Friday, March 6, 2015

Minnesota's Justification Rule Shield Employer Liability on Non-Compete Claims

The economics of non-competes often don't work.

Injunctive relief is expensive and sometimes yields a hollow remedy if customers start to bolt regardless. As for damages, many employees aren't collectible.

This is where the new employer comes in. If there is real customer attrition linked to a non-compete violation, the new employer becomes the target simply because the old employer perceives it as able to satisfy a damages judgment.

The theory of liability hinges on the tort of "interference" with contract rights - encouraging the non-compete breach, in other words. For companies trying to enforce the non-compete and collect damages, it's essential to consider how to prove interference.

Most states apply the tort the same way, but crucial differences can arise.

The principal difference involves "justification" - that is, a party's ability to interfere with a contract to further its own business enterprise. In that respect, one question that frequently comes up is whether counsel's advice that a non-compete is unenforceable can rise to the level of legal justification absolving the tort. If so, the new employer may not face liability even if the employee breaches the contract and must pay damages.

This was the question before the Supreme Court of Minnesota in Sysdyne Corp. v. Rousslang, decided this past Thursday.

The Court found that the justification defenses encompasses the honest reliance on advice of counsel. In Rousslang, the Court applied the defense to the fact-pattern described above: the advice that an employee's non-competition covenant was unenforceable.

The Court's opinion provides what appears to be a safe harbor for new employers. The ruling is demonstrably unsound because it extends the concept of justification beyond the honest furtherance of one's own contractual right. A new company does not have a "right" to employ a particular individual. It may want to and may feel that person would be a valuable asset. However, this interest should not provide a third-party a pathway to interference, because it then would eviscerate the tort claim entirely (even outside the non-compete context). A party always will be able to claim a business interest in something.

The advice-of-counsel defense effectively undercuts any viable damages remedy, leaving the enforcing party with potentially a hollow judgment. The Court in Rousslang did not articulate what kind of inquiry a new employer must make, defaulting only in the broadest sense to a "reasonable inquiry" standard to be applied under the facts of each case.

So what kind of facts would the new employer establish as part of the advice-of-counsel/justification defense? Here are some:
  1. Testimony concerning how the company retained counsel and the experience of counsel.
  2. Evidence that it sent counsel the agreement for review.
  3. A description of the facts the company gave counsel (such as the employee's experience, exposure to customers, training, access to confidential information).
  4. The opinion itself, whether verbally or in writing.
  5. Billing records and e-mail correspondence.
All of this puts counsel in an awkward spot, of course, as her advice may be on trial (at least to show it was reasonable, not necessarily that it was correct). Getting past that awkwardness, an attorney really has no malpractice exposure as long as she follows some basic protocols like understanding the facts, reviewing the agreement, and communicating the basis for advice to the employer.

And on the flip side, it will be awfully difficult for the old employer to prove that counsel administered advice flippantly. One key fact could undermine the advice-of-counsel defense: is the new employer asking the employee to sign a similar non-compete? Relatedly, does the company use non-competes for similarly situated employees? If so, then it's going to be awfully difficult to claim the justification defense because there's no objective honesty in the advice.

To me, this collateral inquiry into what an attorney did in terms of advising a client is no way to run a non-compete case. It adds a layer of transaction costs into what otherwise should be a fairly straightforward case about breach and the protectible interest supporting the covenant. It brings into play the specter of expert witnesses opining on whether the new employer's attorney did what a reasonable lawyer should have.

Other courts disagree with the Minnesota approach and do not allow the advice-of-counsel defense to a tort claim. The Rousslang decision is below.

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