Management Registry, Inc. v. A.W. Companies, Inc.

Background

Management Registry, Inc. (MRI) provides temporary staffing services and had acquired staffing agencies. In 2017, MRI negotiated the purchase of additional companies, including businesses owned by Allan K. Brown. Brown agreed to remain president of most of the acquired businesses and signed an employment agreement containing confidentiality and restrictions on competitive activity.

MRI alleged that Wendy Brown later represented that she and Eric Berg had repurchased and rebranded one of the businesses, even though their negotiations with MRI had not resulted in a deal. MRI also alleged that Allan Brown misrepresented financial information and concealed commissions. After Brown resigned from MRI, the Browns formed A.W. Companies, Inc. MRI alleged that A.W. Companies and the Browns falsely told MRI employees and clients that A.W. Companies was the successor to the acquired business and that the employees now worked for A.W. Companies. MRI further alleged that employees took MRI equipment and confidential information to A.W. Companies, with assistance from Milan Batinich.

MRI’s Second Amended Complaint asserted numerous claims, including conversion, common-law fraud, malicious injury, business defamation, deceptive trade practices, tortious interference with contract, unjust enrichment, breach of the duty of loyalty, indemnification, breach of contract against Batinich, misappropriation of trade secrets, civil conspiracy, and civil theft. MRI also included punitive-damages claims.

Motions and standard of review

The defendants moved to dismiss the Second Amended Complaint for failure to state a claim and moved to strike the punitive-damages claims. A magistrate judge recommended denying both motions. The defendants objected. Judge Tunheim reviewed properly challenged portions of the recommendation anew and reviewed unchallenged portions for clear error.

Rulings on unchallenged recommendations

The court found no clear error in the magistrate judge’s recommendation that the following claims should not be dismissed: conversion, malicious injury, business defamation, unjust enrichment, breach of the duty of loyalty, indemnification, misappropriation of trade secrets, civil conspiracy, and civil theft. The court also found no basis to dismiss arguments concerning speculative damages and denied the motion to dismiss as to those claims.

The court also adopted the recommendation concerning punitive damages and denied the motion to strike. The magistrate judge had concluded that the punitive-damages allegations should be evaluated under the federal pleading rules rather than solely under Minnesota’s statutory procedure for adding punitive damages. The court found that interpretation reasonable and that the allegations were plausible.

Remaining claims

The court denied the defendants’ request to dismiss the entire Second Amended Complaint as an allegedly overly complicated or “shotgun” pleading. It held that the counts met the federal pleading standards and stated that summary judgment, rather than dismissal at the pleading stage, would be the proper method for eliminating claims lacking factual support.

For common-law fraud, the defendants argued that MRI had not adequately pleaded detrimental reliance and could not rely on promises outside the written contract. The court rejected those arguments at the pleading stage. It explained that MRI alleged reliance on the contract’s provision barring Brown from receiving commissions and alleged that Brown received and concealed commissions despite that provision. The court denied the request to dismiss Count II.

For the Minnesota Deceptive Trade Practices Act claim, the court agreed with the defendants that the claim should be reviewed under the heightened particularity requirement of Federal Rule of Civil Procedure 9(b), rather than only the general Rule 8 standard. But after applying Rule 9(b), the court concluded that MRI sufficiently alleged ongoing or future harm, including continuing use of MRI’s information, equipment, customers, and employees. The court therefore denied the defendants’ objections and adopted the recommendation as to Count V.

For tortious interference, the defendants argued that A.W. Companies could not have interfered with Brown’s employment agreement before A.W. Companies existed. The court noted that MRI’s Second Amended Complaint alleged continuing breaches of Brown’s noncompete and nonsolicitation obligations after A.W. Companies came into existence. The court concluded that MRI adequately alleged that A.W. Companies knew of and intentionally interfered with those continuing obligations and adopted the recommendation as to Count VI.

For the breach-of-contract claim against Batinich, the court applied Illinois law because the agreement specified that law. It held that, under the Illinois authorities discussed in the opinion, a purchaser may receive an assignable restrictive covenant even without explicit successor language. The court overruled the defendants’ objections and adopted the recommendation as to Count VIII.

Disposition

Judge Tunheim overruled the defendants’ objections in part and granted them in part, and adopted the magistrate judge’s Report and Recommendation in part consistent with the order. The defendants’ motion for dismissal was DENIED, and their motion to strike was DENIED.