Agreements restricting employees’ competitive activities and solicitation of company business during and following employment are common in Minnesota and throughout the nation. In certain industries, they’re practically ubiquitous. This article will summarize Minnesota’s law of restrictive covenants, i.e. non-competition and non-solicitation agreements, referred to collectively below as “non-competes.”
Choice of Law
The first thing to consider in interpreting a non-compete is the applicable law. Courts in Minnesota routinely uphold contractual clauses dictating whose law governs disputes under a contract, known as “choice of law” provisions. In general, Minnesota will honor the parties’ choice of law if the state in question has some connection to the employment. Thus, for instance, a Minnesota based sales employee working for a New Jersey company may be contractually subject to New Jersey’s law on non-competes. See BMC Software, Inc. v. Mahoney (D.Minn. 2015) (applying contractually agreed-to Texas law, after applying Minnesota choice of law test). This matters, because the law of non-competes varies widely from state to state, some (e.g., California and North Dakota) prohibiting them altogether. See Menzies Aviation (USA), Inc. v. Wilcox (D.Minn. 2013) (declining to apply more employer-favorable law, where the case had no connection to Florida). Similarly, Minnesota courts will enforce an otherwise valid choice of forum clause, dictating the venue for commencing suit, unless the court determines enforcement of such a clause would be unreasonable or unjust. Capstone Fin., Inc. v. Moore (D.Minn. 2012).
The law of non-competes in Minnesota is entirely court-made, in contrast to states such as Wisconsin and North Dakota, where it is governed by statute. See Wis. Stat. § 103.465; N.D. Cent. Code, § 9-08-06. Non-competes are “disfavored” under Minnesota law for being a partial restraint on trade. As such, they are to be strictly construed, with any ambiguities interpreted against the employer. Lemon v. Gressman (Minn.App. 1999).
Nevertheless, courts routinely uphold them if they are determined to be reasonably necessary to protect legitimate business interests. Acceptable interests include (1) protecting against deflection of trade; (2) protecting confidential business information and trade secrets; and (3) protecting customer goodwill. The question boils down to whether the departing employee can hurt the former employer. This depends, to an extent, on the employee’s level of skill and expertise. A scientist at Medtronic who designs and tests medical devices will be treated differently than a janitor who mops the company’s floors. Courts generally will not enforce non-competes against employees paid “modest wages for modest employment.” Ultra Lube, Inc. v. Dave Peterson Monticello Ford-Mercury, Inc (Minn.App. 2002) (invalidating non-compete signed by service manager at an auto rapid-oil-change shop, who lacked specialized skills, whose duties were not managerial or professional and who was paid $8.00 an hour).
It also depends on the employee’s interaction with important customers. A farm implement sales representative or a hair stylist can harm a former employer by diverting company customers with whom they developed a relationship. In such instances, a non-solicitation agreement, a non-competition agreement or both may be necessarily. Compare Advance Contract Equip. & Design LC v. LaMere (Minn.App. 2015) (enjoining foodservice sales representative subject to a 1-year non-compete from working for competitor, owing to the “importance of relationships” in a “highly competitive” industry) with Rosewood Mort. Corp. v. Hefty (Minn.App. 1986) (not enforced, where purchasing decisions were tied to pricing by large industry players and not personal contacts). Gratuitous, over-reaching agreements, by contrast, do little to promote a company’s interests, and can deter good talent from coming aboard.
Geographic and Temporal Scope
Courts measure reasonableness also in terms of geographic and temporal scope. Generally speaking, non-competes in Minnesota may be enforced up to a maximum of two years in length. Those arising from the sale of a business, however, may be far longer. Geographic scope tends to be very industry dependent. Compare the job of a hair stylist to that in the IT industry. In the former case, a reasonable restriction may be measured in city blocks. A statewide ban would be unreasonable; what person travels (say) from Minneapolis to Duluth to get a haircut? In the latter case, the restriction could be the entire planet. A computer programmer today can write and transmit computer code from anywhere on earth, provided he/she has a dependable source of electricity and internet access.
If an agreement is broader than necessary, a court applying Minnesota law may apply the “Blue Pencil Doctrine” to rewrite offending portions. Thus in Medtronic, Inc. v. Hughes (Minn.App. 2011), the trial court reduced a two-year non-compete to one year. Likewise in the Davies case, supra, the court narrowed a ban within 50 miles of the Twin Cities, where most of the work actually performed took place within Hennepin County proper. In a case involving veterinarians, one court described the reasonableness of duration to be “(1) the length of time necessary to obliterate the identification between employer and employee in the minds of the employer’s customers, or (2) the length of time necessary for an employee’s replacement to obtain licenses and learn the fundamentals of the business.” Head, DVM v. Morris Veterinary Center (Minn.App. 2005). As applied in Head, that warranted reduction of a three year non-compete down to one year.
Finally, the restricted period begins immediately after separation from employment, not some later date (e.g., when the employer first learns of the violation), and is not tolled or extended for periods during which the employee is in violation. One court has even suggested that contractual tolling agreements may not be enforceable. Arizant Holdings, Inc. v. Gust (D.Minn. 2009) (citing to Wisconsin law).
To offset the unequal bargaining power between employers and employees, Minnesota requires non-competes be supported by independent consideration. This means the employee gets something of value in exchange for signing it. If signed pre-hire, the offer of employment itself will constitute consideration. Such non-competes are referred to as being “ancillary to employment.” If, however, the employee is presented the non-compete to sign as little as a day after he/she commences work activities, it generally will not be enforceable unless the employee is given something else of value in exchange for signing, which might include a bonus, raise, or expanded job responsibilities. National Recruiters v. Cashman (Minn. 1982) (non-compete signed four days after start date unenforceable). Minnesota courts have upheld signing bonuses of as little as $500 as sufficient consideration. Tenant Construction, Inc. v. Mason (Minn.App. 2008). Presumably, a token or de minimus payment (say, $5 or $10) would not be sufficient, although no court to date as set an absolute floor. Note, however, that mid-stream consideration will not be sufficient if not all workers in the same job category were required to sign a non-compete in order to take advantage of the new benefit. Nott Co. v. Eberhardt (Minn.App. 2014). Also note that not every state takes this approach. Wisconsin, for instance, holds that “forbearance in exercising its right to terminate an at-will employee” who signs a mid-stream non-compete will suffice as consideration. Runzheimer Int’l, Ltd. v. Friedlen, (Minn. 2015).
A narrow exception exists where an employee signs a non-compete, and then stays on with the company for a number of years, during which time he/she gets promoted or has expanded responsibilities and pay. That was the case in Witzke v. Mesabi Rehabilitation Services, Inc. (Minn.App. 2008). The employee there was forced to sign a non-compete that lacked consideration eight months after starting work, but remained employed for seventeen years more, during which time he advanced within the company and was given increased job responsibilities. The court in Satellite Indus., Inc. v. Keeling (Minn.App. 1986) ruled similarly regarding an 11 year employee, who over that time was elevated from sales employee to manager to vice president of sales. In so holding the court emphasized that “[c]ontinuation of employment alone can be used to uphold coercive agreements, but the agreement must be bargained for and provide the employee with real advantages.” Naturally, inquiries such as this are extremely case sensitive, so one should care to not draw too much from such a holding. For instance, while expanded training opportunities may, in conjunction with other factors, support an argument for substitute consideration, the Minnesota Supreme Court in Jim W. Miller Const. Inc. v. Schaefer (Minn. 1980), observed (quoting with approval a New York case):
[N]o restrictions should fetter an employee’s right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment. This includes those techniques which are but “skillful variations of general processes known to the particular trade.
Serving to emphasize, again, that non-competes are disfavored under Minnesota law.
Courts recognize two other exceptions to the consideration requirement. The first is where it is signed in connection with the sale of a business. E.g. seller of company agrees not to compete with the company he/she has sold. Conway v. C.R. Bard, Inc. (D.Minn. 2015). The second is where the employee is employed as a bona fide independent contractor under an independent contractor agreement. Schmit Towing, Inc. v. Frovik (Minn.App. 2012). Barring these exceptions, “mid-stream” non-competes lacking separate consideration are a classic trap for unwary employers, and courts will not hesitate to throw them out.
Similarly, Minnesota courts have held that where an employer fails to inform an employee of the necessity of signing a non-compete until after the job offer is accepted, a subsequently signed non-compete will not be enforceable. National Recruiters, supra. This applies even as to non-competes signed prior to the employee’s first day on the job. Sanborn v. Chase (Minn.App. 1993). But see Tonna Heating Cooling, Inc. v. Waraxa (Minn.App. 2002) (non-compete not shown to employee prior to accepting job not fatal to enforceability, where evidence showed the parties “fully discussed and negotiated” the non-compete, employer told employee that $5,000 to $10,000 of his salary would serve as consideration for the non-compete, employee had offered to draft it, actually filled in some of its terms, and served as general manager for the company). To ensure enforceability, a best practice for employers is to advise prospective new employees that their employment will be subject to a non-compete before extending a job offer, and to provide the essential terms or (better) a copy of the employment agreement containing the non-compete as an attachment to any written offer of employment.
What Does it Mean to “Compete”
Any ambiguity in a non-compete will be interpreted against the employer seeking to enforce it. To limit ambiguity, it is best for employers to define essential terms (such as “compete” or “solicit”). The case of Sealock v. Peterson (Minn.App. 2008) presented no such issue, because the newspaper advertisements placed by defendant optometrist “fall within the plain and ordinary meaning of ‘compete.’” The non-compete in question there prohibited employee from competing within a five mile radius of the clinic, which was violated when he placed an ad in a local newspaper. In ascertaining reasonableness, court drew a distinction between the paper, whose circulation was limited, with broader forms of advertising, such as the Internet or Yellow Pages, which (the court implied) might have yielded a different outcome were they at issue.
A court will not enforce a non-compete that is incomplete, vague and overly broad, such as the one at issue in Gavaras v. Greenspring Media, LLC (D.Minn. 2014) which, among other things, lacked a starting date and did not describe what it meant to compete: “the Non-compete Agreement leaves the employee guessing about what companies compete with MN Monthly in ways that come in conflict with the Non-compete Agreement.” The court in that case touched on an additional defense based on the prior breach doctrine applicable to all contracts. That is, a prior material breach of a contract containing a non-compete by an employer (here, relating to promised compensation) will excuse a subsequent breach of the term restricting employee competition. Owing to this litany of flaws, the court refused to “blue pencil” the non-compete to make it valid, because doing so would essentially require the court to re-write it.
Consequences of Violation
An employer may seek to enjoin a former employee from working with a competitor after considering the relationship between the parties, relative hardship, likelihood of success, the public interest, and any administrative burden. The party seeking an injunction must also show irreparable harm, and that there is no adequate remedy at law (i.e., money damages alone would be insufficient to make the employer whole). Contractual stipulations that a breach would result in irreparable harm are not conclusive; the court must make its own inquiry. Bison Advisors, LLC v. Kessler (D.Minn. 2014). A court will not enjoin a breach where the non-solicitation period expired years before suit was brought. Hughes v. E-Solutions (D.Minn. 2015). As with non-compete enforceability in general, these inquiries are highly fact sensitive. Often, although not always, requests for restraining orders and a preliminary injunction, if denied by the court, will effectively end the case. Plaintiff employer’s incentive to throw good money after bad litigating will diminish, and it may either dismiss or reach a settlement with its former employee.
A party that succeeds in enforcing a non-compete may recover liquidated damages and attorney fees if the contract so provides. Tenant Construction, supra. To recover the former, the employer must show that damages in the event of a breach would be difficult to ascertain, and they are “not manifestly disproportionate” to actual damages suffered.
Whether a restrictive covenant is assignable from one employer to another depends on the language of the contract and circumstances of change in ownership. The leading case, Saliterman v. Finney (Minn.App. 1985), holds that employee non-competes may be conveyed or assigned from one entity to another following a change in business ownership, as part of a company’s “goodwill.” For this to happen, there must be an actual assignment or transfer of the non-compete. In a change in ownership structured as a sale of assets, this may occur one of two ways: through a purchase agreement specifically referencing the non-compete among other contracts assigned, or more broadly through language transferring “all contracts” or “all assets.” Salliterman leaves unsettled whether employee consent to the transfer is required for the transfer or assignment to be effective. Compare Great America Leasing Corp. v. Dolan (D. Minn. 2011) (requiring employee consent) with Wells Fargo Ins. Servs. v. King (D. Minn. 2016) (no employee consent is needed). Further complicating the picture, Wells Fargo suggests (in my opinion incorrectly) that merely continuing to remain employed with the new company shows consent. Often, although not always, consent is “baked into” the non-compete with boilerplate language indicating that the restrictions are for the benefit of the employer, its successors or assigns. Indeed, one Federal court judge interpreting Minnesota law has gone so far as to state that no non-compete may be assigned unless the non-compete contains such an “successors or assigns” clause. Inter-tel, Inc. v. CA Communications, Inc. (D.Minn. 2002). If the transaction is structured as a merger or sale of stock, some authorities believe that the non-competes remain binding as a matter of course. No case to date has addressed the question squarely, however, and the one (or two) part Saliterman test may apply in such circumstances. Arguments may be made for either approach.
Interference with Contract Claims
Employers hiring employees subject to non-competes are routinely named as defendants in enforcement suits, usually under the theory of procurement of breach or tortious interference with contract. In the landmark case of Sysdybe Corp. v. Rousslang (Minn. 2015), the Minnesota Supreme Court recognized for the first time an “advice of counsel” defense, exempting from liability an employer who relies reasonably and in good faith on the legal opinion of an attorney who green lights the hiring, on the basis of his/her opinion that the agreement in question is not enforceable. Even if the opinion is ultimately found to be incorrect. The consequences are obvious, and underscore the importance of speaking to an experienced non-compete and employment lawyer prior to hiring any employee who is subject to a post-employment restrictive covenant.
Duty of Loyalty
Even in the absence of a written contract restricting competition during and for a period following employment, an existing employee owes his/her employer a common law duty of loyalty. The duty prohibits existing employees from soliciting their employers’ customers for themselves or another business, or otherwise competing with the employer. Rehabilitation Specialists, Inc. v. Koering (Minn.App. 1987). The duty does not, however, restrict employee from taking steps in preparation for future competition after he/she resigns. Such permissible steps might include obtaining an internet address, printing business cards, negotiating a lease, incorporating a business and the like.