Rehabilitation Specialists, Inc. v. Koering
1987 Minn. App. LEXIS 4262, 404 N.W.2d 301 (1987)
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Rule of Law:
An employee's duty of loyalty prohibits them from soliciting their employer's customers for their own competing business while still employed. While an employee may take steps to prepare to compete, whether their actions cross the line from permissible preparation to prohibited solicitation is a question of fact based on all the circumstances.
Facts:
- Rehabilitation Specialists, Inc. (RSI) employed Nancy Koering as an administrator, where her duties included soliciting business and negotiating contracts.
- In May 1985, Koering began planning to start her own competing therapy business.
- On June 13, 1985, while still employed by RSI, Koering informed Robert Schuchman, a vice-president at Beverly Enterprises (one of RSI's major customers), that she was starting her own business and inquired about 'possible opportunities for contracting for new business.'
- Following their conversation, Schuchman offered Koering contracts with five nursing home facilities on behalf of Beverly.
- In a July 23, 1985 letter, Koering sent Schuchman draft contracts for two of the facilities and requested a letter of intent for the other three to help her secure a bank loan for her new company.
- On July 26, 1985, Koering informed RSI's president that she intended to resign to start her own business and that she believed she would have five therapy contracts.
- Koering officially ended her employment with RSI on August 31, 1985. She did not have a non-compete agreement.
- Upon her departure, Koering took RSI's policy and procedure manual, a list of its employees, and several sample contracts.
Procedural Posture:
- Rehabilitation Specialists, Inc. (RSI) filed a lawsuit against Nancy Koering, a former employee, in a Minnesota trial court.
- RSI's complaint alleged breach of the duty of loyalty, unfair competition, and misappropriation of confidential business information.
- The trial court granted summary judgment in favor of Koering on all of RSI's claims.
- RSI, as the appellant, appealed the trial court's grant of summary judgment to the Minnesota Court of Appeals, where Koering was the appellee.
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Issue:
Does an employee's communication with their employer's customer about starting a competing business and inquiring about future contract opportunities create a genuine issue of material fact for a breach of the duty of loyalty, thereby making summary judgment inappropriate?
Opinions:
Majority - Sedgwick, J.
Yes. An employee's actions of inquiring about business opportunities with an employer's customer while still employed can constitute a breach of the duty of loyalty, creating a genuine issue of material fact that must be decided by a jury. The court reasoned that while an employee has the right to prepare to enter into competition, the duty of loyalty prohibits them from soliciting the employer's customers for themselves. There is no precise line between permissible 'preparation' and prohibited 'solicitation'; it is a matter of degree and a question of fact for the jury. Koering's admission that she 'inquired about possible opportunities' with RSI's major customer, Beverly, was sufficient to create a factual issue as to whether she crossed that line. It is irrelevant that RSI did not have existing contracts with the specific facilities, as Beverly was an RSI customer, and Koering's duty was to secure business for RSI, not for herself. Because a fact issue exists for the breach of loyalty claim, summary judgment is also inappropriate for the unfair competition claim, which is based on the same conduct. Similarly, factual issues exist as to whether the company manual Koering took constitutes a trade secret and whether its acquisition was improper, precluding summary judgment on the misappropriation claim.
Analysis:
This case clarifies the fact-intensive nature of an employee's duty of loyalty, particularly the distinction between permissible preparation and unlawful solicitation. It establishes that even indirect inquiries about future business with an employer's current customer can be sufficient to survive a summary judgment motion and create a triable issue for a jury. The decision serves as a caution to employees preparing to compete, highlighting that actions taken before resignation can lead to liability. For employers, it reinforces their ability to protect their client relationships from being usurped by departing employees, even without a formal non-compete agreement.
