Does a Material Change in an Employee’s Job Duties Void the Employee’s Non-Compete Agreement?

The material change doctrine is a legal theory that developed in Massachusetts. (See footnote 1.) Under Massachusetts’ law, each time an employee’s employment relationship with the employer changes materially such that they have entered into a new employment relationship a new restrictive covenant must be signed. (See footnote 2.)

Although there is not a material change rule in Minnesota, the determination will depend on the particular facts and whether the employer has a “legitimate business interest” in enforcing the non-compete.

What is a “legitimate business interest?”

Although Minnesota courts do not favor non-compete covenants because they are partial restraints on trade (See footnote 3), restrictive covenants are enforced to the extent reasonably necessary to protect legitimate business interests. (See footnote 4.) An analysis of the legitimate interests of the employer usually falls into three areas:

  1. the relationship between the employee and the employer’s customers (see footnote 5);
  2. confidential information in the possession of or known to the employee (see footnote 6); and
  3. specialized training obtained by employee from employer. (See footnote 7.)

Relationship between employee and employer’s customers:

In determining whether an employee is in a position to trade on the employer’s good will, Minnesota courts have looked at whether the employee developed a special relationship with the business’ customers. (See footnote 8.) For instance, where an employee was the primary contact between the employer and four major customers, worked closely with the customers, and considered them to be friends, the relationship was sufficiently close to give rise to a legitimate business interest in protecting itself. (See footnote 9.) Conversely, where evidence showed the employee did not develop any special relationships with customers, a three-year restrictive covenant was found to be not justified. (See footnote 10.)

Confidential information in the possession of an employee:

Minnesota courts have also found a legitimate interest in protecting trade secrets or confidential information. (See footnote 11.) The Minnesota Supreme Court defined confidential information as:

  1. protected matter not generally known or readily ascertainable;
  2. that provides a demonstrable competitive advantage;
  3. that was gained at the expense of the employer; and
  4. is such that the employer intended to keep confidential. (See footnote 12.)

Matters of general knowledge within the industry may not be classified as trade secrets or confidential information; (see footnote 13) and, the employer must show that reasonable efforts were reasonably taken to maintain the secrecy of the information. (See footnote 14.)

Specialized training:

Minnesota courts have reasoned that an employer’s serious investment in training its employees should be considered an element of a protectable business interest. (See footnote 15.) Specialized training, not just training, is relevant to the determination. (See footnote 16.) The amount of time and financial investment required to train the employee can provide a measure of whether or not the training was specialized. Conversely, an employer is not entitled to protection where the employee received the same training during previous employment. Minnesota caselaw protects only the time, effort, and expense actually invested by the employer in the employee. (See footnote 17.)

[1] See Lycos, Inc. v. Jackson, 18 Mass. 256 (Mass. 2004); See also AFC Cable Sys. Inc. v. Clisham, 62 F.Supp.2d 167 (D. Mass. 1999); F.A. Bartlett Tree Expert Co. v. Barrington, 353 Mass. 585 (Mass. 1968).

[2] Astro-Med, Inc. v. Nihon Kohden Am., Inc. 591 F.3d 1 (1st Cir. 2009) (citing Lycos, Inc. v. Jackson, 18 Mass. 256 (Mass. 2004).

[3] Midwest Sports Mktg., Inc. v. Hillerich & Bradsby of Canada, Ltd., 552 N.W.2d 254, 265 (Minn. Ct. App. 1996).

[4] Cherne Industrial, Inc. v. Grounds & Associates, Inc., 278 N.W.2d 81 (Minn. 1979); Walker Employment Service, Inc. v. Parkhurst, 219 N.W.2d 437 (Minn. 1974); Eutectic Welding Alloys Corp. v. West, 160 N.W.2d 566 (Minn. 1968); Bennett v. Storz Broadcasting Co., 134 N.W.2d 892 (Minn. 1965).

[5] Millard v. Elec. Cable Specialists, 790 F.Supp. 857 (D.Minn. 1992).

[6] Minn. Mining & Mfg. Co. v. Kirkevold, 87 F.R.D. 324 (D.Minn. 1980).

[7] Eutectic Welding Alloys Corp. v. West, 160 N.W.2d 566 (Minn. 1968).

[8] Klick v. Crosstown State Bank of Ham Lake, Inc., 372 N.W.2d 85, 88 (Minn. Ct. App. 1985).

[9] Webb Publ’g co. v. Fosshage, 426 N.W.2d 445, 447-51 (Minn. Ct. App. 1988).

[10] Klick, 372 N.w.2d at 88.

[11] Cherne, 278 N.W.2d at 90.

[12] Id.

[13] Electro-Craft Corp. v. Controlled Motion, Inc. 332 N.W.2d 890, 901-02 (Minn. 1993).

[14] Id.

[15] IDS Life Ins. Co. v. SunAmerica, Inc., 958 F.Supp. 1258, 1274 (N.W. Ill. 1997) (applying Minnesota law), aff’d in part and vacated in part by, 136 F.3d 537 (7th Cir. 1998).

[16] Eutectic Welding Alloys Corp. v. West, 160 N.W.2d 566 (1968).

[17] See, e.g., W. Water Mgmt. v. Heine, No. C4-95-2693, WL 35436 (Minn. Ct. App. April 30, 1996); Jim W. Miller Constr., Inc. v. Schaefer, 298 N.W.2d 455 (Minn. 1980).

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