Employers have Legal Rights when an Employee Leaves to Compete

The Problem: Employees Leave and then Compete with Their Former Employer

One problem many employers face is an employee who leaves the company and then competes. A valuable employee may think, “I could do this on my own and keep the profit for myself.” The employee may try to take customer lists, company information, relationships, and even other employees.

Without a Noncompete Agreement

A noncompete agreement was historically one way to address this, but in Minnesota that path is now largely closed. Under Minn. Stat. § 181.988, subdivision 2(a), “[a]ny covenant not to compete contained in a contract or agreement is void and unenforceable,” for agreements entered into on or after July 1, 2023, subject only to narrow exceptions for the sale of a business and the dissolution of a business (available at https://www.revisor.mn.gov/statutes/cite/181.988). Noncompetes signed before July 1, 2023, remain enforceable if they are otherwise reasonable.

Because a traditional employee noncompete is no longer a tool you can use for new hires, the protections that survive are the ones the statute expressly leaves intact: nondisclosure agreements, agreements designed to protect trade secrets and confidential information, and nonsolicitation agreements restricting the use of your client or contact lists (Minn. Stat. § 181.988, subdivision 1(a)).

Even without a noncompete, you retain real protections. Minnesota’s Uniform Trade Secrets Act lets you enjoin actual or threatened misappropriation of your trade secrets regardless of any contract (Minn. Stat. § 325C.02, available at https://www.revisor.mn.gov/statutes/cite/325C.02), and your employees owe you a common-law duty of loyalty while they are still employed.

Employer’s Rights

Your rights as an employer come from several sources: contract, statute, property law, and the common law. One of the common-law protections is the duty of loyalty every employee owes you while employed.

Under Minnesota law, every employee owes the employer a duty of loyalty. As the Court of Appeals put it, “[a]n 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.” Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301, 304 (Minn. Ct. App. 1987) (available at https://law.justia.com/cases/minnesota/court-of-appeals/1987/c3-86-1897-0.html).

It is worth being precise about a common overstatement. As explained above, every employee does owe the baseline duty of loyalty while employed. People often go further, though, and say every employee owes a full set of “fiduciary duties” of loyalty, obedience, disclosure, confidentiality, reasonable care, and accounting. That six-part list is actually the statutory formulation Minnesota imposes on a real estate licensee toward a client (Minn. Stat. § 82.67, subdivision 3, available at https://www.revisor.mn.gov/statutes/cite/82.67), and given that statute’s narrow real-estate scope this fuller package of heightened duties is not owed by every employee simply by virtue of employment. The baseline duty of loyalty is owed by every employee; these heightened duties, by contrast, attach through an agency relationship. An employee who also acts as your agent will owe those agency duties, but it is the agency relationship doing the work, not employment status alone.

With that distinction in mind, here are the duties an employee may owe you as your agent.

The Duty of Loyalty

While employed, an employee may not solicit your customers for herself or otherwise compete with you. Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301, 304 (Minn. Ct. App. 1987). The duty does not require the employee to act solely for your benefit: she keeps the right to prepare to compete and to pursue unrelated outside interests while still employed. Whether particular conduct crosses from permissible preparation into prohibited solicitation is a fact question decided on all the circumstances.

The Duty of Obedience

As your agent, an employee has a duty to comply with all of your lawful instructions concerning her work on your behalf. Restatement (Third) of Agency § 8.09(2) (Am. Law Inst. 2006). This does not extend to instructions to commit a crime or a tort.

The Duty of Disclosure

An agent’s relationship with the principal carries a duty of disclosure, and Minnesota courts have stated that duty most fully in the context of a broker, who is “always bound to make a full and fair disclosure to his principal of all facts within his knowledge affecting the rights or interests of the principal in the sale.” Olson v. Penkert, 252 Minn. 334, 342, 90 N.W.2d 193 (1958) (available at https://law.justia.com/cases/minnesota/supreme-court/1958/37-239.html). How far a comparable disclosure duty reaches in any other agency relationship depends on the scope of that agency, not on employment status alone.

The Duty of Confidentiality

An employee’s duty of loyalty includes a duty not to use or communicate your confidential information for her own purposes or a third party’s, subject to disclosures she is legally required or privileged to make. See Restatement (Third) of Agency § 8.05 (Am. Law Inst. 2006).

The Duty of Reasonable Care

An employee acting as your agent has a duty to act with “the care, competence, and diligence normally exercised by agents in similar circumstances.” Restatement (Third) of Agency § 8.08 (Am. Law Inst. 2006).

The Duty of Accounting

An agent has a duty “to keep and render accounts to the principal of money or other property received or paid out on the principal’s account.” Restatement (Third) of Agency § 8.12(3) (Am. Law Inst. 2006).

Employee’s Breach of Duty to Employer

An employee may lawfully prepare to leave and compete with you. That preparation alone is not wrongful. Minnesota courts recognize that an employee “has the right . . . while still employed, to prepare to enter into competition with her employer,” and that “[t]here is no precise line between acts . . . which constitute prohibited ‘solicitation’ and acts which constitute permissible ‘preparation.’” Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301, 304-05 (Minn. Ct. App. 1987).

The line is crossed when the employee uses your time or resources to advance a competing venture, or takes your property or copies your confidential or trade-secret information to use against you. Taking tangible property is theft or conversion. Copying protected information can violate the Minnesota Uniform Trade Secrets Act, which defines the “improper means” that make the acquisition of a trade secret wrongful to include “breach or inducement of a breach of a duty to maintain secrecy.” Minn. Stat. § 325C.01, subdivision 2 (available at https://www.revisor.mn.gov/statutes/cite/325C.01). The Act’s reach also extends to the disclosure or use of a trade secret acquired under circumstances giving rise to a duty to maintain its secrecy. Minn. Stat. § 325C.01, subdivision 3 (available at https://www.revisor.mn.gov/statutes/cite/325C.01). Copying information is therefore not automatically wrongful; whether it is actionable turns on whether the information qualifies as a trade secret and how it was acquired and used. The general skills, experience, and knowledge your employee lawfully acquired on the job are not protectable.

An employee who breaches the duty of loyalty while still employed acts wrongfully; as the Minnesota Supreme Court put it, an employee “cannot feather his own nest at the expense of his employer while he is still on the payroll.” Sanitary Farm Dairies, Inc. v. Wolf, 261 Minn. 166, 175, 112 N.W.2d 42, 48 (1961) (available at https://law.justia.com/cases/minnesota/supreme-court/1961/38-452.html).

Because of this duty of loyalty, an employee may not solicit your customers for herself or otherwise compete with you while she is still employed. See Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301, 304 (Minn. Ct. App. 1987) (available at https://law.justia.com/cases/minnesota/court-of-appeals/1987/c3-86-1897-0.html).

Trade Secret Violations

There are also trade secret considerations when an employee leaves. If an employee takes your trade-secret information and uses it or discloses it to others, she has likely violated the Minnesota Uniform Trade Secrets Act. The Act protects only information that qualifies as a “trade secret,” meaning information that “derives independent economic value . . . from not being generally known” and “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Minn. Stat. § 325C.01, subdivision 5 (available at https://www.revisor.mn.gov/statutes/cite/325C.01). Information that you merely label confidential, but did not take reasonable steps to protect, may fall outside the Act, so the secrecy measures you put in place matter.

Tortious Interference with Contract

Finally, consider whether the departing employee is interfering with your contracts with customers, clients, suppliers, vendors, or other relationships. This is not a criminal matter. It is a civil tort that gives rise to money damages. Under Minnesota law, tortious interference with a contractual relationship requires “(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 v. Medtronic, Inc., 573 N.W.2d 356, 362 (Minn. 1998) (available at https://caselaw.findlaw.com/court/mn-supreme-court/1275999.html).

Not every interference is actionable; much turns on the fourth element, justification. Whether interference is justified is ordinarily a factual determination of what is reasonable conduct under the circumstances, and the person who interfered bears the burden of proving justification. Kallok v. Medtronic, Inc., 573 N.W.2d 356, 362 (Minn. 1998) (available at https://caselaw.findlaw.com/court/mn-supreme-court/1275999.html).

Benefits to Employers

When you have been harmed, you have a few options.

First, you can seek a temporary restraining order or a temporary injunction to stop the employee from continuing the wrongful conduct, such as misappropriating trade secrets or breaching a valid restrictive covenant. Minn. R. Civ. P. 65.01-65.02 (available at https://www.revisor.mn.gov/court_rules/cp/id/65/). A temporary restraining order may be granted on a showing, by affidavit or verified complaint, that immediate and irreparable injury will result before the adverse party can be heard.

Second, you can seek compensatory damages to make your business whole, including provable lost profits and other quantifiable financial harm. The goal is to put your business back in the position it would have occupied had the harm not occurred. One thing you generally cannot recover, however, is the attorney fees you spend to sue the employee. Under Minnesota’s American Rule, “attorney fees are not recoverable in litigation unless there is a specific contract permitting or a statute authorizing such recovery.” Ly v. Nystrom, 615 N.W.2d 302, 314 (Minn. 2000) (available at https://caselaw.findlaw.com/court/mn-supreme-court/1490624.html). That rule leaves two routes to a fee award. A well-drafted agreement with a fee-shifting clause can change the result, which is one more reason to put your protections in writing before an employee leaves. A statute can also authorize fees: the Minnesota Uniform Trade Secrets Act provides that if “willful and malicious misappropriation exists,” the court “may award reasonable attorney’s fees to the prevailing party.” Minn. Stat. § 325C.04 (available at https://www.revisor.mn.gov/statutes/cite/325C.04).

Protecting Your Rights with a Business Attorney

For most employers, these are complex areas of the law. A business attorney can help you:

1. avoid problems caused by employees who leave the business to compete, by putting nondisclosure, nonsolicitation, and trade-secret protections in place; and
2. respond to employees who have already left to compete.