Noncompete Agreements in Minnesota

A noncomplete agreements is a clause in a contract, most typically in employment contracts, promising that an employee, once no longer employed, is not to engage in the same type of business for a set amount of time. Not participating in the same business includes operating in the same market as the employer. The most stated benefit of including a noncompete clause in a contract is to protect the employer or other businesses from employees that may take sensitive information or skills with them when they leave the business, and become a competitor with an employer in the same market (the competition). There are a number of factors that determine whether or not a court will enforce a noncompete clause. In most cases, noncompete clauses are critically evaluated by the courts , because they can restrict an individual’s ability to earn a living and find work. In response to the critical scrutiny of noncompete clauses, courts have invoked what is called the “Blue-Pencil Doctrine”, which allows a court to edit the terms of a noncompete clause in order to make it acceptable. Although traditionally Minnesota Courts have strongly disfavored noncompete clauses, there has been a recent trend supporting noncompete clauses in contracts over the last few years.

I. Determining an Enforceable Noncompete Agreement

There must be restrictions on noncompete clauses, because without them employers would have the opportunity to have complete control over potential employees, and could hinder their ability to find work after employment. The following factors are taken into consideration when determining whether or not a noncompete clause in a contract is enforceable. The noncompete must be reasonable, meaning that it must be necessary to protect some legitimate business interest of the employer, and if so whether it imposes a greater amount of restraint than is reasonably necessary for protection. In determining what is considered necessary the court will look at the duration and geographic scope of the restriction. Additionally, the agreement must be ancillary to the employment contract, or if not, it must be supported by independent consideration.

A. Noncompete Agreements Must Be Reasonable

A noncompete agreement is only reasonable if it truly protects a legitimate business interest of the employer. If the employer has nothing substantial worth protecting, it is not necessary to so severely restrict the future work opportunities of the employee. There are generally three ways to determine whether or not an employer has a legitimate business interest to protect. First, if there is a relationship between the employee and the employer’s customers, there may be a legitimate interest to protect, If an employee’s job is built around relationships with the employer’s customers, the employer has an interest in protecting his client base if the employee was to leave the company. Second, if there is confidential information that the employee has access to there is the chance that an employee could disclose that information or use it unfairly against the ex-employer. This most often occurs when an employer’s company revolves around new innovative technology and through employment the employee has unique knowledge of the technology. Third, if the employee gains some specialized, unique skills through employment with the employer, there may be an interest to protect that employee from sharing that unique skill with another employer. This occurs when the employer is responsible for sharing this unique training or skill. Not only could this be a skill that is individual to that employer, but also this could protect the time, effort, and expense that had been invested when the employer trained the employee.

After it is determined that the employer has a legitimate interest worth protecting, in order for the agreement to be reasonable, entering into a noncompete agreement cannot impose more restrictions than are reasonably necessary to protect those interests. There are two main factors that are considered when looking at what is necessary to protect the employer, primarily set out in Bennett v. Storz Broadcasting Co, 134 N.W.2d 892 (Minn. 1965). First, the time and duration of the noncompete clause must not be excessive. Generally, a noncompete agreement that lasts for one year is considered to be reasonable. See Boston Scientific Corp. v. Duberg, 754 F.Supp.2d 1033, 1039 (D. Minn. 2010). Any extended period of time will likely be struck down by a court as unenforceable, because it is bad public policy to impose such a restriction preventing someone from working for multiple years in a certain industry. Second, the geographic scope of the noncompete cannot extend too far. Usually, a court will only uphold a geographic area that is necessary to protect the employer’s business interest, known as the “principal area of business.” Overholt Crop Ins. Serv. Co. Inc., v. Bredeson, 437 N.W.2d 698, 703 (Minn. Ct. App. 1989). Typically, a noncompete clause will be reasonable if it does not extend longer than one year and is limited to an area where the employer primarily does business.

B. A Noncompete Clause Must Be Ancillary or Be Supported with Independent Consideration

A noncompete clause is not the primary element of an employment contract, rather it must be ancillary to the employment contract. This means that the noncompete clause must be supplementary to, or in support of, the employment contract, but cannot be a stand alone contract. Because of this, a noncompete clause cannot be signed as a requirement for work after the employment contract has already been signed. In this case, the noncompete clause is not supplementary to the employment contract, but rather a separate contract itself. This type of noncompete agreement would be unenforceable. See generally, Nat’l Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982). When a noncompete agreement is not ancillary to an employment contract, it must be supported with independent consideration. This means that there must be a bargained for exchange. The employee must receive some sort of benefits from entering into a noncompete agreement that was not ancillary to the employment contract. These benefits must be real benefits that go beyond what may already be obtained by an employee in the course of his work under the employment contract. Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161 (Minn. Ct. App. 1993). These benefits are usually described as “substantial economic and professional benefits.” Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127, 131 (Minn. 1980). Continued employment with the company is insufficient consideration for a noncompete clause, rather, there needs to be other real benefits.

II. Traditionally Noncompete Clauses are Disfavored

The traditional view on noncompete clauses is one of disfavor and high levels of critical scrutiny by the courts. The main reason for such scrutiny is that placing restrictions on where and when a person may work again after previous employment can be problematic and can be seen as a restraint on trade. In a lot of situations, a person has a specialized job, for example a chef. What kind of work that person is capable of finding after ending employment with a previous employer is most usually going to be restricted to other chef jobs. If there is a restriction placed on this person that he cannot work for any restaurant in a given area for a specified amount of time, this could be extremely detrimental to that individual. If he cannot work in his own city, perhaps he would have to move in order to make a living, and this is a restriction on employment that affects an individual’s livelihood that courts will seek to protect. Additionally, limiting where and when someone may work, hinders him from contributing to the economy and the work force and is therefore a restraint on trade that most courts will want to prevent. See generally, Freeeman v. Duluth Clinic Ltd., 334 N.W.2d 626, 630 (Minn. 1983).

III. Minnesota Courts Invoke the “Blue-Pencil Doctrine”

In Witzker v. Mesabi Rehab. Servs., Inc., 768 N.W.2d 127 (Minn. Ct. App. 2009) the Court uses the “Blue-Pencil Doctrine” to revise an otherwise unenforceable noncompete agreement. Under this doctrine, it is at the discretion of the court to alter the unreasonable restrictions in the noncompete clause in an employment contract. As a result, the restrictions in the agreement are enforceable only to the extent that they are reasonable. An example of this doctrine in effect is if a noncompete agreement placed a restriction on work for three years. Typically such a long duration is an unreasonable restriction to impose on a person. A court may therefore apply the “Blue-Pencil Doctrine” and limit the duration of the noncompete to a term they consider to be reasonable, perhaps only one year. Having this discretion is meant to find a middle ground between the business interests of the owner, and the well-being and protection of the employee.

IV. The Recent Trend in Minnesota

In 2010 and 2011, Minnesota Courts took a turn away from the traditional stance of not enforcing noncompete agreements, and began to uphold them. There are two main cases that highlight this friendly approach towards employers and enforcement of their noncompete clauses in employment contracts. The first is Schmidt Towing, Inc. v. Frovik, 27-CV-09-6303 (Minn Ct. App. Nov. 9, 2010), and the second is Medtronic, Inc. v. Hughes, 27-CV-08-21017 (Minn. Ct. App. Jan. 18, 2011). In Schmidt Towing, the court upheld a noncompete agreement as enforceable between a subcontractor and a contractor. The main distinction is that this was a subcontractor, and not an employee, and therefore the requirement of independent consideration was not necessary. The requirement of independent consideration had never been applied to cases outside of the employee-employer relationship. In Medtronic, the court upheld an incredibly wide geographic scope. The employee was a sales representative that sold medical devices to Medtronic. He had a noncompete agreement with Medtronic, left them, and sold the devices to another company. The court upheld the worldwide scope of the noncompete agreement because Medtronic exists on an international playing field, and the medical devices could be used and marketed internationally. In general, these two cases are examples of a more lenient stance that the courts have taken towards noncompete clauses in the last view years, and a turn towards protecting the employer.

Conclusion

Although recently courts have turned towards accepting noncompete clause, most courts still recognize that they should still be strictly scrutinized nonetheless. Noncompete agreements are complex and need to be very carefully drafted and considered in order for a court to enforce them. Before signing an employment contract with a noncompete agreement it may be in an employee’s best interest to consult with an attorney in order to determine whether such a clause in a contract could be enforced, and if so, that the employee understands what he or she is agreeing to.


Contact an attorney in this area