Employers Beware: If You Make Your Employees Sign Noncompetition Agreements You Could Wind Up In Court These Days... As a Defendant in a Government Lawsuit!

June 2016

James B. Sherman, Esq.

Employment agreements that restrict employees from working for a competitor after they leave or are fired, have become increasingly common.  Indeed, these agreements have become so prevalent in today’s workforce that they are coming under fire from an unlikely source - state attorneys general, through lawsuits!  Perhaps this new (and disturbing) trend should not come as such a surprise.  With so many employees being required to sign restrictive covenants as a condition of employment, it is getting harder and harder for them to leave their jobs for another in their chosen field.  Similarly, employers looking to hire are seeing the pool of qualified applicants diminished by the fact that many are saddled with post-employment restrictions from an agreement with their prior employer.  In the past year, states have begun suing employers in court over their alleged unreasonable use/overuse of non-compete agreements.  Illinois became the most recent state to join this trend when Attorney General Lisa Madigan, filed a lawsuit against sandwich maker Jimmy Johns, in Illinois state court on June 8th.  Employers should take notice of these government lawsuits because the legal theories relied on in Jimmy Johns’ and other cases recently filed around the country, could just as easily apply in Minnesota, Wisconsin and most other states!

The case against Jimmy Johns alleges that the company is violating Illinois state law by requiring unskilled sandwich makers and delivery drivers to sign a non-compete agreement banning them from other, similar jobs during and for a specified period following their employment.  The government’s lawsuit asserts that Jimmy Johns has no legitimate business interest that would justify such restrictions on employees in these sorts of jobs. However, what is unique about this case is that Attorney General Madigan is alleging that using a non-compete agreement for employees who essentially pose no threat to the employer if they should leave and go to work for a competitor, constitutes a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. This raises the stakes, since this law could allow for the recovery of damages as well as punitive damages and attorney fees against the defendant.  The complaint asserts that unless an employer has a legitimate, protectable business interest that cannot be secured by means other than a narrowly drafted noncompetition agreement applicable to each employee who is required to sign one, such an agreement harms the employees as well as the general public by decreasing employee mobility, stagnating wages and diminishing the pool of available workers.

Employers outside Illinois should not feel they are immune to similar lawsuits.  Just this month, another employer defendant, Employment 360, which is owned by Lexis Nexis Legal & Professional, settled a lawsuit brought last year by New York’s Attorney General. The suit challenged 360’s use of non-compete agreements for its editorial employees, on grounds that the restrictive covenants were too broad and therefore, constituted an unlawful restraint of trade. The settlement effectively calls for 360 to notify its former employees that their non-compete agreements are no longer in effect and they are free to work wherever they please.

Minnesota and other nearby states (such as Wisconsin) have their own Deceptive Trade Practices Acts similar to that of Illinois, and the courts in these and every state recognize that unreasonable restraints of trade are illegal. Therefore, it is likely only a matter of time before Minnesota and other nearby states begin to see unsuspecting employers dragged into court in lawsuits by the attorneys general in their state, over their use of non-compete agreements if alleged to be unreasonable.   

So what are Minnesota and employers elsewhere to do in light of this growing assault on noncompetition agreements? First, don’t overreact by starting to shred all non-compete agreements.  Used properly, noncompetition and other restrictive covenants can save an employer’s business from unfair competition, poaching by competitors and loss of highly confidential information and trade secrets.  However, simply assuming that your agreements will pass muster if challenged in court, ignores the growing hostility toward restrictive employment agreements and the many new legal theories being used to challenge them.  Not only must the agreement itself be narrowly drafted to secure only clearly protectable business interests, but it must also be required only of employees who would pose a clear danger to those interests if they were to go and work for a competitor.  Therefore, the sensible approach is to have all restrictive agreements evaluated by an experienced attorney who is knowledgeable in this highly specialized area of the law.  Only then can an employer determine whether to: (1) keep its existing agreements unchanged; (2) modify existing agreements and/or pare down which employees are required to sign them; or (3) shred unreasonable agreements before being ordered to do so by a court in a lawsuit brought by the government.

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James B. Sherman has nearly 30 years of experience drafting non-compete and other restrictive employment agreements, as well as litigating their enforceability in state and federal courts in Minnesota, Wisconsin, Illinois and numerous other states.  He is licensed to practice in the state and federal courts of Minnesota, Wisconsin and Illinois and he has represented employers in many other states by special permission or with the assistance of local counsel in those states in which he is not licensed.  For questions about this article, or to discuss how Mr. Sherman can assist your company in evaluating the enforceability and use of its noncompetition, non-solicitation, or confidentiality agreements, as well as related restrictive covenants, please contact his legal assistant: Tyler Birschbach, by email, at tybirschbach@wesselssherman.com or by calling (952) 746-1700 .

Minnesota Court of Appeals Refuses to Enforce Employer’s Nonsolicitation Agreement Against Former Employee Who Resigned and Began Soliciting Customers for a Competitor

July 2015
By: James B. Sherman, Esq.

I often hear business people say, incorrectly, that noncompetition agreements and other restrictive covenants are "not worth the paper they are written on." In truth, these agreements are frequently upheld in court so long as they are carefully drafted. However, it certainly is accurate to say that noncompete, nonsolicitation, confidentiality and similar agreements between employers and their employees often receive a great deal of scrutiny in court. A recent decision from the Minnesota Court of Appeals illustrates this point and the importance of dotting I's and crossing T's when it comes to restrictive employment agreements.

The case involved an employee of roughly three years who was asked to sign a “Nonsoliciation and Confidential Information Agreement” in connection with the employer’s installation of a new computer system that gave employees access to detailed customer information. The agreement applied both during employment and for a period of two years after employment ended. Due to its duration the agreement fell under Minnesota’s statute of frauds, which applies to any contract which by its terms cannot be performed within one year from its making. But Minnesota’s statute of frauds (Minn. Stat. § 513.01) not only requires that such an agreement be in writing, as the appellate court noted it specifically requires that the written agreement “express the consideration” given in exchange for the contract. In this particular case, because the employer’s nonsolicitation agreement did not specify, in writing, what consideration (i.e. thing of value) was being given to the employee in exchange for her promise not to solicit customers, the agreement failed to satisfy Minnesota’s statue of frauds and, therefore, was unenforceable.

The employer in this case tried to argue that its consideration to support the nonsolicitation agreement was giving the employee access to its customer information, which would not have been done had the employee not signed the agreement promising not to solicit customers. The employer's failure to include this, in writing, in the nonsolicitation agreement itself proved fatal because it did not comply with Minnesota’s very explicit statute of frauds. Had this detail not been overlooked, perhaps the outcome of this case could have been different.

Questions? Attorney James Sherman of our Minneapolis office has extensive experience drafting, enforcing, and defending against enforcement of noncompetition, nonsolicitation, trade secret and other restrictive employment agreements. He may be reached by email at jasherman@wesselssherman.com or call (952) 746-1700.

Winds of Non-Compete Agreements Shifting In Favor of Wisconsin Employers

May 2015
By: Alan E. Seneczko, Esq.

Any employer that has ever desired to utilize a non-compete agreement in Wisconsin has asked, “is continued employment sufficient consideration in order for the agreement to be enforceable?” – only to be met with, “well… the law on that point is not clear.”  Not anymore.

 

On April 30, 2015, the Wisconsin Supreme Court finally answered this question, holding that an employer’s forbearance in exercising its right to terminate an at-will employee constitutes lawful consideration for signing a restrictive covenant. In Runzheimer International, Ltd. v. Friedlen, 2015 WI 45, an employer required all of its employees to sign a non-compete agreement or be fired. The employee signed the agreement, worked for two years, was terminated, and then went to work for a competitor in violation of the agreement. When the employer sued to enforce the agreement, the employee argued that it was not enforceable because the employer retained its right to terminate him at will – meaning it essentially gave up nothing in exchange for his promise not to compete. The court disagreed, finding that continued employment was indeed valid consideration for the agreement. In other words, as long as the employee’s continued employment was conditioned on executing the agreement, additional monetary or other consideration was not required in order for the agreement to be enforceable.

 

On another front, the Wisconsin Legislature is now considering substantial revisions to Wis. Stat. §103.465, the Wisconsin statute that governs (and limits) the enforcement of non-compete agreements. 2015 Senate Bill 69, which is currently pending in committee, proposes to repeal and recreate the existing statute in a manner that enhances the likelihood that such agreements will be enforceable – if drafted properly. For example, the new statute would define the consideration necessary for an agreement to be enforceable; exempt agreements that do not restrict competition (e.g., confidentiality agreements); create a rebuttable presumption of reasonableness for any restrictions lasting 6 months or less (and unreasonableness for 2 years or more); and, clarify the “legitimate business interests” that are necessary to justify an agreement. Although the Governor has much on his plate these days, the chances of this bill passing are good.  Stay tuned. 

 

Questions? Please contact WS Attorney Alan E. Seneczko at (262) 560-9696, or email alseneczko@wesselssherman.com.

A Tale of Two States: Whereas Minnesota Considered Legislation in 2014 Disfavoring Non-competition Agreements, in 2015 the Wisconsin Legislature Seeks to Overhaul its Law to Favor Employers and Attract Business to the Dairy State

April 2015

By: James B. Sherman, Esq.

In 2014 Minnesota’s legislature entertained a bill that would have severely limited the use of employment agreements restricting competition; thankfully, it failed to become law. By contrast in 2015 Wisconsin – a state with existing laws that disfavor noncompetition agreements – has pending legislation that, if enacted, would re-write its laws to actually favor such employment agreements.  Under the current Wisconsin law, to be enforceable in court agreements that restrict employees from competing, soliciting, etc. during and after employment, must be reasonably limited as to time and geographic scope and be reasonably necessary for the protection of the employer.  If a non-compete agreement is found by a court to be unreasonable as to time or geographic scope, Wisconsin’s current statute provides that the entire agreement must be declared null and void. Supporters of the proposed bill say that protecting employers from employee poaching and other unfair competition, can attract technology and other high-tech manufacturing business to that state.

Some of the key provisions of the new legislation, which stands a very good chance of being enacted into law this spring, given the political climate in Wisconsin, can be summarized as follows:

Reasonable Post-Employment Restrictions – Under the proposed legislation, the restriction would still have to be reasonable as to time, area, and line of business, but the new law would define what is “reasonable” in many instances.  For example, the proposed language states that any restriction for less than 6 months is presumed to be reasonable, and longer than 2 years is presumed to be unreasonable but the presumption may be overcome by evidence of industry standards. 

Defining “Consideration” – Another significant provision of the new legislation seeks to define by statute what constitutes valid “consideration.”  Common law in most states requires that for any contract to be enforceable it must be supported by something of value in exchange for agreeing to the restriction; i.e. “consideration.”  Oftentimes even well written noncompetition agreements are tossed from court because they lacked this important element of enforceability.  For example, courts in many states have held that agreements signed after employment began (even one day later) cannot be supported by employment alone as the necessary consideration.  The new Wisconsin legislation specifically states that valid consideration will be found in any of the following circumstances:

• If entered into at or within a reasonable time after the beginning of the employment relationship, then the employment or continued employment, if contingent on the execution of the agreement, will be sufficient.
• If entered into at or near the end of the employment relationship, then any consideration acceptable to the employee, above and beyond any compensation already due to the employee, or used to support any other covenants, releases, or promises made by the employee will be sufficient.
• If entered into during the employment relationship, sufficient consideration would be anything of value given in connection with and in exchange for agreeing to the restriction.  Examples of such things include: a bonus or incentive payment, additional paid time off that the employee agrees is adequate to support the restrictive covenant, access to a bonus or incentive program that the employee would otherwise not have access to, or continuation of employment if conditioned on execution of the agreement. 

These provisions would take a great deal of uncertainty out of how employers implement enforceable noncompetition, non-solicitation, confidentiality and other restrictive employment agreements with their employees.

Re-Writing/”Blue-Penciling” Unreasonable Provisions – The new law would allow courts essentially to eliminate or rewrite any specific provisions found to be unreasonable and enforce the agreement as amended, rather than declaring the entire agreement null and void under the current law.  For example, if a judge were to determine that a two year post employment noncompetition agreement was unreasonably long under the circumstances of a particular case, the new law would allow the judge to declare the agreement enforceable but only for a shorter length of time deemed reasonable (e.g. 1 year, 6 months, etc.).

Summary – This new law would only apply to restrictive covenants entered into after passage of the legislation and therefore, it would not apply to any agreements already in existence.  Again, there is a high likelihood this legislation will be signed into law this year.  Employers who use or might wish to use noncompetition, non-solicitation, confidentiality and other restrictive agreements with their employees in Wisconsin will want to closely monitor the progression of this new legislation.  In the meantime, now is a good time for employers who are already using these agreements, to have them audited for enforceability.  If existing agreements are unreasonable and thus unenforceable under current Wisconsin law the new legislation will not operate retroactively to save them.  Therefore, now is a good time to review employment agreements to determine if updates are in order to take advantage of the new law if, as expected, it goes into effect soon.
 
Questions about non-competition agreements or any related matters? Please contact James B. Sherman at (952) 746-1700 or jasherman@wesselssherman.com.

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.