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Wayward employee cases go different ways

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Most employment lawsuits consist of claims by employees against employers for alleged wrongdoing. The converse, far less common, genre of workplace litigation is suits by employers against allegedly wayward employees.

A pair of cases decided concurrently by the Minnesota Court of Appeals last month reflected the latter pattern: employers alleging that ex-employees transgressed their obligations when they left their jobs.

The cases shared several similarities, but one major disparity: They ended up with different results.

In one case, the employee was exonerated from civil liability for allegedly breaching an agreement not to solicit customers, in the other, a former employee was held in civil contempt for violating a court order and had to pay damages in excess of $1 million, to boot.

Non-solicitation nixed

An agreement by an employee not to solicit customers upon leaving employment was nixed by the appellate court in JAB, Inc., v. Naegle, 2015 Minn. App. LEXIS 46 (July 13, 2015). The agreement, signed by a beauty stylist, provided a two-year customer non-solicitation period after her employment ended. She subsequently began working at a competitor and was sued for violating the non-solicitation provision when she contacted her customers about her new place of employment. The Hennepin County District Court denied her former employer’s request for a temporary injunction, and the appellate court affirmed.

The non-solicitation agreement could not be enforced under the Statute of Frauds, Minn. Stat. § 5.1301, which requires written documentation if an “agreement cannot be performed within one year from its making.” The Statute of Frauds also requires express consideration, which was absent here. The absence of any express consideration means the two-year restriction cannot be enforced. The prohibition of the statute serves a valid purpose in avoiding forcing the parties to prove a lengthy contract based upon the memory and truthfulness of witnesses and the parties. It would be repugnant to common sense to enforce a contract that cannot be performed until 24 months after an unspecified future date and does not express consideration.

While enforcement beyond the one-year period may be enforced when there has been part performance, that doctrine does not apply here because the employee never acted as if the agreement were valid. To the contrary, she notified her customers as soon as she left and sought to solicit their business immediately.

The injunction was properly denied by the trial judge because the statute of fraud “prohibits an action brought to enforce a contract that cannot be performed within a year … when the contract does not express consideration in writing.”

An argument to grant injunctive relief on the basis of unjust enrichment also was not viable because it was raised for the first time on appeal, which precluded its consideration in this proceeding.

Third trip

A long-standing dispute between a company and a former employee over a misappropriated electrical engineering trade secret made its third trip to the appellate court, and the outcome was unfavorable to the employee in Analog Technologies Corp. v. Knutson, 2015 Minn. App. LEXIS 624 (Minn. App. July 13, 2015)(unpublished). The company had secured a judgment in excess of $1.8 million against the employee and an injunction prohibiting him from using a misappropriated trade secret, although the amount was reduced after the employee went bankrupt and the parties negotiated a confession of judgment for $600,000, provided that the employee pay the sum promptly and comply with the injunction. The employer sued for violation of the non-solicitation provision and injunction while the employee claimed he had paid the $600,000, and had not violated the injunction. The Dakota County District Court found that he had adhered to the judgment and, therefore, had satisfied the confession.

But the appellate court reversed, holding that the employee had violated the injunction by misusing the trade secret to work for customers. The former employee had performed about $8,000 of repair work on engineering components, which was contrary to the terms of the injunction and constituted “a breach under the plain language” of the injunctive relief previously ordered. By doing repairs, he used the “specific process” prohibited in the agreement, which barred him from any “further continued disclosure or use of the trade secret.”

The provision of the confession that allowed it to be paid for one-third of the amount “became void” because the employee violated the injunction. Although the appellate court had ruled in the first appeal between the parties that an injunction entered six years ago was “too broad to be enforceable,” subsequent injunctive relief that was entered on remand was “clear” and the employee’s violation of it constituted a “contractual breach” that voided the term allowing satisfaction of the confession with the lesser amount.

Commissions case

Meanwhile, the appellate court simultaneously decided another workplace actions, this one a more conventional case brought by former employees against their ex-company seeking penalties for unpaid commissions owing to them. The claim was brought under Minn. Stat. § 181.14, subd. 2, which provides for a penalty of the average daily wages of an employee, not to exceed 15 days, for unpaid commissions, but subject to a defense in subd. 3, based upon a “good faith tender” of the amount by the employer.

In another long-running dispute, the appellate court construed those two provisions as part of a larger dispute between two former salesmen and a forklift dealership that performed work in sales of forklifts and allied products. The Hennepin County District Court had applied a set-off against the commissions based upon a counterclaim made by the dealership against the employees. But the appellate court reversed and remanded, setting forth a standard to be used in calculating the statutory wage penalty in Toyota–Lift of Minnesota, Inc., v. American Warehouse Systems, LLC, LEXIS 48 (Minn. App. July 13, 2015).

The court began by holding that the former salesmen for the dealership were entitled to commissions for sales made in 2009. In doing so, it rejected five arguments made by their ex-employer. The court then turned to the issue of calculating the amount owing for purposes of determining the penalty under the statute, which “does not define the phrase at issue or explain how to calculate the sum recovered.” Nor does the plain meaning of the statute help by referring to the amount that an employee recovers as a basis for the penalty calculation. The term does not clarify whether the applicable calculations to be made upon the amount recovered by the claimants in a claim brought by the employees for commissions or if the “calculation could also include amounts owed on claims unrelated to unpaid wages and commissions,” as the trial court did in this case.

The quandary was extended because Minnesota case law has not “clarified this interpretative issue,” leaving the statute ambiguous whether the calculation of the sum recovered for purposes of determining if the penalty is applicable can include amounts recovered or owing on claims unrelated to unpaid wages or commissions.

The court answered that question by holding that it does not. An employer is not entitled to an offset for unrelated judgment amounts, because doing so would “undermine the protective and punitive purposes” of the statute. Therefore, to carry out these goals, the termination penalty is to be made based upon the “total amount of wages and commission that the court determines that the employer should have paid to the employee” without any setoff for counterclaims against the employer.

Thus, the calculation as to the penalty is to be determined by comparing the amount of wages and commissions that the employer tendered in good faith, with the amount of wages and commissions that the court finds that an employee was actually due. If the amount due to the employee is “greater than the amount tendered,” the employer is liable for the statutory penalties, irrespective of any setoffs that the employer might have against the employee. The case, therefore, was remanded for application of that standard, which also will be applied to all future wage and unpaid commissions cases.

Therefore, the outstanding amount of more than $1.2 million, which consisted of the confession amount minus the $600,000 paid by the employee to satisfy it, were reinstated, but the trial court’s refusal to find the employee in contempt was confirmed because the trial court had not “abused its discretion” and holding the employee in contempt would “serve no further remedial purpose.

This trio of cases reflects the different ways courts can resolve problems that can be caused for both employees and employers when wayward behavior takes place in the workplace.

PERSPECTIVES POINTERS

Elements necessary to enjoin violation of a non-solicitation agreement:

  • Proper consideration;
  • Documentation of the consideration;
  • Reasonable terms;
  • Irreparable harmand
  • Inadequacy of money damages


*Originally published in Minnesota Lawyer.