Non-Competition Agreements – Often Enforceable in Minnesota
In Minnesota, particularly within Minneapolis and its suburbs, non-competition agreements are used by many businesses and almost always enforced by our state trial courts.
There are certainly circumstances where such non-competition agreements are justified and even essential. For example, a manufacturer of components for a particular industry with 200 employees, whose vice president of sales is responsible for over 75% of the firm’s revenue, quits giving 2 weeks’ notice. If that former vice president of sales immediately begins employment with a competitor or starts his own competitive business, the viability of his former employer and continuing jobs for its 200 employees will be at risk. In such circumstances, a non-competition agreement for at least one year restricting the former vice president of sales from calling on existing customers, allowing the former employer time to locate and hire a new sales executive as a replacement who can establish his relationship with customers during that year, will provide the former employer a reasonable opportunity to compete on a level playing field.
Unfortunately, non-competition agreements in Minnesota, especially in Minneapolis and environs, go well beyond that limited understandable circumstance where they are warranted.
For example, within Minneapolis and its suburbs, employers who have terminated employees, even by layoffs, have been able to obtain an order prohibiting such former employees from working in a competing enterprise. Even a cold call sales employee terminated for poor sales has been enjoined by court order after obtaining work at another “boiler room” sales operation. In other instances, where there is no proof a former employee is competing or could compete in a similar business, because of exclusive contractual agreements with customers at both his prior and present employer prohibiting any such sales, has been enjoined from working in the same business by court order.
Because of the broad enforcement of these agreements in Minnesota, it is strongly recommended that any employee entering into such non-competition agreement assume it will be enforced against him, according to its terms regardless of the circumstances of his termination. Sometimes, to induce employees to sign them, employers have stated such a non-competition agreement is “just a formality” or “we need it for your file” or “these are never enforced.” Such statements must be ignored.
If an employee who signed a non-competition agreement is seeking other employment, he should be certain the prospective employer is aware of it, and provide a copy of that agreement to the appropriate person. Otherwise, following hiring, when the new employer is advised by the old employer or, more likely, its attorney, there is a strong likelihood the employee will be fired, to avoid a law suit against the new employer.
If an employee who has entered into such a non-competition agreement, intends to start his own competitive business, he should be aware that whatever funds were invested in the new business will be at risk if a court issues an order enforcing the non-competition agreement. That former employee cannot work in any activity prohibited by the court. Obviously, a two-year prohibition from working, not generating any cash flow, could be difficult if not disastrous.
Because of these difficulties arising from the liberal enforcement of non-competition agreements in Minnesota, employees signing them should be proactive, before signing it and working for the new employer requesting it. At the very least:
A) The prospective employee should request a copy of the non-competition agreement he is expected to sign as soon as he is offered employment, or before, if there is a “standard” form in use;
B) Immediately following receipt of this proposed non-competition agreement and if a job offer has been made or is probable, the prospective employee should contact a Minnesota attorney experienced with such agreements; and
C) Before meeting or conferring with the attorney chosen, the proposed agreement should be carefully reviewed to be certain all issues of concern are addressed by the attorney. It is quite likely there will be certain terms which the employee or his attorney wish to change. The future employer or its counsel should be contacted to negotiate those changes. Depending upon the employee’s responsibilities in sales or other job duties, among the desired changes from the proposed non-competition agreement could be reducing its term, if more than one year; the unenforceability of the non-competition agreement if the employee is terminated by lay-off or otherwise “without cause” (and cause should be defined); the non-assignability of the non-competition agreement under any circumstances; the non-enforceability of the non-competition agreement if there is any adverse change in the employee’s compensation and benefits package caused by any action or inaction, including the employer’s bankruptcy, resulting in a reduction in value thereof by 5% in any 365 day rolling period; a limitation of the scope of the non-competition agreement to actual customers of the new employer who were not customers the employee served while with his previous employers(and identify those customers the employee previously served by name in the Agreement or on an exhibit attached to it); it is also necessary, in addition to the customer limitation, to limit the geographic scope of the non-competition covenant to something the employee can live with if his new employment terminates; and elimination of responsibility for attorney fees of the new employer should it elect to proceed with litigation against the employee.
D) If the prospective employer balks at requested changes on duration and customers, an alternative should be suggested. For example, if the prospective employer insists upon a blanket restriction against the employee contacting any customers, even including customers the employee sold to before his new employment began, suggest a long multi-year employment contract with no mitigation of damage requirement, but always insist upon the prohibition against assignment and the employee’s right to leave and compete for non-payment of compensation.
E) If the prospective employer refuses to negotiate any or most of these requested, reasonable modifications, the prospective employee should, if he is financially able, seek other employment opportunities. Not doing so and ignoring the obvious trend in Minnesota of the aggressive enforcement of non-competition agreements, puts the employee at considerable risk in the future.
If the employee entered into a non-compete agreement with a former employer and is now working with his new employer or in his own business and has been contacted by the former employer or its attorney concerning the alleged violation of the non-competition agreement, the employee should immediately consult with appropriate counsel to explore possible variations to restrictions in that agreement which the former employer may be willing to waive. This could allow the employee to work even though contrary to the terms of the non-competition agreement as written. Such settlement efforts may not be successful, but is sometimes worth the effort.
Please note, the contents of this website are for information purposes only and do not constitute legal advice and no attorney – client relationship is intended nor exists by the information provided herein. An attorney – Client relationship with Lee Watson only exists following the execution of a written Legal Services Agreement with him, a form of which to review is available on request.
Copyright 2014, Lee Watson.