asia. Our lawyers regularly handle every sort of employment matter, litigated and non-litigated. We have extensive, successful trial experience (including class and collective actions), as well as an outstanding record for obtaining summary judgments. Dorsey also has broad experience in advising, counseling, compliance and development, policy handbook review, training and other measures that can greatly reduce the likelihood of litigation or governmental enforcement actions.