Management Registry, Inc. v. A.W. Companies, Inc.
U.S. District Court, District of Minnesota
Management Registry, Inc. v. A.W. Companies, Inc.
Trial Court Opinion
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
MANAGEMENT REGISTRY, INC,
Civil No. 17-5009 (JRT/KMM)
Plaintiff,
v. MEMORANDUM OPINION
AND ORDER
A.W. COMPANIES, INC.; ALLAN K.
BROWN; WENDY BROWN; and
MILAN BATINICH
Defendants.
V. John Ella, Nicholas N. Sperling, and Anna M. Koch, TREPANIER
MACGILLIS BATTINA P.A., 310 Fourth Avenue South, Minneapolis, MN
55415 and James M. Morris, MORRIS & MORRIS, P.S.C., 217 North Upper
Street, Lexington, KY 40507, for plaintiffs.
Alexander Loftus, STOLTMANN LAW OFFICES, 161 N. Clark St. Suite 1600,
Chicago, Illinois, 60603 and Justin Bruntjen, DECERTO LAW LLC, 501 Carlson
Parkway #529, Hopkins, MN 55305, for defendants.
Defendants A.W. Companies, Inc. (“AW”), Allan K. Brown, Wendy Brown, and
Milan Batinich brought two motions regarding Plaintiff Management Registry, Inc.’s
(“MRI’s”) Second Amended Complaint (“SAC”). Defendants sought to dismiss the entire
SAC for failure to state a claim, and also moved to strike punitive damages from the SAC.
The Magistrate Judge issued a Report and Recommendation (“R&R”) on September 12,
2019, recommending that the Court deny Defendants’ motions. Because the Court
concludes that MRI adequately pleaded its claims, the Court will overrule Defendants’
objections, adopt the R&R in part, and deny Defendants’ motions.
BACKGROUND
I. Factual Background
MRI is a company which provides temporary staffing services. (SAC ¶ 1, July 12,
2019, Docket No. 251.) MRI is made up of small staffing agencies which MRI has
acquired over the years. (See Id. ¶ 2.) In 2017, MRI began to negotiate the purchase of
certain additional companies, (the “Allstaff Acquisition”) of which Defendant Allen
Brown (“Mr. Brown”) was an owner and president. (Id. ¶¶ 12–13, 24.)
During the course of negotiations, MRI and Mr. Brown agreed that Mr. Brown
would continue on as president for the majority of the acquired businesses. (Id. ¶¶ 25–26.)
Mr. Brown and MRI entered into an employment agreement to that effect on August 31,
2017. (Id. ¶ 23.) Mr. Brown’s employment agreement contains provisions related to
confidentiality and competitive activity. (Id. ¶ 26.)
MRI and Mr. Brown also discussed the potential sale of certain of the acquired
businesses to Defendant Wendy Brown (“Ms. Brown”). (Id. ¶¶ 34–35.) Specifically, MRI
and Mr. Brown discussed selling AllStaff Recruiting, Inc. (“ARI”), which consisted of
several companies located in Minneapolis. (Id.) Despite these negotiations, the Browns
did not reach a deal. (Id. ¶ 36.) However, shortly after the Acquisition closed in September
2017, Ms. Brown directed an employee of one of ARI’s companies to email that company’s
staff, agents, and clients, informing them that Ms. Brown and her partner Eric Berg had
repurchased the company and were re-branding it. (Id. ¶¶ 37–38.) Ms. Brown continued
to represent to employees and clients that she was the owner of ARI. (Id. ¶ 39.)
MRI alleges that Mr. Brown misrepresented ARI’s financials, and also whether Mr.
Brown had received a commission from the Allstaff Acquisition. (Id. ¶¶ 24–25, 41–42,
44.) In October 2017, Mr. Brown resigned from MRI. (Id. ¶ 50.) Shortly afterward, the
Browns formed AW. (Id. ¶ 55.) AW and the Browns represented to MRI employees that
MRI was merely a payroll service for AW, that AW was the valid successor in interest to
ARI, and that these employees now worked for AW. (Id. ¶¶ 56.) Because MRI employees
wrongly believed AW to be their new employer, MRI employees took MRI equipment and
confidential information to AW. (Id. ¶¶ 58–61) AW also allegedly misled MRI clients
into believing that AW was the successor entity resulting from the Acquisition. (Id. ¶¶ 75-
82.)
MRI alleges that AW was aided in their actions by Defendant Milan Batinich, who
was an employee of one of the acquired companies. (Id. ¶¶ 28, 86, 91.) Batinich’s
employment agreement contained confidentiality and non-compete provisions; this
employment agreement was assigned to MRI as part of the Acquisition. (Id. ¶¶ 30–32.)
II. Procedural Background
MRI brought an initial complaint against AW, the Browns, and Eric Berg1, a former
employee of one of the acquired companies. (Complaint at 1, Nov. 3, 2017, Docket No.
1.) MRI filed its First Amended Complaint (“FAC”) shortly thereafter. (FAC, Nov. 21,
2017, Docket No. 59.) On May 17, 2019, Defendants moved for judgment on the pleadings
as to several of the counts in the FAC. (Mot. for Judgment on Pleadings, Docket No. 204.)
1 Eric Berg is no longer a defendant in the case.
On May 22, 2019, MRI moved to amend its pleadings (Mot. to Amend, Docket No. 206.)
Among other things, MRI sought to add punitive damages to its complaint. (Mem. Supp.
Mot. to Amend at 1, May 22, 2019, Docket No. 207.) MRI accompanied its motion with
affidavits, per Minn. Stat. § 549.191, to allow the Magistrate Judge to review for prima
facie evidence in support of the punitive damages claims. (See Docket Nos. 209–212.)
At oral argument, the parties and the Magistrate Judge agreed that MRI would be
allowed to amend the FAC and that Defendants could move to dismiss. (Order, July 8,
2019, Docket No. 250.) As a result, the Magistrate Judge denied both MRI’s motion to
amend and Defendants’ motion for judgment on the pleadings as moot. (Id.)
On July 12, 2019, MRI filed its Second Amended Complaint (“SAC”) which
includes claims for punitive damages. (SAC, Docket No. 251.) Defendants filed a motion
to dismiss the SAC on July 24, 2019. (Mot. to Dismiss SAC, Docket No. 255.) Defendants
also filed a motion to strike MRI’s addition of punitive damages. (Mot. to Strike, July 24,
2019, Docket No. 256.) The Magistrate Judge issued an R&R on September 12, 2019,
recommending that the Court deny Defendants’ motions. (R&R at 34, Docket No. 298.)
Defendants objected to the R&R, and MRI responded in support of the R&R. (Objections,
Sept. 19, 2019, Docket No. 309; Response, October 3, 2019, Docket No. 332.)
DISCUSSION
I. Standard of Review
Upon the filing of an R&R by a magistrate judge, “a party may serve and file
specific written objections to the proposed findings and recommendations.” Fed. R. Civ.
P. 72(b)(2); accord D. Minn. LR 72.2(b)(1). “The district judge must determine de novo
any part of the magistrate judge’s disposition that has been properly objected to.” Fed. R.
Civ. P. 72(b)(3); accord D. Minn. LR 72.2(b)(3). “The district judge may accept, reject,
or modify the recommended disposition; receive further evidence; or return the matter to
the magistrate judge with instructions.” Fed. R. Civ. P. 72(b)(3); accord D. Minn. LR
72.2(b)(3). “Objections which are not specific but merely repeat arguments presented to
and considered by a magistrate judge are not entitled to de novo review, but rather are
reviewed for clear error.” Montgomery v. Compass Airlines, LLC, 98 F. Supp. 3d 1012,
1017 (D. Minn. 2015).
II. Motion to Dismiss R&R Findings Not Specifically Objected To
In the R&R, Magistrate Judge found that Defendants had shown no basis for
dismissal as to the following counts, and parties have not objected:
• Conversion (Count I)
• Malicious Injury (Count III)
• Business Defamation (Count IV)
• Unjust Enrichment (Count VII)
• Breach of the Duty of Loyalty (Count IX)
• Indemnification (Count X),
• Misappropriation of Trade Secrets (Count XI)
• Civil Conspiracy (Count XII)
• Civil Theft Claim (Count XIII)
The Magistrate Judge also determined no basis for Defendants’ arguments about
speculative damages. Finding no clear error in the Magistrate Judge’s findings on these
issues, the Court will adopt these findings and will deny Defendants’ Motion to Dismiss as
to these claims.
III. Motion to Strike R&R Findings Not Specifically Objected To
MRI added punitive damages claims in the SAC without renewing its motion to
amend or refiling affidavits, and Defendants filed a motion to strike, arguing that MRI did
not comply with Minnesota’s statutory procedure for adding punitive damages. The
Magistrate Judge found that recent caselaw has called into question whether Minn. Stat. §
549.191is compatible with the Federal Rules of Civil Procedure. The Magistrate Judge determined that, instead of the procedure set out in Minn. § 549.191, the correct standard for federal review of a Minnesota punitive damages claim was through the plausibility requirement of Fed. R. Civ. P 15. See, e.g., Shank v. Carleton College, No. 16-cv-1154 (PJS/HB),2018 WL 4961472
, at *4 (D. Minn. Oct. 15, 2018).
The Magistrate Judge then considered allegations and found that MRI’s punitive
damages claims were plausible. Because neither party objected to the Magistrate Judge’s
findings, and because the Magistrate Judge adopted a reasonable interpretation of Minn.
Stat. § 549.191, the Court finds no clear error. The Court will adopt the R&R and will
dismiss Defendants’ Motion to Strike.
IV. Remaining Claims Generally
Defendants object that the R&R “missed an opportunity here to trim the fat” prior
to summary judgment, because MRI has pleaded numerous claims in the SAC. Defendants
repeat the arguments they previously made before the Magistrate Judge – that the SAC is
a “shotgun pleading” and that there are too many causes of action. The Magistrate Judge
found that each count was properly pleaded, and that while the SAC was complicated, that
was not a legal basis for dismissal. Because each of the remaining claims in the SAC meets
the pleading standards set out in Iqbal and Twombly, the Court denies Defendants’ motion
to dismiss the entire Second Amended Complaint pursuant to Fed. R. Civ. P. 8. Summary
judgment would be the proper vehicle to “trim the fat” if there is insufficient factual support
for the claims.
V. Common Law Fraud (Count II)
Defendants object to the R&R’s finding that MRI adequately pleaded detrimental
reliance. Under Minnesota law, detrimental reliance is an essential element of common
law fraud, and “failure to establish detrimental reliance dooms a claim for common law
fraud.” Popp Telecom, Inc. v. Am. Sharecom, Inc., 361 F.3d 482, 491 (8th Cir. 2004)
In their Objections, Defendants repeat the arguments they previously made before
the Magistrate Judge. First, Defendants argue that while the SAC alleges
misrepresentations to MRI employees, it does not allege misrepresentations to MRI as a
corporate entity. Defendants suggest that the Court should construe MRI’s employees as
third parties, instead of corporate agents, but cite no law or facts that support this argument.
Defendants also repeat their argument that MRI may not rely on extra-contractual
promises that conflict with a written contract. However, as the R&R explained, the SAC
alleges that MRI relied on the contract, which precluded Mr. Brown from receiving
commissions. MRI alleges that Mr. Brown, despite this contractual language, did receive
commissions and concealed them from MRI. As such, MRI is not relying on an extra-
contractual promise, but rather the language of the contract itself. Defendants have not
shown that MRI’s common law fraud claims fail as a matter of law. The Court therefore
denies Defendants’ request to dismiss Count II of the SAC.
VI. Deceptive Trade Practices Act (Count V)
Defendants object to the R&R’s finding that MRI adequately pleaded ongoing harm.
A. Pleading Standard
First, Defendants argue that the Magistrate Judge improperly reviewed this claim
under the pleading standards contained in Rule 8, rather than Rule 9(b). Claims under the
Minnesota Deceptive Trade Practices Act (Minn. Stat. § 325D.44) fall under the heightened
pleading standards of Fed. R. Civ. P. 9(b). See, e.g., E-Shops Corp. v. U.S. Bank Nat. Ass'n,
678 F.3d 659, 665 (8th Cir. 2012). It appears that the R&R considered only whether the
Deceptive Trade Practices Act allegations “[met] the pleading standards governing Rule
8.” (R&R at 10.) The Court will sustain Defendants’ objections as to the correct pleading
standard for MRI’s Deceptive Trade Practices Act claims and will review the claim under
Rule 9(b).
B. Future Harm Under Rule 9(b)
Defendants then argue that that the Magistrate Judge erroneously relied on ¶ 125 in
the SAC in finding whether MRI adequately pleaded future harm. Defendants argue that
the bad acts “were committed years ago and MRI is not going to be harmed by Defendants
again.” (Objs. at 7.) However, MRI has demonstrated otherwise in its pleadings.
“A plaintiff asserting a claim under the MDTPA must allege an irreparable injury
or threat of future harm in order to withstand a motion to dismiss.” Knotts v. Nissan N.
Am., Inc., 346 F. Supp. 3d 1310, 1328(D. Minn. 2018) (citing Johnson v. Bobcat Co.,175 F.Supp.3d 1130, 1141
(D. Minn. 2016)). Courts have found complaints lacking where there is a prior injury that will not continue. See, e.g., Johnson,175 F. Supp. 3d at 1141
(noting a prior harm does not necessarily indicate a future harm and in fact may indicate a reduced risk of harm, since a wary plaintiff is unlikely to do repeat business with a deceptive defendant.) Instead, courts look to see whether there are allegations of ongoing or future harm. See Knotts,346 F. Supp. 3d at 1328
(finding allegations of an ongoing
violation of the MDTPA, continued advertising, and ongoing safety risks sufficient to
survive a motion to dismiss).
In this case, MRI has made a sufficient showing even under the heightened pleading
standards of Rule 9(b). First, MRI made several allegations in ¶ 123 of the SAC, including
that Defendants: falsely stated that Ms. Brown purchased a portion of MRI’s business and
rebranded; falsely informed MRI customers that they were released from their contracts;
falsely substituted AW’s name on the bills and contracts for MRI’s clients; and palmed off
MRI’s products and services under AW’s name and receiving compensation for these
services.
Furthermore, as the Magistrate Judge noted, this paragraph does not stand alone and
must be read in context with the rest of the SAC. MRI has detailed the ongoing nature of
Defendants’ actions elsewhere in the SAC. For example:
• ¶ 73: A.W. made . . . communications to mislead each and every ARI
high-level, managerial, administrative, operational, and hourly
employee and to siphon MRI’s temporary workforce in its ongoing
effort to palm off MRI’s customers, employees, databases,
proprietary materials and data as A.W.’s property.
• ¶ 74: As a result of these, and other, illegal actions, A.W. currently
employs, or has employed, the vast majority of these workers at one
point or another since November 2017, including approximately 30
high-level, managerial, administrative and operational employees of
MRI as of the Closing Date, and an even larger number of temporary
and staffing employees who worked with the Minnesota Companies.
• ¶ 89: At the direction of A.W., on November 11, 2017, former MRI
employees illegally accessed and downloaded approximately 375
MRI-owned proprietary, confidential, and trade secret protected
documents, including offer letters, policies, operations documents
related to specific clients, training files, and HR documents, and, on
November 13, 2017, former MRI employees illegally accessed and
downloaded all of MRI’s 360° reviews and Standard Operating
Procedures. A.W. has subsequently palmed off those documents as
its own, and has obtained detailed confidential spreadsheets, data,
documentation, and information regarding all of MRI’s customers,
prospective customers, and employees and is using this information
to unfairly compete with MRI, and to further A.W.’s theft of
MRI’s customers, clients, employees, and databases.
• ¶ 90: From November 10 through 14, 2017, MRI representatives
conducted a thorough inspection of every Minnesota and Wisconsin
facility in order to determine the status of computerized equipment
that MRI had purchased via the Purchase Agreement. At least 78
internal computers and all of the “in-home” computers utilized by the
temporary staff (at least 200 computer terminals, 400 monitors, and
200 headsets) had been misappropriated by A.W. and are being used
to carry out A.W.’s scheme or “ownership,” and to improperly
compete with MRI utilizing MRI’s own equipment and facilities.
• ¶ 91: Commencing on or about October 30, 2017, while still employed
with MRI, and continuing through to the present, Mr. Batinich and
Mr. Brown, and other yet-to-be-identified A.W. agents, stole MRI’s
computers, Confidential Information, Electronic Data,
Client/Customer Lists, Employee Databases, computer monitors, and
other computerized equipment, as well as MRI’s clients, customers,
and employees and/or assisted other third parties to engage in such
theft of MRI’s property, clients, customers, and employees. A.W.
took improper possession of computers and databases upon which
confidential and proprietary information is housed, which has, and
will continue to, cause MRI to be unable to meet its contractual
obligations to many of its customers.
(SAC) (emphasis added). Despite Defendants’ attempt to characterize any harm as a one-
time occurrence, MRI has made a sufficient showing of ongoing harm under Rule 9(b). As
a result, the Court will deny Defendants’ objections and adopt the R&R.
VII. Tortious Interference (Count VI)
Defendants object to the Magistrate Judge’s finding that MRI adequately alleged
that AW could be liable for tortious interference with contract. Defendants repeat the
arguments they presented to the Magistrate Judge on this issue—namely that because AW
was incorporated sometime after Mr. Brown resigned from MRI, AW could not interfere
with Mr. Brown’s contract.
This Court previously noted that MRI would face difficulties demonstrating that
AW intentionally procured breaches of contract prior to AW’s legal existence. (See Order
Vacating TRO and Denying Preliminary Injunction at 11, Jan. 16, 2018, Docket No. 98.)
However, in the SAC MRI makes no such claims. Indeed, Defendants concede as much
in their Objections: “MRI speciously claims with conclusory allegations for the first time
that the alleged interference did not occur until after AW came into existence.”
(Objections at 10.)
The SAC differs from earlier iterations of the complaint, but that is the nature of an
amended complaint. Defendants stipulated that MRI could file the SAC. It appears that
MRI used the amendment to remedy issues previously raised by Defendants. That MRI
has cured a flaw in their prior allegations is not a reason to dismiss a claim.
Furthermore, as the Magistrate Judge found, MRI has alleged that AW engaged in
“ongoing and continuing breaches” of Mr. Brown’s agreements. While Mr. Brown may
have resigned prior to AW’s existence, his agreement with MRI contained ongoing non-
compete and non-solicitation provisions. MRI adequately alleges that AW was aware of
these ongoing requirements, but knowingly interfered. The Court will deny Defendants’
objections and adopt the R&R as to Count VI.
VIII. Breach of Contract Claim Against Mr. Batinich (Count VIII)
Defendants object to the Magistrate Judge’s denial of their Motion to Dismiss the
Breach of Contract Claim (Count VIII) against Mr. Batinich.
First, Defendants make a one-sentence assertion that, contrary to MRI’s allegations,
Batinich was not employed by an entity referenced in the assigned agreement. For the
purposes of a motion to dismiss, the Court assumes the truth of MRI’s allegations, and
Defendants’ argument fails.
Next, Defendants argue that the Magistrate Judge erred in her choice of law analysis.
There is no dispute that the relevant contact is governed by Illinois law. Defendants appear
to argue that the Court should apply Minnesota law because there is no case from the
Illinois Supreme Court directly addressing this issue.
Federal courts exercising diversity jurisdiction are bound by decisions of the
state’s highest court. Foy v. Kapmeier, 992 F.2d 774, 780 (8th Cir. 1993). When state law is unsettled, “it is the duty of a federal court to apply the rule it believes the state supreme court would follow.” Gearhart v. Uniden Corp. of Am.,781 F.2d 147, 149
(8th Cir. 1986). In making this determination, federal courts cannot disregard a state’s intermediate appellate court decision which is a “datum for ascertaining state law.” Meyer v. Tenvoorde Motor Co.,714 F. Supp. 991, 995
(D. Minn. 1989); see also Foy, 992 F.2d at 780 (looking
to case law from the Minnesota Court of Appeals to rule on a legal question not yet
addressed by the Minnesota Supreme Court). The Court is not free to ignore the terms of
the contract, which specifies Illinois law, and instead rely on Minnesota law merely
because there is no Illinois Supreme Court case on point.
Furthermore, there is no real doubt that Illinois law supports MRI’s breach of
contract claim. In Illinois, a restrictive covenant may be assigned to a purchaser, even in
the absence of explicit language regarding successors. AutoMed Techs., Inc. v. Eller, 160
F. Supp. 2d 915, 923–24 (N.D. Ill. 2001) (relying on Illinois Appellate Court case law). Parties may freely assign rights and duties under a contract. Patrick Media Grp., Inc., v. Dupage Water Comm’n,630 N.E.2d 958, 965
(Ill. App. Ct. 1994); see also First Illinois Nat’l Bank v. Knapp,615 N.E.2d 75, 79
(Ill. App. Ct. 1993) (“We know of no case which
holds that a contract must specifically provide for the assignability of an otherwise
assignable contract right.”). Illinois Appellate Courts have upheld the assignment of
restrictive covenants even in the absence of explicit language regarding successors.
Although the Illinois Supreme Court has not addressed this issue, it is likely that it would
adopt the holdings of the Illinois Court of Appeals. Defendants have failed to present any
relevant Illinois case law to the contrary. The Court will overrule Defendants’ objections
and adopt the R&R as to Count VIII.
CONCLUSION
The Court will overrule Defendants’ objections in part and grant them in part, adopt
the Magistrate Judge’s R&R to the extent that it is consistent with this order, deny
Defendants’ Motion to Strike, and deny Defendants Motion to Dismiss.
ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that:
1. Defendants’ Objections to the Report and Recommendation [Docket No. 309] are
OVERRULED in part and GRANTED in part, and the Magistrate Judge’s
Report and Recommendation [Docket No. 298] is ADOPTED in part consistent
with this order;
2. Defendants’ Motion for Dismissal [Docket No. 255] is DENIED; and
3. Defendants’ Motion to Strike [Docket No. 256] is DENIED.
DATED: January 30, 2020 dot, MK. (esa
at Minneapolis, Minnesota. JOHN R. TUNHEIM
Chief Judge
United States District Court
14 Trial Court Opinion
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
MANAGEMENT REGISTRY, INC,
Civil No. 17-5009 (JRT/KMM)
Plaintiff,
v. MEMORANDUM OPINION
AND ORDER
A.W. COMPANIES, INC.; ALLAN K.
BROWN; WENDY BROWN; and
MILAN BATINICH
Defendants.
V. John Ella, Nicholas N. Sperling, and Anna M. Koch, TREPANIER
MACGILLIS BATTINA P.A., 310 Fourth Avenue South, Minneapolis, MN
55415 and James M. Morris, MORRIS & MORRIS, P.S.C., 217 North Upper
Street, Lexington, KY 40507, for plaintiffs.
Alexander Loftus, STOLTMANN LAW OFFICES, 161 N. Clark St. Suite 1600,
Chicago, Illinois, 60603 and Justin Bruntjen, DECERTO LAW LLC, 501 Carlson
Parkway #529, Hopkins, MN 55305, for defendants.
Defendants A.W. Companies, Inc. (“AW”), Allan K. Brown, Wendy Brown, and
Milan Batinich brought two motions regarding Plaintiff Management Registry, Inc.’s
(“MRI’s”) Second Amended Complaint (“SAC”). Defendants sought to dismiss the entire
SAC for failure to state a claim, and also moved to strike punitive damages from the SAC.
The Magistrate Judge issued a Report and Recommendation (“R&R”) on September 12,
2019, recommending that the Court deny Defendants’ motions. Because the Court
concludes that MRI adequately pleaded its claims, the Court will overrule Defendants’
objections, adopt the R&R in part, and deny Defendants’ motions.
BACKGROUND
I. Factual Background
MRI is a company which provides temporary staffing services. (SAC ¶ 1, July 12,
2019, Docket No. 251.) MRI is made up of small staffing agencies which MRI has
acquired over the years. (See Id. ¶ 2.) In 2017, MRI began to negotiate the purchase of
certain additional companies, (the “Allstaff Acquisition”) of which Defendant Allen
Brown (“Mr. Brown”) was an owner and president. (Id. ¶¶ 12–13, 24.)
During the course of negotiations, MRI and Mr. Brown agreed that Mr. Brown
would continue on as president for the majority of the acquired businesses. (Id. ¶¶ 25–26.)
Mr. Brown and MRI entered into an employment agreement to that effect on August 31,
2017. (Id. ¶ 23.) Mr. Brown’s employment agreement contains provisions related to
confidentiality and competitive activity. (Id. ¶ 26.)
MRI and Mr. Brown also discussed the potential sale of certain of the acquired
businesses to Defendant Wendy Brown (“Ms. Brown”). (Id. ¶¶ 34–35.) Specifically, MRI
and Mr. Brown discussed selling AllStaff Recruiting, Inc. (“ARI”), which consisted of
several companies located in Minneapolis. (Id.) Despite these negotiations, the Browns
did not reach a deal. (Id. ¶ 36.) However, shortly after the Acquisition closed in September
2017, Ms. Brown directed an employee of one of ARI’s companies to email that company’s
staff, agents, and clients, informing them that Ms. Brown and her partner Eric Berg had
repurchased the company and were re-branding it. (Id. ¶¶ 37–38.) Ms. Brown continued
to represent to employees and clients that she was the owner of ARI. (Id. ¶ 39.)
MRI alleges that Mr. Brown misrepresented ARI’s financials, and also whether Mr.
Brown had received a commission from the Allstaff Acquisition. (Id. ¶¶ 24–25, 41–42,
44.) In October 2017, Mr. Brown resigned from MRI. (Id. ¶ 50.) Shortly afterward, the
Browns formed AW. (Id. ¶ 55.) AW and the Browns represented to MRI employees that
MRI was merely a payroll service for AW, that AW was the valid successor in interest to
ARI, and that these employees now worked for AW. (Id. ¶¶ 56.) Because MRI employees
wrongly believed AW to be their new employer, MRI employees took MRI equipment and
confidential information to AW. (Id. ¶¶ 58–61) AW also allegedly misled MRI clients
into believing that AW was the successor entity resulting from the Acquisition. (Id. ¶¶ 75-
82.)
MRI alleges that AW was aided in their actions by Defendant Milan Batinich, who
was an employee of one of the acquired companies. (Id. ¶¶ 28, 86, 91.) Batinich’s
employment agreement contained confidentiality and non-compete provisions; this
employment agreement was assigned to MRI as part of the Acquisition. (Id. ¶¶ 30–32.)
II. Procedural Background
MRI brought an initial complaint against AW, the Browns, and Eric Berg1, a former
employee of one of the acquired companies. (Complaint at 1, Nov. 3, 2017, Docket No.
1.) MRI filed its First Amended Complaint (“FAC”) shortly thereafter. (FAC, Nov. 21,
2017, Docket No. 59.) On May 17, 2019, Defendants moved for judgment on the pleadings
as to several of the counts in the FAC. (Mot. for Judgment on Pleadings, Docket No. 204.)
1 Eric Berg is no longer a defendant in the case.
On May 22, 2019, MRI moved to amend its pleadings (Mot. to Amend, Docket No. 206.)
Among other things, MRI sought to add punitive damages to its complaint. (Mem. Supp.
Mot. to Amend at 1, May 22, 2019, Docket No. 207.) MRI accompanied its motion with
affidavits, per Minn. Stat. § 549.191, to allow the Magistrate Judge to review for prima
facie evidence in support of the punitive damages claims. (See Docket Nos. 209–212.)
At oral argument, the parties and the Magistrate Judge agreed that MRI would be
allowed to amend the FAC and that Defendants could move to dismiss. (Order, July 8,
2019, Docket No. 250.) As a result, the Magistrate Judge denied both MRI’s motion to
amend and Defendants’ motion for judgment on the pleadings as moot. (Id.)
On July 12, 2019, MRI filed its Second Amended Complaint (“SAC”) which
includes claims for punitive damages. (SAC, Docket No. 251.) Defendants filed a motion
to dismiss the SAC on July 24, 2019. (Mot. to Dismiss SAC, Docket No. 255.) Defendants
also filed a motion to strike MRI’s addition of punitive damages. (Mot. to Strike, July 24,
2019, Docket No. 256.) The Magistrate Judge issued an R&R on September 12, 2019,
recommending that the Court deny Defendants’ motions. (R&R at 34, Docket No. 298.)
Defendants objected to the R&R, and MRI responded in support of the R&R. (Objections,
Sept. 19, 2019, Docket No. 309; Response, October 3, 2019, Docket No. 332.)
DISCUSSION
I. Standard of Review
Upon the filing of an R&R by a magistrate judge, “a party may serve and file
specific written objections to the proposed findings and recommendations.” Fed. R. Civ.
P. 72(b)(2); accord D. Minn. LR 72.2(b)(1). “The district judge must determine de novo
any part of the magistrate judge’s disposition that has been properly objected to.” Fed. R.
Civ. P. 72(b)(3); accord D. Minn. LR 72.2(b)(3). “The district judge may accept, reject,
or modify the recommended disposition; receive further evidence; or return the matter to
the magistrate judge with instructions.” Fed. R. Civ. P. 72(b)(3); accord D. Minn. LR
72.2(b)(3). “Objections which are not specific but merely repeat arguments presented to
and considered by a magistrate judge are not entitled to de novo review, but rather are
reviewed for clear error.” Montgomery v. Compass Airlines, LLC, 98 F. Supp. 3d 1012,
1017 (D. Minn. 2015).
II. Motion to Dismiss R&R Findings Not Specifically Objected To
In the R&R, Magistrate Judge found that Defendants had shown no basis for
dismissal as to the following counts, and parties have not objected:
• Conversion (Count I)
• Malicious Injury (Count III)
• Business Defamation (Count IV)
• Unjust Enrichment (Count VII)
• Breach of the Duty of Loyalty (Count IX)
• Indemnification (Count X),
• Misappropriation of Trade Secrets (Count XI)
• Civil Conspiracy (Count XII)
• Civil Theft Claim (Count XIII)
The Magistrate Judge also determined no basis for Defendants’ arguments about
speculative damages. Finding no clear error in the Magistrate Judge’s findings on these
issues, the Court will adopt these findings and will deny Defendants’ Motion to Dismiss as
to these claims.
III. Motion to Strike R&R Findings Not Specifically Objected To
MRI added punitive damages claims in the SAC without renewing its motion to
amend or refiling affidavits, and Defendants filed a motion to strike, arguing that MRI did
not comply with Minnesota’s statutory procedure for adding punitive damages. The
Magistrate Judge found that recent caselaw has called into question whether Minn. Stat. §
549.191is compatible with the Federal Rules of Civil Procedure. The Magistrate Judge determined that, instead of the procedure set out in Minn. § 549.191, the correct standard for federal review of a Minnesota punitive damages claim was through the plausibility requirement of Fed. R. Civ. P 15. See, e.g., Shank v. Carleton College, No. 16-cv-1154 (PJS/HB),2018 WL 4961472
, at *4 (D. Minn. Oct. 15, 2018).
The Magistrate Judge then considered allegations and found that MRI’s punitive
damages claims were plausible. Because neither party objected to the Magistrate Judge’s
findings, and because the Magistrate Judge adopted a reasonable interpretation of Minn.
Stat. § 549.191, the Court finds no clear error. The Court will adopt the R&R and will
dismiss Defendants’ Motion to Strike.
IV. Remaining Claims Generally
Defendants object that the R&R “missed an opportunity here to trim the fat” prior
to summary judgment, because MRI has pleaded numerous claims in the SAC. Defendants
repeat the arguments they previously made before the Magistrate Judge – that the SAC is
a “shotgun pleading” and that there are too many causes of action. The Magistrate Judge
found that each count was properly pleaded, and that while the SAC was complicated, that
was not a legal basis for dismissal. Because each of the remaining claims in the SAC meets
the pleading standards set out in Iqbal and Twombly, the Court denies Defendants’ motion
to dismiss the entire Second Amended Complaint pursuant to Fed. R. Civ. P. 8. Summary
judgment would be the proper vehicle to “trim the fat” if there is insufficient factual support
for the claims.
V. Common Law Fraud (Count II)
Defendants object to the R&R’s finding that MRI adequately pleaded detrimental
reliance. Under Minnesota law, detrimental reliance is an essential element of common
law fraud, and “failure to establish detrimental reliance dooms a claim for common law
fraud.” Popp Telecom, Inc. v. Am. Sharecom, Inc., 361 F.3d 482, 491 (8th Cir. 2004)
In their Objections, Defendants repeat the arguments they previously made before
the Magistrate Judge. First, Defendants argue that while the SAC alleges
misrepresentations to MRI employees, it does not allege misrepresentations to MRI as a
corporate entity. Defendants suggest that the Court should construe MRI’s employees as
third parties, instead of corporate agents, but cite no law or facts that support this argument.
Defendants also repeat their argument that MRI may not rely on extra-contractual
promises that conflict with a written contract. However, as the R&R explained, the SAC
alleges that MRI relied on the contract, which precluded Mr. Brown from receiving
commissions. MRI alleges that Mr. Brown, despite this contractual language, did receive
commissions and concealed them from MRI. As such, MRI is not relying on an extra-
contractual promise, but rather the language of the contract itself. Defendants have not
shown that MRI’s common law fraud claims fail as a matter of law. The Court therefore
denies Defendants’ request to dismiss Count II of the SAC.
VI. Deceptive Trade Practices Act (Count V)
Defendants object to the R&R’s finding that MRI adequately pleaded ongoing harm.
A. Pleading Standard
First, Defendants argue that the Magistrate Judge improperly reviewed this claim
under the pleading standards contained in Rule 8, rather than Rule 9(b). Claims under the
Minnesota Deceptive Trade Practices Act (Minn. Stat. § 325D.44) fall under the heightened
pleading standards of Fed. R. Civ. P. 9(b). See, e.g., E-Shops Corp. v. U.S. Bank Nat. Ass'n,
678 F.3d 659, 665 (8th Cir. 2012). It appears that the R&R considered only whether the
Deceptive Trade Practices Act allegations “[met] the pleading standards governing Rule
8.” (R&R at 10.) The Court will sustain Defendants’ objections as to the correct pleading
standard for MRI’s Deceptive Trade Practices Act claims and will review the claim under
Rule 9(b).
B. Future Harm Under Rule 9(b)
Defendants then argue that that the Magistrate Judge erroneously relied on ¶ 125 in
the SAC in finding whether MRI adequately pleaded future harm. Defendants argue that
the bad acts “were committed years ago and MRI is not going to be harmed by Defendants
again.” (Objs. at 7.) However, MRI has demonstrated otherwise in its pleadings.
“A plaintiff asserting a claim under the MDTPA must allege an irreparable injury
or threat of future harm in order to withstand a motion to dismiss.” Knotts v. Nissan N.
Am., Inc., 346 F. Supp. 3d 1310, 1328(D. Minn. 2018) (citing Johnson v. Bobcat Co.,175 F.Supp.3d 1130, 1141
(D. Minn. 2016)). Courts have found complaints lacking where there is a prior injury that will not continue. See, e.g., Johnson,175 F. Supp. 3d at 1141
(noting a prior harm does not necessarily indicate a future harm and in fact may indicate a reduced risk of harm, since a wary plaintiff is unlikely to do repeat business with a deceptive defendant.) Instead, courts look to see whether there are allegations of ongoing or future harm. See Knotts,346 F. Supp. 3d at 1328
(finding allegations of an ongoing
violation of the MDTPA, continued advertising, and ongoing safety risks sufficient to
survive a motion to dismiss).
In this case, MRI has made a sufficient showing even under the heightened pleading
standards of Rule 9(b). First, MRI made several allegations in ¶ 123 of the SAC, including
that Defendants: falsely stated that Ms. Brown purchased a portion of MRI’s business and
rebranded; falsely informed MRI customers that they were released from their contracts;
falsely substituted AW’s name on the bills and contracts for MRI’s clients; and palmed off
MRI’s products and services under AW’s name and receiving compensation for these
services.
Furthermore, as the Magistrate Judge noted, this paragraph does not stand alone and
must be read in context with the rest of the SAC. MRI has detailed the ongoing nature of
Defendants’ actions elsewhere in the SAC. For example:
• ¶ 73: A.W. made . . . communications to mislead each and every ARI
high-level, managerial, administrative, operational, and hourly
employee and to siphon MRI’s temporary workforce in its ongoing
effort to palm off MRI’s customers, employees, databases,
proprietary materials and data as A.W.’s property.
• ¶ 74: As a result of these, and other, illegal actions, A.W. currently
employs, or has employed, the vast majority of these workers at one
point or another since November 2017, including approximately 30
high-level, managerial, administrative and operational employees of
MRI as of the Closing Date, and an even larger number of temporary
and staffing employees who worked with the Minnesota Companies.
• ¶ 89: At the direction of A.W., on November 11, 2017, former MRI
employees illegally accessed and downloaded approximately 375
MRI-owned proprietary, confidential, and trade secret protected
documents, including offer letters, policies, operations documents
related to specific clients, training files, and HR documents, and, on
November 13, 2017, former MRI employees illegally accessed and
downloaded all of MRI’s 360° reviews and Standard Operating
Procedures. A.W. has subsequently palmed off those documents as
its own, and has obtained detailed confidential spreadsheets, data,
documentation, and information regarding all of MRI’s customers,
prospective customers, and employees and is using this information
to unfairly compete with MRI, and to further A.W.’s theft of
MRI’s customers, clients, employees, and databases.
• ¶ 90: From November 10 through 14, 2017, MRI representatives
conducted a thorough inspection of every Minnesota and Wisconsin
facility in order to determine the status of computerized equipment
that MRI had purchased via the Purchase Agreement. At least 78
internal computers and all of the “in-home” computers utilized by the
temporary staff (at least 200 computer terminals, 400 monitors, and
200 headsets) had been misappropriated by A.W. and are being used
to carry out A.W.’s scheme or “ownership,” and to improperly
compete with MRI utilizing MRI’s own equipment and facilities.
• ¶ 91: Commencing on or about October 30, 2017, while still employed
with MRI, and continuing through to the present, Mr. Batinich and
Mr. Brown, and other yet-to-be-identified A.W. agents, stole MRI’s
computers, Confidential Information, Electronic Data,
Client/Customer Lists, Employee Databases, computer monitors, and
other computerized equipment, as well as MRI’s clients, customers,
and employees and/or assisted other third parties to engage in such
theft of MRI’s property, clients, customers, and employees. A.W.
took improper possession of computers and databases upon which
confidential and proprietary information is housed, which has, and
will continue to, cause MRI to be unable to meet its contractual
obligations to many of its customers.
(SAC) (emphasis added). Despite Defendants’ attempt to characterize any harm as a one-
time occurrence, MRI has made a sufficient showing of ongoing harm under Rule 9(b). As
a result, the Court will deny Defendants’ objections and adopt the R&R.
VII. Tortious Interference (Count VI)
Defendants object to the Magistrate Judge’s finding that MRI adequately alleged
that AW could be liable for tortious interference with contract. Defendants repeat the
arguments they presented to the Magistrate Judge on this issue—namely that because AW
was incorporated sometime after Mr. Brown resigned from MRI, AW could not interfere
with Mr. Brown’s contract.
This Court previously noted that MRI would face difficulties demonstrating that
AW intentionally procured breaches of contract prior to AW’s legal existence. (See Order
Vacating TRO and Denying Preliminary Injunction at 11, Jan. 16, 2018, Docket No. 98.)
However, in the SAC MRI makes no such claims. Indeed, Defendants concede as much
in their Objections: “MRI speciously claims with conclusory allegations for the first time
that the alleged interference did not occur until after AW came into existence.”
(Objections at 10.)
The SAC differs from earlier iterations of the complaint, but that is the nature of an
amended complaint. Defendants stipulated that MRI could file the SAC. It appears that
MRI used the amendment to remedy issues previously raised by Defendants. That MRI
has cured a flaw in their prior allegations is not a reason to dismiss a claim.
Furthermore, as the Magistrate Judge found, MRI has alleged that AW engaged in
“ongoing and continuing breaches” of Mr. Brown’s agreements. While Mr. Brown may
have resigned prior to AW’s existence, his agreement with MRI contained ongoing non-
compete and non-solicitation provisions. MRI adequately alleges that AW was aware of
these ongoing requirements, but knowingly interfered. The Court will deny Defendants’
objections and adopt the R&R as to Count VI.
VIII. Breach of Contract Claim Against Mr. Batinich (Count VIII)
Defendants object to the Magistrate Judge’s denial of their Motion to Dismiss the
Breach of Contract Claim (Count VIII) against Mr. Batinich.
First, Defendants make a one-sentence assertion that, contrary to MRI’s allegations,
Batinich was not employed by an entity referenced in the assigned agreement. For the
purposes of a motion to dismiss, the Court assumes the truth of MRI’s allegations, and
Defendants’ argument fails.
Next, Defendants argue that the Magistrate Judge erred in her choice of law analysis.
There is no dispute that the relevant contact is governed by Illinois law. Defendants appear
to argue that the Court should apply Minnesota law because there is no case from the
Illinois Supreme Court directly addressing this issue.
Federal courts exercising diversity jurisdiction are bound by decisions of the
state’s highest court. Foy v. Kapmeier, 992 F.2d 774, 780 (8th Cir. 1993). When state law is unsettled, “it is the duty of a federal court to apply the rule it believes the state supreme court would follow.” Gearhart v. Uniden Corp. of Am.,781 F.2d 147, 149
(8th Cir. 1986). In making this determination, federal courts cannot disregard a state’s intermediate appellate court decision which is a “datum for ascertaining state law.” Meyer v. Tenvoorde Motor Co.,714 F. Supp. 991, 995
(D. Minn. 1989); see also Foy, 992 F.2d at 780 (looking
to case law from the Minnesota Court of Appeals to rule on a legal question not yet
addressed by the Minnesota Supreme Court). The Court is not free to ignore the terms of
the contract, which specifies Illinois law, and instead rely on Minnesota law merely
because there is no Illinois Supreme Court case on point.
Furthermore, there is no real doubt that Illinois law supports MRI’s breach of
contract claim. In Illinois, a restrictive covenant may be assigned to a purchaser, even in
the absence of explicit language regarding successors. AutoMed Techs., Inc. v. Eller, 160
F. Supp. 2d 915, 923–24 (N.D. Ill. 2001) (relying on Illinois Appellate Court case law). Parties may freely assign rights and duties under a contract. Patrick Media Grp., Inc., v. Dupage Water Comm’n,630 N.E.2d 958, 965
(Ill. App. Ct. 1994); see also First Illinois Nat’l Bank v. Knapp,615 N.E.2d 75, 79
(Ill. App. Ct. 1993) (“We know of no case which
holds that a contract must specifically provide for the assignability of an otherwise
assignable contract right.”). Illinois Appellate Courts have upheld the assignment of
restrictive covenants even in the absence of explicit language regarding successors.
Although the Illinois Supreme Court has not addressed this issue, it is likely that it would
adopt the holdings of the Illinois Court of Appeals. Defendants have failed to present any
relevant Illinois case law to the contrary. The Court will overrule Defendants’ objections
and adopt the R&R as to Count VIII.
CONCLUSION
The Court will overrule Defendants’ objections in part and grant them in part, adopt
the Magistrate Judge’s R&R to the extent that it is consistent with this order, deny
Defendants’ Motion to Strike, and deny Defendants Motion to Dismiss.
ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that:
1. Defendants’ Objections to the Report and Recommendation [Docket No. 309] are
OVERRULED in part and GRANTED in part, and the Magistrate Judge’s
Report and Recommendation [Docket No. 298] is ADOPTED in part consistent
with this order;
2. Defendants’ Motion for Dismissal [Docket No. 255] is DENIED; and
3. Defendants’ Motion to Strike [Docket No. 256] is DENIED.
DATED: January 30, 2020 dot, MK. (esa
at Minneapolis, Minnesota. JOHN R. TUNHEIM
Chief Judge
United States District Court
14 Reference
- Status
- Unknown