Non-Compete Agreements

Freedom to Work v. Employer Interests

Many talented professionals have left a job seeking a better opportunity, only to find their options constrained by a non-compete agreement they signed years ago.

Many business owners have poured valuable time and resources into an employee, only to watch that employee leave for a competitor, taking valuable intangibles along with them.

Minnesota Non-Compete Law:
An Overview

Restrictive Covenants

Non-compete agreements are a type of restrictive covenant which limit (“restrict”) what a former employee may do after leaving an employer.  In fact, what most people call a non-compete agreement or clause is actually often a bundle of restrictive covenants. Other common restrictive covenants in employment include non-solicitation agreements, assignment of invention clauses, and non-disclosure agreements (the infamous “NDA”).

Because the legal principles generally do not differ, this website uses non-compete to refer to the broader list of restrictive covenants.

Non-Competes are “Disfavored” But Enforceable

Under Minnesota law, non-competes are “disfavored” because they limit an individual’s freedom to seek other employment opportunities and potentially better one’s economic situation. For this reason, courts examining a non-compete require it to meet several requirements designed to keep the agreement reasonable for the employee. The non-compete must satisfy all the necessary elements of a contract, protect a legitimate employer interest, and be reasonable in its scope. A non-compete that fails to meet these requirements is susceptible to nullification or modification.

It is a myth, however, to think that a non-compete is unenforceable.  Courts will enforce properly drafted non-competes, so employers and employees alike should be thoughtful in their actions. Whether a non-compete will be held enforceable is often fact specific and a balancing of the employer’s economic interests, the employee’s right to earn a living, and the scope of the agreement.

A Non-Compete is a Contract

A non-compete is a specific kind of contract. As such, it must satisfy the basic elements of a contract: offer, acceptance, and consideration. 

Offer and acceptance are generally straightforward. A non-compete may be offered to the employee, either before they take the job, as a condition of employment, or at any other time during their employment. Similarly, the employee must accept the non-compete. Signing a physical copy is the surest and safest way of demonstrating acceptance. That said, Minnesota law allows an employee to demonstrate acceptance through words and actions, as long a reasonable person would understand the conduct to be acceptance. If you are shown a non-compete before you begin work and are informed that accepting it is a condition of your employment, your subsequent acceptance of the job offer and beginning work may be considered acceptance of the non-compete, even if you don’t sign it.

As a contract, a non-compete must also be supported by consideration, or a bargained for benefit. As a general rule, courts do not inquire into the adequacy of the consideration if they can help it. If the non-compete is put to the employee at the inception of employment, the offer of employment itself is deemed adequate consideration. If the employer requests a non-compete after an employee has begun employment, there may be a need for new or additional consideration. Minnesota courts have found raises, bonuses, stock options, new and substantial training, and access to previously off-limits information to be adequate consideration in various cases.

LEGITIMATE EMPLOYER INTERESTS

Minnesota law requires that a valid non-compete protect a legitimate business interest of the employer. Courts recognize two types of legitimate employer interests: (1) the protection of confidential information or trade secrets, and (2) the nurturing of goodwill with customers.

CONFIDENTIAL INFORMATION

Minnesota courts have widely recognized the legitimate interest of an employer in protecting confidential information or a trade secret. While not exactly the same, courts tend to apply a similar test to determine whether something is confidential or a trade secret. Namely, the information must: (1) not be generally known or readily ascertainable (i.e., you can’t be able to “google” it), (2) provide a demonstrable competitive advantage to the business, (3) have been obtained through effort or expense by the employer, (4) be something the employer intended to keep confidential (and made active efforts to do so). [4] This test has been codified in Minnesota’s Uniform Trade Secrets Act.

Trade secrets are the highest level of protected information. Information that is not a trade secret may still be considered confidential information if the employee’s duty of loyalty to the employer and the nature of the information warrant. Common law duty of loyalty and fiduciary duties may exist without explicit documentation stating that the employee owes an employer a duty of loyalty, and officers of a business entity face heightened duties.

While often fact dependent, various courts have held the following information to be confidential and, thus, a legitimate employer interest: customer information, pricing, marketing strategies, new product development, unique production methods, and technical information.

EMPLOYER GOODWILL

Minnesota courts also recognize that, in certain industries, a business may become so strongly identified with a particular employee, that the goodwill of the business is held largely by that employee. This is most common where the employee has personal interactions with the clients, as in the case of sales representatives.

Customer interaction alone is rarely sufficient to serve as a legitimate employer interest. Courts generally require employers to demonstrate that they have invested meaningful resources into developing the customer relationship through the employee. Employers may satisfy this requirement by evidencing the significant training they have provided to an employee, particularly if the field requires advance knowledge or expertise. Thus, a medical device manufacturer will likely have a legitimate goodwill interest in its sales representatives; a fast food establishment will struggle to establish a goodwill interest in its fry cooks. 

Reasonable Scope

Even if an employer demonstrates a legitimate interest in binding an employee to a non-compete, Minnesota law requires that the scope of a non-compete be reasonably limited to the extent necessary to protect that interest. The scope of a non-compete is measured in three ways:  geography, duration, and substance. Courts tend to examine the scope holistically, and the determination of reasonableness is fact-specific.

GEOGRAPHIC SCOPE

As a rule, the reasonableness of the geographic scope of a non-compete is strongly related to the business footprint of the employer or the former employee. A Minnesota court is not inclined to uphold a non-compete that restricts a former employee’s opportunities where the employer has never conducted business. This can still be quite larger, as courts have upheld non-competes against salesmen covering the entire Upper Midwest, their former sales region. It is incredibly rare for a court to uphold a “global” non-compete, unless the knowledge of the employee borders on that of a trade secret and the rest of the non-compete is narrowly tailored.

A prohibition on soliciting certain customers is frequently used as a substitute for more physical measures of scope. In such cases, the size of the geographic footprint becomes less important, as the list of customers tailors the restrictions the employee faces. Such a list must be limited to the employer’s existing customers; the employer is not harmed if the employee attracts a customer that ceased doing business with the employer before the employee quit.

It is often fatal for a non-compete not to have any measure of geographic scope. The scope of a non-compete is a material term, and while courts tolerate some incompleteness in contracts or will sometimes “blue pencil” a non-compete (see below), many courts will not accept the complete lack of a material term.

DURATION

The longer a non-compete lasts, the less reasonable a court will find it. Minnesota courts frequently uphold non-competes that are limited to a year and are often favorable to those lasting up to two years. A non-compete written to last three or more years requires extraordinary circumstances. The employer must convince the court that the information held by the employee is so important or the relationship between employee and customer is so strong that three or more years is required to replace the departed individual.

 SUBSTANTIVE SCOPE

The substantive scope of a non-compete is the most difficult to generalize. It will vary by industry, position, and location. A court will look to prior cases involving similar circumstances, if they exist. It will balance the substantive scope against the duration and geographic restrictions of the agreement, as well as the interest being protected. One takeaway from existing cases is that courts will be more skeptical of non-competes where the employee was previously engaged in the same line of work, as the resources invested by the employer are smaller.

THE BLUE PENCIL DOCTRINE

Under Minnesota law, courts may blue pencil elements of a non-compete viewed as unreasonable: they may re-write parts of the agreement to make it reasonable, rather than declaring the entire agreement unenforceable. If a court views the rest of a non-compete to be reasonable, but finds that a two-year duration too long, it may shorten the duration to one year and enforce the re-written agreement accordingly. If it finds a geographic restriction of the entire state of Minnesota too onerous, it may limit to the city of Minneapolis.

A word of caution: the blue pencil doctrine is entirely discretionary. Employers should not write a non-compete broadly with the expectation that the court will narrow until it is enforceable; employees should not sign a broad non-compete expecting a court to narrow it for them later. Both sides take a risk by holding such expectations. As previously mentioned, while a court may blue pencil the scope of a non-compete, the doctrine will not save an agreement from other shortcomings. Failure to satisfy the contractual requirements or lack of a legitimate interest will still doom a non-compete.

The Rise of Non-Compete Litigation

The rise of non-compete agreements, which now affect roughly 20% of all workers in the U.S., has lead to an explosion in non-compete litigation to challenge or enforce the agreements.

Often broadly worded and disfavored by Minnesota courts, non-competes are ripe to be challenged in court.  Because litigation can be expensive, and it may be difficult to determine how any individual judge will rule, non-competes are also ripe for settlement.  While challenging a non-compete may not always get it thrown out the window, there is a chance to negotiate it to more favorable terms.

Challenges to Non-Competes

CONTRACT-BASED CHALLENGES

As previously mentioned, a non-compete is a contract and must satisfy all the requisite elements of such.  One way to challenge a non-compete is to argue that it fails to satisfy one of the requirements of a contract.  Most commonly, this would involve demonstrating that there was a lack of consideration.  This can be difficult if the non-compete was accepted before work started, as the employment itself may be the consideration.  If the non-compete came into being after employment started, contract employees may be able to demonstrate that they received no new consideration.

Alternatively, you may demonstrate that the non-compete was never accepted.  This would be easiest for employees under a contract that does not reference the non-compete, and the non-compete was never signed by the parties.

LACK OF GENUINE EMPLOYER INTEREST

An employer wishing to enforce a non-compete must demonstrate that it protects one of two genuine business interests: confidential information or customer goodwill. The job duties of many employees will not satisfy either of these.  Employees that have little or no personal interaction with customers will rarely satisfy the goodwill interest.  Even employees that have constant interaction with customers will not satisfy the goodwill interest if they are easily replaceable or if there have not been years spent building a relationship with the client. Other jurisdictions with similar non-compete law have begun to scrutinize more closely the goodwill element, which may be persuasive to Minnesota courts.

Similarly, while an employer may utilize information that rises to the level of confidential or even a trade secret, they must prove something more than that to enforce the non-compete.  Recent Minnesota court of appeals cases suggest that, if an employer seeks an injunction or other type of actual enforcement of the non-compete, it must demonstrate that the employee has actually used or divulged confidential information in her new position.  The fact that the employee merely had access to confidential information may not be sufficient for anything more than monetary damages. To be enforceable in any form, the employer must prove that the employee had access to information that was in fact confidential.  This can be an uphill task, and one that may be fact-specific to the line of business.

POORLY WORDED RESTRICTIONS

A non-compete agreement may also fail or be weakened because it is poorly worded or error-filled.  If the terms of the non-compete are inconsistent, for example, courts favor interpreting the contradiction in favor of the non-drafting party, which is almost always the employee. 

The same is true for undefined or vaguely defined terms.  Failure to properly define what triggers the start of the non-compete time period may result in the court “starting the clock” during the time the employee was still working for the employer, or upon expiration of an original employment agreement, effectively causing the non-compete to expire before the employee left or was terminated.

While a court utilizing the blue pencil doctrine may choose to alter and make reasonable an otherwise unenforceable scope, failure to define scope at all is sometimes fatal, as courts may take the position that the parties simply failed to define a central term of the agreement.  A court that finds this to be the case may be more inclined to void the non-compete, as courts are reluctant to fill in key terms of a contract.

Equitable Defenses

Some defenses to a non-compete do not directly challenge the validity of the underlying non-compete. Rather, they argue that, for an important reason, justice would not be served by enforcing the non-compete.

One such example is called equitable estoppel.  In short, estoppel prevents a party from contradicting its prior words or actions in court, when another party has relied upon those words or actions and would be harmed if things changed.  Thus, an employer who erroneously, but in good faith, informs the employee that it will only enforce the non-compete in a narrow manner may be “estopped” from enforcing the non-compete more broadly against the employee who relied upon that interpretation to take a specific job.

Another example is called the doctrine of unclean hands.  Most employers seeking to enforce a non-compete seek an injunction, a court order that states the employee must stop competing against the employer.  Such an order is known as an equitable remedy, because it seeks a specific action instead of simply money damages.  A key principle of equitable remedies is that “he who comes into equity must come with clean hands.” In other, less poetic words, those seeking an equitable remedy must have acted equitably and fairly in the matter themselves, or else the court will likely not grant an injunction.  There are numerous cases in which the courts have refused to grant an injunction when an employee left a job and took client contacts with him, because the employer had benefited when the employee had done the exact same thing when joining the employer previously.

Equitable defenses are rarely the strongest defense, as proving them is often difficult and much is being placed in the consideration of the judge.

Non-Contractual Duties.

All employees are bound by certain basic legal duties to their employer.  This is true whether or not the employee has signed a valid employment agreement; the duties exist by virtue of the employment relationship.  Any challenge to a non-compete agreement must consider these duties that lurk in the background.

In its most basic form, the duties owed to an employer may be placed into two categories:  (1) the duty of loyalty, owed by every employee; (2) fiduciary duties, owed by specific employees by virtue of their office or position within the company.

Duty of Loyalty

An employee, regardless of his position within a business, must act honestly and faithfully when dealing with his employer.  While not exhaustive, Minnesota courts recognize that the duty of loyalty covers several activities related to competing with a former employer:  1) soliciting or usurping a business opportunity prior to departing; (2)  disclosing or misappropriating an employer’s confidential information; (3) various serious misconduct, such as embezzlement.

Courts recognize that the duty of loyalty is not absolute, and may be at odds with the right of an employee to seek new employment that improves her economic situation.  Thus, an employee has a right to “prepare to enter into competition with her former employer.” While still employed, an employee may, on her own time, take such actions as forming a limited liability entity, seeking funding sources, or lease space.  The line between preparation and solicitation may often be blurry, leading to a fact-specific determination by the court.

Fiduciary Duties

Certain kinds of employees, particularly corporate officers and other senior leadership, are subject to fiduciary duties, which are governed by both Minnesota statute and common law.  Minnesota Statute 302A.361 states that “an officer [of the corporation” shall discharge the duties of an office in good faith,” in a manner “reasonably believed to be in the best interests of the corporation, and with the care of an ordinarily prudent person.”  In closely-held corporations, Minnesota courts have found that the shareholders may also be subject to these higher fiduciary duties.

This additional duty of care creates an affirmative duty on the part of the fiduciary to act in their employer’s best interests, even at the exclusion of the fiduciary’s self-interest. While it is unclear whether being a fiduciary heightens the non-fiduciary duty of loyalty, it likely makes some attempts to prepare to compete more difficult.  Officers and directors are not allowed to utilize their “position as an insider by appropriating . . . a business opportunity properly belonging to the corporation.” Any business opportunity or prospective client the officers identify while still with his employer, even if he does not actively pursue it until he departs.