Hagen v. Burmeister & Associates, Inc., C3-00-496.

• Decision Date: 02 August 2001
• Docket Number: No. C3-00-496.,C3-00-496.
• Citation: 633 N.W.2d 497
• Court: Minnesota Supreme Court
• Parties: Paul J. HAGEN, Plaintiff, v. BURMEISTER & ASSOCIATES, INC., Defendant and Third-Party Plaintiff, Respondent, v. American Agency, Inc., Third-Party Defendant, Petitioner, Appellant.

633 N.W.2d 497

Paul J. HAGEN, Plaintiff, v. BURMEISTER & ASSOCIATES, INC., Defendant and Third-Party Plaintiff, Respondent, v. American Agency, Inc., Third-Party Defendant, Petitioner, Appellant.

No. C3-00-496.

Supreme Court of Minnesota.

August 2, 2001.

Rehearing Denied September 27, 2001.

Joseph M. Sokolowski, David A. Orenstein, Parsinen Kaplan Rosberg & Gotlieb, P.A. and Leon R. Erstad, Erstad & Riemer, P.A., Minneapolis, for the appellant.

Eric J. Magnuson, Kimberly T. Ross, Rider, Bennett, Egan & Arundel, LLP, Minneapolis, and Rodney J. Mason, Chandler and Mason, Ltd., St. Paul, for respondent.

HEARD, considered, and decided by the court en banc.

OPINION

LANCASTER, Justice.

A trial court held that insurance agent Paul Hagen was liable to his former employer, respondent Burmeister & Associates, Inc., for breach of contract and for misappropriation of trade secrets in violation of the Minnesota Uniform Trade Secrets Act (UTSA). The trial court also held that Hagen's current employer, appellant American Agency, Inc., was not vicariously liable to Burmeister for Hagen's UTSA violation because an employer cannot, as a matter of law, be vicariously liable for an employee's UTSA violation. Burmeister appealed that holding and the court of appeals reversed, concluding that an employer can be liable for an employee's UTSA violation. The court of appeals remanded the case for further findings to determine whether Hagen's UTSA violation fell within the scope of his employment with American. On remand, the district court granted summary judgment for American, and Burmeister appealed for the second time.¹ The court of appeals again reversed. This case comes before us on American's appeal of that decision. We reverse.

Paul Hagen is an experienced insurance agent who specializes in selling property and casualty insurance. In October 1991, respondent Burmeister & Associates, Inc. (Burmeister), whose sole shareholder and president is Randall Burmeister (Mr. Burmeister), purchased the assets of Hagen's insurance agency, the Hagen Agency, Inc. Those assets included the Hagen Agency's insurance contracts and information about the agency's policyholders. Three documents were executed in connection with that sale: an asset purchase agreement; a consulting, confidentiality, and noncompetition agreement; and a producer agreement. After the sale, Hagen went to work for Burmeister as an independent contractor, but later became an employee. The noncompete and confidentiality agreement Hagen signed with Burmeister prohibited the disclosure of information relating to Burmeister's policyholders, which, according to the agreement, was "deemed to be `trade secrets' within the meaning of the Minnesota Uniform Trade Secrets Act." Pursuant to the agreement, Hagen agreed that if and when he left Burmeister's employ he would not sell or issue property or casualty insurance to Burmeister customers, including the Hagen Agency's customer accounts sold to Burmeister in 1991, until February 28, 2001.

In November 1994, while still a Burmeister employee, Hagen met Steven Menefee, an insurance agent and branch manager of American Agency, Inc. Hagen contacted Menefee and had a series of meetings with him and other American representatives to explore employment opportunities with American. During these meetings, Hagen told American about the noncompete and confidentiality agreement he entered into with Burmeister. On January 17, 1995, Hagen resigned from Burmeister.

Shortly before Hagen resigned, Mr. Burmeister and Hagen discussed the client accounts that Hagen sold to Burmeister in 1991. Mr. Burmeister said something to the effect that he would understand if Hagen's close family and friends kept their business with Hagen, but if he tried to take 90% of the client accounts he sold to Burmeister, they would have a problem. Approximately one week later, Hagen went to work for American.² After Hagen left Burmeister, but before he joined American, he described his parting from Burmeister to Menefee. Menefee understood that Hagen "had a good exit interview and that he was free to solicit some of the accounts * * *."

On January 29, 1995, Hagen, now working for American, sent out a solicitation letter to more than 200 Burmeister customers from among the accounts he sold to Burmeister in 1991. Those 200 customers accounted for 20 to 30 percent of the accounts Hagen sold to Burmeister. Menefee did not read the final version of the solicitation letter, but did review a rough draft. Additionally, Menefee gave Hagen access to, and Hagen used, American Agency stationery and envelopes to send the letter. Menefee did not, however, monitor the number of letters sent out or to whom those letters were sent.

After Mr. Burmeister learned of the solicitation letter, Burmeister's attorney sent Hagen a letter notifying him that, in Burmeister's view, he was in violation of his noncompete agreement. A few days later, on February 6, Hagen filed an action against Burmeister seeking a declaratory judgment that he was not prohibited from competing with Burmeister. About this time, Menefee contacted Mr. Burmeister to discuss the letter from Burmeister's attorney. Menefee agreed on behalf of American that it would not accept any business from Burmeister clients until the parties could meet and discuss the situation. Shortly thereafter, Hagen, Mr. Burmeister, Menefee and others met and agreed to send out a joint letter to the clients who received Hagen's solicitation letter, informing them that they "have a right to select the insurance agent of their choice." The parties interpreted the significance and effect of this agreement differently: Menefee came away from the meeting feeling that any conflict was essentially resolved, whereas Mr. Burmeister merely viewed the meeting and agreement to send out the joint letter as "damage control," not affecting his legal options. After the meeting and based on his understanding of its resolution, Menefee permitted Hagen to transfer business from clients who had received his solicitation letter.

Burmeister filed its answer to Hagen's declaratory judgment complaint and asserted counterclaims of breach of contract, unjust enrichment, and misappropriation of trade secrets. Subsequently, Burmeister filed a third-party complaint against American, claiming tortious interference with contract. Notwithstanding this claim, Burmeister's theory of recovery against American evolved throughout the proceedings into a respondeat superior claim: Burmeister argued the respondeat superior claim at trial and both parties briefed the trial court on that claim. American never challenged Burmeister's change in recovery theories. Accordingly, we will treat the respondeat superior claim as if it had been pled. Minn. R. Civ. P. 15.02; see T.W. Sommer Co. v. Modern Door & Lumber Co., 293 Minn. 264, 269, 198 N.W.2d 278, 281 (1972) (stating that issues litigated either by express or implied consent are treated as if they had been pled).

After a four-day bench trial in August 1996, the court held that Hagen was liable for breach of contract, concluding that Hagen violated the noncompete clause when he sent the solicitation letter to Burmeister clients. Additionally, the court held that Hagen "misappropriated trade secrets as defined in Minn.Stat. [§ 325C.01] when he improperly solicited customers in violation of the Contracts." The court awarded damages to Burmeister "for [Hagen's] misappropriation of Trade Secrets at $28,000 per year for a six year period from January 1995 to February 2001 * * *." With regard to Burmeister's third-party claims against American, however, the court held in favor of American:

Defendant American Agency is not liable for violating the Minn.Stat. [§ ] 325[C].01 because [the] Minnesota Trade Secrets Act does not permit recovery against an employer when its employees misappropriate trade secrets. Defendant Burmeister's claim that [third-party] Defendant American is liable under a common law tort theory of responde[a]t superior is unsupported by law. Moreover, this Court has found that Defendant [American] did not know, and had no reason to know, that Plaintiff [Hagen] had not agreed upon a permitted use of [the confidential client list] with Defendant Burmeister * * *. Defendant American Agency erroneously, but not culpably, believed that Plaintiff [Hagen] and Defendant Burmeister had reached an agreement on [Hagen's] use of [the client information].

Burmeister appealed to the court of appeals and argued that the trial court erroneously ruled that American was not vicariously liable for Hagen's breach of contract or for his misappropriation of trade secrets. Hagen v. Burmeister & Assocs., Inc., No. C8-98-864, 1999 WL 31130, at *2 (Minn.App. Jan.26, 1999) (Hagen I). American also filed a notice of review in connection with the trial court's decision. In its statement of the case, American proposed that the court of appeals review whether the client list used by Hagen to send out his solicitation letters was in fact a trade secret. A review of the record reveals no subsequent document, including the appellate briefs, where American made any argument to the court of appeals regarding whether the client list was a trade secret. In Hagen I, the court of appeals held that American was not liable under respondeat superior for Hagen's breach of contract because respondeat superior generally applies to tortious conduct committed by employees, and there was no independent tortious conduct committed by American. Id. at *2-3. However, the court also held that the trial court erred in concluding that, as a matter of law, American could not be liable for Hagen's violation of the UTSA. Id. at *4. The court of appeals held that the misappropriation of trade secrets is an intentional tort, that respondeat superior can apply to tortious acts committed by employees, and therefore "the general rule for vicarious liability should apply to...