Thursday, February 19, 2015

Contrary to Popular Belief, Non-Compete Agreements Are Alive and Well in Minnesota, Wisconsin and Elsewhere

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.