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 Finds Employer's Written Nonsolicitation Agreement Unenforceable for Failing to Satisfy Minnesota's Statute of Frauds

July 2015
By: James B. Sherman, Esq.

Every state has a "statute of frauds" requiring that certain contracts be stated in writing to be enforceable. However, 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, a recent decision from the Minnesota Court of Appeals illustrates the importance of dotting I's and crossing T's when it comes to drafting restrictive employment agreements. Specifically, the court found that a written nonsolicitation agreement nevertheless failed to comply with Minnesota's statute of frauds. The result was that the agreement was deemed unenforceable.

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.

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.