Disaster strikes – your superstar sales agent announces she is leaving your company to join your biggest competitor, effective immediately. Fortunately, you scan her personnel file and notice she signed a non-competition agreement at some point in her career. So, all you need to do now is send her (and her new employer) a cease-and-desist letter – and if they refuse to comply, you have an airtight lawsuit.
Right?
Well, before you launch that blazing salvo, you need to make sure the agreement is enforceable. Really, you should get a legal opinion before making any threats, but preliminarily you should at least consider the following: Did the employee sign the agreement when she started work, or in connection with a bonus or other compensation award? Did you provide her with access to confidential information or opportunities to develop client relationships? And, could she use that information or those relationships to help a new employer compete against you?
These questions touch upon the core requirements courts impose on non-competition agreements, and if the answer to all of them is “yes,” you may have a case for enforcement. This article surveys the special rules governing these agreements and offers tips to help you avoid crossing the line between legitimate protection and unreasonable overreach.
I. Legal Requirements for Non-Compete Agreements.
Minnesota courts treat non-competition agreements (also called “covenants not to compete” or, simply, “non-competes”) different from other contracts. Unlike commercial contracts, courts will not simply enforce non-competes as written but rather require that they be “reasonable.”
Threshold question: what is a non-compete? In its most basic form, a non-compete is a contract whereby an employee agrees not to compete with an employer for a certain amount of time after termination of employment. A full non-compete, per se prohibiting an employee from working for any competitor, is the most rigorous (and most rigorously scrutinized) restraint an employer can impose on an employee. Short of that, an employer may use a non-solicitation agreement (or “non-solicit”), prohibiting the employee from soliciting the employer’s clients. And even less restrictive, an employer may use a non-disclosure or confidentiality agreement – which simply prohibits misuse of the employer’s confidential information, and is not a non-compete at all (nor is it scrutinized as such).
In Minnesota, non-competes must meet the following requirements:
- They must be executed in exchange for valid consideration;
- They must protect legitimate business interest of the employer; and,
- They must be "reasonable," meaning, no greater than necessary to protect that interest.
a. Consideration
The best time to ask an employee to sign a non-compete is when she joins the company, for two reasons. First, Minnesota courts hold that a non-compete executed at the onset of employment is supported by consideration. Second, employees are less likely to push back against a non-compete introduced when they first start, as opposed to after they have been working for some time. Thus, many employers include non-competes in standard new-hire agreements covering confidentiality, intellectual property rights, and other post-termination employee obligations.
If you want to roll out a non-compete to an existing workforce, you will need to provide consideration – legally, and to incentivize employees to sign it. Employers often accomplish this by tying the non-compete to special compensation actions. That is, they require employees to sign a non-compete in order to receive (for example) a year-end bonus, salary increase, equity grant, or some other discretionary benefit.
If you do roll out non-competes with compensation awards you must do so for all similarly-situated employees, and withhold awards from employees who refuse to sign it. Otherwise, those who did sign can argue the non-compete was not actually mandatory to receive an award. And, you should only request non-competes from employees who actually will receive awards, rather than requiring all employees to sign it merely to be “eligible” for an award (which they may or may not receive). Employees must actually receive something of value in the exchange.
b. Legitimate Business Interest
Substantively, non-competes must protect a “legitimate business interest.” In Minnesota, these include customer relationships and goodwill, confidential information and trade secrets, and investment in specialized training for employees. Thus, if you are considering rolling out (or enforcing) a non-compete, you should review your workforce to assess what interests you need to protect, what sorts of employees could threaten those interests, and how they could do so.
Customer Relationships. Here, the core inquiry is whether the employee developed valuable relationships, on your dime, that she could port over to a competitor when she leaves. For example, if your business hinges on deep relationships with a limited number of key clients, and you devote resources to helping your sales force develop those relationships, you probably have a strong interest in preventing former sales agents from poaching those clients. On the other hand, if your business widely offers goods or services to the general public you probably do not have a strong interest in protecting client relationships.
Confidential Information. Here, the core inquiry is whether the employee had access to secret information that would give her (or her new employer) a competitive edge. (In Minnesota, confidential information need not meet the statutory requirements for “trade secrets” to justify a non-compete.) For example, you probably would have a strong interest in preventing a senior leader from using supply chain, pricing, staffing, and margin information to help a competitor undersell you. But you would have a less compelling interest in preventing an entry-level clerk with little access to sensitive business information from joining a competitor.
Specialized Training. To qualify as a legitimate business interest, training truly must be unique and specialized – not just the ordinary on-the-job training most employers require and provide for employees. Speaking generally, the more time and money you spend training an employee for a complex role, the more likely you have a legitimate business interest in that training.
c. Reasonableness
Minnesota courts hold non-competes must not be greater than necessary to protect the legitimate business interest(s) at issue. They make this determination by asking whether the non-compete restraint is reasonable in duration and in its geographic or other applicable scope.
Duration. The permissible duration of a non-compete largely depends on the employee’s role and (relatedly) the employer’s protectable interest. For example, if you are trying to prevent a former sales agent from poaching clients while you introduce them to her replacement, one or two years should give you enough time to grow new relationships and sever the old ones. On the other hand, if you are trying to protect competitive bidding information that quickly becomes stale or outdated, you might not be able to enforce a non-compete for more than a year.
In practice, many companies settle on one- or two-year non-competes, and Minnesota courts usually find those terms reasonable. In rare cases courts have enforced non-competes for up to five years, but unless the former employee was a founding partner or a corporate officer you should not count on restraining her for longer than two years.
Geographic or Other Scope of Restraint. Employers typically define the “area” of the restriction by reference to either (i) a geographic region or (ii) lists or categories of clients or competitors. If your business generally provides goods or services to the public, you probably want a geographical restraint prohibiting competition within a certain radius of your store(s) or showroom(s). However, if your business requires deep client relationships you probably want a client-focused restraint, prohibiting former employees from trading on the relationships they developed in your employ.
Thus, if you want to prevent a former sales agent from stealing your clients, you could use a non-solicit rather than a non-compete – prohibiting the agent from working with clients she solicited while working for you, with no geographical limitation. (That said, many employer include both non-competes and non-solicits in their post-employment restrictions agreements.) On the other hand, if you are trying to protect your confidential information or investment in specialized training, a geographic limitation might or might not be relevant depending on how and where the employee could use that information or training to compete against you.
Finally, the reasonableness of a geographic restraint hinges on where and how you do business. If your company sells rarified goods or services you might require a worldwide non-compete because all competitors, wherever located, compete for a small set of clients. If, however, you operate only within a particular city, you have little interest in preventing an employee from working for a competitor located outside a certain distance from your business.
II. The “Blue-Pencil” Doctrine.
If a non-compete is overbroad, a court still might enforce it to a lesser extent. In Minnesota (and elsewhere), courts deal with excessive non-competes using the “blue-pencil” doctrine. This rule essentially allows courts to rewrite unreasonable non-competes to make them reasonable. Thus, if a non-compete is excessive in duration or geographic reach, the court can make it shorter or narrower; if a non-compete contains an excessive client restriction, the court can limit the list or categories of restricted clients.
The blue-pencil doctrine cannot save a non-compete that was executed without consideration. Substantively, however, it affords courts broad latitude to modify and enforce overbroad non-competes.
III. Quick-Reference Summary.
The following "snapshot" outline distills the key points for ease of reference.
- Non-competes must be executed in exchange for valid consideration.
- If possible, introduce them at the start of employment.
- Otherwise, tie them to discretionary compensation awards.
- They must protect a legitimate business interest; these include:
- Client relationships and good will.
- Confidential information and trade secrets.
- Specialized training.
- They must be reasonable in duration, and in geographic or other scope of restriction.
- Courts usually find one or two years to be reasonable in most cases.
- Geographic restraints should be tied to the relevant market.
- Client-facing employees may be subject to non-competes and non-solicits.
- If a non-compete is unreasonably overbroad, a court may enforce it to a reasonable extent under the blue-pencil doctrine.
If you would like to roll out non-competes to your existing workforce or new hires, if you believe a former employee is breaching a non-compete or otherwise engaging in unfair competition, or if you would like further information on these topics, feel free to contact Daniel Lowin (dlowin@seatonlaw.com) or any other Peters, Revnew, Kappenman & Anderson, P.A. attorney.