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holding that new employer is not liable for "an employee's breach of a valid noncompete agreement where there was no independent tortious conduct by the new employer" and declining to hold new employer liable when the record disclosed no ratification of the employee's alleged improper conduct
Summary of this case from Benfield, Inc. v. MolineOpinion
No. C8-98-864.
Filed January 26, 1999.
Appeal from the District Court, Hennepin County, File No. CT-95-3634.
Eric J. Magnuson, Todd P. Zettler, Rider, Bennett, Egan, Arundel, LLP, and
Rodney J. Mason, Chandler and Mason, Ltd., (for appellant)
Leon R. Erstad, Erstad Riemer, P.A., (for respondent American Agency, Inc.)
Considered and decided by Randall, Presiding Judge, Short, Judge, and Lansing, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (1998).
UNPUBLISHED OPINION
Appellant argues the district court erred as a matter of law when it ruled that respondent was not liable for respondent's employee's breach of certain covenants not to compete with appellant or for the employee's misappropriation of appellant's trade secrets. We affirm in part, reverse in part, and remand.
FACTS
In October 1991, respondent Paul J. Hagen sold his insurance business to appellant Burmeister Associates, Inc., and accepted a position with the new company as an independent contractor/consultant. As part of the sale, Hagen entered into three contracts with Burmeister: an asset purchase agreement, a producer agreement, and a consulting agreement. The producer and consulting agreements contained covenants not to compete that applied to customers Hagen had secured prior to the sale and to any new customers he obtained while working for Burmeister.
In November 1994, Hagen began looking for new employment, and he met with representatives of respondent American Agency, Inc. At the meeting, Hagen informed American Agency that he believed his bankruptcy invalidated the noncompete agreements he executed with Burmeister. Hagen and American Agency met again in December 1994. Hagen resigned from Burmeister in January 1995 and began work with American Agency. Hagen informed American Agency that his exit interview with Burmeister went well and that he had been authorized to solicit business from an undefined group of friends and family.
Several days after Hagen began working for American Agency, Steven Menefee, the branch manager for American Agency, saw a letter from Burmeister's attorney to Hagen alleging that Hagen was violating his noncompete agreements with Burmeister. Menefee wrote to Burmeister, stating that he wanted to open a line of communication if there were any misunderstandings. Pursuant to Burmeister's request, Menefee sent over information on Hagen's solicitations. In addition, Menefee informed Burmeister that until the parties could meet, American Agency would not allow Hagen to transfer any insurance business from customers who were insured through Burmeister. A meeting was held two weeks later and it was agreed that Hagen and Burmeister would send a joint letter to customers informing them that they could choose to do business with either Burmeister or American Agency. Hagen was not allowed to sell any insurance to customers insured by Burmeister until the joint letter was mailed.
Hagen commenced a declaratory judgment action in Hennepin County District Court against Burmeister, to declare that the confidential customer list did not contain trade secrets and that his noncompete agreements with Burmeister were invalid. Burmeister counterclaimed, alleging breach of contract, unjust enrichment, and misappropriation of trade secrets, and sought a permanent injunction against Hagen to enjoin him from violating the noncompete agreements. Burmeister then brought a third-party complaint against American Agency, claiming tortious interference with contractual relationships.
The matter was tried before the district court. The district court ruled that Hagen breached his noncompete agreement with Burmeister and that he violated the Minnesota Trade Secrets Act when he solicited potential customers from the confidential customer list subject to the noncompete agreements. The court permanently enjoined plaintiff from soliciting business from protected customers and found him liable for damages. The district court rejected Burmeister's claim that, under the doctrine of respondeat superior, American Agency also was liable for Hagen's acts. The district court denied Burmeister's motion for amended findings and judgment was entered. Later, an amended judgment, dismissing Burmeister's claims against American Agency was entered. Burmeister appeals from the dismissal of his claims against American Agency
DECISION
When reviewing a case tried by the district court without a jury, this court's review is limited to determining whether the district court's findings are clearly erroneous and whether it erred in its conclusions of law. Lake Mille Lacs Inv., Inc. v. Payne , 401 N.W.2d 387, 389 (Minn.App. 1987), review denied (Minn. Apr. 29, 1987). A reviewing court is not bound, nor need it give deference, to a district court's decision on a purely legal issue. Frost-Benco Elec. Ass'n v. Minnesota Pub. Utils. Comm'n , 358 N.W.2d 639, 642 (Minn. 1984).
I. Breach of covenant not to compete
Burmeister argues the district court erred as a matter of law when it ruled that American Agency is not liable under the doctrine of respondeat superior for the Hagen conduct that violates the noncompete agreement. Under the doctrine of respondeat superior, an employer is "vicariously liable for the wrongful acts of its employees committed within the scope of their employment." Oelschalger v. Magnuson , 528 N.W.2d 895, 902 (Minn.App. 1995) (citation omitted), review denied (Minn. Apr. 27, 1995). To establish that an employee's acts occurred within his or her scope of employment, "it must be shown that the conduct was, to some degree, in furtherance of the interests of the employer." Hentges v. Thomford , 569 N.W.2d 424, 427 (Minn.App. 1997) (citations omitted). Other factors to be considered are whether the (1) employee was authorized to perform this type of act; (2) act occurs substantially within authorized time and space restrictions; and (3) employer should have reasonably foreseen the employee's conduct. Id. at 428.
Burmeister relies on Kallok v. Medtronic, Inc. , 573 N.W.2d 356 (Minn. 1998), to argue that American Agency is liable because it failed to make a reasonable inquiry into Hagen's claim that Burmeister had agreed that he could solicit the customers covered by the noncompete agreements. However, the decision in Kallok is distinguishable because it was brought as an action for tortious interference (an active tort) with contract by a third party and not under the doctrine of respondeat superior. The doctrine of respondeat superior has never been applied to cases involving an employee's breach of a noncompete agreement (a breach of contract action), entered into with a former employer. The application appears to be generally limited to tortious conduct committed by an employee.
We conclude the doctrine of respondeat superior does not apply to an employee's breach of a valid noncompete agreement where there was no independent tortious conduct by the new employer. Here, there was no independent tortious conduct by American Agency. As soon as American Agency found out about the dispute, it contacted Hagen's former employer, Burmeister, and tried, in good faith, to work it out between the two companies. The record discloses no ratification by American Agency of Hagen's alleged improper conduct. Under these circumstances, the district court did not err when it refused to find American Agency liable for Hagen's breach of the noncompete agreements.
II. Breach of Minnesota Trade Secrets Act
Burmeister also argues Hagen's misappropriation of trade secrets is a tort and that American Agency is, as a matter of law, liable for the acts of Hagen under the doctrine of respondeat superior. The parties do not dispute that Hagen misappropriated trade secrets in violation of Minnesota's Uniform Trade Secrets Act (UTSA), Minn. Stat. §§ 325C.01-.07 (1998). But, the district court concluded that American Agency is not liable for this violation "because [the] Minnesota Trade Secrets Act does not permit recovery against an employer when its employees misappropriate trade secrets." We disagree.
Respondeat superior is a common law remedy. See Watson by Hanson v. Metropolitan Transit Comm'n , 553 N.W.2d 406, 414 (Minn. 1996) (noting doctrine of respondeat superior is common law remedy). Although respondeat superior is not among the remedies specifically provided in the UTSA, the remedies provided in the MTSA are not exclusive. See Minn. Stat. § 325C.07(a) (providing Act displaces conflicting remedies). No Minnesota case addresses whether the UTSA precludes imposition of remedies available at common law, but appellate decisions have recognized that the Act does not preclude imposition of similar duties under the common law. See Aries Info. Sys. v. Pacific Management Sys. Corp. , 366 N.W.2d 366, 369 (Minn.App. 1985) (imposing common law duty of employer/employee confidentiality), review denied (Minn. June 27, 1985); Saliterman v. Finney , 361 N.W.2d 175, 178-79 (Minn.App. 1985) (recognizing MTSA can work in conjunction with common law duty not to disclose or use confidential information obtained at expense of former employer).
The misappropriation of trade secrets is an intentional tort. See Micro Data Base Sys., Inc. v. Dharma Sys., Inc. , 148 F.3d 649, 654 (7th Cir. 1998) (holding "misappropriation of a trade secret is an intentional tort"); Tracer Research Corp. v. National Envtl. Servs. Co. , 42 F.3d 1292, 1295 (9th Cir. 1994) (noting misappropriation of trade secrets count in complaint was a tort claim). When a third party seeks to hold a corporation liable for a tort committed by an employee, the doctrine of respondeat superior applies. Melady v. South St. Paul Livestock Exch. , 142 Minn. 194, 197-98, 171 N.W. 806, 807 (1919). Respondeat superior applies to common law torts and to a wide range of federal statutory wrongs. Continental Data Sys., Inc. v. Exxon Corp ., 638 F. Supp. 432, 439 (E.D.Pa. 1986).
The same principles that support extension of the respondeat superior doctrine in federal law apply to violations of state statutes. See Opatz v. John G. Kinnard Co. , 454 N.W.2d 471, 475 (Minn.App. 1990) (holding Minnesota's blue-sky laws are subject to common law principles allocating agent or employee liability to principal or employer). Logically, the general rule for vicarious liability should apply to trade secrets torts that an agent commits in the course and within the scope of the agency which are not for a purpose personal to the agent. See Semrad v. Edina Realty, Inc. , 493 N.W.2d 528, 535 (Minn. 1992) (stating principal is liable for act committed by agent in course and scope of agency and not for agent's personal purposes).
The Restatement defines the vicarious liability of an employer:
A master is subject to liability to third persons injured in their business relations by the tortious conduct of a servant acting within the scope of employment or, if apparent authority is relevant, acting within his apparent authority.
Restatement (Second) of Agency § 248 (1958). The comments to section 248 recognize that vicarious liability extends to unfair trade practices:
A master who authorizes a servant to compete with others and to do such acts as appear to the servant to be reasonably necessary in order to make such competition effective is subject to liability to persons injured by tortious acts committed in the course of such competition if intended for the benefit of the principal or master and if not an extraordinary or outrageous method of conducting such competition.
Id. , cmt. a.
The supreme court relied on section 248, comment a, of the Restatement in Kasner v. Gage , 281 Minn. 149, 152-53, 161 N.W.2d 40, 43 (1968). It that case, the court held that corporation is not liable for its agent's misappropriation of confidential customer information because this action was outside the scope of the agent's employment. Id. See also Semrad , 493 N.W.2d at 535 (citing Kasner as holding principal is not liable for unauthorized intentional tort of its agent).
We conclude the district court erred when it found, as a matter of law, that American Agency could not be liable for Hagen's violation of the MTSA. We reverse the district court on this legal issue and remand for trial on that part of Burmeister's complaint against American Agency wherein it alleges that under the doctrine of respondeat superior, American Agency must answer for Hagen's alleged tortious conduct under the MTSA. An essential element on retrial will be a factual determination on whether Hagen was acting within the course and scope of his new employment when he mailed his solicitation letter to individuals listed on the confidential customer list.
III. Motion to Strike
Finally, American Agency filed a motion to strike portions of Burmeister's reply brief, arguing that the issue of trade secrets was not argued in their primary brief. In the alternative, American Agency moves that it be allowed to file the additional brief it submitted along with its motion papers. The argument presented in Burmeister's reply brief reasonably and properly addresses the argument raised by American Agency in its brief. We deny American Agency's motion to strike.