Official Publication of the Minnesota State Bar Association


Vol. 59, No. 8 | September 2002
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Employers Bite Back:
Suing Employees Under Contracts


While employees' exposure to liability for breach of employment agreements is not as extensive as employers', they can nevertheless be held liable for breach of duties other than those covered by noncompete and confidentiality agreements.

by Marshall H. Tanick


Most workplace lawsuits are brought by employees against employers. Aside from cases involving noncompete clauses, trade secrets and other intellectual property, and similar confidentiality concerns, the focus of most litigation relating to employment arrangements is whether the employer is liable and, if so, the amount of damages to which the employee is entitled.

However, employees can be susceptible to claims for breach of employment law duties other than those involving the conventional noncompete and confidentiality concerns. Employees' exposure to liability for breaching employment agreements is not as extensive as employers'. But the prospect of employee liability highlights that workplace contractual arrangements are a two-way street: a fact that is often overlooked or bypassed.

Haskins Hassle

The recently concluded lawsuit brought by the University of Minnesota against former men's basketball coach Clem Haskins reflects this phenomenon. University of Minnesota v. Haskins, File No. 00-12750 Hennepin County District Court. The "U" sued to reclaim some of the $1.5 million contractual buy-out it paid Haskins when he was ousted in the wake of an academic scandal in 1998. District Judge Deborah Hedlund this spring confirmed an arbitrator's award entitling the school to reimbursement of $815,000, with the bulk of it, $550,000, not payable until Haskins, now 59, reaches age 70 in 11 years.

The Haskins' hassle wasn't the only recent employer-versus-employee legal dispute within the University's athletic infrastructure. After women's basketball coach Brenda Oldfield left the school to go to the University of Maryland this spring, with four years remaining on her contract, there was a public outcry and some demands that she be sued. The clamor quieted when the school sought to spirit away other coaches under contract at other schools before finally finding a new mentor, Pam Borton, an assistant coach from Boston College. Meanwhile, University President Mark Yudof left the University in the midst of his contract, taking advantage of a 90-day exit provision to take the top position at the University of Texas.

The Haskins case was, to be sure, unusual. But it illustrates that employment litigation is not a one-way street. Other Minnesota cases reflect this reality as well and like the University basketball brouhaha often are unusual situations and wind their way through twisting paths.

Haff-Hearted

The exposure of employees to suit for breach of employment agreements was reflected in a pair of recent rulings of the Minnesota Court of Appeals. In Haff v. Augeson, 2002 WL 378172 (Minn. App. 03/12/02) (unpublished), the owner of a cement pumping truck business in west central Minnesota hired a husband and wife team to perform services over a six-month period. The wife was to be responsible for office administration, while her spouse was to operate and maintain the cement truck and pump used at construction sites.

After four and one-half months, the couple had a change of heart, quit, and sued for unpaid wages. The company counter-claimed for loss of income due to their departure based upon calls for jobs that could not be performed because of the absence of a truck operator. The company also sued the husband for damages to the truck.

The Hubbard County District Court, on appeal from the Conciliation Court, awarded the wife $772 in damages. It also dismissed the counterclaims on grounds that the contract was unenforceable due to "ambiguities" regarding whether the signatory was the owner of the company. Therefore, the employment relationship was deemed to be "at-will" and it was terminated by mutual consent of the employer and employees.

The appellate court reversed, holding that there was no dispute about the signatories to the agreement, which was for a "definite term of six months," and could not be terminated "at-will." The court also found no evidence to support a mutual termination. The court reduced the wife's damages to $350 because of a failure to account for a health insurance premium that was paid by the employer. The appellate court also upheld denial of the claim for damages to the truck.

But the heart of the case was the company's counterclaim for damages for lost profits against the husband-truck operator. The court found the claim for lost profits actionable, noting that there was evidence prospective customers had called to place orders for work that could not be fulfilled because the company was unable to obtain a replacement truck operator to perform the work. This evidence could sustain the company's counterclaim for loss of profits, which warranted remand for factual findings and conclusions of law regarding damages to which the employer may be entitled.

Elsewhere a contract requiring employees to reimburse their employer for the cost of their training if they voluntarily quit was deemed waived when the employer sued the departing employees to recover on confessions of judgments previously signed by the employees. The confessions by the three employees were vacated by the appellate court in American Summit Lending Corp. v. Ewing, 2002 WL 977483 (Minn. App. 05/14/02) (unpublished). The employees agreed in advance to judgments of $25,000 if they left the company after receiving their training.

When they were about to resign, their manager told them the company would forgo any claims if they quit. In their letters of resignation, prepared by the company, the employees stated they were resigning and that the company would "waive the repayment amount." The Hennepin County District Court set aside the confessions of judgment on grounds of ambiguity in the contracts they signed when they began their work.

The appellate court affirmed but on different grounds. It reasoned that the resignation letters, which the company drafted, "waived the confessions." The meaning of the "clear and unambiguous" language in those letters reflected a relinquishment by the employer of its claims for reimbursement of training costs.

Consulting Contracts

A sales consultant, formerly employed by the company, was sued for breach of contract by the employer for failing to produce $6,000 in monthly revenue in Business Machines Sales and Services, Inc. v. Murphy, 2002 WL 1315610 (Minn. App. 06/16/00) (unpublished). The former employee had entered into a four-year contract stating that he would "commit to achieve a minimum" of $6,000 net gross profit or sales per month. After achieving that level for 17 months, his sales declined, and he quit, with two and one-half years remaining on the contract. The company sued him for breaching the agreement.

Reversing a ruling in favor of the company, the appellate court held that the term "commit" in the contract did not constitute a "guarantee." The court pointed to other provisions in the contract that "militate against" imposing a $6,000 per month requirement. These included a provision that he forfeit commissions if he does not reach $6,000 in sales, rather than a requirement that he compensate the company for the deficit, as well as a "best efforts" clause. The contract also noted the general rule that an agent is obligated only to "make reasonable efforts to perform services."

The case was remanded for new trial on other issues under the contract, including damages as well as the salesman's failure to represent exclusively the company's products. The calculation of damages was to be based upon what he would have generated had he used his "best efforts," subject to a setoff for the company's failure to mitigate.

Although it did not establish a formal employment relationship, another consulting contract for services was the source of litigation by a Minnesota company and a consultant that was hired to do a prepurchase inspection of warehouses that the company was planning to purchase. Nova Consulting Group v. Weston, Inc., 2002 WL 418205 (Minn. App. 03/19/02) (unpublished). The engagement contract included a limitation of liability clause, which restricted the liability of the consultant to the amount paid for the inspection services. The inspection was performed, and the Minnesota company paid $34,180 for the work. The inspection revealed only slight repair work was necessary. But after the warehouses were acquired, serious deficiencies were found, which resulted in substantial repair costs in excess of $1 million. The Minnesota purchaser then sued the inspection company, which operated out of Illinois, for breach of contract.

They squabbled in federal court in Illinois, where the lawsuit ultimately was dismissed on grounds that the court lacked jurisdiction under the diversity of citizenship provision. Because the limitation of liability clause fixed the damages to the $34,180 figure paid by the warehouse purchaser, the $75,000 threshhold for diversity jurisdiction was not met. After the lawsuit was dismissed, the inspection consultant sued in Minnesota state court to recover its legal expenses, and the warehouse buyer counterclaimed for damages for negligent inspection.

The Minnesota Court of Appeals held that the lawsuit was barred on grounds of res judicata since dismissal of the federal court action in Illinois constituted a judgment on the merits. While resolution of the lawsuit on jurisdictional grounds generally does not invoke res judicata, in order to reach the jurisdictional issue, the federal court had to pass upon the underlying merits of the case to determine that the Minnesota company was entitled only to $34,180 under its contract. The federal court ruling satisfied the four requirements for collateral estoppel: The issues were identical in the federal and state cases, the same parties were involved in the two cases, the result in the federal case was final since it had not been appealed, and the Illinois proceeding afforded a full and fair opportunity for the parties to be heard.

In the alternative, the appellate court would have upheld the validity of the limitations clause because it complied with the two-pronged standard for exculpation clauses in Minnesota law under Schlobohm v. Spa Petite, Inc., 326 N.W.2d 920 (Minn. 1982). It was not the product of "disparity or bargaining power between the parties" and did not involve a "public or essential service."

Therefore, the company that employed the consultant could not proceed with the lawsuit. Further, it was required to pay that consultant its attorney's fees under the contractual provision in the contract that provided for the prevailing party to pay attorney's fees to the other side.

Negligence Nuances

An employee's negligence or other wrongful conduct also may give rise to a claim against the employee by the employer. The doctrine stems from an antiquated 1866 case in neighboring Wisconsin, which the Minnesota Supreme Court has declined to follow, and it has been rarely fleshed out because of sparse case law in which employers have sued employees for negligence.

The principle was passed upon by the state Supreme Court in Capitola v. Minneapolis, St. Paul & Sault Ste. Marie Railroad Company, 258 Minn. 206, 103 N.W.2d 867 (1960), in which an injured railroad employee sued his employer for damages suffered from a head-on railroad collision. The lawsuit was brought under Federal Employers' Liability Act, 45 U.S.C. ¤51 (FELA), but the employer counterclaimed against the employee for damages to the equipment resulting from the collision that the railroad claimed the employee caused. A Hennepin County District Court jury found that the employee was 20 percent negligent, ascribing the balance of negligence to his co-employees who were at the throttles of the colliding railway cars.

The issues on appeal were: 1) whether the employer could pursue a counterclaim against the injured employee; and, 2) the application of the "fellow servant" rule, which generally holds that an employer is not liable to an employee for injuries suffered as a result of the negligence of a co-employee. The Court struggled with the issue, noting that the "paucity of cases in which an employer has sought damages from an employee ... suggests that this [situation] is more theoretical than practicable." However, the Court went on to hold that "in an action by an employer against his employee for damages resulting from the negligence of the employee, contributing to the negligence is a defense and may be established by attributing to the employer the negligence of a co-employee which is the proximate cause of the damage." 103 N.W.2d at 869. The ruling departs from the old Wisconsin case, Zulkee v. Wing, 20 Wis. 408 (429), 91 Am. D. 425 (1866), in which the Wisconsin Supreme Court held that in such a situation the negligence of a co-employee is not attributable to the employer and, thus, the employee who is sued for damages cannot raise that defense.

The "general rule" followed by the Minnesota court, that an employee who is sued by an employer for negligence "has the defense of contributory negligence," is set forth in the Restatement, Agency (2nd ed.) ¤415, comment b. The Minnesota court reasoned that since the "majority of employed persons are employed by corporate employers which act only through agents and co-employees ...," it would be illogical and unjust to prevent an employee from citing the negligence of co-employees in defending a claim of negligence brought by an employer. The fellow servant doctrine which does raise this bar, is a "limited exception" to the rule of respondeat superior, and should not be extended.

Since the co-employees were partially at fault for the accident, and their fault was attributable to the employer, the employer could not recover from the employee because of the then-existing contributory negligence law, which barred recovery if the claimant was in any degree responsible. While noting the "rigor of the common-law doctrine of contributory negligence," the Court nonetheless upheld the dismissal of the negligence counterclaim against the employee.

That result, however, would be different in litigation today with applicable comparative negligence principles. Under Minn. Stat. ¤604.01, et seq., a claim is not barred unless the claimant is at least as culpable as the party against whom the claim is asserted. Therefore, the doctrine that emerges from the Capitola case, as modified by the comparative negligence statute, is that an employee can be sued by an employer for damages if the harm stems from the employee's negligence; that the employee can defend against the claim by asserting the negligence of the employer or the co-employees, which is attributable to the employer; and that the determination of damages will revolve around allocation of comparative fault among those contributing to the harm.

The nuances of another statute also affect claims by employers for damages from employees. The defective workmanship statute, Minn. Stat. ¤181.79, poses practical restrictions on suing employees for damages resulting from employee misconduct. Under the statute, an employer may not withhold wages or other compensation to which an employee is entitled because of any claim for negligence or other misconduct by the employee unless the employee has, prior to the incident giving rise to the claim, signed an acknowledgment that compensation can be withheld.

The measure, often known as the "barkeep's law," is intended to prevent employers from overreaching by withholding salary or commissions due to employees as a means of leverage to resolve workplace disputes. Most knowledgeable employees will refrain from executing such a pre-incident waiver of their rights. If employees decline to execute the waiver, employers lose the strategic advantage of being able to withhold money from the employees and must, instead, pursue a lawsuit against the employee, which often is impractical. On the other hand, by withholding money, the employers often gain a major tactical advantage in seeking payment from employees for damages attributable to the employees' conduct.

Misappropriation Matters

Employers also occasionally bring lawsuits against employees on grounds of misappropriation of confidential and proprietary data, even without noncompete contracts. The Uniform Trade Secrets Act, Minn. Stat. ¤325C.01, .08 et seq. allows them to do so, under appropriate circumstance, even without preexisting contractual arrangements with employees.

But these lawsuits often can backfire on litigious employers. In Wixon Jewelers, Inc. v. Aurora Jewelry Designs, Inc. 2002 WL 1327014 (Minn. App. 06/18/02) (unpublished), a company sued former employees who established a competing retail jewelry store on grounds that their advertisements violated the Uniform Trade Secrets Act, and the Uniform Deceptive Trade Secrets Act, Minn. Stat. ¤328D.43-48. The former employees triumphed at a jury trial and were awarded one-third of their attorney's fees.

The appellate court reversed, holding that there was no authority to award fees under either statute. The Trade Secrets statute, ¤325C.04, allows a fee award only if a claim of misappropriation "is made in bad faith, and the Deceptive Practices law, ¤325D.45 subd.2, limits fee awards to actions brought by parties knowing them "to be groundless." Neither of the standards was achieved in this case, especially because the claims survived summary judgment, which negates a "bad faith" determination under Uselman v. Uselman, 464 N.W.2d 130,144 (Minn. 1990). In Blackburn, Nickels & Smith v. Erickson, 366 N.W.2d 640 (Minn. App. 1985), an employer sued a pair of former executives who had left to start with a competing company, asserting misappropriation of customer data, breach of fiduciary duty, unfair competition, and interference with contracts between the employer and its customer. One of the employees, the former president, counterclaimed for breach of employment contract, claiming that he was entitled to unpaid incentive payments for work he performed before he left.

The Court of Appeals, affirming the Hennepin County District Court, held that the employee was entitled to contractual payments of $100,000. The appellate court rejected the employer's claim that the employee relinquished his right to payment under contract by breaching the provisions of the contract prohibiting him from engaging in competitive activity and forbidding use of customer lists. The court also rejected the claim that the employee was bound by another clause that provided he would forfeit his right to future payments if he resigned without cause. The court determined that the duration of the contract was for two years, and that the employee's departure 27 months later did not breach the contract since he "worked slightly longer than his initial two-year contract." The court rejected the contention by the employer that the contract was ambiguous, noting that the two-year term was plainly stated in the contract and that another provision stating that the employee may terminate upon 60 days notice did not extend the term of the contract. Since the employee "stayed for the entire two years" under contract, he did not leave without cause and, therefore, was entitled to "the future incentive payments promised to him under the contract."

In addition to upholding summary judgment for the employee on his counterclaim, the appellate court also affirmed the jury's determination that neither of the departing executives breached any contractual duty to the employer or acted tortiously. Although the court had some qualms whether the two executives were carrying out their obligations to promote their employer's "best interests" throughout the relationship, there was sufficient evidence upon which a jury could have determined otherwise. Therefore, the verdict would not be overturned.

Misappropriation of confidential information also was at the heart of a lawsuit brought by an employer against an employee in Rehabilitation Specialists, Inc. v. Koerning, 404 N.W.2d 301 (Minn. App. 1987). An administrative employee of a physical therapy business started her own computing company, which triggered a lawsuit by her former employer alleging breach of duty, unfair competition, and misappropriation of confidential business information. The Hennepin County District Court granted the employee summary judgment and dismissed the lawsuit, but the Court of Appeals reversed.

The appellate court held that the employee's action in preparing to start a competing business, while still working for an employer, may have "crossed the line from preparation to solicitation." The court noted that there is "no precise line between acts by an employee which constitute prohibited 'solicitation' [of current customers] and acts which constitute permissible 'preparation'." How far an employee can go in making plans to start a future business, including the solicitation of prospective customers, "is a matter of degree," which yields a "question of fact to be determined based on all the circumstances of the case."

In this case, the employee had made some efforts to develop contracts with health care facilities that were serviced by her current employer, and had "tentatively secured" these agreements while still on the payroll of her former employer. Even if she did not expressly solicit those customers, her lack of specific overtures "would not necessarily shield her from liability." Since she did not disclose to her employer that she was going to start her own business until after she believed that she had secured arrangements with five customers who had been serviced, or were being solicited by that employer at the same time, her conduct became susceptible to characterization as "unlawful solicitation."

The wrongful solicitation of customers could constitute a breach of duty and loyalty. That same course of conduct could give rise to an unfair competition claim. The employee taking from a company its policy and procedures manual, which the court deemed constituted a "trade secret" under the Trade Secrets Act and that may have been acquired by "improper means," would necessitate a trial on that issue, too.

The rights and obligations of an employee with respect to current customers of an employer is a thorny problem that often arises in employment relationships that, are not, as in Koerning, imbued with explicit contractual restrictions. A leading case is Sanitary Farm Dairies Inc. v. Wolfe, 261 Minn. 166, 112 N.W.2d 42 (1961), reh. denied 261 Minn. 177. The lawsuit involved a driver on a milk route who was responsible for soliciting customers and selling dairy products. He left the business and started a competing business, taking with him many of the customers he serviced for his employer. He claimed that 90 percent of his patronage came from "his own personal acquaintances prior to the time he was employed with the company."

In the Washington County District Court, the parties fought over property rights to names and addresses of customers who were serviced by the driver-salesman while employed with the company. The Supreme Court, however, thought that the outcome "hinges on principles of unfair competition rather than ... property right[s]."

Citing decisions from around the country, the Court held that the identities of the customers did not constitute a "trade secret," nor were they otherwise entitled to "equitable protection." The Court noted that the driver-salesman had discussed his proposed new business with many of his customers and had told them that he would soon be getting his own business and soliciting them on his own behalf, which the Court deemed "a solicitation of business inconsistent with the loyalty which he owed his employer."

The Court then turned to the question of whether that action was "merely in preparation for a change in employment and was legally permissible" or constituted unfair competition. It framed the issue as "where the line is drawn between preparation for a change in employment and outright disloyalty to the employer." The latter constitutes unfair competition because the employee had a duty to "refrain from soliciting any customers on his own behalf prior to termination of his employment." Additionally, the employee is obliged to give [the employer] sufficient notice of intention to quit "so the new employee could be hired, trained, and be in a position to compete openly and fairly for existing patrons."

The Court deemed the appropriate remedy to be an injunction prohibiting the employee from seeking out or doing business with customers that he had wrongfully solicited until his former employer had "adequate opportunity to do its own soliciting." Since a temporary restraining order had been in effect during appeal and had "accomplished the same purpose," no further injunctive relief was necessary.

As reflected in the Koerning case, the Sanitary Farm Dairies case is oft-cited in litigation over the proper "boundary" between permissible preresignation preparation for future competitive employment and impermissible "solicitation" that may constitute breach of fiduciary duty, misappropriation, and other statutory or tortious liability.

The haziness of that border is reflected in Eaton Corp. v. Giere, 971 F.2d 136 (8th Cir. 1992), which deals with the misappropriation of a product, rather than solicitation of customers. A mechanical engineer left his employer and formed a new company to sell a machine that he had developed while still working for his former employer. The U.S. District Court in Minnesota enjoined him from marketing the product, and the appellate court agreed. The outcome turned on a provision of his employment agreement that dealt with his employer's right to any "inventions or improvements" that the employee made while employed there, unless the device was developed by the employee entirely on his "own time" and did not relate to the employer's business. The language essentially tracks Minn. Stat. ¤181.78, which governs the rights of employees to intellectual property developed while they worked for a former employer.

The court deemed the former employee to have breached the agreement because, except for "minor differences," the product that the employee was now developing and selling was identical to the one he worked on while at his former place of employment. Additionally, the employee was culpable because the "design and specifications" for the product were "obviously direct results from his work" at the former employer, which allowed him to "take a great many shortcuts" in time and money spent on research, development, testing, and specifications, due to the "previous work on similar products he helped design and make" for his former employer. Therefore, the fact that the employee "actually designed and made his device at home and after hours" was deemed of "little relevance."

But even without a contract, the former employee's conduct could be enjoined under the "common law duty not to use trade secrets or confidential information obtained from the employer," an obligation that is now magnified by the Trade Secrets Act. The employee was lambasted for approaching one of his employer's chief customers to gather information about potential sale of the product to it in anticipation of leaving and starting his own business to develop the product, all of which was done "while he was still working" for his former employer. Thus, it was appropriate for him to be enjoined from further development and marketing of the product that was derived from work he performed while on his former employer's payroll.

Concluding Considerations

Litigation by employers against employees usually attracts attention because it is out of the ordinary. Just as the old saying that "dog bites person is not news; but person bites dog is news," workplace litigation by employers against employees is notable because it is not the norm.

But a number of considerations come into play in these cases, including contractual provisions, statutes, and common law doctrines. Some of these considerations are age-old while others are more contemporary.

As these principles evolve, it can be anticipated that more litigation will involve employers pursuing employees. How they will be resolved remains to be seen.


Marshall H. Tanick is an attorney with Mansfield, Tanick & Cohen, P.A. He is certified as a Civil Trial Specialist and represents employers and employees in a variety of workplace-related matters.