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.
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.
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.
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
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
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
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.
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
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,
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
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
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
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.
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
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.