As a Minnesota business attorney, I am often asked questions related to Minnesota noncompete agreements. Below I explain an overview of Minnesota noncompete law and answer common questions.
Overview of Minnesota Noncompete Law
A noncompete agreement may go by many names: non-compete clause (NCC), covenant not to compete (CNC), do not compete agreement, restrictive covenant, non-solicitation agreement, or whatever title an attorney gives it. Regardless of the title, the intent is the same: one party wants to prevent another party from competing. Whether a noncompete agreement is enforceable depends on a number of factors to be analyzed by an attorney. These factors include:
Was the restricted party (the one who cannot compete) paid independent consideration (compensation) for signing the noncompete agreement? In most circumstances, this consideration is financial compensation, but training and promotions can sometimes be sufficient.
Is the geographic limitation in the noncompete agreement reasonable or too broad? This depends on the type of business. Local businesses are narrow, and international businesses are broad. The test is whether the restriction is reasonably limited to a legitimate business interest deserving protection. For example, a hair salon with most clients in a five-mile radius could not enforce a noncompete covering the entire United States.
How long is the noncompete agreement in force after the employment relationship is terminated? Two years or less is generally okay for employers, but longer is suspect. Ten years is generally permitted in the sale of a business. Before you ignore a noncompete agreement, you should consult with an attorney to analyze the contract. An attorney can give you a legal opinion regarding whether the noncompete is enforceable. The consequences of breaching a noncompete agreement may include a temporary restraining order preventing you from working in violation of the noncompete along with a lawsuit for monetary damages.
Are Employee Noncompete Agreements Enforceable in Minnesota?
Often, employers want to prevent an employee competing with the employer at another company. The employer has to offer something to the employee (this is called “consideration”). Usually, the consideration an employer gives is (1) the job offer to a new employee or (2) a payment to an existing employee. Payments of $500 are usually sufficient, but $1 is probably not. Sometimes, “ongoing employment” can be considered consideration (see #3 below). If there is no consideration, the noncompete agreement is not enforceable. If there is consideration, the next question is whether the geographic limitation is reasonably calculated to protect a legitimate interest of the employer or whether the geographic limitation is overly broad. This depends on the facts, looking at the business operations and market of the employer. The final question is whether the duration of the noncompete is reasonable. This also is done on a case by case basis. Generally, 2-3 years is reasonable. An attorney practicing in noncompete law should stay current on how courts handle each case, which provides a precedent for future cases. The courts weigh many factors, and this area of law continues to evolve, so experienced noncompete attorneys are often needed to determine whether a noncompete agreement is enforceable, and if so, to what extent.
What is Involved in Drafting a Noncompete Agreement that is Enforceable?
The laws involving noncompete agreements varies across the United States. A noncompete agreement that is enforceable in one state may not be enforceable in another. For this reason, understanding Minnesota law is important. Also, noncompete contract forms purchased on the internet may be inadequate for parties in Minnesota. When I draft a noncompete agreement, the process involves carefully applying relevant Minnesota law to ensure the contract remains enforceable. Properly written noncompete agreements are routinely enforced by courts in Minnesota. However, mistakes can void the agreement. For this reason, you should consult with an attorney if you need a noncompete agreement drafted.
Is ‘Ongoing Employment’ Sufficient ‘Consideration’ to Make a Noncompete Enforceable?
In some cases, an employee’s continued employment may be sufficient consideration even though the employee did not sign the noncompete when starting and was never paid money for signing it. Three 2008 Minnesota Court of Appeals cases upheld noncompete provisions under a variety of circumstances:
- Tenant Construction, Inc. v. Mason, 2008 WL 314515 (Minn. Ct. App., Feb 5, 2008) (unpublished).
- Sealock v. Petersen, 2008 WL 314146 (Minn. Ct. App., Feb 5, 2008) (unpublished).
- Witzke v. Mesabi Rehabilitation Services, Inc., 2008 WL 314535 (Minn. Ct. App., Feb 5, 2008) (unpublished).
Witzke is especially interesting because the court held that “continued employment” for a long duration after signing the noncompete will qualify as “consideration.” Previously, the general rule was that a noncompete must be accompanied by “independent consideration” (normally some sort of financial compensation) to be enforceable on a current employee. These cases supported an employer’s position that noncompete agreements are enforceable. In the end, whether a noncompete agreement is enforceable is often unclear because every situation is different. There is no clear line. For this reason, even most attorneys who are not experienced with noncompete agreements will defer to the analysis of an experienced noncompete lawyer. Thus, it goes without saying that, if you are not an attorney, you should consult with an experienced noncompete attorney to determine whether your contract is enforceable, and if so, to what extent.
Are Independent Contractor Noncompete Agreements Enforceable?
Noncompete agreements with independent contractors are generally enforceable. In fact, they are often more enforceable than noncompete agreements with employees because (1) courts view independent contractors as generally sophisticated businesses able to determine whether they want to be bound to an agreement and (2) the concerns over an “employee’s right to work” are not present in an independent contractor relationship. There was recently an important development in Minnesota law regarding noncompete agreements with independent contractors. The Minnesota Court of Appeals held that the doctrine of independent consideration (which generally requires independent payment to an employee for a noncompete agreement to be valid) did not apply to independent contractors. The case is Schmidt Towing, Inc. vs. Chris Frovik d/b/a FTR Towing and Recovery, 27-CV-09-6303 (Minn. Ct. App. Nov. 9, 2010). The Minnesota Court of Appeals did not say that noncompete agreements with independent contractors are always valid. Rather, the Court of Appeals directed the district court to examine the enforceability of the noncompete agreement using “the legal principles that generally govern noncompete agreements.”
Are Attorney, Doctor, Dentist, Accountant and Veterinarian Noncompete Agreements Enforceable?
Recently, I have represented a number of professionals who were bound to noncompete agreements. Here are the general principles for each profession.
The Minnesota Rules of Professional Conduct prohibits the enforcement of a noncompete against another attorney. The basis for this rule is that clients should have a right to pick their attorney, and a noncompete agreement among attorneys would violate the client’s right to choose a lawyer. Thus, Minnesota law does not permit noncompete agreements among attorneys.
Medical Physician Noncompete
No Minnesota law prohibits a noncompete agreement with an employee doctor. However, the American Medical Association (AMA) has an opinion “discouraging” noncompete agreements. Learn more about noncompete agreements for doctors and medical professionals.
The American Dental Association’s professional code provides for “freedom of choice” for patients to select their dentist “without any type of coercion.” However, Minnesota law generally does not restrict noncompete agreements with an employee dentist. For example, in 1985, the Minnesota Court of Appeals considered a dental noncompete agreement. In this case, the court held that a “noncompete covenant in an employment agreement will be enforced when necessary to protect the goodwill of the employer’s business” and the dental noncompete agreement was assignable. The court quoted the Minnesota Supreme Court to support its holding:
Enforcement of restrictive covenants against professional employees is based on the relationship that is created, as for example, between a doctor and his patients. Once this relationship is formed, it is beyond question that a doctor’s patients will seek his aid regardless of this doctor’s employment situation.
Minnesota law generally does not restrict noncompete agreements with an employee accountant or certified public accountant (CPA). Read a good law review article on whether noncompete agreements are permitted for attorneys, accountants, or physicians throughout the United States.
No Minnesota law prohibits a noncompete agreement with an employee veterinarian. However, the American Medical Association has an opinion “discouraging” noncompete agreements.
Are Noncompete Agreements in the Sale of a Business Enforceable?
Noncompete agreements involving the sale of a business are generally enforceable as long as they are reasonably calculated to protect the buyer of the business. Business sellers and buyers are considered “sophisticated parties,” so they are generally bound to the language of the agreements they enter. Of course, outrageous language that is not reasonably calculated to protect the interests of the buyer may be subject to the blue pencil doctrine, where the court limits to the agreement to the scope permitted under Minnesota law.
Can a Noncompete Clause be Enforced against Some Employees or Independent Contractors but Not Others? Isn’t Selective Enforcement Illegal or a Waiver of Rights?
Under some circumstances, a noncompete agreement may be enforced against one party even though it is not enforced against another. For example, if an employer did not enforce its contract against employee A, it can still enforce its contract against employee B under some circumstances.
One factor courts use to determine whether to enforce a noncompete agreement is whether the agreement protects a legitimate interest of the employer. Thus, if an employer did not enforce a noncompete agreement with employee A in the past, and employee B is in similar circumstances, the court could easily conclude the employer does not have a legitimate interest to protect for employee B. The counter-argument is that employee B’s position is substantially different from employee A, so while the employer had no interest in enforcing a agreement with employee A, the employer has a legitimate interest to protect with employee B.
While there is case law supporting the notion that the contractual doctrine of “waiver” can apply to multiple contracts with different parties, most agree waiver is only applicable to multiple contracts between the same parties. However, whether courts use “waiver” or “legitimate interest of the employer,” the outcome may be the same.
Thus, the key question is whether the employees who were allowed to violate their noncompete agreements in the past were similarly situated as it relates to the legitimate interests of the employer. This is a balancing test, weighed against the public policy concern that people have an opportunity to earn a living.
Where Can I read More about the Details of Minnesota Noncompete Law?
Other Minnesota attorneys have written good articles on Minnesota noncompete law including this legal explanation of Litigating Covenants Not to Compete, by William Christopher Penwell, and this site by my friend Craig W. Trepanier.
Is a Noncompete Clause that is Too Broad Void or Unenforceable?
To the extent that a court determines a noncompete agreement is too broad, it will be unenforceable. However, a court is permitted to use the “blue pencil doctrine,” which essentially enforces the agreement to the extent the law would permit. For example, if a noncompete agreement says it prohibits an employee from working worldwide, the court may “blue pencil” the contract to limit enforcement to only Minnesota.
Can an Employer Recover Attorney’s Fees for Suing an Employee who Violates a Noncompete Agreement?
In general, parties suing for breach of a noncompete agreement are not entitled to recover attorney’s fees unless one of the following conditions are present:
- the contract being breached states that the parties may recover attorney’s fees,
- a state or federal statute specifically states that parties may recover attorneys’ fees, or
- the employer is suing the employee’s new employer for interference with contract (a tort claim).
About the Author: This article was written by attorney Aaron Hall. Aaron routinely represents employers and employees with noncompete agreement disputes and drafting noncompete agreements. An attorney is available to analyze noncompete agreements or represent parties seeking to understand their legal rights and options.