A non-compete agreement is a type of contract that generally prohibits an employee from competing against his or her employer for a period of time after that employee leaves their employment. It can be a great way for employers to protect the time and value that they’ve put into the employee, however, there are special considerations that need to be taken into account when drafting and executing non-compete agreements.
Non-Compete versus Confidentiality and Non-Solicitation Agreements
First, a non-compete is different from other types of agreement in restricting employees’ actions after they leave employment. A non-solicitation agreement is an agreement where the employee agrees to refrain from contacting certain customers or other employees and a confidentiality or non-disclosure agreement is where the employee refrains from disclosing confidential information. These are different from a non-compete which prohibits the employee from competing with the current employer. Some general considerations for non-compete agreements is that courts usually have a disposition against the enforceability of non-compete agreements because they restrain trade and restrict someone from earning a living. In Satellite Industries Inc. v. Keeling, 396 N.W.2d. 635,639 (Minn. Ct. App. 1986), the court stated that,
restrictive covenants which prevent an employee from working for others or for himself in the same competitive field so as to discourage him from terminating his employment constitutes a form of industrial peonage without redeeming virtue in the American enterprise system.
As a result, courts look upon non-competes with disfavor and scrutinize them with care.
Elements of Non-Compete Agreements
Elements of an enforceable agreement include the following;
Just and Honest Purpose
Evidence the restraint in the non-compete is for a just and honest purpose, and for the protection of legitimate interests to the party in whose favor it is imposed reasonable as between the two parties and not to the public. If those elements are found within a non-compete agreement, the court is more likely to find the agreement valid.
Next, the agreement has to have a legitimate interest. A legitimate interest includes a company’s goodwill trade secrets and confidential information as well as preventing exploitation of the company’s name recognition. The Minnesota Supreme Court has:
uniformly upheld covenants in contracts of employment designed to protect the employer against the deflection of trade and customers by the employee by means of the opportunity which the employment has given him; or to protect the legitimate interest of the business or professional man about to employ another under circumstances where the employee is given access to the employer’s patronage, customers, clients, or trade secrets.
Bennett v. Storz Broadcasting Co., 134 N.W.2d. 892, 898 (Minn. 1965)
Courts have also found that the more specialized an employee’s training and integral that person’s position to a business, the more likely a court is to enforce a non-compete agreement. In contrast to the court’s finding that a specialized employee’s training could be a legitimate interest in enforcing a non-compete, if the information that an employee has is only skillful variations of a general process that is available to the public, a non-compete agreement for that employee would not be enforced.
The non-compete has to be reasonable between the parties. A non-compete cannot be sweeping and broad allowing for advantage in the employer’s favor. The non-compete may not impose upon the employee greater restraint than is reasonably necessary to protect the company’s legitimate business interests. The way that the court determines that a non-compete is reasonable is that it weighs the relative harm to the parties under the agreement. The factors that the court uses to determine reasonableness are nature and extent of the business, time for which the restriction is imposed, and the territorial extent of the covenant. Bennett , 134 N.W.2d. at 898.
A lot of non-competes involve geographical restrictions where an employee is not allowed to engage in the same area of business or specialty after it leaves a certain employer. However, courts will uphold geographical restrictions only when they are restricted areas necessary to protect the employer’s interests. In the case of Tom Schmidt & Assoc. Inc. v. Williams, No. CX-00-1547, 2001 WL 1385819 (Minn. Ct. App., Feb. 20, 2001), the court found that a 5 mile geographical scope for a hair styling salon non-compete agreement was not sufficiently limited to protect the employer’s interest, as it encompassed different markets. In contrast, a Federal Minnesota District Court case, Millerd v. Electronic Cable Specialists, 790 F.Supp. 857 (D. Minn. 1992), the court held that a non-compete with a nation-wide restriction was enforceable because the employer operated nationally.
Courts also look at temporal restrictions in a non-compete where a non-compete restricts an employee from practicing or doing business in their selected field for a certain amount of time. The test that courts use to determine the reasonableness of temporal restriction is that the court observes the nature of the employee’s work, the time necessary for an employer to train a new employee, and the time necessary for the customers to become familiar with the new employee.