Tuesday, March 17, 2015

Minnesota Supreme Court Creates New Defense to Noncompete Agreements Based on Relying on Advice from Legal Counsel

March 2015
By: James B. Sherman, Esq.

In Minnesota and elsewhere, employers who hire an applicant whom they know has a noncompete agreement with a former employer often find themselves defending a lawsuit alleging “tortious interference” with that agreement. A claim of tortious interference essentially alleges that the hiring employer caused a former employee to breach his or her noncompete agreement by offering a job in conflict with its restrictions. Because it is an intentional tort this type of claim rests on the fact that the hiring employer knew about the applicant’s agreement with the former employer, but nevertheless chose to hire the applicant in violation of the noncompete. A typical defense to a claim of tortious interference is for the hiring employer to prove that the noncompetition agreement is either not being breached, or is unenforceable for any number of reasons. A recent decision of the Minnesota Supreme Court, issued on March 4, 2015 in the case of Sysdyne Corp. v. Rousslang, et al., has added another potential defense to claims of tortious interference.  An oversimplification of this new defense might be articulated as: “My lawyer said it was okay to hire this applicant.”

Okay, so the defense articulated by the court in Sysdyne was considerably more complex and laden with legalese than the above, but it did hinge on the hiring employer’s reliance on the advice, albeit erroneous legal advice, of its lawyer who had advised that the applicant’s noncompete agreement with his former employer was poorly drafted and thus unenforceable.

The defense articulated by the court in Sysdyne was not without limitations. At the outset, any reliance on the advice of counsel must be “reasonable” under the circumstances.  In discussing what may be reasonable the court referred to its previous decision in the case of Kallok v. Medtronic, Inc. There, the hiring employer was found liable for tortious interference – and liable for Medtronic’s legal fees in addition to its own – because it did not “candidly provide its attorneys with all relevant information.” In that case the defendant never told its lawyers details about the applicant’s position and responsibilities as an employee at Medtronic, nor of his access to confidential information. Quoting Kallok, the court in Sysdyne Corp. stated that hiring employers “may not rely upon an infirm consultation with counsel” to justify hiring an applicant in violation of a noncompete agreement.

So what can Minnesota employers take from the new Supreme Court decision in Sysdyne?

1.      Don’t hire applicants who have noncompete or other restrictive employment agreements (non-solicitation, confidentiality, etc.) with former employers without a good faith assessment of the agreement to determine whether doing so might expose your company to a claim of tortious interference.
2.      Don’t listen to off-the-cuff opinions (even from lawyers) that noncompete agreements are not enforceable; oftentimes they are enforced in court.
3.     Do consult with an experienced employment attorney who is well versed in the law of noncompete and other restrictive agreements.  However, a legal opinion will be useless unless it is grounded in a reasonable investigation of all relevant facts. At a minimum this includes information about the applicant’s former position and duties with his or her former employer, measured against those of the new position with the hiring employer.

Getting a legal opinion before hiring someone with a noncompete or other restrictive employment agreement is highly recommended and can avoid costly litigation.  Now, thanks to the Minnesota Supreme Court’s recent decision in Sysdyne, a legal opinion (even one that may turn out to be wrong) can also potentially provide a viable defense to claims of tortious interference if you do hire the applicant.

The author, James Sherman, is licensed to practice and has drafted and enforced noncompete and similar agreements in Minnesota, Wisconsin and Illinois for over 20 years. He also reviews these agreements and counsels employers who are considering an applicant with these sorts of restrictions with a former employer. Contact Mr. Sherman with questions at (952) 746-1700 or email jasherman@wesselssherman.com