This article answers common questions about noncompete agreements in Minnesota between employers and employees/independent contractors.
Noncompete agreements are common in the workplace and are utilized to protect a company’s legitimate business interests. Whether a noncompetition agreement is valid and enforceable will be determined by the laws of each state. Noncompetition agreements are treated very differently between states, with agreements considered enforceable to a certain extent in states such as Minnesota, provided certain elements are met, and generally unenforceable in states such as California, which views noncompetition agreements in the employer-employee/independent contractor setting as an unreasonable restraint on trade.
Warning: whether a noncompetition agreement is valid and enforceable will depend on the specific circumstances and facts of each situation.
In what types of relationships are noncompete agreements commonly found?
Noncompete agreements are generally found between the following relationships:
- employee and employer
- a company and independent contractor
- buyer and seller of a business
Each of these relationships is governed by different standards when determining whether a noncompete agreement is enforceable. Note that the answers below are not focused on noncompete agreements between the buyer/seller of a business.
Does Minnesota have a statute that generally governs the enforceability of noncompetition agreements?
No, Minnesota does not have a statute that generally governs the enforceability of noncompetition agreements. The enforceability of noncompetition agreements is based on a series of case law that has developed over a substantial period of time. Note that industry specific rules and statutes may apply to certain professions. For example, the Minnesota Rules of Professional Conduct do not permit attorneys to enter into noncompetition agreements, in part to protect a client’s freedom to choose an attorney and to safeguard an attorney’s professional autonomy.
What interests can an employer protect with a noncompetition agreement?
In order for a noncompetition agreement to be enforceable, it must protect a legitimate business interest. Legitimate business interests include protecting an employer’s goodwill and customer relationships, confidential information, and trade secrets, and preventing unfair competition from former employees and independent contractors.
What elements will be considered in determining whether a noncompetition agreement is enforceable?
Noncompetition agreements are, by definition, a partial restraint on trade and thus are subject to a certain level of scrutiny. Noncompetition agreements are generally enforceable when they are (1) supported by adequate consideration, (2) are necessary to protect a company’s legitimate business interests, and are reasonable both in (3) time and (4) geographic scope.
Is an offer of employment sufficient consideration for a noncompetition agreement?
Yes, provided that the noncompetition agreement is ancillary to the offer of employment. If the noncompetition agreement is not ancillary to the offer of employment, independent consideration must be provided. An offer of employment for a position that will be subject to a noncompetition agreement should include the noncompetition agreement for the potential employee to consider as a component of the employment offer. If the noncompetition agreement is not an element of the employment offer, and the employee is later asked to sign a noncompetition agreement, either on the first day of employment or thereafter, an argument exists, depending on the specific facts of the case, that the noncompetition agreement may only be valid if it is supported by independent consideration.
If the terms and conditions of the employment position change, will this constitute sufficient consideration for a noncompetition agreement entered into after the commencement of the employment relationship?
Yes, provided the change in terms and conditions constitutes adequate consideration. Meaning, they must represent real advantages to the employee. Whether the change in terms and conditions constitutes adequate consideration will depend on the facts of each case. For example, courts have held that a promotion to management, involving increased authority and responsibility, constituted sufficient consideration when the noncompetition agreement was a component of the promotion.
Does continued employment constitute sufficient consideration for a noncompetition agreement entered into after the commencement of the employment relationship?
No. Continued employment alone does not constitute sufficient consideration for the enforceability of a noncompetition agreement entered into after the employment relationship commenced. However, courts have held in limited, factually-specific circumstances that a substantial duration of employment that included promotions, raises, and other opportunities and benefits may constitute adequate independent consideration for a noncompetition agreement signed after the employee commenced work.
What elements will a court consider when determining if the time limitation in a noncompetition agreement is reasonable?
Courts in Minnesota recognize two different elements as to the duration of a noncompetition agreement: (1) the time necessary to eliminate the association between the employer and the former employee in the minds of the employer’s customers; and (2) the length of time necessary for a replacement to learn the business and acquire any relevant licenses or certifications.
What time limitations in noncompetition agreements are generally considered reasonable?
While the specific facts of each case will determine whether the time limitation is reasonable, courts have upheld time restrictions of 1 to 3 years. Generally, a 1-year limitation period is considered reasonable, a 2-year limitation period may be reasonable under certain circumstances, and a 3-year limitation period will only be reasonable in very limited circumstances. Under the blue-pencil doctrine, courts are free to reduce a time limitation to a period deemed reasonable. Accordingly, courts have periodically reduced time limitations to shorter durations. With respect to contracts that are silent as to time limitations, some courts have determined that such agreements are unreasonable, while other courts have modified the contract to incorporate a reasonable time limitation.
What geographic restrictions in noncompetition agreements are generally considered reasonable?
While the specific facts of each case will determine whether the geographic restriction is reasonable, courts have upheld geographic scopes extending nationwide. Under the blue-pencil doctrine, courts are free to reduce a geographic restriction to a scope deemed reasonable. Accordingly, courts have, on occasion, reduced nationwide limitations. With respect to contracts that are silent as to geographic restrictions, some courts have determined that such agreements are unreasonable, while other courts have modified the contract to incorporate a reasonable geographic scope.
Can customer restrictions substitute for, or be included with, geographic limitations?
Courts have upheld customer restrictions and noncompetition agreements that include both customer and geographic-based limitations. A contract that includes a restriction based on customers may be enforced in the absence of a territorial limitation. However, courts may closely analyze the customer-based restrictions and have, on occasions, limited restrictions based on customers.
What happens if a court determines that the noncompetition limitations are overbroad?
Courts may take an overly broad restriction and enforce it to the extent the restriction is reasonable under what is commonly referred to as the blue-pencil doctrine. Specifically, courts have the authority to modify the terms of a noncompetition agreement, and have reduced time limitations to shorter durations, and have reduced nationwide territorial limits to a reasonable geographic area, or to the employer’s customers.
Will choice of law and forum selection clauses in a noncompetition agreement be upheld?
While exceptions exist, Minnesota courts will generally uphold a choice of law clause in a noncompetition agreement. Minnesota law generally allows parties to a contract to decide which law is going to be applied to resolve any issues regarding the contract. Minnesota courts will generally honor a forum selection clause as well
Are noncompetition agreements with independent contractors enforceable?
Noncompetition agreements are similarly enforceable against independent contractors and are generally analyzed under the same legal principles that govern noncompetition agreements with employees. However, there is a greater likelihood that a noncompetition agreement with an independent contractor will be upheld as enforceable as independent contractors are generally considered to be sophisticated individuals or businesses. Noncompetition agreements with independent contractors are also subject to less stringent standards with respect to whether adequate consideration was provided for the agreement.
If the employer terminates the employment relationship, will the noncompetition agreement be enforceable?
Courts have held that termination of an employee does not preclude enforcement of a covenant not to compete, but wrongful termination may alter this analysis under specific circumstances.
Can an employer selectively enforce noncompetition agreements?
If an employer chooses to enforce a noncompetition agreement against certain employees, but not others, it opens itself up to the defense of waiver. An employee defending against enforcement of a noncompetition agreement may present evidence of selective enforcement. Courts have held that it may be inequitable to permit an employer to enforce a noncompetition agreement that it has ignored against other employees in the past.
What elements must an employer prove to obtain an injunction?
Most noncompetition disputes involve obtaining a temporary restraining order (“TRO”) and/or a temporary/preliminary injunction. A Minnesota state court will typically consider five factors when deciding whether to issue an injunction: (1) the relationship between the parties preexisting the dispute; (2) the balance of the harms between the parties; (3) the likelihood of success on the merits; (4) public policy considerations; and (5) administrative burdens, if any. See Dahlberg Bros. v. Ford Motor Co., 272 Minn. 264, 274–75, 37 N.W.2d 314, 321–22 (1965). Minnesota Rule of Civil Procedure 65 controls the injunction process in Minnesota state court.
Minnesota federal courts evaluate the following factors: (1) the threat of irreparable harm if the injunction is not granted; (2) the harm suffered by the moving party if injunctive relief is denied compared to the effect on the non-moving party if the relief is granted; (3) the public interest; and (4) the probability that the moving party will succeed on the merits. See Dataphase Sys., Inc. v. C.L. Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981). Federal Rule of Civil Procedure 65 controls the injunction process in federal court.
The court will place the most weight into the balance of the harms element, and the likelihood that the company will be successful in ultimately proving its claims. The court will also consider whether to impose a bond or other form of security if the injunction is later found to be improper.
How does an employer generally establish that it will suffer irreparable harm?
An employer must establish that money damages will be insufficient and that it will suffer irreparable harm if injunctive relief is not granted. A showing of speculative harm will be insufficient. Failure to establish irreparable harm may alone be sufficient grounds to deny injunctive relief. However, irreparable harm may be inferred from the breach of a noncompetition agreement. Courts have held that irreparable harm may exist as a result of damaged or destroyed business relationships, loss of goodwill toward a business, and misappropriation of confidential information or trade secrets.
What is the standard of review if the court’s decision regarding an injunction is appealed?
An order granting, denying, or later dissolving or refusing to dissolve, or modifying or refusing to modify, an injunction is appealable as a matter of right under Minnesota state and federal rules and statutes. The standard of review on appeal is abuse of discretion.
Can the new employer who hired an employee with a noncompetition agreement be sued?
If the employment relationship with the new employer is in violation of the employee’s noncompetition agreement, and the new employer knew about the employee’s noncompetition agreement, the new employer could be sued for tortious interference with contractual relationships. A critical element to a tortious interference with contractual relations claim is that the new employer knew about the noncompetition agreement and hired the employee in violation of that agreement, or continued to employ the employee after it found out about the noncompetition agreement.
What damages are recoverable for a breach of a noncompetition agreement?
Damages and injunctive relief are permissible for a breach of a noncompetition agreement. The most common damages for a breach of a noncompetition agreement are consequential damages, such as lost profits. A liquidated damages provision in a noncompetition agreement may also be enforced, though such provisions are closely scrutinized by the court. If an attorney’s fees and costs provision is included in the noncompetition agreement, and the employer is successful in enforcing the noncompetition agreement, courts may award attorney’s fees and costs as well. Also, the new employer may be responsible under the principle of respondeat superior for a breach of a noncompetition agreement between an employee and the employee’s former employer if the breach was within the course and scope of employment with the new employer.