While non-competes or restrictive covenants are disfavored in Minnesota, they remain a valuable tool for employers to protect legitimate business interests. Whether it be a high-level employee with access to proprietary information, a c-level employee that has a grip on the company’s goodwill, or ensuring that a trusted employee does not take the company’s confidential information on the way out, a narrowly tailored non-compete can provide such protections (this article does not focus on whether the same are appropriate for lower level or hourly employees – another topic for another day).
And when an employee leaves their employer and violates a non-compete, litigation often ensues. One of the initial questions for the former employer is whether or not to seek an injunction against the former employee from utilizing the proprietary, confidential, or trade secret information or working for the competitor. What is an injunction? What are the factors courts analyze in Minnesota when an injunction is sought? These are key considerations to discuss with your attorney as the outcome of the Motion can have wide-ranging impacts on the discovery process and the litigation as a whole.
What Is An Injunction?
An injunction prohibits a party from doing something. Whether utilizing trade secrets or proprietary information, soliciting a specific customer or customer base, or working within a geographic range of the former employer, the injunction sets forth conditions that must be complied with.
A court may issue a temporary restraining order or temporary injunction only when the movant establishes irreparable harm. “The procedures for obtaining injunctive relief are technical and exacting. Such relief is available only in extraordinary circumstances where all other means of resolving the matter have failed or would be inadequate.” Bio-Line, Inc. v. Burman, 404 N.W.2d 318, 320-21 (Minn. Ct. App. 1987); Metropolitan Sports Facilities Commission v. Minnesota Twins Partnership, 638 N.W.2d 214, 222 (Minn. Ct. App. 2002); Morse v. City of Waterville, 458 N.W.2d 728, 729 (Minn. Ct. App. 1990) (recognizing that a temporary injunction is “an extraordinary equitable remedy,” which is reserved for only the most extreme circumstances).
“The party seeking the injunction must demonstrate that there is an inadequate legal remedy and that the injunction is necessary to prevent great and irreparable injury.” U.S. Bank Nat. Ass’n v. Angeion Corp., 615 N.W.2d 425, 434 (Minn. Ct. App. 2000) citing Cherne Indus. Inc. v. Grounds & Assocs., Inc., 278 N.W.2d 81, 91 (Minn. 1979) (emphasis added). Although the irreparable injury is not always susceptible to precise proof, the injury must be of such a nature that money damages alone would not provide adequate relief. Haley v. Forcelle, 669 N.W.2d 48, 56 (Minn. Ct. App. 2003) review denied (Minn. Nov. 25, 2003).
Courts exercise “great caution and deliberation” when granting temporary injunctions. AMF Pinspotters, Inc. v. Harkins Bowling, Inc., 110 N.W.2d 348, 351 (Minn. 1961). “Injunctive relief should be awarded only in clear cases, reasonably free from doubt, and when necessary to prevent great and irreparable injury. The burden of proof rests upon the complainant to establish the material allegations entitling him to relief.” North Central Pub. Serv. Co. v. Village of Circle Pines, 224 N.W.2d 741, 746 (Minn. 1974); AMF Pinspotters, Inc., 110 N.W.2d at 351 (same).
Minn. R. Civ. P. 65.02(b) provides that “[a] temporary injunction may be granted if, by affidavit, deposition testimony, or oral testimony in court, it appears that sufficient grounds exist therefor.” Meaning that someone must swear under oath the facts which support the request for the injunction and the claim of irreparable harm.
What Are The Factors for Granting An Injunction?
In Minnesota, the courts utilize a five-factor test to determine whether an injunction is appropriate. The test is called the Dahlberg test based on the 1965 case, Dahlberg Bros., Inc. v. Ford Motor Co., and as follows:
- The nature and background of the relationship between the parties preexisting the dispute give rise to the request for relief;
- The harm to be suffered by [the moving party] if the temporary restraining order is denied as compared to that inflicted on the [nonmoving party] if the injunction is issued pending trial;
- The likelihood that one party or the other will prevail on the merits when the fact situation is viewed in light of established precedents fixing the limits of equitable relief;
- The aspects of the fact situation, if any, which permit or require consideration of public policy expressed in the statutes, State and Federal; and
- The administrative burdens involved in judicial supervision in enforcement of the temporary decree.
137 N.W.2d 314, 321-22 (Minn. 1965); Miller v. Foley, 317 N.W.2d 710, 712 (Minn. 1982).
“A party seeking an injunction must first establish that the legal remedy is inadequate and that the injunction is necessary to prevent great and irreparable injury. The moving party must show that the particular relief requested will prevent the certain occurrence of an event that will cause significant injury – harm that a legal remedy cannot redress.” City of Mounds View v. Metro. Airports Comm’n, 590 N.W.2d 355, 357 (Minn. Ct. App. 1999) (citations omitted); Cherne Indus., 278 N.W.2d at 82 (recognizing that a plaintiff has the burden of showing that a legal remedy is inadequate and that a temporary restraining order is necessary to prevent great and irreparable harm). In order to be irreparable, the injury must be “of such a nature that money alone could not suffice.” Morse, 458 N.W.2d at 729.
“The failure to show irreparable harm is a sufficient ground upon which to deny a preliminary injunction.” Id. This is the most important factor in determining whether a temporary injunction should be issued. Edin v. Jostens, 343 N.W.2d 691, 694 (Minn. Ct. App. 1984). Although the moving party must prove that it would suffer irreparable harm if the Motion is not granted, the nonmoving party must only demonstrate that it will suffer substantial harm if the injunction is granted. Yager v. Thompson, 352 N.W.2d 71, 75 (Minn. Ct. App. 1984) (citation omitted).
Allegations of lost customers will (generally) not support a finding of irreparable harm where the lost customers can be identified, and the amount of business gained from those customers can be quantified. GreatAmerica Leasing Corp. v. Dolan, 2011 WL 334829, *3 (D. Minn. 2011). In this respect, any such lost clients are (generally) a purely economic injury, thus establishing an adequate remedy at law. See Miller, 317 N.W.2d at 713 (“The possibility that adequate compensatory or other corrective relief will be available at a later date, in the ordinary course of litigation, weighs heavily against a claim of irreparable harm.” (emphasis added)); Morse, 458 N.W.2d at 729-30 (recognizing that a primarily economic injury does not establish grounds for a temporary injunction); see also B&Y Metal Painting, Inc. v. Ball, 279 N.W.2d 813, 816 (Minn. 1979) (recognizing that “damages for the breach of a covenant not to compete are to be measured by the plaintiff’s loss” or, in certain circumstances, “by the defendant’s gain”).
Suppose the former employer has not suffered a loss of goodwill, a loss of a trade secret, or a loss of any proprietary information. In that case, there is not a sufficient showing of irreparable harm. And if so, the moving party has failed on the threshold question, thereby dooming its Motion for an injunction.
If, on the other hand, the threshold question has been established in the affirmative, the court moves through the Dahlberg factors and looks at them both individually and in aggregate.
1. The Nature and History of the Parties’ Relationship.
The nature and history of the parties’ relationship are relevant to a temporary injunction because it affects the parties’ reasonable expectations and because one of the purposes of a temporary request is to preserve the status quo until trial. The court examines whether the employee is a high-level employee, whether the former employer-provided training or if the former employer came trained, and if such training was provided, what and at what cost. The court considers whether the former employee had access to proprietary information, trade secret information, or confidential information and what protections the company put in place to protect the same. The court will also examine whether the employee had a direct level of contact and, if so, has gained a hold on the company’s goodwill.
2. The Balancing of the Harms.
The second Dahlberg factor examined the harm to be suffered by the moving party if the temporary injunction is denied as compared to that inflicted on the nonmoving party if the injunction issued pending trial. See Dahlberg, 137 N.W.2d at 321.
“A person’s right to labor in any occupation in which he is fit to engage is a valuable right, which should not be taken from him, or limited, by injunction, except in a clear case showing the justice and necessity therefor.” Ultra Lube, Inc. v. Dave Peterson Monticello Ford-Mercury, Inc., 2002 WL 31302981, *6 (Minn. Ct. App. 2022) citing Standard Oil Co. v. Bertelsen, 243 N.W. 701, 703 (Minn. 1932).
The Minnesota Supreme Court has distinguished restrictive covenants upon business executives and professional employees nothing that, with such employees, “[t]he interest to be protected is more substantial, and there is usually some consideration for the restraint,” as opposed to situations where “modest wages [are] paid for modest employment.” Eutectic Welding Alloys Corp. v. West, 160 N.W.2d 566, 571 n. 8 (Minn. 1968). In discussing how non-compete agreements affect such modest employees, the Minnesota Supreme Court expressed concern about the unequal bargaining power in such situations:
It may well be surmised that such a covenant finds its way into an employment contract not so much to protect the business as to needlessly fetter the employee, and prevent him from seeking to better his condition by securing employment with competing concerns. One 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).
The question here often hinges on whether the former employee is a high-level or modest or low-level employee. If the latter, the hardship of being precluded from earning a living, particularly in the present economic circumstances, can be substantial. Issuing a temporary injunction could cripple a former employee and their family living paycheck-to-paycheck.
If a high-level employee, the impact of being unable to work during the term of the injunction may be less substantial. This is a fact-intensive inquiry.
3. A Likelihood of Prevailing on the Merits.
In order to obtain a temporary injunction, the moving party must establish that it is likely to prevail on the merits. Chalfen v. Med. Invest. Corp., 210 N.W.2d 216 (Minn. 1973). Because the Motion (in the context discussed here) hinges on an employment agreement, the moving party must establish a likelihood that the employment agreement is enforceable.
Because non-compete agreements are restraint of trade, “they are enforced only to the extent reasonably necessary to protect a legitimate business interest.” Bennett v. Storz Broad. Co., 134 N.W.2d 892, 898 (Minn. 1965). Non-competition agreements are invalid unless bargained for and supported by adequate consideration. Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161, 164 (Minn. Ct. App. 1993); National Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982). The agreement is unenforceable when the non-compete agreement is made known or signed after the employee has accepted the job. Id. (“The practice of not telling prospective employees all of the conditions of employment until after the employees have accepted the job…takes undue advantage of the inequality between the parties”). Indeed, non-competes not given to an employee to sign until the first day of employment, such as here, are unenforceable and lack consideration. Midwest Sports Marketing, Inc. v. Hillerich & Bradsby of Canada Ltd., 552 N.W.2d 254 (Minn. Ct. App. 1996).
For employment to be considered for the employment agreement, the employment agreement, and its terms must be known at the time of the offer and acceptance for 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 employment has been offered, accepted, and thus begun is simply unenforceable. National Recruiters, 323 N.W.2d at 740.
Along with examining whether there is sufficient consideration, the former employer must also establish that the employment agreement is necessary to protect any 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).
If there are legitimate interests to protect, the analysis moves to 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).
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).
4. Public Policy.
The Dahlberg factors also examine public policy considerations. Dahlberg, 137 N.W.2d at 321-22. There is a strong and oft-stated public interest in permitting employees to pursue a livelihood without unnecessary restraint. This is often at odds with public policy in favor of enforcing valid contracts. Here, the issue is often resolved by whether the former employee brings a key skill to the area (a specialized doctor, for instance, in a remote area) or whether the employment agreement has valid consideration.
5. The Administrative Burdens.
The final factor to be considered is “the administrative burdens involved in judicial supervision and enforcement of the temporary decree.” Dahlberg, 137 N.W.2d at 322. How much supervision will the court have if the injunction is granted? Will there be daily oversight on whether new customers violate the agreement? Will the order be easy to follow without such supervision? These are questions the court grapples with in the final analysis.
If the court does grant an injunction, it must also determine the proper amount of security to be posted—Minn. R. Civ. P. 65.03(a). The bond serves as security to pay for damages caused to the nonmoving party if the injunction is ultimately found improper. Hubbard Broadcasting, Inc. v. Loescher, 291 N.W.2d 216, 220 (Minn. 1980).
The bond amount can be based on the lost compensation to the former employee during the pendency of the injunction. While the court can also determine that no bond is necessary, the amount of a bond can be a deterrent to the former employer in deciding whether or not to seek an injunction.
Temporary injunctions should be given careful consideration before being filed. Because irreparable harm and a likelihood of success on the merits are determined early, a successful motion can put winds in the sails of a party or act as a substantial blow if not. Such a motion is factually dependent and often costly for all parties involved.