February
2015
By: James
B. Sherman, Esq.
I often hear sales and other business persons
say that non-compete agreements and other restrictions on solicitation, etc. “are
not worth the paper they are written on.” As an attorney who has drafted as
well as enforced these agreements in courts in many states, I beg to differ.
Although it is true that non-compete, non-solicitation and other restrictive
covenants face greater scrutiny by the courts in Minnesota and elsewhere, when
reasonably drafted and properly executed they are readily enforced. Even in
Wisconsin, which has a statute specifically disfavoring agreements that lack
reasonable geographic and temporal limitations, a well drafted agreement will
be upheld in court. Ultimately, winning or losing when it comes to enforcing or
undermining the enforceability of a non-compete usually comes down to one or
more of the following factors: How the agreement was executed; the
reasonableness of its restrictions; or certain factors that are relatively
overlooked by employers and lawyers alike.
1. Proper Execution. In Minnesota, conditioning a job offer on
an offeree’s agreement to a covenant not to compete provides the required
“consideration” (i.e. value exchanged for the employee’s agreement). However, once
an employee already is employed an employer must offer more than mere continued
employment as consideration for a restrictive employment agreement
to make it enforceable. As a result, allowing a new employee to work for even a
day/hour/minute before requiring her or him to sign a non-compete, can ruin its
enforceability years down the road.
A raise, promotion, or lump sum payment may
suffice as consideration in return for a current employee’s agreement to a
non-compete, non-solicitation or other restrictive agreement, so long as it was
not something to which the employee was already entitled. There are many
creative ways to supply the necessary consideration for a non-compete with an
existing employee. Minnesota courts generally
do not scrutinize the sufficiency of consideration other than to ensure that it
is at the very least not “unconscionable.”
2. Reasonableness. Restrictive employment
agreements – non-competition, non-solicitation, confidentiality, no-poaching
and similar provisions must be narrowly designed to protect the employer’s “legitimate business interests” to be
enforceable in Minnesota and most states. This is not a terribly difficult
standard to meet, although it is a legally technical concept. Where employers usually
have problems is when they get too greedy, or try to ban fair competition
through their arguments.
Besides being narrowly tailored to protecting
legitimate business interests, an agreement must not restrict activities for
too long a time following an employee’s departure, or restrict competition over
an excessive or unreasonable geographic area. For example, a non-compete
agreement for a salesperson that bars competition for three years after
employment ends, throughout an entire state, would not be enforced in a Minnesota court if the
employee’s sales territory was much smaller or if customer relations are proven
to change in fewer than three years.
3. Miscellaneous
Additional Facts.
As an attorney who drafts/enforces non-compete and similar agreements for his
business clients in many states, but who also works to destroy the
enforceability of such agreements on behalf of employers who may be hiring
someone with an agreement drafted by a former employer, my experience has
taught me that there definitely are numerous tricks to this area of the law not
found in the law books. Here are just a few that are worth considering:
a. Don’t use restrictive employment agreements unless you are
prepared to enforce them. I used an employer’s past failures to enforce their
agreements as evidence that the agreements clearly were not designed to protect
a legitimate business interest (otherwise, why would the employer have allowed
past employees to violate their provisions?). In one case, I actually used a
company’s decision to sue a former salesperson as evidence to support a
counter-claim of FMLA retaliation, where the salesperson was the only one of
five former employees who were sued when they all had gone to work for my
competitor client.
b. Don’t rush to court. While this point may seem to contradict the
above rule about enforcing your agreement, “enforcement” does not always
require litigation. Court proceedings on non-compete agreements can be
expensive, with injunctive proceedings essentially requiring that the majority
of a case be litigated up front, in the first month or so of the case. Going
after a former employee, but coming to reasonable terms with the employee
and/or her or his new employer, often serves a client’s interests as well as
any court decision, and for a lot less money.
c. Other laws may come into play. In addition to any
contract or employment agreements, most states have a host of additional
statutes and common law principles that govern what employees do both during
and following their employment. In Minnesota, employees who take or
retain company property when they leave may be sued for “conversion.” If
information or property meets the statutory definition of a “trade secret” a
claim for “misappropriation” may be pursued for injunctive relief, punitive
damages, and attorney’s fees. Claims for breach of duty of loyalty, fiduciary
duties, and unfair competition are just some of many other claims that may
exist absent any contract. Having said this a well drafted, reasonable
agreement with employees is always preferred in court.
d. Who has the most money and stomach for litigation. It may not sound pretty
but the truth of the matter is that the outcome of litigation over non-compete,
non-solicitation and other restrictive employment agreements and unfair
competition, often is less dependent on the legal merits of the parties’
respective cases as it is on which party is willing to fight the hardest and
spend the most money. Knowing this
before fighting in court can avoid disappointment down the road.
e. Hiring employers need to be aware that hiring someone who
has a non-compete agreement with a former employer, could expose them to claims
for “tortious interference.” In Minnesota the state supreme court, in Kallok
v. Medtronic, ruled that when a hiring employer causes the previous
employer to expend legal fees to defend the enforceability of its employment
agreement, it may be held liable for the legal fees reasonably expended by that
former employer if the court finds the agreement enforceable. Although not yet adopted in the courts of most
states, this legal principle likely would apply in Wisconsin, Illinois and
other neighboring states. As a result, employers who hire applicants who have
restrictive agreements with their former employers should think twice before they
try to challenge the enforceability of the agreement in court.
