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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Navigating Noncompete Agreements

The tide seems to be turning in Minnesota in favor of the use of these restrictive employment devices.


Minnesota formerly was a safe harbor, relatively speaking, for employees navigating through noncompete contracts.  But rulings by the Minnesota Court of Appeals in recent years, including two last winter, signify troubled waters for employees who seem to be swimming upstream these days in challenging noncompete clauses.

Although not inhospitable as some states, such as California, where noncompetes are virtually prohibited, Minnesota generally looks upon such contracts with disfavor.  A telling remark by the Minnesota Supreme Court, more than 40 years ago, described these restrictive devices that circumscribe employees’ future employment prospects as vestiges of “industrial peonage, without redeeming virtue in the American enterprise system,” harsh words coming from a court not known for empathizing with the low-level workers.1

Reflective Rhetoric

The peonage rhetoric is reflective of an attitude that was not amorous of these restrictive devices.  That philosophy bred a number of judicially crafted limitations on the use of noncompete agreements.

Foremost among them is the doctrine of independent consideration, a principle that has been embraced by about a third of American jurisdictions.  Under this tenet, a noncompete agreement is not valid unless the employee receives a material benefit from entering into it or it is signed immediately upon commencement of employment.2

This concept has been extended to noncompete agreements when the new employer has not informed any employee about them before the employee leaves one job to take a new one.3  It also may arise when employees are not told of the noncompete agreement before they begin their new employment relationship.4

Another doctrine, also not unique to Minnesota, is the “blue pencil” rule, which allows judges to salvage onerous noncompete provisions by modifying them to make the instrument “reasonable” and, hence, enforceable.5  An example of this exercise was the reduction of the term of a three-year noncompete agreement covering a pair of veterinarians from central Minnesota to one year each, because the facility that they left to start a competitive business could fill their positions and have new veterinarians up to speed within a six-month period.6  In contrast, a statute in Wisconsin explicitly bars the “blue pencil” indulgence.7

Tide Turning

But the tide is seemingly turning as the Minnesota courts have been more inclined lately to uphold noncompete clauses than to strike them down or substantially restrict them.  Two rulings by the appellate court at the turn of 2010-11 reflect this trend.  Those cases were preceded by a trio of appellate court decisions four years ago, which foreshadowed a more hospitable judicial attitude towards noncompete contracts in this state.

The two recent appellate actions arose in markedly different contexts.  But each is indicative of a friendlier environment for employers seeking to impose and enforce noncompete agreements.

Independent Issues. An independent contractor was not entitled to utilize the doctrine of independent consideration to defeat a noncompete agreement in Schmit Towing, Inc. v. Frovik.8  The case concerned a subcontract between a company towing vehicles for private and government entities and a subcontractor who actually did the towing.  It contained a noncompete clause, which the subcontractor violated by providing towing services to a competitor of the towing contractor.  The Hennepin County District Court dismissed the lawsuit on grounds that the noncompete agreement was invalid due to lack of independent consideration because it was entered into immediately upon termination of a prior contract between the parties which did not contain a noncompete clause.

But the appellate court reversed, holding that a noncompete agreement with an independent contractor rather than an employee does not require independent consideration.  Recognizing that Minnesota courts “do not favor noncompetition agreements because they are partial restraints on trade,” the court nonetheless upheld this one because the analogy to an employer/employee relationship was inapplicable. As the court stated, because the independent consideration requirement stems from a “public” policy “concern [for] … the disparity in bargaining power that exists in an employer-employee relationship,” in the absence of any disparity, “public policy is not at issue and the parties are free to contract as they wish.”  Since the subcontractor was an “independent contractor,” not an employee, the requirement of independent consideration was inapplicable.  The subcontractor did not cite any case law in which the independent consideration “requirement has been applied outside of the employer–employee context.”  Because requiring independent consideration in an independent contractor relationship would “require an extension of existing law,” the appellate court concluded it was up to the supreme court or legislature to make this determination.

Rather than reversing outright, the court of appeals remanded the matter to allow the district court to consider “legal principles that generally govern noncompete agreements” along with other issues raised by the parties that had not been considered below and, therefore, were not amenable to appellate review at this stage of the proceeding.

Behavior Battle. In the second case, a battle between medical device behemoths yielded an enforceable, noncompete agreement, along with an award of attorney fees in excess of $600,000 to the employee’s former employer in Medtronic v. Hughes.9 The case involved the services of a sales manager handling devices used by physicians who treat cardiac rhythm diseases and disorders.  He had a noncompete agreement with Medtronic, then bolted to St. Jude’s, which prompted a lawsuit by Medtronic against the departing employee and St. Jude’s for breach of the noncompete agreement and tortious interference, respectively.  The Hennepin County District Court upheld the noncompete agreement and enjoined the employee from competitive activities, awarding a fee of $615,958 to Medtronic to defray its attorney fees and related expenses of the contentious litigation.  The district court did, however, apply a “blue pencil” by halving the two-year noncompete provision.  The appellate court affirmed both the injunction and the monetary award.

The claim that the agreement was defective because it contained no territorial limitation was rejected because the “worldwide noncompete covenant was reasonable under the circumstances,” which included Medtronic’s operation “on a global scale,” and its world-wide competition “in these markets with St. Jude.”  Confidential information that the employee had access to was “not specifically limited to the geographic areas where he worked … [and] could be applied to markets internationally.”

The district court’s modification of the term of the noncompete restriction to one year was appropriate and need not have been limited to a lesser period of six months, as argued by the employee and his new employer.  While it was “questionable” whether the confidential information maintained by the manager justified protection for more than six months, the trial court’s finding that Medtronic failed to prove the need for a two-year noncompete agreement was warranted.  These findings “are not inconsistent,” and did not constitute abuse of the trial court’s discretion in reducing the term of the restriction to one year.

St. Jude’s assertion of attorney-client privilege as the basis for refusing to disclose why it believed the noncompete agreement was unenforceable was “fatal” to its claim.  Therefore, the finding of tortious interference by St. Jude in hiring the employee under a valid noncompete agreement justified the fee award, which is permissible under the supreme court’s ruling in another Medtronic case.10

Curbing Competition

Earlier these trends were reflected in a trio of cases concurrently decided by the Minnesota Court of Appeals.  All three competing employees lost, which may indicate the aversion of that court to curbing competition is constricting.

Solicitation Stop.   An optometrist who entered into a noncompete agreement after selling his business was enjoined from soliciting for clients after he began a new practice outside of the proscribed noncompete area in Sealock v. Petersen.11

A Hennepin County District Court judge enjoined the optometrist from soliciting new customers by advertising within the five-mile restricted geographic area of the noncompete agreement, even though his new business was located outside of the five-mile area.

The court of appeals affirmed, agreeing with the trial court that the “plain and ordinary meaning” of the prohibition against the optometrist competing included newspaper advertisements that constitute “an attempt to secure the business of third parties, which constitutes ‘competition’ or an attempt to ‘compete.’”

Relying on the dictionary, the court pointed to the definition of competition as “[r]ivalry between two or more businesses striving for the same customer or market,” which accurately described the newspaper advertisements by the optometrist that were “certainly aimed for the same customers or market” as  that of the buyer of the old business.

Advertising in the Yellow Pages or on the internet, “which have large circulation areas that only incidentally enter the restricted geographic areas” would not be violative of the noncompete clause.  But newspaper advertisements that were targeted within the restricted area did transgress the restrictive prohibition.  Although some cases in other jurisdictions have refused to enforce noncompete agreements that restrict the availability of health care, in this case the noncompete agreement did not “hinder the ability of individuals located in the restricted geographic areas to obtain the services of optometrists,” which negated the claim that the noncompete agreement is “contrary to the general public’s interest.”

Medical Matter.  Another decision involving a medical matter upheld a noncompete agreement in Witzke v. Mesabi Rehabilitation Services, Inc.12 A St. Louis County District Court refused to enforce the noncompete agreement, which had been entered into by a rehabilitation consultant.  The agreement preceded the employee’s receiving support, training, and promotions at the company.  Therefore, when he left 17 years later, the trial court refused to enforce the noncompete agreement on grounds that it lacked consideration.

But the court of appeals reversed, holding that the two noncompete clauses, one regarding solicitation and the other concerning competitive work, were enforceable because they were supported by the consideration stemming from “continued employment with the company for 17 years,” along with professional support by the company and advancement within the business in terms of both “salary and responsibility,” including a near-trebling of the employee’s salary over the course of his employment.

The existence of a hand-written exception in the noncompete agreement, which allowed the employee to perform rehabilitation services for a local school district, showed that the parties contemplated that the employee “would advance” in his position, which he did over time, “gaining significant professional advantages through the company.”

Consideration Considered. A noncompete clause entered into by a supervisor of construction workers employed by a commercial-building contractor was enforced in Tenant Construction, Inc. v. Mason.13 The agreement had been signed six months after he began employment for a consideration of $500.

The court of appeals affirmed a ruling of the Hennepin County District Court, holding that the payment of $500 was sufficient consideration because it was “not an insignificant sum.”  Although the continued employment alone was not adequate to support a noncompete clause under well-established caselaw, the $500 payment constituted a “real” advantage for the employee that, combined with the continued employment, warranted enforcement of the noncompete agreement.

The trial court’s award of liquid damages of $14,000 also was upheld, together with an award of attorney fees of $19,000.  The liquidated damage award, which was contained in the employment agreement, was “valid based upon the assumption that it is not a penalty for nonperformance but that it represents fair compensation for breach-related damages.”  The attorney fees, which were called for in the agreement, also were appropriate because there was a finding of breach of contract by the employee.

Conspiracy Case.  But the court of appeals capsized a jury’s finding of conspiracy in a noncompete case in GSS Holdings, Inc. v. Greenstein.14  The Hennepin County jury had found that an attorney who drafted a noncompete agreement for an employee conspired to interfere with the agreement and allow its breach.  But it also determined that the lawyer did not “intentionally interfere” with the noncompete agreement or cause its breach.

The trial judge rejected a post-trial motion to overturn the verdict, but the court of appeals reversed.  Because the employee and her new employer had settled with the former employer, evidence to show an intentional tort by them “was of no consequence” as to the claim against the attorney.  Since the “underlying claims of damages … were not established,” there could be no conspiracy claim either.

Nor could the lawyer be found vicariously liable.  Because the jury found the attorney did not “intentionally interfere with the [agreement] … there is no legal basis for liability premised on conspiracy.”

Conclusion

The split in these cases shows the divergence in legal doctrines involving noncompete agreements.  While they are disfavored by the law, courts will uphold them if they are reasonable and in compliance with Minnesota caselaw requirements.

These new nuances in noncompete law may bode well for employers seeking to use these restrictive devices.  But noncompete clauses can cut both ways.  While employers generally favor their strict enforcement, they also may chafe when they seek to hire employees who are chained to noncompete clauses with competitors.

For employees, noncompete agreements are almost always a bitter medicine.  Because they restrict mobility, they have a tendency to depress wages, benefits, and other emoluments for workers.  Even if the agreements are defective, employees face significant costs and contentiousness in successfully challenging them.

Marshall H. Tanick is an attorney with the law firm of Mansfield, Tanick & Cohen, P.A., in Minneapolis and St. Paul.  He is certified as a Civil Trial Specialist by the Minnesota State Bar Association and represents employers and employees in a variety of workplace-related matters.

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