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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Is There An Implied Covenant in Employment Agreements?

Understanding an important discrepancy in case law

Lawsuits claiming breaches of an implied covenant of good faith and fair dealing in employment agreements are dismissed every day. Why do plaintiffs keep trying? Because there is a discrepancy in case law. In some matters it has been held that it was bad faith to terminate non-at-will employees to deprive them of earned compensation.

0217-ContractLawEvery day, employees claim their employers breached the implied covenant of good faith and fair dealing in their employment agreements, and every day courts dismiss their claims. Why do the employees keep trying? Because there is a discrepancy in the case law. On the one hand, case after case holds that there is no implied covenant of good faith and fair dealing in employment agreements. This line of cases begins with Hunt v. IBM Mid Am. Employees Fed. Credit Union,1 and includes cases as recent as Laser Aiming Sys. Corp. v. Bondhus.2

On the other hand, in Bratton v. Menard, Inc.3 and Holman v. CPT Corp.,4 the Minnesota Court of Appeals held that it was bad faith for an employer to terminate a non-at-will employee for the purpose of depriving the employee of earned compensation. These cases were followed, at some distance, by Daum v. Planit Solutions, Inc.,5 in which the federal district court held that it was a bad-faith tort for an employer to terminate an at-will employee for the purpose of depriving the employee of compensation.

Bratton and Holman are consistent with implied covenant case law holding that a party breaches the implied covenant of good faith and fair dealing when it is shown to have “an ulterior motive for its refusal to perform a contractual duty.”6 In Bratton and Holman, the employer’s alleged desire not to pay compensation was the alleged motive for the terminations. The deciding factor in permitting such claims to proceed, however, was that the employment contracts were not at-will contracts, but were contracts containing restrictions on termination that were potentially provable on the basis of employee handbooks.

Bratton and Holman have never been overruled. They arguably show that there is an implied covenant in non-at-will employment agreements, at least to the extent that an employer may not terminate a non-at-will employee to avoid paying contractual compensation.

Hunt v. IBM Mid America Employees Federal Credit Union

The result in Bratton and Holman is contrary to the frequent recital in court opinions that there is no implied covenant in employment contracts, but it can arguably be reconciled with Hunt and cases that follow it. The crux of Hunt was the policy objection to inserting a good-faith termination requirement into employment relationships, specifically at-will employment relationships. The Minnesota Supreme Court determined that “[t]he statements in Mid America’s employee handbook constitute nothing more than general statements of policy which fall far short of meeting contractual requirements of an enforceable covenant.”7 Thus the court determined that the employment at issue was at-will before it developed its policy analysis on the implied covenant.

The analysis begins, “For sound policy reasons, a majority of our sister jurisdictions have likewise rejected the implication of a covenant of good faith termination.”8 The court then cites Parnar v. Americana Hotels, Inc.,9 in which the court determined not to imply a good-faith termination requirement in an at-will employment contract; Thompson v. St. Regis Paper Co.,10 in which the court made a similar determination, citing Parnar; and Brockmeyer v. Dun & Bradstreet,11 in which the court also refused to imply a duty to terminate an at-will employee only in good faith. The real issue in Hunt, Parnar, Thompson, and Brockmeyer was arguably not whether or not to imply a good faith covenant in any employment contract, with respect to any provision, but only in at-will employment contracts, and only with respect to termination.

The Minnesota court’s language makes the latter point clear when it states that sister jurisdictions have “rejected the implication of a covenant of good faith termination.” (Emphasis added.) The concern to prevent implied covenants from converting at-will employment relationships into employment relationships requiring a good-faith cause for termination is also the basis of the three out-of-state decisions the Hunt court cites.

On this view, Hunt is arguably consistent with Bratton and Holman, in which the court of appeals permitted non-at-will employees to sue for bad-faith terminations allegedly motivated by the employer’s desire to deprive employees of earned compensation. The question for courts is whether Hunt is precedent only with respect to at-will relationships, with any broader statement being dictum. In litigation, employees may want to argue that Hunt does not exclude the implied covenant from claims based on non-at-will employment relationships, and/or from claims involving contract issues other than termination. Employers may want to argue that the Supreme Court intended to fashion a rule broader than the facts and authority before it because the same policy reasons that militate against recognizing the implied covenant in the termination of at-will relationships also apply to non-at-will relationships and disputes not involving termination. That policy is not to impair the free market in employment by subjecting discretionary employer decisions to judicial review. Contract law and breach-of-contract actions still exist, but the policy precludes the expansion of contract duties and contract liability into the penumbra generated by the implied covenant.

Cases following Hunt

A closer look at the cases following Hunt shows awareness on the part of some appellate panels of the potentially limited scope of Hunt. In Guercio v. Production Automation Corp.,12 in which the terminated employee had been at-will, the court cautiously characterized the rule thus: “Minnesota law has not read an implied covenant of good faith and fair dealing into employment contracts when considering a termination.” Consistent with Hunt, the court declined to imply a good-faith termination requirement in the employee’s at-will contract.

Similarly nuanced language appears in Spera v. Kosieradzki Law Firm, LLC:13 “Minnesota courts have declined to recognize an implied covenant of good faith and fair dealing in at-will employment relationships.” That paraphrases Hunt, with the qualification “at-will” inserted for clarity.14 The court found no implied covenant that prevented a law firm from terminating an at-will associate based on the associate’s alleged commitment to the ethical practice of law. Consistent with Hunt, no implied covenant prevented the termination of an at-will employee.

Finally, in Friedman v. BRW, Inc.,15 the 8th Circuit quoted Hunt as holding that an employer’s offer of “‘permanent employment,’ whether expressed in manuals or otherwise, does not change an at-will contract into one of ‘discharge-for-cause-only’ or create an implied covenant of discharge only in good faith.” Also consistent with Hunt, the court in Friedman determined that the employee had been an at-will employee and therefore could not sue for breach of contract arising from his termination.16 These cases characterize Hunt as applying specifically to the termination of at-will employees, not employees under non-at-will employment contracts.

Debatable cases

Other cases, however, have applied the more far-reaching interpretation of Hunt, sometimes with debatable results. In Jara v. Buckbee-Mears Co.,17 employees and their labor union sued for fraud and breach of the implied covenant based on pre-contract representations that the employer planned to open a new plant. The court determined it did not have jurisdiction over the fraud claims under the Labor Management Relations Act. With respect to the implied covenant claim, the court reasoned, “Minnesota courts have consistently declined to read this covenant into written employment contracts,” citing Hunt.

The union employees, however, were not at-will employees, and termination of employment was not at issue. The case thus fell outside the scope of Hunt as defined by the facts and the authority cited by the Hunt court.

The right result was probably reached, but arguably for the wrong reasons. The implied covenant likely would have applied only if the employer had decided, post-contract, in bad faith, not to build a plant in order to deprive the employees of the benefit of their bargain. The allegation that the contract was based on false representations was properly the subject of the fraud claim, not an implied covenant claim—although misrepresentations in negotiations conceivably violated the good-faith covenant in prior contracts, if they touched on future contract negotiations.

Similarly, in Brozo v. Oracle Corp.,18 the right of the employer to terminate an at-will employee was not at issue. The employee claimed a $1 million commission he had earned under his compensation agreement with the employer, but the employer had determined, after the commission was earned, to cap his commissions for the year, depriving him of approximately $600,000 of commission income.19 The compensation agreement gave management the right to “determine the appropriate treatment” of the commission on a single sale that exceeded the salesperson’s annual quota.

The employee argued, for the first time on appeal, that the employer capped the commission in bad faith to punish the employee for a practical joke he had played on his supervisor.20 The 8th Circuit declined to consider the argument, reasoning that “no manifest injustice would result” from treating the argument as waived because “Minnesota does not recognize an implied duty of good faith and fair dealing in employment contracts.”21

From the information available in the opinion, it appears that the employee was an at-will employee. The agreements at issue, though, were apparently not employment agreements but compensation agreements, i.e., the “Fiscal Year 1999 Oracle Americas Compensation Plan,” the “License Sales Terms and Conditions,” and the “February 12, 1999 Individualized Compensation Plan.” There was no issue of applying the implied covenant to convert at-will employment into employment terminable only in good faith or only for cause. Instead, the issue was the promise to compensate. There was no question of requiring a court to look into the termination of an at-will employee.

In Brozo, an expansive reading of Hunt prevented the consideration of evidence of bad faith in a contracting party’s exercise of its contractual discretion, which was also evidence of an ulterior motive for refusing to perform—classic subjects of implied covenant case law. Brozo thus illustrates the potentially extreme consequences of applying Hunt to situations outside the scope of the termination of an at-will employee. The employee in Brozo was seeking to enforce compensation provisions in his agreements with the employer. Brozo is inconsistent with Bratton and Holman insofar as it is concerned with the breach of a promise to compensate, not the breach of an alleged promise to terminate only in good faith. It is arguably inconsistent with Hunt itself. It should be added that Judge Lay dissented from the panel’s decision, calling the majority’s interpretation of the contract “unjust and nonsensical,” and stating: “This case troubles me as much as any case I have sat on in over thirty-seven years on this court.” Petitions for rehearing and rehearing en banc were denied, despite amicus arguments offered by the National Employment Lawyers Association and Attorney General Mike Hatch, as was a petition for certiorari to the United States Supreme Court.

In Laitinen v. Per Mar Security and Res. Corp.,22 the federal district court, also citing Hunt, rejected a claim that the employer breached the implied covenant of good faith and fair dealing by failing to pay an allegedly promised bonus. At the same time, the court declined to dismiss the employee’s breach of contract claim because of the possibility that the employee would be able to prove a unilateral contract limiting the employer’s ability to terminate the employee. Thus the court refused to entertain an implied covenant claim by an employee who may not have been at-will. Like Brozo, that is arguably beyond the scope of Hunt. It is apparently inconsistent with Bratton and Holman as removing the protection of the implied covenant from the employee’s claim that he was deprived of compensation.

The recent case of Laser Aiming Sys. Corp. v. Bondhus23 illustrates, again, a right result based on a wrong reason. In this case, the controversy was entirely over compensation, not termination. Specifically, the employees claimed that the employer breached the implied covenant by failing to pay issue fees for allowed patent applications, which would have resulted in the employees receiving incentive bonuses. The employer argued that nothing in the agreements expressly required payment of issue fees.

The court granted summary judgment on the claim for two reasons. The first, which is arguably erroneous, is that “under Minnesota law, the implied covenant of good faith and fair dealing does not apply to employment agreements.” This case had nothing to do with terminating an at-will employee, but with determining whether the employer was required to preserve the employees’ opportunity to earn patent incentive bonuses by paying the fees on the patent applications. It does not fall in the ambit of Hunt. It involves a compensation provision that happens to be included in an employment agreement. An employee could argue there is no reason an agreement to pay money should receive less protection in an employment agreement that in a contract for the sale of goods or real property. The employer could stand behind the more expansive reading of Hunt and the policy reasons that support that reading.

The second reason, apparently valid, is that even if the good-faith covenant were implied, it could not be stretched to requiring the employer to pay patent application fees to ensure that incentive bonuses were earned. One could just as well require an employer to drive an employee to work so that the employee can earn his or her salary. If there were evidence that the employer normally did pay such fees but in the individual case decided not to pay them in order to deprive the plaintiffs of their incentive bonuses, the implied covenant could apply.

The expansive reading of Hunt can also lead to unnecessary conundrums. In Shukh v. Seagate tech. LLC,24 the employee evidently argued, as discussed in this article, that provisions not relating to the termination of employment, such as the employer’s alleged obligation to protect the employee’s inventorship rights, should be subject to the implied covenant. The court disagreed, citing Brozo for the rule that “Minnesota does not recognize an implied duty of good faith and fair dealing in employment contracts.”25 The court also cited Hunt: “[W]e have not read an implied covenant of good faith and fair dealing into employment contracts.”

The court countered the employee’s argument thus: “Shukh has not cited any authority suggesting that a contract can be read in separate parts, such that a portion of the agreement governing inventions and the parties’ rights regarding those inventions are considered not related to employment and can thus be sheltered from the rule that Minnesota does not imply good faith and fair dealing into employment agreements.”26 By the court’s reasoning in Shukh, founded on the broad formula that there is no implied covenant whatsoever in any employment agreement, any provision in an agreement that included employment provisions would be stripped of the implied covenant. Based on
Hunt, Bratton, and Holman, however, the employee may argue that the implied covenant should be excluded only from provisions permitting the termination of an at-will employee. Compensation terms, as in Brozo, Laitinen, and Laser Aiming, and all provisions in an employment agreement with a non-at-will employee, would be augmented by the implied covenant. The employer, again, can invoke the Hunt court’s ruling that the judiciary should not be put in the position of making “good faith” decisions in the arena of employer-employee relations.

At another extreme, the expansive reading of Hunt led the court in Daum v. Planit Solutions to create a tort of bad-faith termination, contrary to Minnesota law as stated in Wild v. Rarig,27 in order to avoid the supposed exclusion of the implied covenant from every corner of an at-will employment contract. Dismissing the employee’s claims in Daum on the ground that there is no implied covenant in an employment agreement would have resulted in a manifest injustice. However, a limited reading of Hunt as precluding the good-faith covenant from the at-will term of an employment agreement would have permitted the court to recognize a claim for breach of the implied covenant with respect to the agreement’s compensation provisions—as the courts apparently did in Bratton and Holman, and arguably ought to have done in Brozo, Laitinen, and Laser Aiming. 

Under this minimalist reading of Hunt, even Bratton and Holman were wrongly decided insofar as the courts required a finding of a non-at-will employment contract as a condition precedent to recognizing a claim for breach of the implied covenant with respect to compensation. The facts and reasoning of Hunt and the public policy Hunt is intended to maintain arguably require no more than the exclusion of the implied covenant from an at-will termination provision. Any other provision in an at-will contract, and any provision in a non-at-will contract, would be subject to the covenant. The employer, however, has the policy argument and the apparent weight of precedent in favor of excluding the implied covenant from any provision in an employment agreement.

A sidenote: Hilligoss v. Cargill Inc.

In this employment termination case, the district court instructed the jury that “The term ‘cause’ generally means a real cause or basis for dismissal… That is, some cause or ground that a reasonable employer, acting in good faith in similar circumstances would regard as a good and sufficient basis for terminating the services of an employee.”28 (Emphasis added.) This language, taken from CIVJIG 55.50, appears to require good faith in the termination of an employee whose contract requires “cause” for termination. Accordingly the case seems to support a claim for breach of the implied covenant based on lack of good faith in the terminating employer. The court of appeals and the Supreme Court both affirmed the district court’s instruction in Hilligoss, and have cited the case approximately 60 times for the principle that district courts have broad discretion in determining jury instructions. The court of appeals, however, rejected this argument in Mandel v. Multiband Corp.,29 declining to see in Hilligoss, Hunt, or Bratton a requirement of good faith in terminating an employee for cause.

Treating employment contracts like contracts

The employee would like to see employment contracts treated like other contracts. “A deal is a deal,” as they say. The democratic and egalitarian traditions in American law also argue against imposing unique disadvantages on employees in comparison with other contracting parties. The employer, however, facing many potential sources of litigation, legitimately desires to make employment litigation more predictable by confining contract liability to the actual terms of agreements, not their implied terms. Minnesota courts do not show any sign of altering the status quo. It will be up to counsel to persuade courts to clarify the discrepancy between Bratton and Holman, on one hand, and the expansive tradition of interpreting Hunt, on the other.

WILLIAM G. CARPENTER (BA, Stanford; JD, University of California – Berkeley; PhD, Princeton) practices securities and commercial litigation, including employment litigation, at Briol & Benson, PLLC. He serves on the executive committee of the Corporate Counsel section of the Hennepin County Bar Association.

MARK J. BRIOL (Briol & Benson, PLLC) has been selected by Minnesota Super Lawyers© to its Top 10 list for five years and to its Top 100 list for 22 years. Selected by Best Lawyers® as Minneapolis Securities Litigation “Lawyer of the Year” for 2016.

 

Notes

1 Hunt v. IBM Mid Am. Employees Fed. Credit Union, 384 N.W.2d 853 (Minn. 1986).

2 Laser Aiming Sys. Corp. v. Bondhus, No. 15-510, 2016 WL 912181 (D. Minn. 3/7/2016).

3 Bratton v. Menard, Inc., 438 N.W.2d 116 (Minn. Ct. App. 1989).

4 Holman v. CPT Corp., 457 N.W.2d 740 (Minn. Ct. App. 1990).

5 Daum v. Planit Solutions, Inc., 619 F. Supp. 2d 652 (D. Minn. 5/28/2008).

6 See, e.g., Minnwest Bank Cent. v. Flagship Props. LLC, 689 N.W.2d 295, 303 (Minn. Ct. App. 2004).

7 Hunt, 384 N.W.2d at 858.

8 Id.

9 Parnar v. Americana Hotels, Inc., 652 P.2d 625 (Haw. 1982).

10 Thompson v. St. Regis Paper Co., 685 P.2d 1081 (Wash. 1984).

11 Brockmeyer v. Dun & Bradstreet, 335 N.W.2d 834 (Wis. 1983).

12 Guercio v. Production Automation Corp., 664 N.W.2d 379, 387 (Minn. Ct. App. 2003).

13 Spera v. Kosieradzki Law Firm, LLC, No. A-09-1907, 2010 WL 2650540 (Minn. Ct. App. 7/6/ 2010).

14 See Hunt, 384 N.W.2d at 858.

15 Friedman v. BRW, Inc., 40 F.3d 293, 296 (8th Cir. 1994).

16 Other cases in which Hunt was applied to termination claims based on at-will employment relationships include Singleton v. Christ the Servant Evangelical Lutheran Church, 541 N.W.2d 606 (Minn. Ct. App. 1996); Spanier v. TCF Bank Sav., 495 N.W.2d 18 (Minn. Ct. App. 1993); Michaelson v. Minnesota Mining & Mfg. Co., 474 N.W.2d 174 (Minn. Ct. App. 1991); Poff v. Western Nat’l Mut. Ins. Co., 13 F.3d 1189 (8th Cir. 1994); Lee v. Sperry Corp., 678 F. Supp. 1415 (D. Minn. 1987).

17 Jara v. Buckbee-Mears Co., 469 N.W.2d 727 (Minn. Ct. App. 1991).

18 Brozo v. Oracle Corp., 324 F.3d 661 (8th Cir. 2003).

19 Id. at 663.

20 Id. at 668.

21 Id.

22 Laitinen v. Per Mar Security and Res. Corp., No. 11-3120, 2012 WL 695897 (D. Minn. 3/5/2012).

23 Laser Aiming Sys. Corp. v. Bondhus, No. 15-510, 2016 WL 912181 (D. Minn. 3/7/2016).

24 Shukh v. Seagate tech. LLC, No. 10-404, 2011 WL 1258510 (D. Minn. 3/30/2011).

25 Brozo, 324 F.3d at 668.

26 Shukh, at *9.

27 Wild v. Rarig, 234 N.W.2d 775, 790 (Minn. 1975).

28 649 N.W.2d at 146.

29 Mandel v. Multiband Corp., No. A15-1133 (Ct. App. 3/28/2016).

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