Non-Competes – Are They Enforceable?

Are non-competes enforceable? This is a common question for business owners, employees contemplating switching jobs, and the business debating hiring a key employer of one of their competitors. And like most things in the law, the answer to the question depends on the facts of the situation. What is key, no matter what side of this question you find yourself on, consult an attorney experienced in this area of the law to guide you to the answer.

As an initial consideration, non-compete litigation can be expensive for both former employers and employees. Given the expense involved, even if there is a violation per se of a non-compete, absent the loss of clients or revenue that makes litigation worthwhile, many times the former employer will forgo the expense incurred in litigation if the loss of revenue does not justify the time and expense of litigation.

If there is, however, a significant loss of revenue to justify the time and expense of litigation, or if an example needs to be set to ensure other employees do not leave or the competitor does not continue to poach key staff, the body of law related to non-compete enforcement is well-developed as it is a topic of frequent litigation.

THE LAW:

Because covenants not to compete are agreements in partial restraint of trade that limit an individual’s right to work and earn a livelihood, Minnesota Courts “look upon [non-compete agreements] with disfavor and scrutinize them with care.” Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626, 630 (Minn. 1983); National Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982). As a result, restrictive covenants are enforced only to the extent reasonably necessary to protect a legitimate business interest.

As the Minnesota Supreme Court said over one hundred years ago, “[o]ne who has nothing but his labor to sell and is in urgent need of selling that, cannot well afford to raise any objection to any of the terms in the contract of employment offered him, so long as the wages are acceptable.” Menter Co. v. Brock, 180 N.W. 553, 555 (Minn. 1920). Courts have also expressed concern that restrictive covenants might be improperly used to discourage employees from terminating their employment. See Eutectic Welding Alloys Corp. v. West, 160 N.W.2d 566, 571 (Minn. 1968).

But a court may enforce a non-competition clause if it is necessary to protect the reasonable interests of an employer and does not impose unreasonable restraints on the rights of the employee. As the Minnesota Supreme Court said, “Where the restraint is for a just and honest purpose, for the protection of a legitimate interest of the party in whose favor it is imposed, reasonable as between the parties, and not injurious to the public, the restraint has been held valid.” Bennett v. Storz Broadcasting Co., 134 N.W.2d 892, 898 (Minn. 1965). When examining the reasonableness of a restrictive covenant, a district court should consider “the nature and character of the employment, the nature and extent of the business, the time for which the restriction is imposed, the territorial extent of the covenant, and other pertinent conditions.” Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 799 (Minn. Ct. App. 1993).

The determination of the necessity for the restriction is dependent upon the nature of the business, the nature of the service of the employee, and other pertinent conditions. Bennett, 134 N.W.2d at 899-900. The test of reasonableness of a non-competition clause is whether the restraint is necessary to protect the business or the goodwill of the employer. If so, whether the stipulation has imposed on the employee any greater restraint than is reasonably necessary to protect the employer’s business, regard being had to the nature and character of the employment, the time for which the restriction is imposed, and the territorial extent of the locality to which the prohibition extends. Id. The Minnesota Supreme Court has also noted that to extract covenants not to compete from “average employees” (think below C-level/managerial employees) may become an oppressive restraint upon the employee’s opportunities to work and earn a living. Id.

The mere continuation of employment can constitute adequate compensation to uphold non-compete agreements, but the non-compete must be bargained for and provide the employee with real advantages. Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127, 130–31 (Minn.1980). “The adequacy of consideration for [non-compete agreements] signed during an ongoing employment relationship will depend upon the facts of each case.” Freeman v. Duluth Clinic, Ltd., 334 N.W.2d 626, 630 (Minn.1983); C.H. Robinson Worldwide, Inc. v. FLS Transp., Inc., 772 N.W.2d 528, 534 (Minn. Ct. App. 2009).

Minnesota law requires that the Agreement be interpreted as written. The purpose of contract construction is to allow the parties’ intent to prevail. Turner v. Alpha Phi Sorority House, 276 N.W.2d 63, 66 (Minn. 1979). To determine the parties’ intent, a reviewing court must place itself “in the position of the parties at the time the agreement was negotiated and executed.” Midway Ctr. Assocs. v. Midway Ctr, Inc., 237 N.W.2d 76, 78 (Minn. 1975). If a written agreement specifically states the terms of the parties’ bargain, it should be honored. Gunderson v. Alliance of Computer Prof’ls, Inc., 628 N.W.2d 173, 186 (Minn. Ct. App. 2001) review granted (Minn. July 24, 2001) and appeal dismissed (Minn. Aug. 17, 2001). The general rule for the construction of contracts is that where language is plain and unambiguous, there is no room for construction. Starr v. Starr, 251 N.W.2d 341, 242 (Minn. 1977).

That said, under the blue-pencil doctrine, a district court that finds a non-competition provision unreasonable as written may modify the provision “to render it reasonable and enforceable.” Dynamic Air, 502 N.W.2d at 800. But the district court need not do so—Klick v. Crosstown State Bank, 372 N.W.2d 85, 88 (Minn. Ct. App. 1985).

ANALYSIS:

The following are the areas that become the focus of non-compete litigation:

  1. When was the employee first informed of the execution of the non-compete? Did the employer advise the employee that a non-compete was a condition of employment, or did it not come to light until after the employee had been hired? For employment to be the consideration for the non-compete, the employment agreement must be known at the time of the offer and acceptance of the employment. Overholt Crop Ins. Serv. Co., v. Bredeson, 437 N.W.2d 698, 702 (Minn. Ct. App. 1989).  A non-compete agreement made known or signed after the employee had been offered, accepted, and thus begun is unenforceable. National Recruiters, 323 N.W.2d at 740.
  2. The employer must also establish that the non-compete is necessary to protect legitimate business interests. Legitimate business interests that may be protected include the company’s goodwill, trade secrets, and confidential information. Medtronic Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 456 (Minn. Ct. App. 2001). “Customer lists are generally not deemed trade secrets or confidential.” Reliastar Life Ins. Co. v. KMG America Corp., 2006 WL 2529760, *4 (Minn. Ct. App. 2006) citing Blackburn, Nickels & Smith, Inc. v. Erickson, 366 N.W.2d 640, 645 (Minn. Ct. App. 1985), review denied (Minn. June 24, 1985).
  3. Next, the analysis examines whether such restrictions are narrowly tailored to protect those interests. Geographic limitations and temporal limitations are frequently utilized in non-competes and come under heightened scrutiny during this analysis. “Territorial limitations … are but one of several factors a [district] court is to consider in determining the reasonableness of a restrictive covenant.” Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 799 (Minn.App.1993).   In Bloch, the Minnesota Court of Appeals declined to enunciate a per se ruling barring the enforceability of a non-compete that contained no territorial limitation, noting that “[t]he covenants must be scrutinized as a whole to determine whether it is reasonable.” Id. at 800. Courts will uphold a geographic limitation when it is limited to areas necessary to protect the employer’s interest. Overholt Crop Ins. Serv. Co. v. Bredeson, 437 N.W.2d 698, 703 (Minn.App.1989).  In determining the validity of a non-compete covenant, the court should weigh the employer’s interest in protection from unfair competition against the employee’s right to earn a living, taking into consideration the context or the nature and character of the employment.  Kallok v. Medtronic, Inc., 573 N.W.2d 356, 361 (Minn.1998).
  4. With respect to time, the reasonableness of a temporal restriction depends on the nature of the job, the amount of time necessary to find and train a replacement for the employee, and the amount of time necessary for the employee’s customers to become accustomed to the employee’s replacement. See Eutectic Welding Alloys Corp. v. West, 160 N.W.2d 566 (Minn. 1968).
  5. Courts also examine whether the subject employee is a key employee, the face of the company, or has developed significant control over client relations. If not, the likelihood of enforcing a non-compete decreases. If so, it is more likely that a non-compete will be found valid and enforceable.

Whatever side of this question you find yourself on, understanding the factors as to whether a non-compete is enforceable is paramount. From whether or not to file for enforcement, to move for a temporary injunction prohibiting the employment, or to simply move forward without litigation, the decisions require knowledge of what the court will review if presented with the question of enforceability. And given this hotly contested area of law and the large body of law we can turn to, there is substantial case law to rely upon to support your position.

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