Non-Compete Agreements: Enforceable or Not?

One question we encounter often in our practice from businesses and employees is whether the non-compete agreements they have signed can be enforced. The non-compete agreements (also known as covenants not to compete or non-solicitation agreements, among other things) at issue often prohibit former employees, contractors or owners from competing with a business following the termination of their relationship with that business.

The general answer is YES. Minnesota courts enforce non-compete agreements under certain conditions. However, non-compete agreements are aptly considered partial restraints on free trade, which are disfavored by courts. As a result, non-compete agreements are simply unenforceable in many states. Minnesota courts will enforce them, but only if the agreement is: supported by adequate consideration; narrowly tailored to protect a legitimate business interest; and reasonable in scope.

These conditions represent a drastic departure from ordinary contract law and if non-compete agreements are not handled carefully in Minnesota, failure to satisfy these conditions often nullifies the non-compete agreement altogether.

CONSIDERATION The term ‘consideration’ literally means the inducement to a contract, or something of value given in return for a performance (or a promise of performance) by another. Traditionally, courts would not enforce a promise as contract, if it was nothing more than a gift. But the promise would be enforceable as contract if it was supported by something of value such as money. Today, in contract law courts do not analyze the adequacy of consideration, only whether consideration exists. That is why contracts often include the recital for one dollar and other valuable consideration or for valuable consideration the receipt and sufficiency of which is hereby acknowledged.

For non-compete agreements though, Minnesota courts are careful to determine whether the agreement was supported by adequate consideration. Importantly, in Minnesota continued employment alone is not considered adequate consideration for a non-compete agreement. The non-compete, therefore, will not be enforceable unless it is made a condition from the outset of the employment relationship or it is supported by a bonus or pay raise after the employment relationship has already begun.

LEGITIMATE BUSINESS INTERESTS Minnesota courts will not enforce a non-compete agreement if the party seeking to enforce the agreement cannot articulate a legitimate business interest in enforcement. Typically, businesses secure non-compete agreements to prevent individuals from taking advantage of valuable training, information or relationships acquired at the expense of the business, and bringing those assets to a competing business to use in competition. Examples of valuable assets that Minnesota courts would consider legitimate business interests are:

Important pre-existing customer relationships entrusted to an employee by the employer for handling; Confidential and/or proprietary information entrusted to an employee that provides a competitive edge for the business; Valuable training and experience offered to employees on a salary to develop their skills in the business.

On the other hand, an employer will have difficulty enforcing a non-compete agreement that seeks to prevent an administrative employee who does not receive special training, is not exposed to trade secrets and does not have relationships with the employer’s customers from taking a job with a competitor.

REASONABLENESS IN TERMS OF SCOPE Finally, for non-compete agreements Minnesota courts scrutinize the scope of the proposed restriction and if necessary, courts will modify the scope in connection with enforcement to make it reasonable. This is known in Minnesota Courts as the ‘blue pencil’ doctrine.

In practice, Minnesota courts look at the scope of the restriction as to geographic area, duration, categories of customers and confidential information, etc., on a case by case basis, and determine whether it is reasonable in light of the business interests at stake. For geographic scope, the agreement should not impose a restriction beyond the market in which the business operates. For duration, Minnesota courts have generally found 1-2 year restrictions enforceable, and longer in agreements that arise from the sale of a business. For non-solicitation of customers, Courts readily enforce restrictions from soliciting actual customers of the business, and are less inclined to enforce restrictions from soliciting ‘potential’ customers.

CONSULT A LAWYER While this discussion covers the most common issues associated with non-compete agreements, each case is different and there are other potential considerations depending on the context of each agreement. Consequently, it is important for you to consult a lawyer before creating or signing a non-compete agreement.

At Peters Law Firm, we regularly advise our business clients regarding non-compete agreements and litigate issues regarding enforcement as necessary. Our first consultation is always free of charge.