Without the benefit of court guidance, conventional wisdom in Minnesota has long been that non-competes are enforceable only up to their contractually stated limits. A one year non-compete should run one year from the date the employee departs, not a day more. This follows from (1) the fact that non-competes are strictly creatures of contract, and (2) they are disfavored under Minnesota public policy and are to be narrowly construed. Accordingly, if an employee subject to a one year non-compete quits to join a competitor, but the old employer only learns of the fact ten months later, the old employer should be entitled to at most a two month injunction prohibiting such employment. In most cases, the cost of suing would outweigh any benefit, unless the employer has a solid claim for substantial damages and an ability to collect on its judgment. But what if the conventional wisdom is wrong, and the 12 month period can be extended under equitable or contractual principles? In a July 2018 decision, the Minnesota Court of Appeals appears to provide an answer, and not one favorable to employees.
Up until this recent decision, the case law on non-compete extensions was sparse and unsettled. The leading case, Cherne Industries, Inc. v. Grounds & Assoc., 278 N.W.2d 81 (1979), involved a plaintiff employer who sued several employees who left to compete with plaintiff, a business that created and sold federally required sewage treatment plant operations manuals, in alleged violation of their non-competes. Before leaving, defendant employees took with them reams of confidential documents and customer lists belonging to the plaintiff, which they used to successfully divert many existing and prospective customers. In its ruling, the Supreme Court affirmed a lower court’s extension of the non-compete for an additional two years, beyond the contractual limitation. However, the court took pains to state that it did not do so based on breach of the non-compete, but rather based on common law legal claims arising from the theft and improper use of confidential information. While noting that at least one other state had specifically rejected the practice of equitably extending non-competes beyond their contractually specified limit, the court punted and declined to decide the issue because other grounds to support the non-compete sufficed.
Fast forwarding to 2018, the Minnesota Court of Appeals in Medtronic, Inc. v. Petitti, A18-0010 (Minn. App. July 23, 2018) revisited the issue of whether a court has the authority to extend a non-compete beyond its contractual limit, albeit on somewhat different facts and contractual principles. Previously in the case, the lower court tackled the question the court in Cherne punted on, holding that a non-compete may in fact be extended when equity so requires. Although the Cherne and Medtronic cases shared similarities in that they involved targeting and attempting to divert customers of the former employer, there’s nothing in the published Medtronic decision to indicate that defendants there misappropriated and improperly used trade secrets or confidential information. On appeal, the Minnesota Court of Appeals reversed the lower court, but critically not on the grounds that Minnesota public policy proscribes extending non-competes. Rather, it did so based on tolling language in the non-competes. That is, the non-competes specifically stated that for every day in which the employees are in violation of their post employment restrictions, an additional day is tacked on to the time limitation. The court based its ruling on principles of contract, stating that where a contract addresses an issue, a court is not at liberty to disregard the language and accomplish similar means through equity. Accordingly, it remanded the case to the district court, with instructions to apply the tolling agreement as it appears in the non-compete. Medtronic therefore is as important for what it didn’t say as for what it said: it specifically did not say that non-competes cannot be extended, in a court’s discretion, through equity. Indeed, it cited in a footnote, with apparent approval, a federal court decision applying Minnesota law doing this very thing. Overholt Crop Ins. Serv. Co. v. Travis, 941 F.2d 1361 (8th Cir. 1991).
The takeaway of of Medtronic is two-fold, and is not good for employees. First, a contractual tolling provision within a non-compete may, in fact, be legally enforced and is not a violation of public policy. Second, even in the absence of such language, it appears that a court may at its the discretion extend the term of a non-compete to remedy a violation. In the aftermath of Medtronic, look to see more and more employers including tolling language in their non-competes.