Growing up in Minnesota, I heard a lot about the “Five State Area”, consisting of Minnesota and its neighbors to the South, West and East: Iowa, North Dakota, South Dakota and Wisconsin. A region, I later came to learn, unknown to anyone from those places. In addition to not being a geographic center, apparently, Minnesota is not a legal center. At least when it comes to the law of non-competes. This article will outline the surprising differences in the law of non-competes within the Five State Area.
One might as an initial matter ask, “Why should I care?” For employers with employees in multiple states, the reason is obvious: you want your non-competes to hold up in court. From the reverse perspective, employees of out-of-state employers need to know their rights and obligations, particularly if their employment agreements includes a choice of law provision. Minnesota courts routinely uphold contract language designating which state’s laws to apply in interpreting or enforcing an agreement, with limited exceptions for “take-it-or-leave-it” contracts of adhesion involving consumers. Ditto forum selection clauses, designating where legal actions must be brought. For either to be enforceable, there must exist some connection between the employer’s chosen state and the employee’s work. Examples may include reporting to or receiving direction from a manager in the designated state, maintenance of a national or regional headquarters there or perhaps as little as attending training programs or conferences. In the absence of a choice of law clause, courts by default will apply Minnesota’s law to an employee working in Minnesota.
The Badger State, unlike Minnesota, regulates non-competes by statute and not the common law. Wisconsin’s statute, however, doesn’t say much. It merely provides that non-competes are legally enforceable if the imposed restrictions are “reasonably necessary for the protection of the employer,” temporally and geographically. Wis. Stat. 103.465. This general formulation mirrors that of Minnesota and a majority of states. Differences exist nonetheless. Minnesota courts generally require that a non-compete be signed before the employee commences work activities. Not so in Wisconsin. Courts enforcing Wisconsin’s non-compete statute have deemed continued employment adequate consideration for a non-compete, so long as employees are required to sign one to retain their job. (Some court’s refer to such agreements as “mid-stream” non-competes.) Another significant difference is that Wisconsin explicitly rejects the so-called “blue pencil doctrine” favored by Minnesota courts, under which a court is permitted to judicially modify an overly broad non-compete to make it enforceable. An example might include reducing the temporal scope from three to two years (Minnesota courts have created a rule that non-competes outside of the context of the sale of a business are enforceable up to a maximum of two years), or shrinking a statewide ban to a county or group of counties. Wisconsin’s statute makes this plain: “Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.” (Emphasis added). Accordingly the Wisconsin Supreme Court in The Manitowoc Company, Inc. v. Lanning, Case No. 2015AP1530 (Wisc. Jan. 19, 2018) invalidated an employee’s non-compete that contained an unenforceable provision prohibiting the solicitation of the former employer’s employees, even though other portions of the non-compete were legally compliant. In another 2018 case, a Wisconsin court refused to enforce a doctor’s non-compete that barred her from providing urgent care services, services which the doctor (a family practitioner) had not provided in over 10 years. In addition, the restricted zone of 20 miles was deemed to be unnecessarily broad, insofar as it prohibited the doctor from seeking employment at 100 health care facilities that were not in competition with the former employer. The take away is that Wisconsin employers must be extra careful to make sure their non-competes are legally enforceable in their entirety, lest they risk having no protection at all from unfair competition.
Non-compete law in the Hawkeye State tracks Minnesota’s law pretty closely. Like Minnesota (and unlike Wisconsin), it follows the blue-pencil doctrine, allowing courts to re-write overly restrictive agreements. The court retains ultimate discretion in this regard, however. See M & F Livestock v. Mohr, No. 9-049/08-0872 (Iowa Ct. App. May 29, 2009) (throwing out and refusing to modify overly broad non-compete signed by pig broker, whose restrictions were so broad and unnecessary to protect employer’s business as to evidence “bad faith”). Less clear is whether continuing employment is inadequate consideration for a non-compete entered after the onset of employment. Compare Insurance Agents, Inc. v. Abel, 338 N.W.2d 531 (Iowa Ct. App. 1983) (invalidating mid-stream non-compete, stating, “a promise to do that which one is already obligated to do will not provide consideration for a return promise”) with Primmer v. Langer, 856 N.W.2d 382 (Iowa Ct. App. 2014) (enforcing non-compete contained in employee handbook received seven months after start of employment). The Iowa Supreme Court’s three part test requires that a non-compete be (1) necessary for the protection of the employer’s business; (2) not unreasonably restrictive of the employee’s rights; and (3) not prejudicial to the public interest. Under Iowa law, it is important to quantify harm through actual or probable loss of business. In one case involving a dentist sued by his former clinic, the court explained this as follows: “pirated or had the chance to pirate part of plaintiff’s business; took or had the opportunity of taking some part of the good will of the plaintiff’s business, or it can reasonably be expected some of the patrons or customers he served while in plaintiff’s employment will follow him to the new employment.” Dental East, P.C. v. Westercamp, 423 N.W.2d 553 (Iowa Ct. App. 1988). Importantly, the non-compete at issue in Westercamp was found to be enforceable, despite running two years and being a healthy twenty mile radius. Tempering the unreasonableness, perhaps, was the fact that the agreement allowed the defendant dentist to retain 60% of the profits derived from treating any patient in violation of the non-compete. Clearly then, the further the employee is from customers and sales, the less likely the Iowa test will be satisfied. Purely “back office” personnel, presumably, would be free to compete, unless it could be somehow shown that they would divulge trade secrets or other confidential information injurious to the employer. As always in the area of non-compete law, details matter. In a case involving a trucking company operations manager with extensive customer contacts who quit to join a competitor, the court invalidated the former employer’s non-compete upon finding the trucking industry to be “a largely commoditized industry,” dependent more on pricing than personal relationships, and noting that the former employer’s customers and even pricing information was “widely known.” Curry’s Transp. Servs., Inc. v. Dotson, 860 N.W.2d 923 (Iowa Ct. App. 2014). Finally, non-competes in Iowa may generally be up to two years. Unlike Minnesota, however, this may even be the case where the non-compete arises in the context of the sale of a business. Lucy v. Platinum Servs., Inc., No. 17-1118 (Iowa Ct. App. Nov. 7, 2018) (reducing seven year non-compete to two years).
The Mount Rushmore State by statute permits restrictions on competition and solicitation of “existing customers” of up to two years from the “date of termination of the agreement”. SDCL 53-9-11. Courts interpreting the statute employ the familiar test for enforceability. The restrictions must (1) not be greater than are required for the protection of the employer, functionally and in geographic/temporal terms, (2) not impose an undue hardship on the employee and (3) not be injurious to the public. Central Monitoring Service, Inc. v. Zakinski, 553 N.W.2d 513 (1996). The text of the statute actually addresses mid-stream non-competes, specifying that they may be entered “at the time of employment or at any time during his [sic.] employment.” Unlike Minnesota, South Dakota courts require no showing of reasonableness on the employer’s part as a pre-condition to enforcement when an employee quits to go into competition with her former employer, versus one who is fired (unless for cause) or laid off. American Rim & Brake, Inc. v. Zoellner, 382 NW2d 421 (SD 1986). The Zakinski case is instructive in this respect. There, an employee of a private security company refused to sign a non-compete, and later quit to start up a competing firm. A month later, a fellow employee of the former firm who had signed a non-compete was fired, and then went to work for the other former employee’s company. The employer then filed suit to enforce the non-compete signed by the second employee. In dismissing the case, the South Dakota court noted that the employee in question was fired because he “lacked technical ability” and was “of no value” to the company, according to the company’s owner. In short, a terrible employee is not capable of harming his (or her, as the case may be) former employer.
The Peace Garden State is one of a handful of states prohibiting non-competes outright by statute. N.D.C.C. § 9-08-06. The only others being California and Oklahoma. The statute as interpreted by the courts is broad, and covers non-solicitation agreements as well as non-competes. Warner and Company v. Solberg, 634 N.W.2d 65 (2001). Moreover, North Dakota’s prohibitions cannot be circumvented with a contractual choice of law provision purporting to apply another state’s law to an employee employed within the state’s boundaries. Dawn Osborne v. Brown & Saenger, Inc., 904 N.W.2d 34 (2017) (rejecting attempt by South Dakota employer of North Dakota resident to enforce choice of law and choice of forum provisions designating South Dakota law and venue for dispute; case involved sales of office supplies). The statute contains exceptions for non-competes arising from the sale of a business or dissolution of a partnership. In that instance, they are enforceable to the extent they are “reasonable.” In one case involving a pizzeria, that amount was five years. Lire, Inc. v. Bob’s Pizza Inn Restaurants, 541 N.W.2d 432 (N.D. 1995). Similar to Minnesota, however, North Dakota employees are subject to a duty of loyalty which, among other things, prohibits their soliciting customers on behalf of a competitor while still in a company’s employ. Biever, Drees & Nordell v. Coutts, 305 N.W.2d 33, 38 (N.D. 1981). This common law duty exists whether or not the employee signed a contract of employment.
Taking into account all of these differences, one may conclude that “The Non-Compete Law” of the “Five State Region” is, well, just as imaginary as the region itself.