Employee Anti Theft Agreement

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					           AVOIDING BUSINESS THEFT: LEGAL STRATEGIES FOR PREVENTING
           COMPETITORS FROM STEALING YOUR EMPLOYEES AND CLIENTS∗

                                    Sarah L. Beuning & Jennifer G. Lurken
                                             LARSON · KING, LLP

                                              INTRODUCTION

             With the rise of intellectual property law and the ongoing importance of customer loyalty

and goodwill, employers are utilizing noncompete agreements more frequently than ever before.

Additionally, employers are considering other alternatives, in lieu of, or in addition to,

noncompete agreements to protect their confidential information.                   These additional options

include nondisclosure agreements and non-solicitation agreements. If these restrictive covenants

are narrow in scope and reasonably necessary to protect the employer’s legitimate business

interests, they generally will be enforceable in Minnesota. Davies v. Davies Agency, Inc. v.

Davies, 298 N.W.2d 127, 132 (Minn. 1980); Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 800

(Minn. Ct. App. 1993). If such agreements are struck down or narrowed by the courts, (or if

employees fail or refuse to sign noncompete agreements) employers are increasingly relying on

the common law inevitable disclosure doctrine to try to prevent their employees from disclosing

their confidential information and trade secrets to their competition.

    1.       Noncompete Agreements

             Noncompete agreements are contracts in which an employee agrees not to perform

certain work for a period of time after termination of employment.                      State law governs

noncompete agreements.1 Although Minnesota courts look upon noncompete agreements with


∗
         Prepared for Clarion Legal’s Seminar on Business Theft, April 20, 2006.
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         Several states are much less willing to enforce noncompete agreements in the employment context (as
         opposed to the sale of business context) and some states have deemed them void as violation of public
         policy. E.g. Cal. Bus. & Prof. Code § 16600 (2006); N.D. Cent. Code § 9-08-06 (2005). If you have
         questions about the validity of noncompete agreements in states other than Minnesota, please contact
         the authors at 651-312-6500.


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some disfavor because they are in partial restraint of trade, these agreements will be enforced so

long as a valid contract exists and the restrictions placed upon the employee are narrowly

tailored to impose no greater restriction on the employee than is necessary to protect the

legitimate business interests of the employer. Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626,

630 (Minn. 1983); Bennett v. Storz Broad. Co., 270 Minn. 525, 134 N.W.2d 892, 899 (1965).

       When determining whether to uphold a noncompete agreement, the court first looks at

whether a valid contract exists.     Most importantly, the court looks as whether adequate

consideration was given for the agreement. Because state law governs noncompete agreements,

state law determines what qualifies as adequate consideration.          In Minnesota, adequate

consideration exists if the employee enters into the noncompete agreement when the employee is

first hired. This is because in exchange for signing the agreement the employee is receiving

employment, something that the employee did not have before signing the agreement. Overholt

Crop Ins. Serv. Co., v. Bredeson, 437 N.W.2d 698, 702 (Minn. Ct. App. 1989). For this

consideration to be adequate, the noncompete agreement must be made a part of the original job

offer. Sanborn Mfg. Co v. Currie, 500 N.W.2d 161, 164 (Minn. Ct. App. 1993). Continued

employment is not adequate consideration unless it is accompanied by additional independent

consideration that provides the employee with “substantial economic and professional benefits,”

such as increased wages, a promotion, a bonus, a fixed term of employment or access to

protected information. Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626, 630 (Minn. 1983);

Davies, 298 N.W.2d at 132; Sanborn Mfg. Co, 500 N.W.2d at 164.

       Once Minnesota courts find a valid contract exists, they look at the reasonableness of the

agreement. Reasonableness is measured by the existence of a legitimate business interest and the

extent of the restrictions imposed upon the employee. In Minnesota, courts generally will




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enforce a noncompete agreement if: (1) the restraint is for a just and honest purpose; (2) the

restraint protects a legitimate interest of the employer; (3) the restraint is reasonable; and (4) the

restraint is not injurious to the public. Jim W. Miller Const. Inc. v. Shaefer, 298 N.W.2d 455,

459 (Minn. 1980); Bennett, 134 N.W.2d at 898.

       Legitimate business interests generally consist of protecting trade secrets, proprietary

business information, customer base, customer goodwill and other confidential information.

Cherne Indus. Inc. v. Grounds and Assoc., Inc., 278 N.W.2d 81, 92 (Minn. 1979); Overholt Crop

Ins. Serv. Co., 437 N.W.2d at 702; Webb Pub. Co. v. Fosshage, 426 N.W.2d 445, 449 (Minn. Ct.

App. 1988); Saliterman v. Finney, 361 N.W.2d 175, 178 (Minn. Ct. App. 1985). Courts require

legitimate business interests because courts do not want employers using noncompete

agreements to penalize a departing employee or to gain an upper hand against their competition.

       Once courts determine the noncompete agreement protects legitimate business interests,

courts next examine whether the restriction is reasonable. Courts look at the agreement’s

geographical scope and time frame to determine whether it is reasonable. The reasonableness of

the scope and time is determined, in large part, by the legitimate business interests the employer

is trying to protect. Generally, a noncompete agreement can only be as long or as broad as is

necessary to protect the employer’s legitimate business interests. Minnesota courts also consider

any payments to the employee during the period of restriction, the employee’s access to the

employer’s business information and the nature of the employer’s business. See e.g., Roth v.

Gamble-Skogmo, Inc., 532 F. Supp. 1029, 1032 (D. Minn. 1982) (finding even five years

reasonable for former CEO because of access to confidential information and business strategy

and payments being made by former employer company). Compare Lexis-Nexis v. Beer, 41 F.




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Supp. 2d 950 (D. Minn. 1999) (noting that information former employee may have retained has

lost considerable value after four months).

       As long as the employer can prove legitimate business interests, courts typically will find

that periods of six to twelve months are reasonable to protect those interests. When good will is

the legitimate business interest courts will look at the length of time necessary to obliterate the

identification between the employer and the employee in the minds of the employer’s customers

and the length of time necessary for the employer to find and train a replacement. See, e.g.,

Minnesota Mining & Mfg. Co. v. Kirkevold, 87 F.R.D. 324, 335 (D. Minn. 1980) (finding two-

year restraint reasonable).

       In determining whether the geographical scope is reasonable, Minnesota courts typically

will look to the area in which the employee was active and had client contact. Lexis-Nexis, 41 F.

Supp. 2d at 957 (finding geographically unlimited agreement unreasonable); Millard v. Elec.

Cable Specialists, 790 F. Supp. 857, 859 (D. Minn. 1992) (finding nationwide restraint

reasonable). Compare Walker Employment Serv., Inc. v. Parkhurst, 300 Minn. 264, 219 N.W.2d

437, 442 (1974) (single county restraint reasonable).

       Minnesota courts recognize the “blue-pencil” doctrine, which allows a court to modify a

noncompete agreement that is determined to be unreasonably broad and to enforce it only to the

extent that it is reasonable. Davies, 298 N.W.2d at 131 n. 1; Bess v. Botham, 257 N.W.2d 791

(Minn. 1977).    A court, however, is not required to modify an overly broad noncompete

agreement. Instead it may simply refuse to enforce the agreement. Klick v. Crosstown State

Bank of Ham Lake, Inc., 372 N.W.2d 85, 88 (Minn. Ct. App. 1985).

       When protecting their confidential information, employers may also require an employee

to sign non-solicitation, nondisclosure and anti-raiding agreements.




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 2.    Non-solicitation Agreements

        Non-solicitation agreements fall into two categories: agreements not to solicit

employees and agreements not to solicit clients. The latter operates as a non-compete agreement,

and it can and often does interfere with a departing employee's ability to get another job. A non-

solicitation of customers provision raises some genuine concerns for the employee in terms of

future employment. Because a non-solicitation of customers is a type of noncompete agreement,

it is therefore subject to the same reasonableness review as laid out above. Like noncompete

agreements, reasonable customer and employee non-solicitation agreements are generally

enforceable in Minnesota.

 3.    Nondisclosure Agreements

       Nondisclosure agreements, also known as confidentiality agreements, are effective tools

for protecting a company’s confidential information.         Properly drafted, a nondisclosure

agreement can serve three purposes: to place the employee on notice of what information the

employer considers confidential; to evince the employer's steps to maintain secrecy of the

information; and to provide the employer with a breach of contract claim in addition to any tort

or statutory claim. See Aries Info. Sys., Inc. v. Pacific Mgmt. Sys., Inc., 366 N.W.2d 366, 369

(Minn. Ct. App. 1985). Generally a nondisclosure agreement may protect a broader category of

information than would otherwise be protected as a trade secret under the common law or the

Minnesota Uniform Trade Secret Act.

       To be enforceable in Minnesota, a nondisclosure agreement must be supported by

adequate consideration. Courts look at consideration for nondisclosure agreements just as they

look at consideration for noncompete agreements laid out above. Jostens, Inc. v. Nat’l Computer

Sys., 318 N.W.2d 691, 703 (Minn. 1982).         Unlike noncompete agreements, a geographic




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limitation for a nondisclosure agreement is generally irrelevant and not required in Minnesota.

Dynamic Air, Inc., 502 N.W.2d at 800. Furthermore, a nondisclosure agreement lacking a

temporal limitation may be enforceable, but a court may choose to limit the duration of the

agreement. In Cherne, the Minnesota Supreme Court held that a confidentiality agreement of

unlimited duration was enforceable until the trade secret information became publicly known or

for the amount of time it would have taken the new employer to independently develop the

information. Cherne Indus. Inc., 278 N.W.2d at 92.

 4.    Anti-raiding Legal Theories

       Minnesota has not recognized the legal theory of “raiding.” See Storage Technology

Corp., v. Cisco Systems, Inc., 395 F.3d 921 (8th Cir. 2005). Generally, the courts that do not

recognize “raiding” as a claim refuse to do so because the theory is vague and is fundamentally

inconsistent with long-standing protections of employee rights. The minority of jurisdictions

that have adopted a cause of action for “raiding” have identified three elements required to

establish the claim: (1) that the new employer enticed or induced the former employer’s

employees to leave the former employer; (2) that the new employer did so with the wrongful

intent to injure or destroy the former employer’s business; and (3) that the former employer

suffered injury or damages as a result of the wrongful conduct. See e.g. Reading Radio, Inc. v.

Fink, 833 A.2d 199 (Pa. Super. Ct. 2003); Lockheed Martin Corp. v. Aatlas Commerce Inc., 283

A.D.2d 801, 725 N.Y.S.2d 722 (N.Y. App. Div. 2001).

       Although Minnesota has not adopted a pure “raiding” theory, it does recognize several

legal theories that are related to the “raiding” analysis. Minnesota’s closest approximation to a

“raiding” theory is the claim for intentional interference with contractual relations. Kallok v.

Medtronic, 573 N.W.2d 356 (Minn. 1998) (making new employer liable for employee’s breach




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of contract with former employer and the resulting damages). The availability of an intentional

interference with contract claim against a competitor who is aware of the employee’s non-

compete agreement with the former employer and hires the employee anyway can be a key

leverage tool in resolving these matters because it puts the new employer at risk as well as the

former employee.

       Other causes of action available in Minnesota that may be used to pursue a “raiding” type

theory are breach of contract, breach of fiduciary duty, inducement to breach fiduciary duty, and

unfair competition.

 5.    Breach of Fiduciary Duty: Duty of Loyalty and of Confidentiality

       A fiduciary duty exists between an employer and employee. The fiduciary duty includes

a duty of loyalty, which prohibits the employee from soliciting the employer’s employees or

customers for the employee’s own use, or from otherwise competing with the employer while the

employee is employed. Sanitary Farm Dairies, Inc. v. Wolf, 112 N.W.2d 42 (Minn. 1961);

Rehabilitation Specialists, Inc. v. Koering, 303 N.W.2d 301, 301 (Minn. 1987).

       A fundamental issue, arising in many breach of fiduciary duty claims related to departing

employees, is whether pre-departure planning constitutes a breach. Here, courts have attempted

to balance the practical realities of the workplace (i.e., good friends speak to each other about

their future plans, including future employment plans) with the legitimate interests of the

employers from whom the employee is departing (i.e., pre-departure planning should not include

systematic contacts with the employers’ customers to induce them to follow the employee to a

new employer). Generally the duty of loyalty does not prevent an employee from preparing to

leave while still employed, and in doing so, from preparing to enter into competition with the

employer.   Rehabilitation Specialists, Inc., 303 N.W.2d at 304.       Thus, while a departing




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employee cannot solicit clients, copy employer-owned information, download computer-stored

information, share confidential information, or divert the employer’s business, the employee can

interview for a new job, negotiate the terms of future employment, plan for a competing

enterprise, and lease office space and equipment. Id.; Sanitary Farm Dairies, Inc., 112 N.W.2d

at 48.

         The duty of confidentiality is also a fiduciary duty, which requires the employee to

protect the secrecy of the employer’s confidential information.           Electro-Craft Corp. v.

Controlled Motion, Inc., 332 N.W.2d 890, 903 (Minn. 1983). The duty of confidentiality may

arise under a contractual agreement or under common law concepts. Aries Info. Sys, Inc., 366

N.W.2d at 369; Jostens, Inc., 318 N.W.2d at 701. “The employee is entitled to fair notice of the

confidential nature of the relationship and what material is to be kept confidential.” Electro-

Craft Corp., 332 N.W.2d at 903 (citing Jostens, Inc., 318 N.W.2d at 702).

         General damages principles are used in assessing breach of fiduciary duty damages.

Punitive damages also may be available when there is clear and convincing evidence that the

defendant acted with deliberate disregard for the rights of others. Minn. Stat. § 549.20.

 6.      Unfair Competition

         Minnesota courts have recognized a cause of action for unfair competition against the

new employer. Rehabilitation Specialists, Inc., 303 N.W.2d 301. Unfair competition, however,

is not a tort with specific elements; rather it describes a general category of torts which courts

recognize for the protection of commercial interests. For example, “unfair competition can be

based on tortious interference with contract or improper use of trade secrets.” United Wild Rice,

Inc. v. Nelson, 313 N.W.2d 628, 632 (Minn. 1982). A claim for breach of fiduciary duty has also




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been recognized as the tort of unfair competition. See Rehabilitation Specialists, Inc., 303

N.W.2d 306; Cherne Indus. Inc., 278 N.W.2d at 92.

 7.    Enforcement of Agreements: Injunctions and Monetary Damages

       If an employee breaches a valid noncompete agreement, the employer may bring an

action seeking injunctive relief or may sue for damages without seeking an immediate injunction.

This decision is becoming more difficult for employers. By moving for injunctive relief an

employer is going to set the tone for the entire case. This is because if the injunction is granted

then the employee must refrain from engaging in activities specified in the contract. If the

injunction is not granted, the employer has an undesirable opinion that will carry significant

weight through the rest of the litigation.

       If the employer decides to seek an injunction, Minnesota courts apply the Dahlberg test

to determine whether an injunction should be issued. Dahlberg Brothers, Inc. v. Ford Motor

Co., 137 N.W.2d 314, 321-22 (Minn. 1965). Under the Dahlberg test, the court looks at:

      1.   The nature and background of the relationship between the parties preexisting
           the dispute giving rise to the request for relief;
      2.   The harm to be suffered by a plaintiff if the temporary restraint is denied as
           compared to that inflicted on the defendant if the motion is granted pending
           appeal;
      3.   The likelihood that one party or the other will prevail on the merits when the
           fact situation is viewed in light of established precedents fixing limits of
           equitable relief;
      4.   The aspects of the fact situation, if any, which permit or require consideration
           of public policy expressed in the statutes, state and federal; and
      5.   The administrative burdens involved in judicial supervision and enforcement of
           the temporary decree.

Id. Generally the most important factors are the threat of irreparable harm and likelihood of

success on the merits. Under Minnesota case law, when seeking a preliminary injunction, an

inference of irreparable harm to the former employer arises from the former employee’s breach




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of a noncompete agreement. See Thermorama, Inc. v. Buckwold, 267 Minn. 551, 125 N.W.2d

844, 845 (Minn. 1964).

       In addition, or as an alternative, to seeking an injunction, an employer may also file a suit

seeking damages caused by the former employee’s breach of contract and/or fiduciary duties.

Filing such a lawsuit allows the former employer to seek damages from the former employee and

often also from the new employer/competitor. Claims a wronged employer could allege include

breach of contract, misappropriation of trade secrets, breach of fiduciary duty or duty of loyalty,

and tortious interference with contract or business advantage as laid out above. Damages do not

flow automatically from a breach of a duty but must be proved. See B & Y Metal Painting, Inc.

v. Ball, 279 N.W.2d 813, 813 (Minn. 1979). Compensatory damages, including out-of-pocket

losses and lost profits directly caused by the breach, may be recovered. Id. at 816-17; Cherne

Indus. Inc., 278 N.W.2d at 94-95. To establish damages, the employer must establish that:

profits were lost, the breach of the noncompete agreement directly caused the loss, and the

amount of loss can be calculated with reasonable certainty rather than benevolent speculation.

Ball, 279 N.W.2d at 816 (citing Faust v. Parrot, 270 N.W.2d 117 (Minn. 1978)).

       Also, under certain circumstances, the court may consider the departed employee’s

wrongfully-gained profits at the new job as a measure of damages. See, e.g., Cherne Indus., Inc.,

278 N.W.2d at 94-95. The key element of proof is showing that the employee’s gross income, or

some of it, was specifically derived from former or prospective customers whose relationship

with the former employer was protected by the noncompete agreement. Id.

 8.    Inevitable Disclosure Doctrine

       The inevitable disclosure doctrine “permits a trade secret owner to prevent a former

employee from working for a competitor . . . by demonstrating the employee’s new job duties




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will inevitable cause the employee to rely upon knowledge of the former employer’s trade

secrets.” Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 281 (Ct. App. 2002). Courts are

sharply divided on the validity of the inevitable disclosure doctrine. See id. at 290-92 (surveying

cases addressing validity of inevitable disclosure doctrine). It is unclear whether the Minnesota

courts will adopt or reject the inevitable disclosure doctrine as no decision issued by the

Minnesota Supreme Court or the Minnesota Court of Appeals speaks squarely upon the issue. In

International Business Machine Corp. v. Seagate Technology, Inc. the District Court of

Minnesota did not outright reject the inevitable disclosure doctrine but did state, “A claim of

trade secret misappropriation should not act as an ex post facto covenant not to compete.” 941 F.

Supp. 98, 101 (D. Minn 1992). Because Minnesota courts have not squarely decided whether to

adopt the inevitable disclosure doctrine, it is often still argued to the courts, and attorneys should

be aware of the inevitable disclosure doctrine and its elements.

        The threshold issue in an inevitable disclosure case is whether the employee has

information that meets the legal definition of a trade secret. The Uniform Trade Secret Act,

which has been adopted by more than 40 states, (LeJeune v. Coin Acceptors, Inc., 849 A.2d 451,

461 (Md. 2004)) defines a trade secret as “information . . . that . . . derives independent economic

value, actual or potential, from not being generally known to, and not being readily ascertainable

by proper means by, other persons who can obtain economic value from its disclosure or use,”

and that is the “subject of efforts that are reasonable under the circumstances to maintain its

secrecy.” Uniform Trade Secrets Act § 1(4) (1985). As one court explained, a trade secret “is

not readily ascertainable from a public source but, rather, is developed over time with a

substantial amount of effort and expense.” RKI, Inc. v. Grimes, 177 F. Supp. 2d 859, 873 (N.D.

Ill. 2001).




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       Courts then look at whether the employee will inevitably use the trade secrets as part of

the employee’s new job and thus gain an unfair competitive advantage. Courts examine a

number of factors when addressing this element including: the level of competition between the

former employer and the new employer, the comparability of the employee’s new position with

his former one, whether and to what extent the new employer has taken action to prevent the

employee from disclosing trade secrets of the former employer, whether trade secret

misappropriation has already occurred. RKI, Inc., 177 F. Supp. 2d at 876.

       Even though Minnesota has not adopted the inevitable disclosure doctrine, the existence

of Eighth Circuit case law suggesting that the Minnesota Uniform Trade Secrets Act, in and of

itself, contains a requirement of “inevitable disclosure” may give a company leverage to

negotiate a favorable resolution to the employment dispute. See Watkins, Inc. v. Lewis, No. Civ.

02-3708, 2002 WL 31319491, at *14 (D. Minn. Oct. 11, 2002); Universal Health Servs., Inc. v.

Henderson, No. Civ. 02-951, 2002 WL 1023147, at *4 (D. Minn., May 20, 2002); New Leaf

Designs, LLC v. BestBins Corp., 168 F. Supp. 2d 1039, 1043 (D. Minn. 2001); Lexis-Nexis, 41 F.

Supp. 2d 950; Seagate Technology, Inc., 941 F. Supp. at 101.

                                         CONCLUSION

       Employers and their counsel should be aware of both the steps to take to protect their

business and the potential limits to the restrictions that can be used. After these steps are taken

to protect business interests can an employer effectively protect itself in the event key employers,

who are lured away by competitors, attempt to steal the employer’s clients and confidential

information.




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