Are non-competes enforceable? This question is common for employees who are considering switching jobs or business owners. The answer depends on the facts, as with most things in law. It doesn’t matter which side you are on in the question, consult an attorney who is experienced in this area to help you find the right answer.
Non-compete litigation is expensive for employees and former employers. Even if there is a violation per seof non-compete, if it does not result in the loss or revenue that makes litigation worth while, the former employer may choose to forgo the cost of litigation if it is not justified by the revenue loss.
However, there may be a substantial loss in revenue that justifies the expense and time spent on litigation. If an example is needed to ensure that other employees don’t leave or that the competitor doesn’t continue poaching key staff, then the law governing non-compete enforcement is well-developed. This topic is often litigated.
THE LAW
Covenants not to Compete are agreements in partial restraint on trade that restrict an individual’s ability to work and earn a living. Minnesota Courts “look at [non-compete] agreements with disfavor” (Minn. 1983). National Recruiters, Inc. v. Cashman, 33 N.W.2d 736, 740. (Minn. 1982). Restrictive covenants can only be enforced to the extent necessary to protect legitimate business interests.
The Minnesota Supreme Court stated over 100 years ago that “[o]ne who doesn’t have anything but his labor to sell, and is in dire need of selling it, cannot afford to raise any objections to any terms in the contract or employment offered to him,” Menter Co., 180 NW. 553, 555 (Minn. 1920). Judges also raised concerns that restrictive covenants could be used improperly to discourage employees terminating employment. Eutectic Welding Alloys Corp., 160 N.W.2d 566, 571 (Minn. 1968).
A court can enforce a noncompetition clause, provided it is necessary to protect an employer’s reasonable interests and does not place unreasonable restrictions on employees’ rights. The Minnesota Supreme Court stated that a court may enforce a non-competition clause if it is necessary to protect the legitimate interests of the employer and is reasonable as between them. Bennett v. Storz Broadcasting Co. 134 N.W.2d 882, 898 (Minn. 1965). A district court must consider the “nature and character of the employment, nature and extent the business, the time the restriction is imposed, and any other relevant conditions” when determining the reasonableness or unjustifiability of a restrictive covenant. Dynamic Air, Inc. 502 N.W.2d796, 799 (Minn. Court of App. 1993).
The nature of the business and the nature of employee service, as well as other relevant conditions, will determine the necessity of the restriction. Bennett, 134 N.W.2d at 899-900. A non-competition provision must be reasonable if it is necessary to protect the employer’s business or goodwill. If the answer is yes, then the clause must be considered reasonable in order to protect the employer’s business. This will take into account the nature and character the employment and the duration of the restriction. It also needs to consider the geographical extent of the area that the restriction applies. Id. Id. Id.
While mere continuation of employment may be sufficient compensation for non-compete agreements to be upheld, the non-compete agreement must be negotiated and offer the employee real benefits. Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127, 130-31 (Minn.1980). “The amount of consideration given for [noncompete agreements] during an ongoing employment relationship will vary depending on the facts of each case.” Freeman, v. Duluth Clinic, Ltd., 334 N.W.2d 626,630 (Minn.1983); C.H. Robinson Worldwide, Inc. v. FLS Transp., Inc., 772 N.W.2d 528, 534 (Minn. Ct. App. 2009).
Minnesota law requires that the Agreement must be read as written. Contract construction serves to let the intent of the parties prevail. Turner, 276 N.W.2d at 63, 65 (Minn. 1979). Midway Ctr. Assocs. v. Midway Ctr, Inc., 237 N.W.2d 76, 78 (Minn. 1975). A written agreement should clearly state the terms of the bargain between the parties. Gunderson, Inc., 628 N.W.2d 173, 182 (Minn. Court of App. 2001 review granted (Minn. July 24, 2001), and appeal denied (Minn. August 17, 2001). For the construction of contracts, it is a general rule that language should be clear and unambiguous. Starr v. Starr, 251 N.W.2d 341, 242 (Minn. 1977).
However, the blue-pencil doctrine allows a district court to modify a non-competition clause “to make it reasonable and enforceable.” dynamic Air, 502N.W.2d 800. The district court does not have to do this–Klick against Crosstown State Bank 372 N.W.2d 85, 88 (Minn. Ct.App. 1985).
ANALYSIS:
These are the areas where non-compete litigation is most prevalent:
- When was the first time the employee was informed about the non-compete being executed? Was the non-compete a condition for employment? Or was it only known to the employee after they had been hired. The employment agreement must have been signed at the time the employee accepts the job offer. Overholt Crop Ins. Serv. Co., v. Bredeson, 437 N.W.2d 698, 702 (Minn. Ct. App. 1989). 1989. National Recruiters at 740.
- Employers must also prove that the non-compete is required to protect legitimate business interests. The company’s goodwill, trade secret and confidential information may be protected. Medtronic Inc. against Advanced Bionics Corp.., 630 N.W.2d 448, 456 (Minn. Ct.App. 2001). Reliastar Life Ins. Co. v. KMG America Corp., 2006 WL 2529760, *4 (Minn. Ct. App. Co. v. KMG America Corp., 2006 WL 2529760, *4 (Minn. Ct.App.). 2006 citing Blackburn, Nickels & Smith, Inc. v. Erickson, 36 N.W.2d 640, 645. (Minn. Ct.App. 1985, review denial (Minn. June 24, 1985).
- The analysis then examines whether these restrictions are sufficiently narrow to protect their interests. This analysis will focus on geographical limitations and temporal limitations, which are often used in non-competes. “Territorial restrictions… are just one factor a [district] Court is to consider when determining the reasonableness or inapplicability of a restrictive covenant.” DynamicAir, Inc., 502 N.W.2d 756, 799 (Minn.App.1993). Bloch, The Minnesota Court of Appeals refused to enunciate a per-se ruling banning the enforceability of a covenant that did not contain a territorial limitation. Id. 800. A geographic restriction will be upheld by courts if it is only in the areas that are necessary to protect an employer’s interests. Overholt Crop Ins. Serv. Co. v. Bredeson, 437 N.W.2d 698, 703 (Minn.App.1989). The court must consider the context and the character of the employment when deciding whether a non-compete clause is valid. Kallok v. Medtronic, Inc., 573 N.W.2d 356, 361 (Minn.1998).
- Time is a matter of personal opinion. It depends on the job and how long it takes to train and find a replacement. Customers also need to adjust to the new employee. See Eutectic Welding Alloys Corp., 160 N.W.2d 566, (Minn. 1968).
- The courts also look at whether the subject employee has significant control over client relationships or is a key employee. The likelihood of enforcing the non-compete is lower if this is the case. It is more likely that a valid and enforceable non-compete will be established if this happens.
It doesn’t matter which side you are on in this debate, it is important to understand the factors that determine whether a noncompete is valid. The decisions include whether to file for enforcement or not, to request a temporary injunction to prohibit the employment or to just move ahead without litigation. It is important to understand what the court will consider if the issue of enforceability comes up. This is a hotly contested area of law, and there is a lot of case law that can be referred to to support your position.
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