Non-Competition and Non-Solicitation Agreements for Employers

As a condition of employment, an employer may require that an applicant or employee sign an agreement not to work for a competitor and not to form a competing business during the term of his or her employment or after he or she departs. The agreement also may provide that the individual may not solicit the employer’s customers or employees when he or she starts a competing business or works for another employer. Confidentiality obligations are almost always included in non-compete agreements; agreements to assign inventions may also be included. Such agreements are enforceable against former employees and independent contractors if they protect a legitimate interest of the employer, are supported by adequate consideration, and are reasonably limited in scope and in time.59 Non-competition and non-solicitation agreements should be separate documents, distinct from other employment paperwork. If the employee is employed “at will,” the non-compete agreement should state specifically that it is a separate agreement to protect intellectual property rights, not an employment contract, and that it does not modify what otherwise may be an “at will” employment relationship.

Adequate consideration for a covenant not to compete varies from case to case. Courts generally agree that consideration is adequate when, for example, the agreement was executed as a condition of, and in consideration of, hiring, or in exchange for payment. If an employer is going to require a new employee to sign a non-competition or non-solicitation agreement, the employer should provide notice to the prospective employee at the time the offer of employment is made, so that the new employee knows that he or she will be expected to sign the agreement as a condition of hire. Ideally, the prospective employee will receive notice before he or she has quit another job, moved to a new location, or otherwise made changes in his or her life in reliance on his or her expectation of new employment. Because there is no such thing as a “standard” non-competition agreement, an employer should provide a prospective employee with an opportunity to review and respond to the proposed agreement before he or she accepts the new job. If an employee has verbally accepted an offer of employment without being advised that such an agreement will be required, or without an opportunity to review the terms, the agreement may have to be supported by separate consideration, such as a cash payment, in addition to the initial offer of employment.

Employers should review non-competition/non-solicitation/confidentiality agreements with existing employees to determine if each agreement was adequately supported by consideration at the time it was signed. If there is a question about the fact of or adequacy of consideration, the agreement may not be enforceable unless the employee signs a new agreement promising not to compete and receives new consideration.

Because the law generally disfavors non-compete agreements, it is important that the language in each contract be appropriately drafted to protect the specific interest of the employer in each circumstance. Courts determine if restrictions are reasonable in scope and time based on their evaluations of individual contracts. For example, a non-compete agreement executed by the seller as part of the sale of a business is likely to be enforceable for a decade or longer.60 In the employment context, by contrast, restrictive covenants may endure for two or at most three years. Because courts view covenants not to compete with skepticism, the contract may be interpreted against the employer. For example, a non-compete covenant in an employment contract may not be enforceable after an employee has been fired unless it is absolutely clear that the parties intended the non-compete clause to survive even involuntary termination of employment.61

Where restrictions are determined to be overly broad, a court may modify or “blue pencil” the agreement by substituting reasonable geographical scope and time limitations.62 In egregious cases of employer overreaching, courts will refuse to enforce an unreasonable agreement at all. Some states, like Wisconsin, do not permit a court to “blue pencil” an agreement. Instead, Wisconsin courts will simply declare such a contract invalid and unenforceable if even a single provision is deemed to be overbroad. Some states also may refuse to enforce an agreement by one of their residents, even if the agreement selects the law of another jurisdiction; no matter what law the parties have agreed will apply, the courts of these states will apply their own state law, which may have the effect of invalidating the agreement. A Minnesota employer must take care to ensure that non-competition agreements comply with the laws of the states where its employees live. If an employee lives in North Dakota, for example, the non-competition agreement may not be enforceable at all if the court applies the law of the employee’s state of residence. If a court applies South Dakota law, the non-compete may be enforced for a maximum of two years, and possibly not at all. Thus, an employer with employees located in several states should carefully tailor the non-compete agreement for each employee to ensure that it is enforceable wherever the employee lives, regardless of what law is applied.

Before an offer of employment is made, employers also should determine if a prospective employee is subject to a non-competition, non-solicitation or confidentiality agreement with a prior employer that may restrict or limit that applicant’s ability to perform effectively. An employer who hires a new employee without making such an inquiry may be liable for interference with the previous contract of employment and could be ordered to pay the previous employer damages, including attorney fees.63

Non-competition agreements do not automatically establish ownership of intellectual property and cannot prevent all forms of direct and indirect competitive damage by former employees if they have had access to valuable intellectual property. Such intellectual property may be transferred overtly or covertly to a third party without technically violating the non- compete provision.

By establishing at the outset its ownership of intellectual property, an employer may establish that the employee, ex-employee, or independent contractor has no right to certain copyrights, patents, trade secrets, or trademarks, regardless of whether that individual is subject to an enforceable non-compete agreement. If properly drafted, an assignment contract will convey those rights to the employer and prevent misappropriation.

CREDITS: The content of this and any related posts has been copied or adopted from from An Employer’s Guide to Employment Issues in Minnesota, provided by the Minnesota Department of Employment and Economic Development & Linquist & Vennum P.L.L.P., Tenth Edition, 2009. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.

This post is also part of a series of posts on how employers can protect intellectual property through non-compete and non-solicitation agreements.

59. Webb Publ’g Co. v. Fosshage, 426 N.W.2d 445 (Minn. Ct. App. 1988).
60. Bennett v. Storz Broadcasting Co., 270 Minn. 525, 534; 134 N.W.2d 892, 899 (1965).
61. Burke v. Fine, 608 N.W.2d 909 (Minn. Ct. App. 2000), rev denied June 13, 2000.
62. Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127, n.1 (Minn. 1980).