Employment agreements restricting future competition by learned and licensed personnel have garnered mixed reviews from courts around the country and in Minnesota. Nevertheless, certain professions appear to be more compatible with such agreements than others.
Laws pertaining to noncompete agreements vary from state to state. Although there are some general principles applicable in most jurisdictions, each state has its own laws governing these restrictive arrangements, sometimes statutory, and heavily imbued with common law principles. The federal courts, when confronted with noncompete clauses in diversity of citizenship cases under 28 U.S.C §1332, follow applicable state law under the Erie doctrine.1
Attitudes differ in various jurisdictions regarding noncompete clauses. Some jurisdictions are relatively supportive, particularly those that are generally deemed more conservative or employer-oriented. Others, mainly in mid-Atlantic and northeastern parts of the country, are less inclined to uphold these restrictions.
One state stands out, California, where noncompetes are invalid and unenforceable, even if entered into in other states.2 The courts there will, as a matter of public policy, almost invariably not enforce them.3
Dismay and Delight
Minnesota was for many years considered in the middle of the spectrum. It generally upheld noncompetes, if “reasonable,” but scrutinized them carefully for fairness.4 Occasionally the courts remarked that noncompetes were disfavored in the law. In one notable but somewhat uncharacteristic outburst, the Minnesota Supreme Court described them as vestiges of “industrial peonage without redeeming virtue in the American enterprise system.”5
But, in recent years, observers noted that Minnesota courts have drifted towards more readily upholding these noncompete arrangements, even in circumstances in which they may have been disinclined to do so in the past. A trio of cases concurrently decided in 2008 reflects this trend,6 viewed with dismay by employees but regarded with delight by many employers.
But even management can be ambivalent about these instruments, depending on circumstances. While strict enforcement of noncompete clauses may be advantageous for the employer trying to enforce them, they are less favorable when the employer is on the receiving end of a claim from another employer whose employee just jumped ship. In those instances, the new employer may, if the lawsuit by the former employer is successful, be obligated to pay the legal fees incurred by the former employer on grounds of interference with a contract.7
A noncompete tussle typically arises when an employee with a close relationship with customers or intimate information about the business leaves and starts a competing enterprise or joins a competitor. Sales personnel are among the most vulnerable to these clauses and their enforcement. People with high-tech information about product development, sales strategy, or technology are also vulnerable to these volatile legal volleys.
But noncompetes, obviously, are not confined to these particular positions. They can encumber those on relatively lower rungs of the employment ladder, too.8
Noncompetes may also be imposed upon professionals, those who are deemed to engage in learned occupations or have licensed positions. This includes attorneys, accountants, doctors and dentists, among others with post-college credentials and state professional licensure.
The stakes are generally high when noncompete agreements are imposed upon these individuals and attempts are made to enforce them because professionals are generally higher paid than most other employees. Professionals often also possess specialized knowledge and skills and may have relatively large client groups who will follow them from one employer to another.
Consequently, noncompete arrangements involving professionals can pose complex and difficult legal issues, both at the inception stage and in enforcement. There is no place for amateurs in dealing with these restrictive arrangements for professionals.
Here’s a look at how noncompete laws in Minnesota are affecting four fields of professional practice.
Minnesota law is adverse to noncompete agreements for attorneys; noncompete clauses may not be imposed on lawyers in this state. That limitation does not arise from state law or statutes, but from the Rules of Professional Conduct.9 The lack of enforceability of noncompete clauses against lawyers is not universal. For example, Michigan’s state supreme court has not ruled definitely, but appears receptive to the possibility that “reasonable” noncompetes on attorneys might pass muster.10 Both California, which generally bars noncompetes, and Arizona, which does not, take the approach that forfeiture clauses may be upheld as to those lawyers who leave law firms and then compete with their former firms.11
The American Bar Association (ABA) has numerous protocols and rules addressing attorneys’ conduct and professionalism. Although not binding upon states, they provide guidance that noncompetes should not be entered into between lawyers.12
In contrast, there is a paucity of restrictions on noncompetes for accountants. These devices are occasionally used in the profession. One commentator states that noncompetes “among accountants today are numerous and multifaceted.”13
But there is scant case law. The court in Krigbaum & Associates, Ltd. v. Ross-Rhoades, for example, found no breach of a noncompete provision without addressing the enforceability of the provision.14 An accounting firm’s stockholders’ agreement contained a noncompete provision that prohibited withdrawing stockholders from engaging in the practice of accounting in competition with the company within 100 miles of the company for a period of seven years. Without discussing whether the provision was enforceable, the court held that the company consented to a division of the client list so the withdrawing stockholder did not compete with the company, and consequently, did not violate the noncompete provision.
The dilemma of noncompetes for doctors has been addressed in Minnesota jurisprudence. A seminal noncompete case involved a physician whose noncompete was deemed invalid because he was not given any independent consideration, which is required if such agreement is to be signed after the beginning of an employment relationship, although not if signed when the job begins.15
More recently, doctors of veterinary medicine have been subject to noncompete clauses, although the impact of these clauses was diluted by the Minnesota Court of Appeals in Head v. Morris Veterinary Center, Inc.,16 which reduced the term of two, three-year noncompete agreements covering a pair of veterinarians from central Minnesota to one year each. The court, affirming a ruling by the Stevens County District Court, used the “blue pencil” doctrine to cut back the restrictive period because the facility that the veterinarians left could fill their positions and have new veterinarians up to speed in less time than the term of the agreements. This suggests that the time necessary to replace a departing employee may be a determining factor in assessing the length of the noncompete.
The professional association for doctors, the American Medical Association (AMA), has promulgated an ethical opinion “discouraging” restrictive agreements. The opinion regards restrictive agreements as “unethical” if they are excessive in scope or duration.17
The professional code of the dental profession, adopted by the American Dental Association (ADA), provides “freedom of choice” for patients to pick the dentist of their choice “without any type of coercion.”18 While this is not equivalent to a bar on noncompetes, it does suggest that the ADA disfavors any agreements that might widely interfere with the ability of patients to see the dentist of their own choosing.
Minnesota case law is not so hostile to noncompetes in the dental profession. A dentist in Winsted was barred from bringing a claim under the Minnesota Human Rights Act while trying to escape from the jaws of a noncompete agreement in Correll v. Distinctive Dental Services, P.A.19
In Correll, a dentist signed a noncompete agreement with a clinic that forbade the dentist from engaging in similar business activity, directly or indirectly, within seven miles of the clinic. The agreement also contained a broad arbitration clause. The dentist’s wife, also a dentist, took a job with a competing clinic within seven miles of where her spouse worked. As a result, the dentist who was a signatory to the employment agreement was fired.
He brought a charge before the Minnesota Department of Human Rights asserting discrimination based upon marital status under Minn. Stat. §363.11. The clinic sought to enjoin the administrative proceeding on grounds of the arbitration clause, but the McLeod County District Court refused.
The Minnesota Court of Appeals disagreed and reversed. In a case of first impression, the court sought to “harmonize” the Human Rights Act which contains an exclusivity clause, and the Minnesota Uniform Arbitration Act,20 which requires arbitration when agreed to between the parties. The court opted for the latter, reasoning that the Human Rights Act should not be interpreted to preclude arbitration because to do so would impose “a sweeping constriction on the ability of the parties to freely contract.”21 The court also relied upon federal cases under Title VII of the Federal Civil Rights Act which “favor arbitration” in these circumstances.22
Pointing to “strong public policy favoring arbitration agreements,” the court felt constrained to follow the federal precedents. But the court overlooked a federal precedent holding that an arbitration clause does not necessarily preclude statutory discrimination claims unless it contains an “explicit” waiver of such claims.
This precedent was set in Wright v. Universal Maritime Services Corp., wherein the Supreme Court held that a longshoreman could pursue a disability discrimination claim under the Americans with Disabilities Act notwithstanding an arbitration clause in the collective bargaining agreement between the employee’s union and his employer.23 The court reasoned that an arbitration clause that does not specifically reference statutory discrimination claims does not extend to those issues.
The Wright court urged the drafting of broad and all-encompassing clauses if the parties wished to preclude administrative action, litigation or statutory claims, but that issue was not addressed in the Correll case.
Noncompete clauses are fairly prevalent these days. Their enforceability and scope varies, as do the laws covering their application to varying professions.
Those dichotomies are likely to continue as employers grapple with these restrictive devices in Minnesota and elsewhere. It requires the professional interpretation of attorneys, the acumen of accountants, the perception of physicians, and the dexterity of dentists. It’s not a job for amateurs.
Marshall H. Tanick and Phillip J. Trobaugh are attorneys with the law firm of Mansfield, Tanick & Cohen, PA, Minneapolis and St. Paul. They represent a number of professionals and their employers in connection with noncompete and other workplace-related matters. The authors thank Brian R. Christiansen, a law clerk with the firm, for his assistance.
1 See, e.g., Mayer Hoffman McCann, P.C. v. Barton, 614 F.3d 893 (8th Cir. 2010) (evaluating the enforceability of restrictive covenants in a stockholder agreement under Missouri law); see also 28 U.S.C. §1332; Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938).
2 See Calif. Bus. & Prof. Code §16600 (“[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void”).
3 See, e.g., Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App. 4th 881, 902 (Cal. App. 1998); see also Swenson v. File, 475 P.2d 852, 855 (Cal. 1970).
4 See, e.g., Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 456 (Minn. App. 2001) (“[R]estrictive covenants are enforced to the extent reasonably necessary to protect legitimate business interests”); Webb Publ’g Co. v. Fosshage, 426 N.W.2d 445, 450 (Minn. App. 1998) (“Because restrictive covenants are agreements in restraint of trade, they are enforced only to the extent reasonably necessary to protect a legitimate business interest”).
5 Eutectic Welding Alloys Corp. v. West, 281 Minn. 13, 20, 160 N.W.2d 566, 571 (1968).
6 See Sealock v. Petersen, 2008 WL 314146 (Minn. App. 02/05/2008) (unpublished); Witzke v. Mesabi Rehab. Servs., Inc., 2008 WL 314535 (Minn. App. 02/05/2008) (unpublished); Tenant Constr., Inc. v. Mason, 2008 WL 314515 (Minn. App. 02/05/2008) (unpublished).
7 See, e.g., Kallok v. Medtronic, Inc., 573 N.W.2d 356, 363-64 (Minn. 1998).
8 Lora Pabst, “Shop leashes fired worker,” Minneapolis Star Trib., 03/14/2011 (noncompete agreement for dog daycare employee).
9 Minn. Rules of Prof’l. Conduct R. 5.6.
10 Daniel D. Quick, “Noncompete Agreements for Attorneys: Are We Now Fair Game?” Mich. B.J., Dec. 2008, at 29, 30.
11 Id. at 30-31; see also Howard v. Babcock, 863 P.2d 150 (Cal. 1993); Fearnow v Ridenour, Swenson, Cleere & Evans, P.C., 138 P.3d 723 (Ariz. 2006).
12 Model Rules of Prof’l. Conduct R. 5.6. See generally Glenn S. Draper, “Enforcing Lawyers’ Covenants Not to Compete,” 69 Wash. L. Rev. 161 (1994).
13 Sandra S. Benson, Patricia S. Wall & Betty S. Harper, “Recognizing a Litigious Reality: Safeguarding Against Unfair Competition and Tortious Interference,” CPA J., Nov. 2007, available at http://www.nysscpa.org/cpajournal/2007/1107/essentials/p56.htm.
14 Krigbaum & Assocs., Ltd. v. Ross-Rhoades, 1999 WL 43319, at *3 (Minn. App. 02/02/1999) (unpublished).
15 Freeman v. Duluth Clinic, Ltd., 334 N.W.2d 626, 630 (Minn. 1983).
16 Head v. Morris Veterinary Ctr., Inc., 2005 WL 1620328 (Minn. App. 07/12/2005) (unpublished).
17 AMA Code of Medical Ethics, Opinion 9.02.
18 ADA Current Policies, 1994:667.
19 Correll v. Distinctive Dental Servs., P.A., 594 N.W.2d 222 (Minn. App. 1999). See generally Marshall Tanick, “Bracing Yourself to Deal with Top 10 Employment Law Problems,” Seminars in Orthodontics, June 1997, at 121, 123-124.
20 Minn. Stat. §§572B.01-.31.
21 Correll, 594 N.W.2d at 225.
22 Id. at 226.
23 Wright v. Univ. Mar. Serv. Corp., 525 U.S. 70 (1998).