Minnesota Supreme Court Allows Advice of Counsel Defense to Tortious Interference Claim in Non-Compete Dispute
The Minnesota Supreme Court has affirmed lower court findings dismissing a claim of tortious interference with contract by a staff augmentation company that successfully sued a former employee and his new employer for breach of a non-compete agreement. Sysdyne Corp. v. Rousslang, et al, No. A13-0898 (Minn. March 4, 2015). Sysdyne, the plaintiff at the trial court level, based its tortious interference claim against Xigent Solutions, LLC, the new employer, on an earlier Minnesota Supreme Court decision, Kallok v. Medtronic, 573 N.W.2d 356 (Minn. 1998) in which the Court affirmed judgment against the hiring company in a non-compete dispute for tortious interference, with damages measured by the attorneys’ fees expended in the successful prosecution of the lawsuit. Since Kallok, companies looking at the possible hiring of a candidate with a non-compete have had to consider the potential impact of this court-created exception to the “American Rule” which could result in the award of attorneys’ fees to the prevailing plaintiff in a non-compete lawsuit.
In this most recent case, Xigent’s president provided its outside counsel with a copy of Brian Rousslang’s offer letter and employment agreement from Sysdyne, and informed the lawyer that the positions were essentially the same. Xigent’s attorney opined that the non-compete was overbroad as to Rousslang’s existing customers and stated that “the entire agreement was unenforceable.” Based on this advice, Xigent hired Rousslang. At summary judgment, the trial court ruled in favor of Rousslang as to his pre-existing customers, but denied summary judgment as to the balance of the non-compete. At trial, Sysdyne won damages of $158,240 plus costs and interest on the breach of contract claim. Based on the evidence presented, however, the trial court found that Xigent was justified in interfering with the contract because it conducted a reasonable inquiry into the enforceability of the non-compete agreement and, based on the advice of counsel, honestly believed the agreement was unenforceable.
Sysdyne appealed, arguing that Xigent’s actions were not justified and that Sysdyne should have been allowed to call Xigent’s attorney as a witness. The Court of Appeals affirmed. The Minnesota Supreme Court granted review to address two issues: (1) whether the justification defense to a claim of tortious interference with contract may be justified by reliance on incorrect advice of counsel and (2) if so, whether the trial court’s finding of good-faith reliance was supported by the record. The Court held that interference in the form of hiring an employee with a valid non-compete can be justified if the inquiry performed and reliance on the advice obtained was “reasonable.”
The Court noted in a footnote that an amicus brief filed in the case expressed
concerns that recognizing this defense will effectively extinguish tortious interference with contract claims and will unfairly transfer the consequences of erroneous legal advice onto the innocent party.
The Court downplayed the impact of its ruling, pointing out that the plaintiff obtained a six figure monetary award.
The Court next turned to Sysdyne’s contention that, even if an errouneous belief based on advice of counsel can justify intentional interference with contract, “the belief must be informed by something more than an infirm, conclusory legal opinion.” The nature of the advice of Xigent’s attorney was never revealed in the litigation. The evidence consisted of testimony as to what information the attorney was provided (including a copy of the agreement and confirmation that the work would be the same) and billing records showing that the attorney billed time for review and providing advice. The Court found that this was sufficient, distinguishing Kallok where the defendant failed to provide relevant information, actually provided incorrect information, and did not provide copies of the relevant noncompete agreements.
The Court held that a defendant is not required to establish the legal analysis underlying an attorney’s advice in order to prove justification. An advice of counsel defense requires that the defendant establish that he or she disclosed all mateiral facts to the attorney, received advice that his or her conduct was legal, and acted in good-faith reliance on that advice.
This decision may make tortious inteference claims more difficult in Minnesota. It suggests that clients and their counsel should document, in a generic fashion, that advice was provided before proceeding with the hire of an applicant with what is believed to be an unenforceable non-compete.