Non-competes are a special kind of contract, whose language must be interpreted under the law of contracts and not on the basis of a standard borrowed from some other area of the law. That is the learning of the April 3, 2017 decision Valspar v. Mueller, A16-1113 (Minn. Ct. App. April 3, 2017), in which the Minnesota Court of Appeals affirmed a lower court decision declining to enforce a former employer’s request for a temporary injunction to enforce a non-compete. The agreement at issue only applied to employees who “voluntarily resign” or are fired for cause. After being demoted from manager to “individual contributor,” Defendant Mueller, a long time Valspar employee, went to work for a direct competitor of the company. In the ensuing lawsuit, Mr. Mueller argued that the non-compete did not apply because his changed status and duties amounted to an “involuntary resignation.” In deciding this issue, the District Court rejected Valspar’s application of the stringent “constructive discharge” standard from employment discrimination law: a resignation to escape intolerable working conditions caused by illegal discrimination. The court concluded that a trial was needed to determine the parameters of “voluntariness” under the non-competition agreement at issue. Although not emphasized in the written opinion, this ruling makes sense for the reason that non-competes are disfavored under Minnesota law, so applying an especially rigorous standard not even arising under contract law would go against long established public policy of the state.
The court also waded into the relatively uncharted waters of what consideration for a non-compete will be deemed sufficient. Under Minnesota law, an employee generally must receive something of value as compensation for a mid-stream non-compete (i.e., one signed after the onset of employment). Here, the employee was given what was billed as an enhanced bonus in the form of Restricted Stock Units (“RSUs”), which unlike stock options, were not subject to a loss of value in the sense they could never go under water. In concluding the benefit was not appreciably better than its alternative, the court noted (among other things) that the RSUs could not be exercised if the employee resigns. By contrast, conventional stock options could be exercised following resignation within 30 days.
The takeaway may be that a benefit of debatable value, as with a benefit of nominal or de minimus value (say, a one dollar bonus given in exchange for a non-compete), will not support a mid-stream non-competition agreement. In making this ruling, lower court was clearly concerned that the subject non-compete was signed several months after the RSU’s were granted. This separation in time undermined the employer’s argument that they were given as compensation for the post-employment restrictive covenants, and could have supported rejection of employer’s arguments even without consideration of the relative merits of RSU’s and conventional stock options.