Businesses constantly search for ways to protect their competitive advantages, customer relationships, confidential business information and trade secrets. Non-competition agreements (which often include confidentiality provisions) are usually part of those protection efforts. Despite the belief of many employers (and employees) that these non-competition agreements are unenforceable and not worth the paper they’re written on, they are both enforceable and extremely valuable when properly drafted. Attorneys, however, are often asked to revise or pursue enforcement of agreements which are unlikely to be enforced by courts because of one or more problems. Sometimes this is because “form” agreements are used for multiple employees that are not tailored to the specific circumstances of a particular business and/or position. Other times this is due to a failure of consideration relating to the timing of when an employee signed or was given the agreement.
Non-competition agreements are enforceable under Minnesota law if they are supported by consideration, are necessary to protect a “legitimate business interest,” and they are no broader than necessary in scope and duration. Below is a brief overview of what these requirements actually mean, and some pointers Minnesota employers should consider in crafting those agreements. Although non-competition agreements are also frequently used in connection with the sale of a business and other settings, this post focuses on their use in the employment setting.
How Do I Make a Non-Competition Agreement Enforceable? Present and Sign the Agreement Prior to Commencement of Employment or Provide Additional Benefit
Like any contract, non-competition agreements must be supported by consideration (i.e. something valuable received in exchange for signing) to be enforceable. An employment offer can be sufficient consideration if the agreement is presented ancillary to the offer. Courts, however, will carefully scrutinize the timing of the notice and execution of a non-competition agreement to determine whether an employment offer is truly contingent upon the applicant’s execution of it. Employers should make clear, in writing, that a job offer is contingent upon the applicant’s execution of the agreement, provide a copy of the agreement before the offer is accepted, and obtain the signed agreement before the commencement of employment.
If a non-competition agreement is not presented or signed until after employment has commenced, additional consideration needs to be provided (e.g. a raise or a bonus or cash payment that is not part of the employee’s compensation), and that consideration should be identified in the agreement.
Make Sure Your Company has Legitimate Business Interests to Protect
Courts have found a broad range of employer interests to be protectable by non-competition agreements including confidential information, customer goodwill, business relationships, and specialized employment training. Although these interests have generally been found to be deserving of protection, each agreement and employment situation is unique and considered as such by courts.
Don’t Overreach – The Agreement Should Have a Reasonable Scope
Assuming some restraint is needed to protect an employer’s business interests, non-competition agreements must be reasonable and no broader than necessary. Factors considered in assessing reasonableness include the nature and character of the restriction, its temporal length and its geographic scope. Although employers may want non-competition agreements to restrict former employees for several years and/or prohibit competition anywhere in the world, it is unlikely a court would enforce such broad restrictions in the employment context.
In the employment context, Minnesota courts are reluctant to enforce agreements lasting longer than one to two years. They will uphold geographic limitations when narrowly tailored to protect the employer’s business interests. The primary factors considered by courts are the geographic area in which the employer operates, the nature of the employee’s position and the geographic area in which the employee actively worked and/or had customer contacts. Agreements which solely restrict solicitations of customers can be reasonable without a geographic limitation, but a temporal limitation is still required.
If a non-competition agreement is overbroad, Minnesota courts may “blue-pencil” or modify its terms (e.g. reduce the term from three years to two years) and then enforce the modified scope. However, just because a court can modify unreasonable terms does not mean that it will do so. In order to increase the likelihood of enforcement, businesses should craft restrictions so that they are no broader than reasonably necessary.
Keep it Simple
Businesses should use language that is well-defined and understandable. What does “solicit” mean? Does it include where a customer first approaches the former employee? Does it apply to, say, a broadly disseminated LinkedIn post, where the former employee’s connections include customers? Does it prohibit the actual rendering of services? The more understandable the language is, the better (although being too specific in defining prohibited activities can result in the unintentional exclusion of conduct a company wishes to prohibit).
Although not discussed in detail here, there are several additional steps companies should take to maximize the likelihood of enforcement including the use of blue-pencil language, provisions making clear the restrictions survive the termination of employment and authorizing injunctive relief and recovery of attorneys’ fees, choice of law and forum selection provisions, and reminding employees of their obligations upon termination of employment. Businesses that take the time to evaluate each employment position and tailor restrictions are more likely to have those agreements enforced than those which employ a “one size fits all” approach.