What Can You Do When an Employee Leaves to Compete?

What Counts as Disloyal Competition While the Employee Still Works for You?

A Minnesota employee may prepare to compete while still employed but may not solicit your customers or otherwise compete with you until the job ends. The Minnesota Court of Appeals stated the rule in Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301 (Minn. App. 1987): “An employee’s duty of loyalty prohibits her from soliciting the employer’s customers for herself, or from otherwise competing with her employer, while she is employed.”

Preparation is protected. The court said an employee “has the right, therefore, while still employed, to prepare to enter into competition with her employer.” The employee in that case had also filed corporate papers, met with a bank about financing, and applied for business insurance before resigning; the court sent her case to trial because of her dealings with a customer instead. The court also said “There is no precise line” between solicitation and preparation, and whether conduct breached the duty “is a question of fact to be determined based on all the circumstances of the case.”

The employee in Koering, the company’s administrator, told a major customer “she was thinking about beginning her own business,” asked about contracting opportunities, tentatively secured five contracts, and sent draft contracts before she resigned. The court reversed summary judgment for her and sent the case to trial. It also said that the employer’s lack of existing contracts at those five facilities “does not preclude a finding that she was competing with her employer in violation of her duty of loyalty,” because “it was Koering’s duty to attempt to secure additional contracts from it for RSI, not for herself.”

The Minnesota Supreme Court put the same point more bluntly in Sanitary Farm Dairies, Inc. v. Wolf, 261 Minn. 166, 112 N.W.2d 42 (1961). Its opinion said that an employee “cannot feather his own nest at the expense of his employer while he is still on the payroll.” Of a route driver who told customers in his last two days that he would soon solicit their business, the court wrote: “This, in our opinion, constituted a solicitation of business inconsistent with the loyalty which he owed his employer.” My overview of the duty of loyalty Minnesota employees owe covers its background.

What Are the Rules Once the Employee Has Left?

Once employment ends, the duty of loyalty described in Koering no longer restricts the former employee, so what protects you includes a valid contract, a trade secret, your property, and any claim for wrongs committed before departure. Without one of those, and “subject to the principles of unfair competition,” as Sanitary Farm Dairies put it, a former employee may compete and may approach customers.

Sanitary Farm Dairies shows the limit. The Minnesota Supreme Court held that the names and locations of route customers built up by the employer and the driver together were not “either a trade secret, confidential information, or a property right which requires equitable protection.” So, “In the absence of a restrictive covenant, and subject to the principles of unfair competition,” the trial court properly refused to stop the driver from doing business with those customers after he quit.

The court also addressed the disloyal acts before departure, though not in its decision. Its opinion said the employer “was entitled to such relief as would mitigate the consequences of defendants’ unfair competition,” and that the trial court should have barred the driver from soliciting the affected customers “until plaintiff had an adequate opportunity to do its own soliciting,” but the court did not order that relief. Its decision was that “the order of the District Court of Washington County denying plaintiff’s motion for a temporary injunction is affirmed,” with no change to that order. In a later ruling on costs, the court said “there is some dicta in the court’s opinion in this case which would indicate that we felt that the trial court was partially incorrect, but our decision is an affirmance without modification,” and it treated the defendants as the prevailing parties. The order the opinion described would give an employer a fair start at keeping the accounts without taking them away from the former employee for good.

The contracts that do the work after departure are the ones Minn. Stat. § 181.988, subd. 1, leaves outside the noncompete ban: “A covenant not to compete does not include a nondisclosure agreement, or agreement designed to protect trade secrets or confidential information. A covenant not to compete does not include a nonsolicitation agreement, or agreement restricting the ability to use client or contact lists, or solicit customers of the employer.”

How Does Minnesota’s Noncompete Ban Change Your Options?

For agreements entered into on or after July 1, 2023, a Minnesota employer cannot rely on a noncompete against a departing employee, because Minn. Stat. § 181.988, subd. 2, provides: “(a) Any covenant not to compete contained in a contract or agreement is void and unenforceable.” The enacting law states the timing: “This section is effective July 1, 2023, and applies to contracts and agreements entered into on or after that date.”

Five details of the statute change what you can do:

1. Two exceptions remain. A noncompete is still enforceable if “agreed upon during the sale of a business” or “agreed upon in anticipation of the dissolution of a business.” An ordinary employment agreement fits neither.
2. The rest of the agreement survives. Under subdivision 2(c), “Nothing in this subdivision shall be construed to render void or unenforceable any other provisions in a contract or agreement containing a void or unenforceable covenant not to compete.” A void noncompete does not take the confidentiality or nonsolicitation clause down with it.
3. Contractors are covered. For this section, “employee” means “any individual who performs services for an employer, including independent contractors.”
4. Pressing a void noncompete can cost you the employee’s fees. Under subdivision 2(d), “a court may award an employee who is enforcing rights under this section reasonable attorney fees.”
5. Some workers can insist on Minnesota courts and law. Subdivision 3(a) bars an employer from requiring “an employee who primarily resides and works in Minnesota, as a condition of employment,” to agree to adjudicate a Minnesota claim elsewhere or to give up “the substantive protection of Minnesota law.” Under subdivision 3(b), such a provision “is voidable at any time by the employee and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in Minnesota and Minnesota law shall govern the dispute,” and under subdivision 3(d), “adjudication includes litigation and arbitration.” Subdivision 3(e) adds: “This subdivision applies only to claims arising under this section.”

A noncompete signed before July 1, 2023, is judged under the older case law. The Minnesota Supreme Court explained in Kallok v. Medtronic, Inc., 573 N.W.2d 356 (Minn. 1998) that such agreements are enforceable if they serve a legitimate employer interest and are not broader than necessary to protect it. A noncompete signed after the job began needs more: in National Recruiters, Inc. v. Cashman, 323 N.W.2d 736 (Minn. 1982), the court said “Where such a covenant is not ancillary to the initial oral employment contract, it can be sustained only if supported by independent consideration.” For the agreements that replace a noncompete, see the protections that survive Minnesota’s ban; for older agreements, see my noncompete questions page.

What Makes Customer Lists and Company Information a Trade Secret?

Information is a trade secret in Minnesota only if it gains value from being secret and you made reasonable efforts to keep it secret. Under Minn. Stat. § 325C.01, subd. 5, a trade secret is information that “(i) 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 (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

In plain terms, the first part asks whether a competitor would have to work to get this information, and whether having it would help them. The second part asks what you did to protect it: access limits, confidentiality agreements, marking, and return-on-departure rules. The same subdivision adds that a trade secret is not lost “merely because an employee or other person has acquired the trade secret without express or specific notice that it is a trade secret” if the employee knew or had reason to know you expected it to be kept secret.

The two leading cases show both sides. In Sanitary Farm Dairies, route customers whose identity the driver helped build were not protected. In Koering, the employee took “the sole copy” of a policy and procedure manual that cost over $20,000 to prepare. The manual was marked as controlled and had to be “returned upon termination.” The court held “The evidence raises issues of fact as to whether the manual was a “trade secret” and whether it was acquired by “improper means.”” In Sanitary Farm Dairies the driver had helped build the customer relationships; in Koering the employer built the manual and controlled its distribution. My page on what counts as a trade secret under Minnesota law goes further into the definition.

How Do the Minnesota and Federal Trade Secret Acts Work Together?

A Minnesota employer whose trade secret relates to a product or service in interstate commerce can bring claims under both the Minnesota Uniform Trade Secrets Act and the federal Defend Trade Secrets Act, and the federal act leaves state remedies in place with one stated exception. The federal act says: “Except as provided in section 1833(b), this chapter shall not be construed to preempt or displace any other remedies” under state law for trade secret misappropriation (18 U.S.C. § 1838). The exception is the disclosure immunity in 18 U.S.C. § 1833(b)(1), which reaches liability “under any Federal or State trade secret law.”

Under Minnesota’s act, taking the information can be enough. “Misappropriation” includes “(i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means,” and “Improper means” includes “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means” (Minn. Stat. § 325C.01, subds. 2 and 3). In Koering, the court rejected the argument that the employer had to prove the employee used or disclosed the manual.

The federal act adds one condition: under 18 U.S.C. § 1836(b)(1), the trade secret must be “related to a product or service used in, or intended for use in, interstate or foreign commerce.” A federal claim can also be filed in federal court, which has “original jurisdiction” over these cases under § 1836(c). My page on when a federal DTSA claim makes sense walks through that choice.

Two rules shape how you plead the case:

1. Minnesota’s act displaces overlapping state claims. Minn. Stat. § 325C.07 displaces “conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret.” It preserves “contractual remedies, whether or not based upon misappropriation of a trade secret” and “other civil remedies that are not based upon misappropriation of a trade secret.” A breach-of-contract claim, and a loyalty claim based on customer solicitation, can go forward beside the trade secret count. A separate state tort claim resting only on the trade secret theft is the kind the statute displaces.
2. The federal act requires a notice in your agreements. Under 18 U.S.C. § 1833(b)(3), “An employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Without it, the employer “may not be awarded exemplary damages or attorney fees” under the federal act against that employee. The rule reaches agreements “entered into or updated after the date of enactment of this subsection,” which was May 11, 2016, and it counts contractors and consultants as employees.

When Does the New Employer Share the Liability?

A Minnesota competitor that hires your employee becomes liable to you when it knowingly and without justification causes the employee to break a valid contract with you. The Minnesota Supreme Court in Kallok listed the elements of tortious interference with a contract: “(1) the existence of a contract; (2) the alleged wrongdoer’s knowledge of the contract; (3) intentional procurement of its breach; (4) without justification; and (5) damages.”

Kallok involved a valid noncompete, and the court held that interference with it “by a third party is a tort for which damages are recoverable.” The five elements apply to any contract, which after the noncompete ban includes a nondisclosure or nonsolicitation agreement. Two rules govern justification. “The burden of proving justification is on the defendant.” And a new employer that gives its attorney an incomplete picture of the hire gets no protection: the hiring company in Kallok “may not rely upon an infirm consultation with counsel and the resulting advice as a justification for its action.”

The Minnesota Supreme Court later confirmed the other side of that rule. In Sysdyne Corp. v. Rousslang, 860 N.W.2d 347 (Minn. 2015), it held that “the justification defense to tortious interference with contract may encompass reasonable reliance on advice of counsel,” even advice that proves wrong. The new employer there gave its attorney the agreement and the offer letter and described the job, and the court upheld the finding that this inquiry was reasonable. The former employer still won a contract judgment of $158,240 against the employee.

In one dispute a former employee brought to me, the former employer’s attorney wrote to the new company as well, claiming it had interfered with the agreement and threatening an injunction and damages. That second letter gave the new company its own exposure on the same facts. A cease-and-desist letter to the new employer can do the same for you, if the agreement behind it is enforceable.

How Do You Stop the Harm Quickly With a Court Order?

A Minnesota court can order a former employee, and a new employer, to stop using your information or soliciting your customers while the case proceeds, through a temporary restraining order or a temporary injunction. Both require proof you can put in front of a judge quickly, and both require you to post security.

The Minnesota Rules of Civil Procedure set the steps:

1. Temporary restraining order. Under Rule 65.01, a court may issue one without notice only if “it clearly appears from specific facts shown by affidavit or by the verified complaint that immediate and irreparable injury, loss, or damage will result to the applicant before the adverse party or that party’s attorney can be heard in opposition.” Your attorney must also state to the court in writing “the efforts, if any, which have been made to give notice or the reasons supporting the claim that notice should not be required.”
2. Temporary injunction. Rule 65.02(a) provides: “No temporary injunction shall be granted without notice of motion or an order to show cause to the adverse party.”
3. Security. Under Rule 65.03(a), no order issues “except upon the giving of security by the applicant,” which covers the other side’s costs and damages if it is “found to have been wrongfully enjoined or restrained.”

To decide a temporary injunction, Minnesota courts weigh five considerations from Dahlberg Bros., Inc. v. Ford Motor Co., 272 Minn. 264, 137 N.W.2d 314 (1965). They are the parties’ relationship before the dispute, the harm to each side from granting or denying relief, and “The likelihood that one party or the other will prevail on the merits.” The last two are any public policy expressed in statutes and the burden on the court of supervising the order. Statutes add their own grounds. Under Minn. Stat. § 325C.02, “(a) Actual or threatened misappropriation may be enjoined,” and “(c) In appropriate circumstances, affirmative acts to protect a trade secret may be compelled by court order,” such as returning files.

The federal act sets limits that matter for a departing employee. A federal injunction may not “prevent a person from entering into an employment relationship,” and any conditions on the new job “shall be based on evidence of threatened misappropriation and not merely on the information the person knows,” and it may not “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business” (18 U.S.C. § 1836(b)(3)). Its seizure remedy, which lets federal officers take property holding the secret, is available “only in extraordinary circumstances” (§ 1836(b)(2)). My page on trade secret injunctions and damages covers the hearing itself.

What Money Can You Recover, and Who Pays the Attorney Fees?

A Minnesota employer can recover its losses from trade secret misappropriation and the wrongdoer’s gains not already counted in those losses, plus up to double that amount for willful and malicious conduct. It recovers attorney fees only where a statute, a contract, or a narrow court-made exception allows. Under Minn. Stat. § 325C.03, “Except to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation renders a monetary recovery inequitable, a complainant is entitled to recover damages for misappropriation.” It continues: “Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.” The same section provides: “If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under paragraph (a).” The federal act has a parallel provision.

Attorney fees follow their own rules:

• Under the trade secret act, fees can run either way. Minn. Stat. § 325C.04 allows “reasonable attorney’s fees to the prevailing party” if “willful and malicious misappropriation exists,” but also if “a claim of misappropriation is made in bad faith.” A weak trade secret claim filed to slow a competitor can leave the employer paying the other side’s fees.
• Otherwise, each side pays its own. Kallok restated Minnesota’s American rule, which “prevents a party from shifting its attorney fees to its adversary without a specific contract or statutory authorization.” A fee clause in your agreement is one route around it.
• A new employer’s interference can shift fees. The same case applied “the third-party litigation exception to the American rule,” which “permits a court to award attorney fees as damages if the defendant’s tortious act thrusts or projects the plaintiff into litigation with a third party.” Medtronic recovered from the new employer the fees it spent enforcing its agreement against the employee.
• Stealing personal property carries its own penalty. Under Minn. Stat. § 604.14, subd. 1, “A person who steals personal property from another is civilly liable to the owner of the property for its value when stolen plus punitive damages of either $50 or up to 100 percent of its value when stolen, whichever is greater.” Subdivision 5 adds: “The recovery of stolen property by a person does not affect liability under this section, other than liability for the value of the property.”

Both trade secret acts also set deadlines to sue, in Minn. Stat. § 325C.06 and 18 U.S.C. § 1836(d), and each runs from when the misappropriation was discovered or should have been. I suggest checking the current text of both when you first learn of a problem, because a missed deadline ends the claim. In the dispute described above, one of my first observations was that a settlement demand is not a damages calculation: what the former employer says its damages are, and what the agreement says about remedies and fees, set the actual exposure.

How Should You Respond in the First Days After a Key Employee Resigns?

The first days after a resignation decide what evidence you will have and which claims stay available. These steps apply whether you expect to sue or simply want to protect the accounts:

1. Evidence. I suggest keeping the departing employee’s laptop, phone, email account, and file-access logs as they are, rather than wiping and reissuing them, because they may be the best record of what was taken.
2. The signed agreements. I suggest pulling every agreement the person signed and noting each signing date against July 1, 2023, because that date decides which clauses § 181.988 reaches. The confidentiality and nonsolicitation terms deserve their own read, because they survive a void noncompete.
3. A written demand for property. For property that was taken, Minn. Stat. § 604.14, subd. 6, provides that “A person may make a written demand for payment for the liability imposed by this section before beginning an action, including a copy of this section and a description of the liability contained in this section.” If the property has come back, subdivision 5 leaves the liability in place “other than liability for the value of the property.”
4. A letter to the new employer. A letter gives it knowledge of your agreement; under Sysdyne, it may answer that it reasonably relied on its attorney’s advice after a reasonable inquiry.
5. Final wages on schedule. Minn. Stat. § 181.13 (discharge) and Minn. Stat. § 181.14 (resignation) set the final-pay deadlines. Minn. Stat. § 181.79, subd. 1, bars deducting a claimed debt unless the employee “after the loss has occurred or the claimed indebtedness has arisen, voluntarily authorizes the employer in writing to make the deduction or unless the employee is held liable in a court of competent jurisdiction for the loss or indebtedness.” Under subdivision 1(c), the section does not apply “in cases where a contrary provision in a collective bargaining agreement exists” or where “an employee, prior to making a purchase or loan from the employer, voluntarily authorizes in writing that the cost of the purchase or loan shall be deducted from the employee’s wages, at regular intervals or upon termination of employment.” Any authorization must “set forth the amount to be deducted from the employee’s wages during each pay period,” and a deduction “may not be in excess of the amount established by law as subject to garnishment or execution on wages” (subdivisions 1(a) and 1(b)). A contractor paid on commission falls under Minn. Stat. § 181.145 instead, which covers a salesperson “who is not covered by sections 181.13 and 181.14 because the person is an independent contractor.” That section requires the commissions to be paid “on demand no later than three working days after the salesperson’s last day of work,” or “on demand no later than six working days after the salesperson’s last day of work” if the salesperson resigns without “giving at least five days’ written notice” (subdivision 2(b) and (c)). My page on the final paycheck while company property is still out covers the timing.
6. Confidentiality in any lawsuit. Under Minn. Stat. § 325C.05, “a court shall preserve the secrecy of an alleged trade secret by reasonable means, which may include granting protective orders in connection with discovery proceedings, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.” Suing does not require putting the secret in the public file.
7. Agreements for the next hire. Current nonsolicitation agreements, and confidentiality agreements that carry the federal whistleblower notice, preserve the remedies described above for the next departure.

Protecting Your Business When Key Employees Leave

Minnesota law no longer lets an employer stop a former employee from competing under a noncompete signed since July 1, 2023, outside two narrow exceptions, but it still protects against disloyalty on your payroll, broken confidentiality and nonsolicitation promises, trade secret theft, and a competitor that knowingly causes a breach. The strength of each claim depends on what you can prove the employee did before leaving, which agreements were signed and when, and what you did to keep your information secret. For related topics, see my Minnesota employment law page for employers. If an employee has just left for a competitor, you can email me at [email protected] with a brief description of the situation, and I can start an intake and conflict check before you send any confidential documents.