Fulton v. Honkamp Krueger Fin. Servs., Inc.
| Decision Date | 01 December 2020 |
| Docket Number | Case No. 20-CV-1063 (PJS/DTS) |
| Parties | AARON J. FULTON, Plaintiff/Counter-Defendant, v. HONKAMP KRUEGER FINANCIAL SERVICES, INC., Defendant/Counter-Claimant/Cross-Claimant, v. MARINER, LLC, d/b/a Mariner Wealth Advisors, Cross-Defendant. |
| Court | U.S. District Court — District of Minnesota |
Katie M. Connolly, Andrew Peterson, and Joel D. O'Malley, NILAN JOHNSON LEWIS PA, for Aaron J. Fulton and Mariner, LLC.
Jeremy D. Sosna, Benjamin D. Sandahl, and Michael R. Link, LITTLER MENDELSON P.C., and Todd L. Stevenson, KANE, NORBY & REDDICK, P.C., for Honkamp Krueger Financial Services, Inc.
Aaron Fulton is a former employee of Honkamp Krueger Financial Services, Inc. ("HKFS"). On May 1, 2020, Fulton terminated his employment with HKFS and immediately went to work for Mariner, LLC, a competitor of HKFS. Fulton then filed this lawsuit against HKFS, seeking a declaration that the restrictive covenants in his employment agreement with HKFS are unenforceable. HKFS counterclaimed alleging breach of contract and misappropriation of trade secrets, and also filed separate lawsuits against Fulton (in Iowa1) and Mariner (in this Court2).
This matter is before the Court on two motions for a preliminary injunction filed by HKFS—one filed in the lawsuit that Fulton brought against HKFS, and the other filed in the lawsuit that HKFS brought against Mariner. After the Court heard oral argument on these motions, the two cases were consolidated, and the Court therefore addresses both motions in this order. For the reasons that follow, HKFS's motions are denied.
Fulton began working for HKFS as a Senior Financial Advisor in December 2011, and he was eventually promoted to non-equity partner and vice president. ECF No. 51 ¶¶ 9, 11. HKFS is a financial advisory firm that relies heavily on referrals from CPA firms to bring in new clients. As HKFS explains, the firm "provides financial advice and wealth management services to CPA firm clients and then shares revenues generated from that work with . . . the CPA firms." Id. ¶ 4.
At the time that he was hired in 2011, Fulton entered into an employment agreement with HKFS containing non-compete, non-solicitation, and confidentialityprovisions. See ECF No. 1-1. Fulton also executed an employee proprietary information agreement, in which he agreed "not to disclose, or make any use of" HKFS's confidential information, except as specifically authorized. ECF No. 45-2 at 2. Both contracts are governed by Iowa law.
Fulton began looking for a new job in January 2020, after he learned that HKFS was in the process of being acquired by a publicly-traded company. ECF No. 62 ¶¶ 6-12. Fulton received an offer of employment from Mariner in April 2020. Id. ¶ 14. Mariner and HKFS are direct competitors; like HKFS, Mariner is a financial advisory firm that relies heavily on referrals from CPA firms.
Fulton and Mariner were aware of the restrictive covenants in Fulton's contracts with HKFS and, with the help of counsel, they executed a carefully orchestrated scheme to terminate Fulton's employment with HKFS in a manner that was intended to avoid triggering the non-compete clause. The key to the plan was the realization that Fulton's employment agreement distinguished between the termination of the employment agreement and the termination of his employment. In other words, the agreement permitted Fulton to terminate the employment agreement and yet remain employed by HKFS. Fulton and Mariner also realized that nothing in the non-compete clause provided that it survived the termination of the employment agreement. This created a loophole: If Fulton first terminated the employment agreement and then laterterminated his employment, the non-compete clause would not apply, because the agreement would not be in effect at the time that Fulton quit his job.
Fulton exploited this loophole on May 1, 2020. At 2:37 pm, Fulton sent an email to John Darrah, HKFS's CEO, terminating his employment agreement. See ECF No. 51-1 at 11. Two minutes later (that is, at 2:39 pm), Fulton sent a second email to Darrah terminating his employment. See id. at 20-23. The resignation letter attached to Fulton's 2:39 pm email explained that he was going to work for Mariner and that he had deposited all documents belonging to HKFS in a locked filing cabinet in HKFS's office. Id. at 22. Fulton also explained that he had hired a third-party forensics expert to ensure that all confidential information had been removed from his personal devices. Later that same afternoon, Fulton filed this lawsuit seeking a declaration that the restrictive covenants in his employment agreement with HKFS are unenforceable.
According to HKFS, three of its clients followed Fulton to Mariner, and Fulton has contacted at least one CPA firm with whom HKFS has a referral relationship. ECF No. 26 ¶ 15; ECF No. 27. Based on these facts, HKFS alleges that Fulton has violated the terms of both the employment agreement and the employee proprietary information agreement and that he has misappropriated trade secrets in violation of Iowa's Uniform Trade Secrets Act.3 HKFS further alleges that Mariner is liable for tortious interferencewith contractual relations. HKFS seeks preliminary injunctions to enjoin both Fulton and Mariner from further illegal acts.
A litigant seeking a preliminary injunction under Fed. R. Civ. P. 65 "must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest." Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008); see also Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109, 114 (8th Cir. 1981) (en banc). "'[A] preliminary injunction is an extraordinary remedy,' and '[t]he party seeking injunctive relief bears the burden of proving' that these factors weigh in its favor." Mgmt. Registry, Inc. v. A.W. Cos., 920 F.3d 1181, 1183 (8th Cir. 2019) (quoting Watkins Inc. v. Lewis, 346 F.3d 841, 844 (8th Cir. 2003)).
HKFS alleges that Fulton breached the covenant not to compete in his employment agreement when he started working for Mariner. The non-compete provides that:
b. Covenant Not to Compete. Employee further covenants that for a period of one year following the termination of Employee's employment for whatever reason,Employee will not, within the Company's market area, directly or indirectly, either as a sole proprietor, partner, stockholder, director, officer, employee, consultant or in any other capacity, conduct or engage in, or be interested in or associated with, any person or entity which engages in the "Business" (as defined above), working with CPA firms. For purposes of this Paragraph, the "Company's market area" includes, but is not limited to, any state in which HKFS has conducted business at any time in the preceding twelve months.
ECF No. 1-1 ¶ 8(b). Fulton argues that he has not breached this provision because (1) the employment agreement was terminated two minutes before he resigned; (2) the non-compete did not survive the termination of the agreement; and thus (3) at the time that he resigned, the non-compete no longer applied to him.
"Non-compete agreements are generally disfavored in Iowa because they 'are viewed as restraints of trade which limit an employee's freedom of movement among employment opportunities . . . .'" Ag Spectrum Co. v. Elder, 191 F. Supp. 3d 966, 971 (S.D. Iowa 2016) (quoting Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751, 761 (Iowa 1999)), aff'd, 865 F.3d 1088 (8th Cir. 2017). Because non-competes are disfavored under Iowa law, "they are strictly construed against the one seeking to restrain another from pursuing his profession, business or employment." Blackman v. Folsom, 200 N.W.2d 542, 542-43 (Iowa 1972).4
This is a problem for HKFS because Fulton's employment agreement is very poorly drafted. The agreement appears to be stitched together from parts of other employment agreements, with little thought given to how the parts work together. It also contains multiple grammatical, typographical, and other errors. And the non-compete itself is so broad and ambiguous that it may be unenforceable. The Court need not address the enforceability of the non-compete, however, as the Court agrees with Fulton that he managed to avoid its application.
As Fulton argues, nothing in the employment agreement provides that the term of the agreement is synonymous with the term of employment. To the contrary, paragraph two of the agreement provides: "Employment is at will; however the parties agree that either party may terminate the Agreement on written notice." ECF No. 1-1¶ 2. This language strongly suggests that the term of the agreement is distinct from the term of employment.
The first clause—"[e]mployment is at will"—speaks to the term of employment. At-will employment "means the employment relationship is terminable by either party at any time, for any reason, or no reason at all." Fitzgerald v. Salsbury Chem., Inc., 613 N.W.2d 275, 280 (Iowa 2000) (citation and quotation marks omitted).
The second clause—"however the parties agree that either party may terminate the Agreement on written notice"—speaks to the term of the agreement. The subject of the second clause ("the Agreement") is not the same as the subject of the first clause ("Employment"). If the two clauses were addressing the same subject, then presumably they would use the same word. That the two clauses are addressing different subjects is also suggested by the word "however." The first clause essentially says that there are no restrictions applicable to the termination of employment. "However," says the second clause, there is a restriction applicable to the termination of the agreement: A party who wishes to terminate the agreement must provide written notice.5
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