Employer is liable for violation of non-compete

An employer was vicariously liable for its employee’s actions in soliciting more of his former employer’s customers than permitted by a non-compete agreement when it knew about the agreement and failed to properly supervise the solicitations, ruled the Court of Appeals.

An insurance agent sold his agency, signed a non-compete agreement with the buyer allowing him to solicit only “close friends and family,” worked for the buyer for two years and then went to work for a competitor. He later violated the non-compete agreement by soliciting more of the buyer’s customers than permitted.

The buyer sought to hold the agent’s new employer liable for the agent’s acts.

A Hennepin County District Court judge determined, however, that the employer had not authorized or ratified solicitations beyond those permitted by the non-compete agreement so the agent’s conduct was not within the scope of his employment. Therefore the employer was not liable.

But the Court of Appeals reversed.

“[The employer] knew what information [the agent] possessed and knew what the limits of his non-compete agreement were. They didn’t know exactly who on the list were appropriate for solicitation. Ignorance of this significant fact should have alerted them to supervise [the agent],” wrote Judge Roland C. Amundson. “[The agent] was acting within the scope of his employment when he solicited clients in violation of his non-compete agreement with [the buyer].”

The 12-page decision, Hagen, et al. v. American Agency, Inc., is Minnesota Lawyer No. CA-1107-00.

The attorney for the former employer, Eric J. Magnuson, said, “I never thought it was a hard issue. … The Court of Appeals cut through the baloney and got right to the [point].” The employer argued throughout that it should not be liable because it did not know what the agent was doing, Magnuson observed. “But that has never been a defense in a vicarious liability case.”

Minneapolis attorneys Joseph M. Sokolowski and David A. Orenstein, who represented the employer, said that the truly frightening thing about the decision for Minnesota employers is that the court verges on announcing that employers are strictly liable for the harm caused by employees who engage in some form of misconduct on the job.

“[Moreover], we were extremely surprised by the ruling … since the trial court had twice concluded as a matter of law that [the employer] did not know and did not have reason to know of its employee’s misconduct,” said Sokolowski. “We believe the appellate court inappropriately substituted its judgment on evidentiary issues for not one, but two, trial court determinations. Second-guessing the trial court on this type of issue is simply not the province of the Court of Appeals.”

They indicated that they intend to petition for Supreme Court review of the decision.

The breach

On Oct. 10, 1991, Paul Hagen sold his insurance agency to Burmeister & Associates, Inc. (Burmeister). This sale included three contracts: an asset purchase agreement, a producer agreement, and a consulting agreement. Both the producer and consulting agreements contained covenants not to compete, which were effective until February 2001. They also agreed that Hagen would not disclose account information on a list of policyholders that Burmeister was purchasing. Hagen worked with Burmeister as an independent contractor and consultant after the sale, and on Nov. 1, 1992, he became an employee of Burmeister.

In November 1994, while still employed by Burmeister, Hagen contacted American Agency, Inc. (American Agency), regarding prospective employment. Hagen discussed and provided copies of his covenants with Burmeister to American Agency’s lawyers. He informed American Agency that Burmeister gave him permission to solicit insurance business from close family and friends upon his departure. In December 1994, Hagen again discussed his non-compete agreements with American Agency. American Agency hired Hagen and he began working for them.

American Agency approved a draft of a letter that Hagen indicated he would use for the solicitation of business from close friends and family members. The next day, Hagen began to send letters to former clients, many of whom were later determined to be outside of his “close friends and family.” American Agency never requested to see the list of those Hagen was soliciting, nor did they approve this list; Hagen never shared his planned solicitation list before solicitation letters were mailed. It was later determined that of Burmeister’s 1000-name policyholder list, approximately 50 people could be classified as Hagen’s “close friends and family.” Hagen actually solicited approximately 250 of the 1000 names on the list. American Agency first learned of the extent of Hagen’s mailings when Burmeister’s attorney contacted them.

Hagen commenced an action against Burmeister for declaratory judgment, contending that the contracts he signed in conjunction with the asset sale did not prohibit him from competing with Burmeister. Burmeister counterclaimed, arguing that by soliciting clients from his policyholder list, Hagen breached the non-compete and non-disclosure provisions of the contracts and violated the Minnesota Trade Secrets Act (MTSA). It also filed and served a third-party complaint against American Agency for tortious interference, claiming that American Agency had encouraged Hagen to breach his non-compete and non-disclosure obligations.

The District Court found Hagen violated the covenant not to compete and the MTSA. But the court dismissed all claims against American Agency, concluding that American Agency had no reason to know that Hagen’s actions violated his non-compete agreement with Burmeister.

On appeal, the court held that the District Court erred when it dismissed Burmeister’s MTSA claim against American Agency. The court then require a determination on retrial of the question 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.

The parties again filed cross-motions for summary judgment and the District Court held that it could not “find that American [Agency] knew or ratified [Hagen’s] conduct,” and therefore, should not be held liable for his misappropriation of secrets. The District Court held that American Agency had not authorized Hagen to solicit customers on the policy list other than close friends and family, and had not ratified the unauthorized mailing. The District Court found that Hagen’s unauthorized conduct was not “so incidental to conduct authorized as to be within the scope of the employment.” Burmeister appealed.

The proper test

Amundson began by explaining that under the principle of respondeat superior, an employer is liable for the torts committed by an employee within the course and scope of employment. “Here, the parties dispute the applicable test for determining whether Hagen’s conduct fell within the course and scope of his employment,” Amundson wrote.

Burmeister contended that the applicable test is set forth in the 1973 Minnesota Supreme Court case of Lange v. National Biscuit Co.. The Lange test provides that an employer may be held vicariously liable for an employee’s misconduct, even if intentional, when the source of the misconduct is related to the duties of the employee
and it occurs within work-related limits of time and place.

But where, as here, Amundson observed, an employer has specifically authorized an employee to compete with other businesses, and that employee goes too far in effecting that competition, the court’s analysis is controlled by the 1968 decision of Kasner v. Gage. Kasner states that an employer cannot be liable for the tortious or criminal acts of an employee without a supported finding that the act is conduct of the same general nature as that authorized, or incidental to the conduct authorized.

While both cases address the general issue of an employer’s liability for the intentional torts of its employee, the facts of each are unique, Amundson explained. In Kasner, a sales agent had two people infiltrate a competitor to gain access to the competitor’s records, and deliver them to him. In contrast, Lange and its progeny deal with employees who commit unauthorized assaults while they are working.

“Clearly, Hagen’s misappropriation is much more akin to the theft in Kasner than the assault in Lange,” Amundson observed. “Accordingly, the district court did not err in relying on Kasner.”

Vicarious liability

The Court of Appeals concluded, however, that the District Court erred in its application of Kasner’s principles to the case at bar.

Amundson noted that in determining whether an act is within the course and scope of employment, the Kasner court considered the following factors:

• whether or not the act is one commonly done by such servants;

• the previous relations between the master and the servant;

• whether or not the act is outside the enterprise of the master;

• whether or not the master has reason to expect that such an act will be done;

• the similarity in quality of the act done to the act authorized;

• whether or not the instrumentality by which the harm is done has been furnished by the master to the servant;

• the extent of departure from the normal method of accomplishing an unauthorized result; and

• whether or not the act is seriously criminal.

“Application of these factors to this case compel[s] a finding of vicarious liability,” wrote Amundson.

Solicitation letters are very common in the insurance industry. While American Agency argues that improper solicitations are not common, this argument misconstrues the nature of this first inquiry and begs the question, Amundson observed. “Vicarious liability in these cases is not limited to situations where intentional torts are common,” noted the judge.

“Hagen’s solicitation was entirely within the enterprise of American Agency. In fact, the actual text of the solicitation letter was expressly authorized by American Agency, as was the sending of the letter to Hagen’s friends and family,” wrote Amundson. “American Agency, knowing that the area of authorized solicitation was vaguely defined, had reason to expect that Hagen might not correctly determine what constituted ‘close friends and family.’ They specifically met with Hagen to discuss the limits of Hagen’s non-compete agreement.”

Amundson observed further: “Hagen’s improper solicitation was identical in nature to that authorized — only the quantity differed. The solicitation was only improper because it was sent to more people than authorized, not because it was a different letter. The fact that some were sent to individuals in the penumbra outside of Hagen’s close friends and family does not radically change the character of the act. Although the letters can be distinguished on the basis of whether or not, objectively, they were authorized, the authority to send solicitations to close friends and relatives was undoubtedly vague and the terms painfully indescript.”

Amundson also noted the importance of the fact that American Agency alone provided the resources by which the harm was done, including the stationery, postage, and envelopes. Further, the letter was composed and sent from American Agency and the misconduct was accomplished entirely through its officers, the judge continued.

The District Court focused specifically on American Agency’s lack of knowledge, Amundson noted. But if courts were to predicate liability in respondeat superior cases upon a showing that the employer should have reasonably anticipated the employee’s specific misconduct, the distinction between direct and vicarious liability would be lost, the judge observed. “If American Agency had known or approved of the improper solicitations, there would be no respondeat superior issue — they would be directly liable for the improper solicitation.”

In distinguishing the case from Kasner — where the court refused to hold a sales corporation liable for its agent’s misappropriation of a competitor’s records because of the agent’s autonomy — Amundson observed that “Hagen was a supervised employee, but despite being fully aware of the conditions of Hagen’s non-compete clause, American Agency simply failed to supervise the solicitation.”

The court concluded that Hagen was acting within the scope of his employment when he solicited clients in violation of his non-compete agreement with Burmeister.

— Michelle Lore