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Executive and Other Employment Agreements

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Prepared and Presented by

Jeffrey B. Oberman

Oberman Thompson & Segal, LLC

One Financial Plaza

120 South Sixth Street, Suite 850

Minneapolis, MN  55402

Telephone:  612-217-6441

joberman@obermanthompson.com

THE BUSINESS FROM CRADLE TO GRAVE

Minnesota State Bar Association

Continuing Legal Education

 

November 9, 2010

 

 

TABLE OF CONTENTS

Page

SECTION ONE:

Annotated Executive Employment Agreement……………………………………………………… 1

I.          Introduction………………………………………………………………………………………………. 1

II.        Annotated Executive Employment Agreement………………………………………………. 1

III.       Conclusion………………………………………………………………………………………………. 13

SECTION TWO:

Non-Compete Agreements: Recent and Developing Trends, Traps and Strategies.. 13

I.          Introduction…………………………………………………………………………………………….. 13

II.        OLDCO’S Goals in Drafting and Implementing Agreements………………………… 14

III.       Non-Compete Agreements Must Be Necessary and Reasonable…………………….. 14

IV.       Reasonableness………………………………………………………………………………………… 15

V.        Consideration…………………………………………………………………………………………… 18

VI.       Remedies that Deter Violations………………………………………………………………….. 22

VII.     Preserving the Non-Compete Agreement…………………………………………………….. 27

VIII.    Conclusion………………………………………………………………………………………………. 28

 

 

SECTION ONE:

annotated EXECUTIVE

EMPLOYMENT AGREEMENT

  1. I. INTRODUCTION.

This Annotated Executive Employment Agreement is intended to highlight drafting issues, practices and strategies. [Sections in brackets may not appear in many agreements, depending on the parties’ viewpoints and negotiations.] It is a sample, which has been edited and annotated for purposes of this presentation.  Actual agreements need to address the specific needs of the parties and their unique factual and legal issues.

  1. II. ANNOTATED EXECUTIVE EMPLOYMENT AGREEMENT.

This EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the ____ day of _____________, 2010, by and between XYZ Corporation (“Company”), a Minnesota corporation, and _____________________________ (“Executive”).

  1. A. RECITALS.[1]
  2. Executive has the professional and personal skills to serve Company as its [Chief Operating Officer].
  3. [The parties wish to establish an employment relationship, to protect Company’s business and other interests, to provide protections to Executive in the event Executive’s employment is terminated without cause, and to provide the essential terms of Executive’s employment.]
  4. [Company’s current business activities include, among other things, designing, developing, manufacturing, shipping, marketing and selling ______________ products [and/or] providing ____________ services to _________________.]
  5. [Company and Executive recognize that, in performing his/her anticipated job-related duties and responsibilities, Executive will have extensive access to Company’s confidential design, manufacturing, distribution, marketing and sales information; and will have opportunities to cultivate valuable business relationships with Company’s employees, customers and vendors.]
    1. B. AGREEMENT.

In consideration of the foregoing premises, the mutual covenants and obligations of this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

  1. Employment.  Company agrees to employ Executive, and Executive agrees to accept employment with Company, pursuant to the terms and conditions of this Agreement.  It is understood that Executive will be subject to the policies and terms (as they may be amended from time to time) by Company, Company’s Employee Handbook, Company’s Code of Conduct and other policies in effect for salaried employees and officers of Company, except as otherwise specifically provided in this Agreement. [2]
  2. Duties.[3] The services of Executive shall be exclusive to Company, except as otherwise agreed to in writing by Company.  Executive will [initially] serve in the capacity of [Chief Operating Officer].  Executive will assume responsibility for the job titles, reporting responsibilities and duties, which are assigned and which may be changed from time to time, by Company’s [Chief Executive Officer].  Executive will perform Executive’s obligations in a competent and professional manner, consistent with the expectations of Company’s [Chief Executive Officer].  [Notwithstanding the above obligations, Executive may serve on outside boards of directors or committees if the outside activities are first disclosed to and approved in writing by Company’s (Chief Executive Officer).  That approval will not be granted if the outside activities are deemed by the (Chief Executive Officer) to conflict with the provisions of this Agreement, to impair Executive’s ability to perform Executive’s duties, or to otherwise conflict with Company’s business interests.]
  3. Term of Employment.[4] [This Agreement is not intended to establish any minimum or maximum period for Executive’s continuing employment.  Executive and Company will have an “at-will” employment relationship, which means that either party has the right to terminate the employment relationship[5] at any time and for any reason, with or without Cause.]  [The reason for and timing of the termination, as set forth in Paragraph 5, will determine the amount of post-termination payments and benefits, as set forth in paragraph 6.]
  4. Compensation, Reimbursements and Benefits.[6] Company agrees to provide Executive the following compensation, reimbursements and benefits:
  5. [Signing Bonus.  As an inducement to enter into this Agreement, Company will pay Executive a signing bonus in the gross amount of $__________, less standard withholdings, payable within ___ days of _________________.]
  6. Base Salary.[7] Company will pay Executive a monthly base salary (the “Base Salary”), payable in accordance with Company’s standard payroll practices.  The initial monthly Base Salary will be in the gross amount of _______________ Dollars ($_________).  The Base Salary will be subject to annual performance review and possible adjustment by Company’s [Chief Executive Officer.]
  7. [Incentive Awards.[8] Executive [may] [will] be eligible to receive discretionary annual bonuses and/or long term incentive compensation (“Incentive Awards”) pursuant to the terms and conditions of Company’s Annual Bonus Plan and/or Company’s Long Term Incentive Plan (jointly, “Incentive Plans”), subject to the following:

 

(1)  Executive’s eligibility to receive Incentive Awards will be determined by Company’s [Board of Directors.]

(2)  The Incentive Plans are not necessarily all-inclusive because circumstances which Company has not anticipated may arise.  Company reserves the right to make any changes at any time to the Incentive Plans or to terminate the Incentive Plans.

(3)  Any questions regarding the computation of Incentive Awards under the Incentive Plans will be conclusively determined by Company’s [Board of Directors], pursuant to the terms and conditions of the Incentive Plans.]

  1. Discretionary Bonus.  Executive may be awarded an annual discretionary bonus (“Bonus”).  The amount of the Bonus and the timing of payment of such Bonus will be determined in the sole discretion of the Company’s [Chief Executive Officer.]
  2. [Stock Options.  Executive may be awarded stock options from time to time, pursuant to the terms and conditions of Stock Option Plans, which may be adopted by Company’s Board.]
  3. Expenses.[9] Company will reimburse Executive for ordinary, necessary and reasonable business expenses that Executive incurs in connection with the performance of Executive’s duties [including entertainment, telephone, travel and miscellaneous expenses].  Executive must obtain proper approval for such expenses pursuant to Company’s policies and procedures, and provide Company with documentation for such expenses in a form sufficient to sustain Company’s deduction for such expenses under the Internal Revenue Code.
  4. Time Off.[10] Executive will be entitled to time off with or without pay in accordance with Company’s policies in effect at any particular time [; provided, however, that Executive shall, in any event, be entitled to _________ (____) days of Paid Time Off (“PTO”) during each full year of employment.  Executive may carry over up to _________ (___) days annually of PTO.]
  5. Health, Disability, Life Insurance and Other Employee Benefit Plans.[11] Company will provide Executive with health, disability, and life insurance coverage and other employee benefits that are presently existing or which may be established in the future by Company for its full-time salaried employees, subject to the terms and conditions of the applicable benefit plans.
  6. Indemnification.  Company will defend, indemnify and hold Executive harmless from costs, expenses, damages and other liability incurred by Executive as a result of performing services in good faith to Company, subject to the limitations and other terms and conditions of applicable Minnesota statutes and Company’s Articles of Incorporation or Bylaws.
  7. Changes in Benefit Plans.[12] No references in this Agreement to particular employee benefit plans established or maintained by Company are intended to change the terms and conditions of the plans or to preclude Company from amending or terminating the plans.
  8. Withholding; Taxes.  Company may withhold from any compensation, reimbursements and benefits payable to Executive all federal, state, city and other taxes as required by any law or governmental regulation or ruling, as well as other standard withholdings and deductions.
  9. Termination.[13] Executive’s employment may be terminated at any time as follows:
  10. Death.[14] Executive’s employment shall automatically terminate upon Executive’s death.
  11. Disability.[15] Either party may terminate Executive’s employment at any time, upon written notice to the other party, if Executive sustains a disability which precludes Executive from performing the essential functions of Executive’s job, with or without reasonable accommodations, as defined, and if required, by applicable state and federal disability laws.  [Executive shall be presumed to have such a disability for purpose of this Agreement if Executive qualifies to begin receiving disability income insurance payments under any long term disability income insurance policy that Company maintains for the benefit of Executive.  If Executive does not qualify for such payments, Executive shall nevertheless be presumed to have such a disability if Executive is substantially incapable of performing the essential functions of Executive’s job for a period of more than ________________.]
  12. With Cause.[16] Company may terminate Executive’s employment at any time, with “Cause,” upon written notice to Executive.  “Cause” shall mean any one of the following events:

 

(1)  Executive’s breach of any material obligations under this Agreement, or Executive’s [willful and/or repeated] failure or refusal to perform or observe Executive’s duties, responsibilities and obligations to Company;

(2)  Any breach of Executive’s duty of loyalty or fiduciary duties to Company;

(3)  Use of alcohol or other drugs in a manner which affects the performance of Executive’s duties, responsibilities and obligations to Company;

(4)  Conviction of Executive, or a plea of nolo contendere for a felony or of any crime involving theft, misrepresentation, fraud, or moral turpitude;

(5)  Commission by Executive of any other [willful or intentional] act which could reasonably be expected to injure the reputation, business or business relationships of Company and/or Executive; or

(6)  The existence of any court order or settlement agreement prohibiting Executive’s continued employment with Company.

  1. Without Cause.[17] Company may terminate Executive’s employment at any time, without Cause, upon ______ (  ) days written notice to Executive.  [Company may, at its sole discretion, opt not to have Executive provide active employment services during some or all of the notice period, and place Executive on a paid leave of absence for some or all of the notice period.]
  2. Resignation.[18] Executive may, upon _______ (  ) days written notice to Company, terminate Executive’s employment at any time.  [Upon receiving such notice, Company may, at its sole discretion, opt not to have Executive provide active employment services during some or all of the notice period, and place Executive on a paid leave of absence for some or all of the notice period.  If Company exercises this option, it shall not convert the resignation to a termination by Company.]
  3. Resignation for Good Reason.[19] Executive may terminate Executive’s employment at any time, with “Good Reason,” upon written notice to Company. “Good Reason” shall mean any one of the following events [that is not satisfactorily explained to Executive or cured within _____ (  ) days of written notification thereof to Company by Executive]:

(1) Company’s [intentional and material] breach of Company’s obligations under this Agreement;

(2) Working conditions created by Company, which are in violation of Executive’s rights under any federal or state law.  [Among other things, if Company materially alters the terms and conditions of Executive’s employment, or materially reduces or changes Executive’s job duties or authority in conflict with this Agreement, it shall be considered a material breach of this Agreement.][;  or

(3)  ______________________________________________________ _________________________________________________________________.]

  1. Other Reasons.  [_______________________________________ _____________________________________________________________________.][20]
  2. Payments and Benefits upon Termination.[21] Upon the termination of Executive’s employment, Executive shall only[22] be entitled to the following payments and benefits:
  3. Death; Disability.[23] If Executive’s employment is terminated due to Executive’s death or disability, regardless of the date of termination, Executive or Executive’s estate or heirs, as appropriate, shall only be paid (i) Executive’s Base Salary and accrued, but unpaid, PTO, prorated through the date of termination; (ii) any unpaid expense reimbursement; (iii) other accrued and vested benefits, if any, under any of Company’s Incentive Plans or any of Company’s other employee benefit plans (e.g., 401(k) plan), subject to the terms and conditions of those plans; and (iv) any benefits payable under any life or disability insurance policy maintained by Company for the benefit of Executive at the time of the termination of employment, subject to the terms and conditions of such policy.
  4. For Cause [; Resignation without Good Reason].[24] If Company terminates Executive’s employment for Cause, [or if Executive resigns without Good Reason,] regardless of the date of termination, Executive shall only be paid (i) Executive’s Base Salary and accrued but unpaid PTO, prorated through the date of termination; (ii) any unpaid expense reimbursement; and (iii) other accrued and vested benefits as of the date of termination, if any, under any of Company’s Incentive Plans or any of Company’s other employee benefit plans (e.g., 401(k) plan), subject to the terms and conditions of those plans.
  5. Without Cause [; Resignation for Good Reason].[25] If Company terminates Executive’s employment without Cause [or Executive resigns for Good Reason], regardless of the date of termination, Executive shall be paid the same payments and benefits as set forth in Subparagraph 6.b. above.  In addition, if Executive signs (and does not rescind, as allowed by law) a Release of Claims [in a form satisfactory to Company which assures, among other things, that Executive will not commence any type of litigation or assert other claims against Company] [or] [a copy of which is attached hereto as Exhibit A], and if Executive complies with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement,[26] Company shall pay Executive a post-termination payment [in the amount of_______________] [, as set forth below:

(1)  If the effective date of termination of employment is during the first full year of Executive’s employment, an amount equal to ____ (__) months of Executive’s Base Salary as of the date of termination;

(2)  If the effective date of termination of employment is during the second full year of Executive’s employment, an amount equal to ____ (__) months of Executive’s Base Salary as of the date of termination; or

(3)  If the effective date of termination is after the second full year of Executive’s employment, an amount equal to ____ (__) months of Executive’s Base Salary as of the date of termination.]

The [applicable] payment shall be made [in a lump sum on] [at the same intervals and amounts as Executive’s pre-termination Base Salary, beginning with] the first payroll date after Executive signs (and does not rescind, as allowed by law) the above referenced Release of Claims, subject to appropriate withholdings and deductions, and subject to Executive’s compliance with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement.  No Incentive Awards, retirement savings contributions, 401(k) contributions or other employee payments or benefits will be paid to Executive by Company based on the amount of the post-termination payment[.] [, except the following:  ______________.]

 

d.         [At Any Time As a Result of a Change of Control.[27] If Company terminates Executive’s employment at any time as a result of a “Change of Control,” and if Executive does not receive [and accept] an offer of employment [, which has comparable responsibilities and compensation] [that continues for at least ____ (  ) months] with the new controlling entity, Executive shall be paid the same payments and benefits as set forth in Subparagraph 6.b. above.  In addition, if Executive signs (and does not rescind, as allowed by law) a Release of Claims in a form satisfactory to Company and the new controlling entity which assures, among other things, that Executive will not commence any type of litigation or assert other claims against Company, and if Executive complies with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement, Company shall pay Executive a post-termination payment equal to ___ months of Executive’s Base Salary as of the effective date of the termination of employment.

This payment shall be made [in a lump sum on] [at the same intervals and amounts as Executive’s pre-termination Base Salary, beginning with] the first payroll date after Executive signs (and does not rescind, as allowed by law) the above-referenced Release of Claims, subject to appropriate withholdings and deductions, and subject to Executive’s compliance with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement.  The payment under this Change of Control provision will be paid in lieu of, and not in addition to, the post-termination payment referenced in Subparagraph 6.c.(1), (2) or (3) above.  No Incentive Awards, retirement savings contributions, 401(k) contributions or other employee payments or benefits will be paid to Executive by Company based on this post-termination payment[.] [, except the following:  ________________].

If Executive does receive an offer of [comparable] employment with the new controlling entity, and chooses not to accept that employment, Executive’s termination of employment shall be considered a resignation, and treated as set forth in Subparagraph 6.b. above.  For purposes of this provision, “Change of Control” means a sale or lease of the assets or a controlling interest of the stock of Company to a third party, which may come as a result of a divestiture, an acquisition, a lease arrangement, or a merger.]

  1. Business Protections.[28]
  2. Representations by Executive.[29] Executive represents to Company that Executive has not signed and/or entered into any written or oral noncompetition agreements, confidentiality agreements, or other proprietary information agreements that would prevent Executive from accepting this offer or performing the anticipated duties and services at Company.  This Agreement is subject to these representations being correct.
  3. No Violations of Others’ Rights.[30] Company does not authorize Executive to utilize any other individual or entity’s intellectual or other property, confidential or proprietary information on Company’s behalf.  Executive will not knowingly do any of the following on Company’s behalf:

(4)  Use any other individual or entity’s intellectual or other property, confidential or proprietary information. Specifically, Executive will not bring any other individual or entity’s proprietary information, customer lists, records, trade secrets, or any other property or confidential information with Executive when Executive comes to work at Company.  All of that information and property should be left with the proper owner(s);

(5)  Contact or do business with any supplier or other individual or entity who or which has an exclusive contract or any other agreement with any other individual or entity which prevents him/her/it from doing business with Company; or

(6)  Interfere with, infringe, misappropriate or violate any intellectual property rights of a third party.

  1. Protective Covenants.[31] Company has many confidential and proprietary business interests and other information relating to its products, services, customers and employees, which it needs to adequately protect.  Company’s willingness to enter into this Agreement is contingent upon Executive simultaneously signing a separate Confidentiality, Noncompetition and Nonsolicitation Agreement with Company.  The business protections in that Confidentiality, Noncompetition and Nonsolicitation Agreement will apply throughout Executive’s employment, and will continue to apply thereafter even if Executive’s employment is terminated under Paragraph 5 of this Agreement, regardless of the reason for or timing of the termination.
  2. Miscellaneous.
  3. Entire Agreement.  This Agreement contains the entire agreement of the parties relating to the subject matter hereof and, except as otherwise stated[32], supersedes any and all oral or written prior agreements and understandings with respect to such subject matter.  The parties have made no agreements, representations, or warranties relating to the subject matter of this Agreement which are not set forth herein.
  4. Construction.  Each provision of this Agreement shall be interpreted so that it is valid and enforceable under applicable law.  If any provision of this Agreement is to any extent invalid or unenforceable under applicable law, that provision will still be effective to the extent it remains valid and enforceable.  The remainder of this Agreement also will continue to be valid and enforceable, and the entire Agreement will continue to be valid and enforceable in other jurisdictions.
  5. Waivers.  No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought.  A waiver shall operate only as to the specific term or condition waived.  No waiver shall constitute a continuing waiver or a waiver of such term or condition for the future unless specifically stated.  No single or partial exercise of any right or remedy under this Agreement shall preclude any party from otherwise or further exercising such rights or remedies, or any other rights or remedies granted by law or any other document.
  6. Captions.  The headings in this Agreement are for convenience of reference only and do not affect the interpretation of this Agreement.
  7. Modification.  This Agreement may not be altered, modified or amended except by an instrument in writing signed by each of the parties hereto.
  8. Choice of Law; Forum Selection.[33] The laws of the State of Minnesota shall govern the validity, construction and performance of this Agreement, to the extent not pre-empted by federal law.  Any legal proceeding related to this Agreement shall be brought in Minnesota in the Hennepin County District Court or the Minnesota District of the U.S. District Court, and each of the parties hereto hereby consents to the exclusive jurisdiction of the Minnesota state and federal courts for this purpose.  The parties acknowledge the existence of sufficient contacts to the State of Minnesota and Hennepin County to confer jurisdiction upon these courts.
  9. Notices.  All notices and other communications required or permitted under this Agreement shall be in writing and provided to the other party either in person, by fax, or by certified mail.  Notices to Company must be provided or sent to its [Chief Executive Officer]; notices to Executive must be provided or sent to Executive in person or at Executive’s home.
  10. Survival.  Notwithstanding the termination of Executive’s employment with Company, the terms of this Agreement which relate to periods, activities, obligations, rights or remedies of the parties upon or subsequent to such termination shall survive such termination and shall govern all rights, disputes, claims or causes of action arising out of or in any way related to this Agreement.
  11. Successors and Assigns.  This Agreement shall be binding on and inure to the benefit of Company’s successors and assigns.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

___________________________________EXECUTIVE XYZ CORPORATIONBy:________________________________

Its:________________________________

 

  1. III. CONCLUSION.

In conclusion, the parties’ employment agreements should anticipate all possible scenarios unique to the parties’ situation, and assure that both parties know their rights and obligations during and after the employment relationship.

SECTION TWO:

NON-COMPETE AGREEMENTS: RECENT AND

DEVELOPING TRENDS, TRAPS AND STRATEGIES

 

 

  1. I. INTRODUCTION.

More employers than ever are using non-compete, non-solicitation, and confidentiality agreements to prevent unfair competition and solicitation by their employees, and to protect their goodwill, trade secrets and other confidential information.  These agreements are often included in new-hire packets, employment contracts, incentive compensation plans, and stock and other equity plans.

 

A strong understanding of the current law on restrictive employment covenants, as well as the developing trends, traps and strategies, is more important than ever.  Business lawyers can bring enormous value to their clients in drafting and implementing agreements that accomplish their clients’ goals, or they can unwittingly participate in creating a “perfect storm” for their clients.  This article will discuss the current law and trends regarding noncompetition agreements and offer practice tips and strategies for attorneys representing businesses who want to improve the odds regarding enforceability of their non-compete agreements.  Using the hypothetical company “OLDCO” as an example, the article will explain how to protect OLDCO’s business interests against unfair competition by a former employee and her new employer—“NEWCO.”

 

  1. II. OLDCO’S GOALS IN DRAFTING AND IMPLEMENTING AGREEMENTS.

 

  1. A. Deterrence.

OLDCO’s goal is to avoid problems, not litigate them. OLDCO wants to deter violations in the first place if possible, and address its risks before, not after, they occur.

 

  1. B. Damage Control.

 

If OLDCO learns of potential violations, it wants to enhance its negotiation position—again, in hopes of resolving problems short of litigation. If litigation is necessary, OLDCO wants to enhance its odds of getting a temporary restraining order and/or an injunction, in hopes that it can quickly put a stop to ongoing violations.

 

  1. C. Recovery.

 

If extensive litigation is needed, OLDCO wants to enhance its potential damage recovery from the former employee and from NEWCO.  OLDCO needs to understand the claims available to OLDCO and the possible defenses the employee and NEWCO can lodge in opposition.

 

  1. III. NON-COMPETE AGREEMENTS MUST BE NECESSARY AND REASONABLE.

 

Non-compete agreements are generally disfavored.[34] Notwithstanding their obvious economic appeal to employers, courts consider them partial restraints of trade and construe them narrowly.[35] This is particularly the case in the current economy, in this author’s experience. Courts are reluctant to restrict a person from obtaining work, especially if OLDCO terminated the relationship or unfairly (or in violation of agreements) changed the terms and conditions of employment.

 

In Minnesota, an enforceable non-compete agreement must be both necessary to safeguard the employer’s protectable interests and reasonable as between the parties.[36] Generally, companies have protectable interests in (1) customer goodwill, (2) confidential

 

information, (3) trade secrets, and (4) customer contacts.[37] The agreement must not impose any greater restriction on the employee than is necessary to protect the employer’s business.[38]

PRACTICE TIPS:

 

  • Do not overuse non-compete agreements; be selective.[39] Non-compete agreements are an excellent way to protect your client, but overuse can dilute their effectiveness. If there is little likelihood that your client will want to enforce a non-compete against a particular person (e.g., a low-level employee with minimal access to confidential information, customers or competitors), then the client should avoid putting itself into a position of arguably “waiving” or otherwise “not enforcing” its non-compete program.[40] Worse, if the client’s litigation effort to enforce the non-compete is unsuccessful, the case may create a legal or internal “precedent” as to the validity of your client’s non-compete agreements. Your client will want to avoid these situations. Generally, it is advisable to require non-compete agreements only from management-level, sales, key technical employees and others with substantial access to confidential information and/or customers.

 

  • When you do use non-competes, increase your odds of enforceability. Vague one-size-fits-all non-competes that “go too far” tend to get ignored, challenged, and often fully or partially invalidated. Your client is far better off being able  to articulate, from the start, what it needs to protect and why its non-compete agreement is reasonable and necessary.

 

  • Drafting is only the first step; implementation is critical. As discussed more fully in this article, many defenses to non-compete agreements result from improper implementation of an otherwise legitimate non-compete program.  You should take steps to assure that your client is well aware of the implementation requirements, and has a fail-proof system set up to follow the needed steps and prove that it did so.

 

  1. IV. Reasonableness.

 

Because non-compete agreements are generally disfavored, courts demand that such contracts meet a minimum level of reasonableness. This reasonableness inquiry is on a case-by-case, fact-specific basis.[41] Different jurisdictions use various methods of addressing overly broad and unreasonable covenants.  Some states hold unreasonably restrictive covenants totally unenforceable,[42] as a way to encourage employers to write more narrowly-tailored covenants.[43] In other jurisdictions, the courts will modify invalid portions of the agreement under the “blue pencil” doctrine, and enforce the rest as written.[44] Minnesota courts utilize a modified blue pencil doctrine and will, in their discretion, rewrite portions to make them reasonable.[45] In any event, the subjectivity of the reasonableness question provides an opportunity for a vehement defense by NEWCO and the former employee should OLDCO pursue litigation to enforce its non-compete agreement.  So much the better to nip this argument in the bud by considering the reasonableness of the clause upfront.

 

It should be noted that this article will discuss non-compete agreements in the context of employment agreements, not in transactions for the sale of a business.  Parties involved in the sale of a business often include a provision stating that in exchange for a specified payment (which can be part of the sale price), the seller promises not to go into a similar type of business within a certain geographical area for a specified amount of time.  Although reasonableness is the touchstone of enforceability of non-compete clauses in transactions for purchasing corporate assets and in employment agreements, courts have consistently recognized a distinction between the two types of contracts.[46] Therefore, the information contained in this article should not be construed to apply to non-compete provisions in a contract for the sale of all or part of a business.

 

Minnesota courts have historically reviewed two types of restrictions for their reasonableness: temporal and geographical.[47] A covenant whose restriction extends too far into the future or across too broad of a geographical area might be invalidated or modified.[48]

 

  1. A. Time.

 

Non-compete agreements must be reasonable in their temporal scope, or they will not be enforced.[49] Courts consider a variety of factors in determining whether a restrictive covenant is reasonable from a temporal standpoint, including: (1) nature of the work; (2) time necessary to train new employees; (3) time necessary to allow customers to become familiar with new employees; and (4) time necessary to obliterate the identification between the employer and the employee in the minds of the employer’s customers.[50]

 

PRACTICE TIP:

 

  • In general, do not make a non-compete more than a year post-termination without a very good reason.  Although Minnesota courts have enforced non-compete agreements for periods of two or three years[51] after the termination of employment, these cases are more likely the exception than the rule.  It is this author’s experience that, in a traditional employment setting (as compared to a sale-of-business setting), courts generally are reluctant to enforce non-compete agreements for periods longer than one year, unless it involves a high-level executive, a post-termination severance, deferred compensation, or similar pay-out package that also lasts longer than a year or other unique facts and circumstances.

 

  1. B. Geographical territory.

 

Employment-related covenants restricting competition must be reasonable from a geographic standpoint as well, or they will not be enforced.[52] In the past, global restrictions have generally been unenforceable as unreasonably broad,[53] but this is changing as the world marketplace develops.  Some of the factors courts take into account when judging the reasonableness of a geographical limitation are as follows: (1) reasonable trade area; (2) area where employee actually performed duties; (3) employer’s actual business area; and (4) location of employer’s customers.[54]

 

PRACTICE TIP:

 

  • If you use geographic restrictions, be clear what they are. For example, are you referring to the address of the new business or the location of the customers?  Also, the increased roles of telephones, e-mails, and the Web as sales tools make the office location irrelevant in many industries. The location of the salesperson may not even matter, depending on the situation.

 

  1. C. Customer-Based Restrictions.

 

Customer restrictions may substitute for or complement a geographic restriction.  Basing a territorial restriction on the presence of customers in a certain area enhances the reasonableness of a non-compete agreement.[55] Customer restrictions contained in a non-compete agreement are distinct from non-solicitation agreements: the latter permits an employee to work for a competing business but prohibits him from soliciting his former employer’s customers, while the former forbids competition of any kind and merely limits the geographic scope of competition to areas in which the employer has customers.[56]

 

PRACTICE TIP:

 

  • Use customer-based restrictions. In recent years, an increasing number of non-compete agreements tie to customers’ locations rather than geographic locations. Often, these make far more sense than pure geographic restrictions since the customers may well be all over the county or even the world.  Many recent agreements even provide that a person may  even go to work for a competitor, as long as the person does not directly or indirectly solicit or serve its customers (or employees, or improperly use or share confidential information, etc.). While a pure “non-solicitation” agreement may not provide as much protection as a full non-compete agreement, the likelihood of it being enforced—even for longer periods of time—is greatly enhanced.

 

  1. V. Consideration.

 

Even if an agreement is by its terms reasonable, it may nevertheless fail for lack of sufficient consideration.  Courts are concerned about ensuring that an employee received a valuable present benefit in exchange for the sacrifice of future freedom in seeking gainful employment.  In addition, the cases below demonstrate that consideration is an argument pressed—and won—by many former employees challenging the enforcement of a non-compete agreement.  Consideration is therefore a critical element of a valid non-compete agreement.

 

  1. A. At Time of Hire.

 

Minnesota law treats the employee’s new job as sufficient consideration for a non-compete agreement so long as it is entered into at the commencement of the employment relationship—the non-compete must be “ancillary” to the employment contract.  Timing is critical on this point.  It is not enough for the employer to give the employee notice about the non-compete agreement; in such cases, Minnesota courts have invalidated agreements for lack of consideration.[57] Even if an employee has not physically begun to work, but has already accepted an offer of employment, a non-compete agreement following the original offer of employment cannot be enforced absent independent consideration.[58]

There are a couple of exceptions in the case law where an employee knew of the implementation of the non-compete agreement, continued working, and continued to receive advance payments on unearned commissions,[59] or where the employee had the opportunity to fully negotiate and discuss the non-compete, offered to draft the agreement, and filled and typed up the terms of the agreement prior to employment, although he did not sign it until after he started working.[60] Under these circumstances, courts are less concerned that the employer is taking advantage of the parties’ unequal bargaining power.

 

PRACTICE TIPS:

 

  • Make the job offer in writing, expressly contingent on the signing of the non-compete.

 

  • Give the employee the non-compete agreement at the time of the offer.

 

  • Make sure the agreement is signed, received and preserved BEFORE you start the employment. One of the biggest implementation errors that employers make is not doing this. They frequently provide the non-compete to the employee after the job is offered and accepted – which is a recipe for challenge and possible disaster (see below). It is also the easiest error for employers to avoid.

 

  1. B. Mid-Stream Employees.

 

If a non-compete agreement is executed after an employee has commenced employment, the agreement is unenforceable unless supported by “independent consideration” to be enforceable.[61] Independent consideration consists of real benefits that are bargained for between the employee and the employer.  “Real benefits” mean benefits beyond those to which the employee is already entitled by virtue of employee status or a separate contract.[62]

 

Many employers incorrectly conclude that if they missed the opportunity to obtain a non-compete at the time of hire, they are too late.  In fact, there are many other opportunities to obtain enforceable non-compete agreements with mid-stream employees, all of which may well constitute “real benefits” and therefore “independent consideration.”

 

  1. Benefit-Related Agreements.

 

In recent years, more employers are conditioning mid-stream benefit agreements (for stock grants and options, bonuses, change of control benefits, severance benefits and other incentives) on the execution of non-compete agreements.

 

To satisfy the independent consideration requirement, the critical step is distinguishing clearly between employees who sign non-compete agreements and those who do not.  Otherwise, the alleged “independent consideration” may be deemed to be illusory and insufficient to permit enforcement of a restrictive covenant.[63]

 

Also, a benefit plan that allows but does not require an employer to provide benefits to an employee may not be sufficient consideration for the non-compete agreement, because it was “unilateral” and could not be enforced.[64] On the other hand, one Minnesota federal district judge has commented in dicta that whether an employee “actually received the stock options is of no moment.  By signing the . . . Agreement, [the employee] was made eligible for a benefit he could not have received without signing the Agreement.  Thus, the . . . Agreement is valid.”[65] This language appears to suggest that the decline in value of stock options, even to a point where they are “underwater,” would not affect the enforcement of a non-compete agreement.

 

PRACTICE TIPS:

 

  • Put the deal in writing.

 

  • Make it clear, in the written benefits plan and all related agreements, that the benefits are expressly conditioned on the non-compete.

 

  • Beware of language preserving the employer’s right, in its sole discretion, not to provide any benefit.

 

  • If an employee refuses to sign the non-compete, do NOT give that employee the benefits.

 

  1. Promotions.

 

A promotion to a higher position with increased authority and responsibility is generally viewed as adequate consideration.[66] In fact, a promotion may be adequate consideration even if the employee makes less money after the promotion.[67]

 

The timing of the promotion and the signing of the agreement is critical.  If an employee is promoted prior to signing the non-compete agreement, then the promotion cannot serve as consideration for the agreement.[68]

 

In an issue of first impression, the Minnesota Court of Appeals recently had to decide whether a promotion, offered informally at first and later in a writing that contained non-solicitation language, served as sufficient consideration for the non-solicitation agreement.[69] In Softchoice, the employee argued that he was promoted when he was first informed that he would receive the promotion (although the promotion was not implemented at that time); the employer countered that the employee was promoted when he signed a formal offer letter. The Court held that a promotion serves as consideration for a non-compete agreement at the time when the terms of the promotion have been defined and the promotion has been formally offered and accepted in writing, reasoning that the “key inquiry is when the promotion provides the employee with ‘real advantages.’”  In reviewing that decision, however, it seems that if the employee had actually received the increase in compensation, duties, and benefits prior to being provided the documents, the result would have been different.

 

PRACTICE TIPS:

 

  • Put the terms of the promotion in writing.

 

  • Make it clear, that the promotion is expressly conditioned on the non-compete, and tie them together.

 

  • Do NOT put the promotion into effect until after the non-compete agreement is signed and returned.

 

  1. Continued Employment.

 

As discussed above, a non-compete entered into after the employment relationship commences is presumptively invalid unless clearly ancillary to the original employment contract; therefore, continued employment is not sufficient consideration for a non-compete.[70] Even when an employee receives some amorphous long-term benefits as a result of signing the non-compete, the non-compete is still invalid because the employee is not aware that the benefits were in exchange for the covenant not to compete.[71]

 

  1. Cash payments.

 

Cash payments are another form of valid consideration for a mid-stream non-compete agreement.  The adequacy of consideration is a fact issue particular to each case, and the ultimate question is whether the consideration was of “real benefit” to the employee.  While the Minnesota Court of Appeals recently held that $500 provided a “real advantage” to the employee that, under the specific facts of that case, constituted sufficient consideration,[72] this case in no way suggests  to this author that $500 is the new floor of reasonableness in Minnesota.  Many would balk at the suggestion that $500 was a reasonable bargain for future employment restrictions.

 

  1. VI. remedies that DETER VIOLATIONS.

 

Non-compete agreements are usually executed at a time when the employment relationship is positive and mutually beneficial.  At that point, it is often unimaginable that there will be a separation of employment and a violation of the agreement. Of course, that euphoria does not always last. Later on, the employee and NEWCO may decide that the benefits of going forward with a new relationship outweigh the risks of a possible breach. Remedy provisions in non-compete contracts can be an effective way to make this risk less attractive to the employee and/or NEWCO.  Where the “carrot” of consideration fails to deter competition, the “stick” of strong remedies may succeed.

 

PRACTICE TIP:

 

  • Include remedies with teeth. In addition to the traditional language making it clear that an injunction is possible, many employers are adding increasing large “sticks” to their non-compete agreements. If OLDCO’s non-compete agreement contains sufficient “remedies with teeth,” OLDCO has a much better chance of accomplishing its goals of deterrence, damage control and recovery.

 

  1. A. Injunctive Relief.

 

Non-compete agreements, for dozens of years, have generally stated that that injunctive relief would be appropriate in the event of a breach and that irreparable harm would result absent injunctive relief.[73] In recent years, non-compete agreements have been upping the ante in many ways, some of which are discussed below.

 

  1. B. Accountings and Damage Descriptions.

 

Violation of a non-compete agreement may provide an employer with the opportunity to seek monetary damages as well as injunctive relief.  OLDCO should include provisions in its contracts that provide it with contractual remedies, such as full accounting by the former employee of all of activities with the new employer and full payment of various types of damages.   

 

  1. C. Attorney fees.

 

Attorney fees are not recoverable unless there is a specific contract permitting or a statute authorizing such recovery.[74] Courts adhere very strictly to this rule.[75] Since very few statutory grants of attorney fees favor employers, attorney fees must be contractually agreed to.   Non-compete agreements can, and often do, expressly provide for the recovery of attorney’s fees in the event of breach.

 

  1. D. Forfeiture provisions.

 

Increasingly, employers are including provisions in benefit plans and agreements conditioning an employee’s retention of stock, stock options, or other benefits on not competing with the employer for a certain time period following the employee’s termination (sometimes referred to as “forfeiture provisions” or “forfeiture-for-competition” provisions).  Sometimes the plan/agreement provides that the benefit will not be provided (e.g. the employee cannot exercise a stock option) if there is a violation of a non-compete agreement. Other plans/agreements contain claw-back provisions, requiring the violating employee to pay back any prior benefit received.

 

To date, Minnesota courts have demonstrated a willingness to enforce forfeiture provisions if they pass a test of reasonableness.[76] For example, last year in Medtronic v. Hedemark, the Minnesota court of appeals upheld the enforcement of a provision requiring an employee to forfeit cash or stock received within six months of the employee’s termination with the employer and subsequent employment with a competitor.[77] The court concluded that such a provision is not unreasonable, primarily because the employee has complete control of the circumstances generating the forfeiture; so long as the employee stays with Medtronic for six months after receiving the cash or stock, no forfeiture will occur.[78] By contrast, a forfeiture provision that was “not limited as to time, harm to the employer or geographical area” is an unreasonable restraint of trade.[79] New York’s “employee choice” doctrine also permits forfeiture provisions in non-competes so long as the employee has truly been afforded the choice between not competing (and thereby preserving her benefits) and competing (and thereby risking forfeiture).[80]

 

PRACTICE TIPS:

 

  • If you decide to use forfeiture provisions in benefit plans/agreements, put clear language in the plans/agreements up front.

 

  • Beware of language preserving the employer’s right, in its sole discretion, not to provide any benefit.

 

  • Do not give the benefit to otherwise eligible employees unless and until they sign the required non-compete agreement.

 

  • Make the forfeiture provisions “reasonable.”

 

  • Make it clear that the forfeiture provisions are NOT OLDCO’s sole remedy and are NOT to be considered to be liquidated damages; but rather are in addition to any other injunctive and legal relief available to OLDCO.


  1. E. Bond Waivers.

 

Once OLDCO is successful in convincing the court that it is entitled to a temporary injunction against competition by a former employee, it may be required to post a bond to cover the costs and damages to the former employee if the court later determines that the injunction was in error.[81] A bond requirement protects defendants from loss and discourages plaintiffs from seeking injunctions in dubious cases where there is no real need for injunctive relief or where the plaintiffs have a questionable claim.[82]

 

Minnesota state courts have discretion over the amount of the bond or whether to waive the security requirement altogether.[83] By contrast, Minnesota federal district courts are not entitled to waive the bond requirement completely, although they are permitted to reduce the bond to a nominal fee.[84]

 

Many attorneys have started to include provisions in non-compete  agreements  in which the employee acknowledges that if he breaches the agreement, the employer is entitled to temporary injunctive relief without the necessity of posting a bond.  To date, Minnesota federal courts have rejected the contention that such a provision is controlling on the court’s determination of bond.[85] Minnesota state courts have not yet ruled on this issue.

 

PRACTICE TIP:

 

  • If you decide to use bond waiver provisions, consider instead agreeing that the bond will be no more than a set amount.

 

  1. F. Liquidated damages.

 

Liquidated damage provisions can be a blessing or a curse for OLDCO, and should be carefully considered before OLDCO includes them in its non-compete agreements.

 

Enforcement of a liquidated-damages clause is dependent on satisfaction of two elements: (1) the fixed amount is a reasonable forecast of just compensation for the harm caused by the breach; and (2) the harm is incapable of accurate estimation or is very difficult to estimate.[86] Whether the liquidated-damages clause is “reasonable” must be determined “in light of the contract as a whole, the nature of the damages contemplated, and the surrounding circumstances.”[87]

 

However, liquidated damage clauses may create some issues. Critically, the existence of a liquidated damages provision in a non-compete may preclude an employer from seeking injunctive relief.  Arguably, an employee who breaches her non-compete agreement should not have to suffer the further damage of an injunction, since there is an adequate remedy at law under the terms of the contract. The employee has already contracted with the employer for a possible future breach, so there is no need for further relief by way of an injunction.  For example, a Minnesota federal district court judge observed, in dicta, that the existence of a liquidated-damages provision may obfuscate the need for a temporary injunction, since the damages clause indicates that the parties have already chosen a preferred remedy for any future breach of the non-compete agreement.[88] The Minnesota Court of Appeals cited the existence of a liquidated-damages clause in a non-compete agreement as support for its conclusion that the employer would not suffer irreparable injury if a temporary injunction was not granted.[89]

 

But the law is far from settled on this question, and the Eighth Circuit has not entirely accepted this theory.  For example, in Frank B. Hall & Co. v. Alexander & Alexander, Inc., the court held that the existence of a liquidated damages provision in a Settlement Agreement between two competing employers did not preclude pursuit of injunctive relief by one of the employers in the event the other employer induced an employee to violate his non-compete agreement.[90] The Eighth Circuit concluded that the liquidated-damages provision was not the exclusive remedy in the event of a breach of the Settlement Agreement; the party alleging such a breach is entitled to pursue other forms of relief such as a temporary or permanent injunction.  More recently, a Minnesota federal district court judge concluded that in cases where “money damages alone would be inadequate due to the recurring and uncertain nature of the harm,” a party to a non-compete agreement may seek injunctive relief notwithstanding the existence of a liquidated-damages provision.[91]

 

PRACTICE TIPS:

 

  • Generally, OLDCO is better off not including liquidated damage provisions. The risks outweigh the gains. If the contract spells out the damages in advance, the employee and NEWCO can assess the risk in advance with a higher degree of predictability, which may their choice easier and more detrimental to OLDCO. Further, OLDCO may not be able to get injunctive relief.

 

  • Generally, OLDCO is better off preserving all injunctive rights, as well as all rights to seek a full accounting and recover any and all lost profits, lost business opportunities and other damages, as well as legal fees and costs.

 

  • If, however, OLDCO would not be able to maintain any ongoing business in the event of a breach, e.g. if the employee is the only person with the skills and contacts needed to carry forward, then liquidated damage provisions might make sense.

 

  • If OLDCO does include a liquidated damages clause, make it “reasonable,” but make sure it also provides OLDCO with a full recovery of its damages.

 

Inclusion of these and other remedies in a non-compete agreement furthers all three of OLDCO’s goals: deterring employees from competing; strengthening OLDCO’s negotiation position in order to control the damage to OLDCO of an employee’s competitive activities; and recovering damages for the loss caused by an employee’s violation of the agreement.  These provisions have been reviewed with favor by Minnesota federal and state courts.

 

  1. VII. Preserving the Non-Compete Agreement

 

One of the most frustrating things that can happen to OLDCO is when it prepares and implements an otherwise perfectly enforceable non-compete agreement that later becomes null and void or cannot as a practical matter be enforced.  There are many provisions and steps that can be taken to ensure that the non-compete agreement survives the occurrence of future events or new contractual obligations.

 

PRACTICE TIPS:

 

  • Do not allow the parties to “terminate the Agreement” unless that is what you intend to provide. Focus instead on their rights to “terminate the employment relationship.”

 

  • Post-termination obligations in the agreement must expressly survive termination of employment.[92]

 

  • The agreement should preserve OLDCO’s right to assign, in the event of later changes in business circumstances (mergers, acquisitions, etc.).[93]

 

  • Clearly put in both a choice of law and a forum selection. OLDCO would be remiss if it did not consider the multi-jurisdictional dimension of its non-compete agreements. While non-compete agreements are universally “disfavored,” some states, California being one, have statutorily prohibited such agreements.  The question becomes whether an employee and NEWCO may circumvent a non-compete by litigating in one of those states. It is critical to include a choice of law provision and a forum selection clause, to best protect OLDCO in the event of multi-state and race to the court house issues. In fact, the Minnesota Court of Appeals recently concluded that forum-selection clauses in non-compete agreements bind not only the former employees but NEWCO as well, where NEWCO is “closely related” to the dispute between OLDCO and the employee.[94]

 

  • Future incentive programs should expressly state that they are contingent on complete and ongoing compliance with the non-compete agreement.

 

  • Merger clauses in subsequent agreements, such as separation agreements, must not supersede the non-compete agreement.[95]

 

  • OLDCO should require the employee to disclose potential violations and provide the agreement to NEWCO. Best case: OLDCO learns of potential problems in advance and can deal with them.  Worst case:  the employee and/or NEWCO are on notice of the obligation and breached it.  Either way, it helps OLDCO accomplish its goals.

 

  1. VIII. CONCLUSION.

 

In conclusion, employers like OLDCO should carefully and systematically implement reasonable policies, practices, and agreements to protect themselves from unfair competition and solicitation of their employees, and to protect their trade secrets and other confidential information.  These measures will go a long way toward deterring problems, enhancing the odds of successful damage control, and, as a last resort, damage recovery.  If at all possible, the best time for OLDCO to get comprehensive business protections is at the beginning of the employment relationship.


[1] Recitals. Recitals are often viewed as mere “boilerplate.” However, recitals can provide very helpful language, in the event of future disputes. The language in this sample assumes a new employment relationship.  If the Agreement is made with an existing employee, and is part of, for example, a new incentive package, the Recitals might include the following:

  1. Executive desires to become a Participant in Company’s Long Term Incentive Plan.
  2. Company desires to have Executive make agreements, which will protect Company’s business and other interests during the term of Executive’s employment and thereafter.
  3. Company is willing to make Executive a Participant in Company’s Long Term Incentive Plan, in exchange for having Executive enter into this Agreement. Execution of this Agreement is a prerequisite to participation in this plan, and this Agreement is considered part of this plan.
  4. Company and Executive desire to clarify their employment relationship, pursuant to the terms and conditions of this Agreement.

[2] General Terms and Conditions. It is often unclear which general policies apply to executives. Even high level executives must be aware that they are subject to company rules and requirements (e.g., policies regarding sexual harassment, ethics, legal behavior, etc.), even if they are not summarized in the Agreement – unless, of course, the stated intent is to override other general terms.

[3] Duties. Although it is helpful to describe the initial title and duties (perhaps with reference to a job description as an exhibit), companies should be careful about this provision. A disenchanted executive may claim breach of contract, claiming the employer changed his/her title and/or duties. Generally, this section should not create the possibility of having later good faith changes constitute a breach, or otherwise give a disenchanted and/or terminated executive an opportunity to claim that he or she should not be obligated to perform his/her post-termination obligations (no-compete, anti-solicitation, trade secret, etc.) It should be noted, however, that many executive employment agreements clearly do identify that the executive will serve in a particular capacity throughout the term of the agreement “unless mutually agreed” otherwise. Further, several executive employment agreements carefully set out in the body of the agreement, or in a separate exhibit, the exact, detailed duties that are expected. That type of specificity can create problems because detailed job descriptions are rarely kept current.  If circumstances change, a company should have the right to expect its employees to be flexible, without risking a breach of contract claim. A good compromise is to have language that assures that, if the duties or titles are materially reduced, it may give the executive grounds to resign for “Good Reason,” as discussed below.

[4] Term of Employment. There are many options here. For example:

  • No Term at All; “At-Will” Relationship. Some employment agreements do not contain any stated term. They state that the relationship can be terminated by either party at any time, and for any reason – expressly stating an “at-will” relationship. That may be the only provision, with no guarantees whatsoever.  Many “at-will” agreements, like this sample, allow either party to end the relationship at any time, but set forth post-termination rights. The agreement may change the rights, depending on who decides to terminate the relationship, why and/or when. Consider, for example, an agreement that provides the executive with a substantial severance package if the employer terminates the relationship without Cause during the first year, with the size of the separation pay decreasing over time. Such a provision might adequately address an executive’s initial concerns (e.g., not being willing to leave a prior employer without minimum guarantees), without creating an overly generous separation package.
  • Specific Period of Time (e.g., two years, with no reference to what happens once it expires). Presumably, once this expires, the relationship is either over or converts to an “at-will” employment relationship. If the employment continues without a new agreement, and if some of the provisions in the agreement continue forward, there is much room for misunderstandings and disagreements. For example, if the compensation and benefits packages continue to be in force (as they were during the term of the agreement), does that mean the post-termination compensation package continues to apply? What about other provisions such as non-competes, confidentiality clauses, etc? The agreement should be clear on these points.
  • Initial Term with Anticipated Renewals. Employment agreements are often drafted to have an initial term (e.g., one year), with the expressed understanding that the term may continue into the future. If that is the desire of the parties, they should state whether the term automatically renews, absent adequate notice by one party to the other not to renew (commonly referred to as an “evergreen” agreement); or whether the parties must renegotiate a new agreement at the end of its term, and, absent that, the employment will terminate. Regardless which type of renewal system is used, both parties should anticipate and address the renewal period. Avoid drafting an agreement that either automatically renews itself or automatically expires because one or both parties “dropped the ball.”

[5] Termination of Employment. From the employer’s perspective, only the employment relationship – not the agreement – should be terminated. Termination of the agreement could inadvertently terminate post-termination business protections.

[6] Compensation, Reimbursements and Benefits. Executives often have unique compensation packages. In addition to base salaries and basic benefits, a compensation package may include intricate bonus plans, incentive compensation plans, separation or severance plans, stock grants, stock warrants, stock options, etc.  If unique compensation arrangements are made, be sensitive to the issues that they create. For example, if a stock option is granted, or if stock is given to the executive, it should be clear in the executive agreement and in a separate Stock Purchase Agreement what will happen if the employment relationship ends. From the employer’s perspective, typically one would want a Stock Purchase Agreement which triggers in the event of termination of employment, regardless of the reason. Similarly, if there are unique promises for employee benefit plans that may be covered by ERISA, care should be taken to prepare proper documentation which reflects the company’s ERISA obligations and desires.  Critically, be sensitive to tax, SEC and Sarbanes-Oxley issues and obligations created by an executive agreement.

[7] Base Salary. Executive agreements typically set the base salary for the first year, with an understanding that the salary will be subject to annual review. Some agreements state that the base salary will never drop below a certain floor during the entire course of the agreement; some guarantee minimal percentage increases each year; some make no guarantees whatsoever.

[8] Bonus and Other Incentive Packages. Executive agreements may indicate that an annual bonus will be considered, at the discretion of the employer, or set up an objective (or combined objective/subjective) bonus plan, which sets out criteria for achievement (e.g., percentage of sales, etc.). Alternatively, the agreement may simply refer to other bonus or incentive programs which are in existence, and state that the executive is eligible for bonuses or incentives under those programs, subject to their terms and conditions. The company should make it clear that it maintains the right to interpret, alter, or replace the bonus/incentive program at its discretion, and specifically should reserve the right to add to, delete from, amend, or even cancel the program if business circumstances warrant.  The agreement should not supersede the company’s obligations under the bonus or incentive plan, unless that is what the parties intend to have it do (which would rarely be the case). The executive may want to set minimum expectations/obligations, or make it clear that if certain award levels are not reached, the executive has a right to resign for Good Reason, discussed below. A common source of disagreement over bonuses and other incentive packages is whether the bonus is payable if the executive leaves before a particular bonus period (e.g., fiscal year) is over. The agreement should state whether a mid-year departure will entitle the executive to a pro rata share of the annual bonus, the entire bonus, or no bonus at all. This may be written to vary, depending on the timing and/or the reason for the departure.  In any event, be sure that the executive agreement does not conflict with other employee benefit plans.

[9] Business Expenses. Executive agreements often provide specific provisions for car expenses, plane expenses, country club expenses, and other matters – some of which may or may not be deductible by the company under the Internal Revenue Code. The agreement should clearly state the various responsibilities.

[10] Time Off. Executives often mix business and pleasure, and generally work while traveling. Depending on a company’s policies and practices, that can lead to large and unexpected accruals of paid time off. Address all of this up front, to avoid major disputes later; and make sure the company’s time off and accrual policies are in compliance with recent legal developments.

[11] Benefits. Agreements often summarize specific benefits available to the executive. The company should make it clear that references in the agreement to particular employee benefit plans established or maintained by the company do not change the terms and conditions of the plans or preclude the company from amending or terminating the plans.

[12] Changes in Benefits. Companies often change policies or employee benefit plans, at least on a prospective basis. Particularly if the executive agreement identifies specific policies or employee benefit plans (which they often do), it is critical for the company to reserve its right to make changes to those plans.

[13] Termination. The agreement should anticipate and address all likely reasons for termination of employment. The parties may have a very different view about post-termination packages and obligations, depending on the reason for and timing of the departure. It is better to have a road map for the different options than to leave items vague or open, and subject to later disputes.

[14] Death of Executive. Obviously, the death of the executive terminates the employment relationship. It is necessary to state this, however, because the employer almost certainly will have a different view about post-termination payments in this situation, as compared to others.

[15] Disability of Executive. An executive’s disability, if serious enough, should be a ground for termination.  Draft the definition so the agreement does not violate the Americans with Disabilities Act or the Family and Medical Leave Act. Many agreements state that, subject to these laws, the executive will be “presumed” to have such a disability if he or she is substantially incapable of performing his or her duties for a particular period of time (12 weeks would be the minimum here, due to the FMLA; the ADA may dictate a longer period).

[16] Termination by Company “For Cause.” The agreement should make it clear that the company can terminate, at any time, “for Cause.” The parties should carefully define “Cause.” Various types of misconduct, illegal activities, intentional breaches of the agreement, etc., will often be included in the definition. Employers are well served if they can get the definition of “Cause” to include less heinous actions of the executive that would, nevertheless, justify a termination.  Executives prefer to have “Cause” only in misconduct situations.  Often, the less serious issues may be subject to a notice/opportunity to cure provision.

[17] Termination by Company Without Cause. This is the situation that new executives are most concerned about. What if the employer decides to terminate the employment relationship due to a change in business plans, a down turn in the market, a mere personality dispute, or some other reason why “it’s just not working out?” Employers who enter into executive agreements definitely want to reserve the right to terminate “without Cause;” they do not want to prove “Cause” every time they want to part ways with the executive.  Typically, this is a situation where fairness and the new executive’s negotiating demands dictate that post-termination separation packages are warranted.

[18] Voluntary Termination by Employee. Employers cannot prevent an executive from voluntarily terminating employment.  However, the agreement should state that if the executive voluntarily quits, separation payment obligations will not apply.

[19] Resignation for Good Reason. This provision is rare. Employers rarely offer it, and executives often fail to ask for it. Even once it is agreed to in concept, there are often disagreements on the definition.  Executives generally want the ability to trigger this provision if the job materially changes after they begin (e.g., material reduction in compensation or title, or forced and unacceptable relocation), or if there is other treatment that may not necessarily rise to the level of a “constructive discharge” under applicable law, but is nevertheless intolerable to the executive. Employers generally resist some or all of these, preferring to maintain flexibility and discretion.  This may be a very good place to address situations where the employer and executive discuss and fully expect a situation to occur (such as a promotion from COO to CEO in one year, after the current CEO retires), but the employer cannot contractually guarantee it – basically assuring the executive that if it does not occur, there will be some ability to trigger a termination package.

[20] Termination as a Result of Other Reasons. Executive agreements occasionally address the possible termination of employment as a result of other reasons. For example, executive agreements often discuss terminations as a result of divestitures, acquisitions, mergers, or other changes in control. From the company’s perspective, this is not necessary because these types of provisions would constitute a termination “without Cause.” Executives may want to see this type of provision set out separately, however, to set up a later provision for severance pay in the event of this type of separation.  The executive may even want to make it a ground for a Good Reason resignation.

[21] Post-Termination Compensation Packages.  Many executive agreements provide a flat severance payment (e.g., twelve (12) months Base Salary) regardless of the reason for the termination, the timing of the termination, and whether the executive abides by other commitments. This may not be a logical approach from the company’s perspective. Employers should not agree to pay separation pay simply because an executive’s employment is terminated. The reason for the termination is critical.

[22] No Additional Pay/Benefits. There have been many claims by former executives for bonus or other incentive payments, various fringe benefits (e.g., cars, club dues, profit sharing, etc.), and even claims for bonuses based on post-termination severance pay. Not surprisingly, companies usually take the position that no such benefits or payments were anticipated. To avoid such a dispute, executive agreements should clearly state whether additional payments or benefits will result from the payment of a post-termination payment, or whether the gross payment stands alone.

[23] Death or Disability of Employee.  If the employment relationship terminates as a result of the executive’s death or disability, this is not the employer’s choice. Further, executives often have (usually through the employer) life and disability insurance.

[24] Termination by Company for Cause [; Resignation Without Good Reason]. If the executive truly did give “Cause” to terminate, and particularly if it was a serious act of misconduct, employers do not want a contractual commitment to make post-termination payments.  Similarly, few employers are happy to make payments to an executive who quits through no fault of the employer.

[25] Termination by Company Without Cause [; Resignation for Good Reason]. Here, a good argument can be made for post-termination compensation. Through no serious fault of the executive, the employment relationship is ended. Accordingly, it is not uncommon for employers to agree to provide post-termination pay to executives who are terminated “without Cause.” This may be part of an overall benefits package or may be contained within the executive agreement. The amount of post-termination compensation might be a flat amount (e.g., one year), a formula (e.g., one month for each year of service), a diminishing amount (e.g., one year if the termination takes place within the first year, six months, if it takes place in the second year, etc.), or some other formula. If the executive is able to negotiate certain rights to resign for Good Reason, the severance sections may be similar, or even identical, to the severance for a termination by the company without Cause.

[26] Contingencies. If an employer agrees to pay post-termination compensation, it should make the receipt of such compensation contingent on the executive’s compliance with all post-termination obligations (noncompete agreements, trade secret and confidentiality agreements, agreements not to hire or solicit employees, cooperation with litigation clauses, etc.); and a signed release of claims.

[27] Change of Control. Change of Control provisions are rare. This is a simple change of control provision.  Many are far more complex.  The language in a Change of Control provision, as a practical matter, can make future business combinations difficult, if not impossible.  There needs to be a reasonable balance between protecting executives from the sudden loss of employment and essentially making the business change impossible to achieve.

[28] Business Protections. This sample assumes a separate Confidentiality, Noncompetition and Nonsolicitation Agreement.  Any or all business protections could be incorporated into the executive agreement, rather than in a separate document.

[29] Representations by Executive. If the new executive has restrictions from a former employer, it is critical to discovery that up front, rather than after the fact.  In fact, these representations should be confirmed as part of the offer.  The Company may choose not to go forward with the arrangement, to negotiate or litigate with the former employer as needed or to change the terms of the new agreement, in order to avoid violations with the existing agreements.

[30] No Violation of Others’ Rights. Again, it is important to clearly assure, up front, that the employer does not want the executive to violate any other entity’s legal rights.  This language may prevent legal conflicts, or at least support “good faith” defenses.

[31] Protective Covenants. It may be critical to the survival of a company to protect its trade secrets, prevent unfair competition, and prohibit the solicitation of its customers and/or employees if a key executive departs.  As further discussed in Section II below, a company can do many things to protect itself with respect to these problems. To stand the best possible chance of prevailing in litigation, the company wants to be able to prove that its trade secrets and other confidential information were truly secret; that it, from day one, took steps to protect that confidential information; and that the executive knew that the information was confidential, etc. Further, the fairness and reasonableness of noncompete agreements, as well as the consideration requirement, should be clear from day one. If the employer does not have a separate noncompete confidentiality/trade secret agreement, those provisions can be included in the executive agreement. Even if the employer does have a separate agreement, it is a good idea to make reference to that agreement in the executive agreement.

[32] Merger Clause. The employer should be careful not to inadvertently supersede something that it wants to survive.

[33] Arbitration Clause. The parties can opt to have future disputes decided in an arbitration forum in lieu of traditional litigation, and they can specially design the procedures under which arbitration will be conducted. Advantages generally include an expedited ultimate resolution, decreased protracted discovery and court procedures, and avoidance of erratic jury verdicts. However, some may perceive these so-called advantages as disadvantages depending upon the facts of the particular case. First, as to both issues of law and fact, the ultimate decisions are left to the arbitrator with limited grounds for appeal (e.g., award procured by corruption, fraud or other undue means). Thus, the threat of an appeal which faces a judge who erroneously applies the law does not have the same effect on an arbitrator who may couch technical applications of the law in order to “split the baby.” Also, beware of the fact that the existence of an arbitration clause in an executive agreement, trade secret/confidentiality agreement, noncompete agreement, etc. can effectively prevent the employer from obtaining an injunction with respect to violations.  If an arbitration clause is vastly preferred, consider at least using compromise language between the two competing issues.  For example, consider making it clear that arbitration is encouraged, but not required; consider adding mediation as another voluntary alternative; and, in any event, make it clear that the arbitration language does not apply to the various non-competition/trade secrets provisions, nor does it bar the company from seeking judicial remedies to enforce them.  Finally, be aware that Arbitration provisions may or may not cover traditional employment claims, depending on how they are drafted.

[34] Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626 (Minn. 1983).

[35] Bennett v. Storz Broad. Co., 134 N.W.2d 892 (Minn. 1965); Lemon v. Gressman, 2001 WL 290512 at *1 (Minn.

App. Mar. 27, 2001).

[36] Bennett, 134 N.W.2d at 898; Medtronic, Inc. v. Sun, 1997 WL 729168, at *3 (Minn.  App., Nov. 25, 1997).

[37] Safety-Kleen v. Hennkens, 301 F.3d 931 (8th Cir. 2002) (upholding injunction because former employee’s close contacts with customers constituted a “protectable interest”); Saliterman v. Finney, 361 N.W.2d 175, 177 (Minn. Ct.

App. 1985).

[38] Bennett, 134 N.W.2d at 899.

[39] While this article focuses on non-compete agreements, it should be noted that employers should require confidentiality agreements of virtually all employees as part of an overall program to protect its property, trade secrets, and other proprietary information.  Before a court will grant protection of a business’s trade secrets, the company must show that it made “reasonable efforts” to maintain the secrecy of this information.  See Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 901 (Minn. 1983).  Execution of confidentiality agreements by all employees has been recognized as one such “reasonable effort.”  Surgidev Corp. v. Eye Tech., Inc., 648 F.Supp. 661, 693 (D. Minn. 1986), aff’d 828 F.2d 452 (8th Cir. 1987).

[40] Ultra Lube, Inc. v. Dave Peterson Monticello Ford-Mercury, Inc., No. C8-02-658, 2002 WL 31302981 (Minn. Ct.

App. Oct. 15, 2002) (refusing to enforce a non-compete agreement against an oil lube technician who was “not

professional or managerial” and who “was paid relatively meager wages”).

[41] Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127 (Minn. 1980).

[42] See, e.g., Fields Found Ltd. v. Christiansen, 309 N.W.2d 125 (Wis. App. 1981).

[43] Telxon Corp. v. Hoffman, 720 F.Supp. 657 (N.D. Ill. 1989).

[44] BDO Seidman v. Hirshberg, 93 NY.2d 382, 394 (N.Y. 1999).

[45] See Davies, 298 N.W.2d at 134; Dean Van Horn Consulting Assoc. v. Wold, 395 N.W.2d 405 (Minn. App. 1986); Ikon Office Solutions, Inc. v. Dale, 2001 WL 1269994 (8th Cir. 2001); see also Klick v. Crosstown State Bank of Ham Lake, Inc., 372 N.W.2d 85 (Minn. App. 1985) (observing that courts are not required to modify non-compete agreements that appear unreasonable).

[46] Id.; see also Sealock v. Petersen, 2008 WL 314146, at *4 (Minn. Ct. App. Feb. 5, 2008) (observing that non-compete agreements entered into in connection with the sale of a business are subject to a more lenient scrutiny than non-competes contained in employment contracts).

[47] Metro Networks Comm. v. Zavodnick, 2004 WL 73591 (D. Minn. 2004) (enforcing a one-year restriction on competition in the Twin Cities metropolitan area); Universal Hosp. Serv., Inc. v. Hennessy, 2002 WL 192564, (D. Minn. 2002) (validating an agreement restricting an employee from competing within a 100-mile radius of the employer for one year).

[48] See, e.g., Ikon Office Solutions, Inc., 170 F.Supp.2d at 895 (reducing time period of noncompetition from five years to three years, because five years was too long, placed undue hardship on the employee, and did not serve any legitimate business needs of the former employer); Dean Van Horn, 395 N.W.2d 405 (modifying a three-year restriction to one year).

[49] See, e.g., Webb Publishing Co. v. Fosshage, 426 N.W.2d 445, 448 (Minn. App. 1988) (citing Dahlberg Brothers,

Inc. v. Ford Motor Co., N.W.2d 314, 321?22 (Minn. 1965)).

[50] Vital Images, Inc. v. Martel, Civil No. 07-4195, 2007 WL 3095378 at *3 (D. Minn. Oct. 19, 2007) (eighteen months); Timm & Assoc., Inc. v. Broad, Civ. No 05-2370, 2006 WL 3759753, at *4 (D. Minn. Dec. 21, 2006) (two years); Overholt Crop Ins. Serv. Co., Inc. v. Bredeson, 437 N.W.2d 698, 704 (Minn. Ct. App. 1989) (two years).

[51] See id note 18.

[52] See, e.g., Ring Computer Sys. v. Paradata Computer Networks, 1990 WL 132615 (Minn. App. 1990).

[53] See, e.g., Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 800 (Minn. Ct. App. 1993) (observing that a non-compete agreement with no geographical limit “will often be held to be unreasonable”). But see Medtronic v. Hedemark, No. A08-0987, 2009 WL 511760, at *3–5 (Minn. Ct. App. Mar. 3, 2009) (upholding a global restriction on competition for a multinational corporation, because the other restrictions in the non-compete were reasonable).

[54] Overholt, 437 N.W.2d 698; Satellite Indus. Inc. v. Keeling, 396 N.W.2d 635 (Minn. App. 1986).

[55] Cook Sign Co. v. Combs, No A07-1907, 2008 WL 3898267, at *7 (Minn. Ct. App. Aug. 26, 2008) (enforcing a non-compete agreement restricting an employee from competing in three states in which the employer does business and has customers); Salon 2000, Inc. v. Dauwalter, No. A06-1227, 2007 WL 1599223, at *2 (Minn. Ct. App. June 5, 2007) (affirming a non-compete agreement restricting an employee from working as a stylist within a ten-mile radius of the employer’s business on the ground that customers will seek out the stylist rather than the services of the salon “if the stylist is sufficiently close” geographically to the salon); Madsen v. Spectro Alloys Corp., No. C7-98-225, 1998 WL 373067, at *2 (Minn. Ct. App. July 7, 1998) (concluding that a restriction from competing in “any market in which Spectro does business in the United States” was not unreasonably broad).

[56] See IDS Life Ins. Co. v. SunAmerica, Inc., 958 F. Supp. 1258, 1273 (N.D. Ill. 1997) rev’d on other grounds, 136 F.3d 537 (7th Cir. 1998) (applying Minnesota law); Commodities Specialists, Co. v. Brummet, 2002 WL 31898166 (D. Minn. 2002).

[57] Nat’l Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982); Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127, 133 (Minn. 1980) (concluding that a non-compete agreement was not ancillary to the employment contract where the employee had been made aware of its existence during employment negotiations but was not given a chance to examine it despite requesting to see it); Midwest Sports Mktg. v. Hillerich & Bradsby of Canada, Ltd., 552 N.W.2d 254, 265–66 (Minn. Ct. App. 1996) (refusing to enforce an agreement whose terms were not presented to the employee until after he began work); FSI Int’l, Inc. v. Shumway, 2002 WL 334409, (D. Minn. Feb. 26, 2002) (denying motion for preliminary injunction or TRO on the basis that the mid-stream non-compete agreement was not supported by sufficient independent consideration and there was no evidence of a competing product);  J. K. Harris & Co., LLC v. Dye and ABC Co., 2001 WL 1464728, (D. Minn. Nov. 16, 2001) (denying TRO because Court found that covenant not to compete was entered into after employment began and was not supported by adequate consideration).

[58] Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161 (Minn. App. 1993); see also TestQuest, Inc. v. La France, 2002 WL 196287 (Minn. App. 2002) (upholding mid-stream agreement allowing the employee to continue working and obtain additional vested stock options, which constituted sufficient consideration).

[59] Progressive Tech. Inc., v. Shupe, 2005 WL 832059 (Minn. App. April 12, 2005).

[60] See also Tonna Heating Cooling, Inc., v. Waraxa, CX-02-368, 2002 WL 31687601, at *3 (Minn. App. Dec. 3, 2002).

[61] Jostens, Inc. v. Nat’l Computer Sys., Inc., 318 N.W.2d 691, 703 (Minn. 1982).

[62] Sanborn, 500 N.W.2d, at 161.

[63] Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626 (Minn. 1983); BFI-Portable Services. Inc. v. Kemple, 1989 WL 138978 (Minn. App. 1989).

[64] Softchoice, Inc. v. Schmidt, 2009 WL 911009, at *4 (Minn. App. Apr 07, 2009) (applying Missouri law).

[65] Universal Hosp. Servs., Inc. v. Hennessey, No. Civ.01-2072, 2002 WL 192564 (D. Minn. Jan. 23, 2002).

[66] Guidant Sales Corp. v. Baer 2009 WL 490052, at *2 (D. Minn. 2009); cf. Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127, 131 (Minn. 1980) (finding independent consideration where the employee continued his employment for ten years after signing the agreement and advanced to a position that would not have been open to him if he had not signed the contract).  But see Sanborn, 500 N.W.2d, at 164 (finding no independent consideration because the employee received nothing more than what he was promised in his initial employment contract).

[67] See Guidant Sales Corp., 2009 WL 490052, at *3. (“[I]n deciding whether a non-compete agreement is supported by independent consideration, a court must consider the entire context, and not just the money”).

[68] See Sheehy v. Bodin, 349 N.W.2d 353, 354 (Minn. App. 1984) (stating that past consideration cannot support a future promise).

[69] Softchoice, Inc. v. Schmidt, 763 N.W.2d 660 (Minn. Ct. App. 2009).

[70] Nat’l Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982).

[71] Northwest Publications, L.L.C. v. Star Tribune Company, No. C6-07-003489 (Ramsey Co. Dist. Ct. Sept. 18, 2007).  But see Witzke v. Mesabi Rehabilitation Svcs., Inc., 2008 WL 314535, *3 (Minn. Ct. App. Feb. 5, 2008), overruled on other grounds, 768 N.W.2d 127 (Minn. Ct. App. 2009) (finding that the employee’s rise within the company, continued employment for many years, training, and increased responsibility constituted sufficient consideration); TestQuest, Inc. v. LaFrance, No. C0-02-783, 2002 WL 1969287 (Minn. Ct. App. Aug. 27, 2002) (finding that access to an employer’s confidential information was adequate consideration for a non-compete agreement).

[72] Tenant Const., Inc. v. Mason, 2008 WL 314515, at *2 (Minn. Ct. App. Feb. 5, 2008).

[73] See Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 68–69 (holding acknowledgement of irreparable harm in the agreement could arguably be viewed as an admission by the employee that his former employer would indeed suffer irreparable harm should he breach the non-compete provisions).

[74] Barr/Nelson, Inc. v. Tonto’s, Inc., 336 N.W.2d 46, 53 (Minn. 1983).

[75] See Tenant Const., Inc. v. Mason, 2008 WL 314515 (Minn. Ct. App. Feb. 5, 2008) (upholding grant of attorney fees to employer in non-compete agreement); Tonna Heating Cooling, Inc. v. Waraxa, 2002 WL 31687601 at *5 (Minn. Ct. App. Dec. 3, 2002) (denying an employer’s request for attorney fees, despite employee’s violation of the non-compete agreement, because the agreement did not provide for the payment of attorney fees in the event of breach).

[76] Other states vary widely, ranging from allowing them without scrutiny to barring them altogether.

[77] Medtronic v. Hedemark, No. A08-0987, 2009 WL 511760, at *3–5 (Minn. Ct. App. Mar. 3, 2009).

[78] Id. at *4.

[79] Harris  v. Bolin, 247 N.W.2d 600, 603 (Minn. 1976).

[80] See, e.g., Lucente v. IBM Corp., 310 F.3d 243, 254 (2d. Cir. 2002); see also Tatom v. Ameritech Corp., 305 F.3d 737 (7th Cir. 2002) (stating in dicta that even if a forfeiture provision were unreasonable, it might nevertheless be enforceable because it would not prevent the employee from working for a competitor, but would instead simply cause the employee to forfeit benefits); Deming v. Nationwide Mut. Ins. Co., 905 A.2d 623, 637–38 (Conn. 2006); Brockley v. Lozier Corp, 488 N.W.2d 556 (Neb. 1992); Durapin, Inc. v. Am. Prods., Inc., 559 A.2d 1051, 1056 n.5 (R.I. 1989) (“The rationale for viewing a forfeiture condition with a kind eye is that, unlike enforcing a covenant by way of an injunction, enforcing a forfeiture condition merely requires a former employee to forfeit a monetary benefit upon entering competition with his or her former employer. This distinction becomes much more subtle, however, when the forfeiture becomes significantly large.”).

[81] Fed. R. Civ. P. 65(c); Minn. R. Civ. P. 65.03(a); see also Bellows v. Ericson, 46 N.W.2d 654, 660 (Minn. 1951).

[82] See James T. Carney, Rule 65 and Judicial Abuse of Power: A Modest Proposal for Reform, 19 Am. J. Trial Advoc. 87 (1995).

[83] Ecolab, Inc. v. Gartland, 537 N.W.2d 291, 297 (Minn. Ct. App. 1995); In re Giblin, 232N.W.2d 214, 223 (Minn. 1975).

[84] Masterman ex rel. Coakley v. Goodno, No. Civ.03-2939, 2003 WL 22283375 (D. Minn. Sept. 25, 2003) (setting bond at $1000 in suit by citizens against public official).

[85] See Novus Franchising, Inc. v. Oksendahl, Nos. 07-1964 , 07-1965, 2007 WL 2084143 (D. Minn. July 17, 2007) (holding that Rule 65(c) does not allow the parties to waive the bond-posting requirement); Hypred S.A. v. Pochard, No. Civ. 04-2773, 2004 WL 1386149 (D. Minn. 2004) (refusing to waive the bond requirement based on the parties’ agreement to the waiver: “[t]he [c]ourt is unaware of any authority that allows parties to contractually waive their rights to the Rules of Civil Procedure”).

[86] Bellboy Seafood Corp., 410 N.W.2d 349, 352 (Minn. Ct. App. 1987).

[87] Gorco, 680 N.W.2d at 74; Tenant Const., Inc. v. Mason, No. A07-0413, 2008 WL 314515 (Minn. App. Feb 5, 2008); See also Becker v. Blair, 361 N.W.2d 434 (Minn. Ct. App. 1985) (holding that a provision requiring the employee to pay the employer $1500 if he resigned within three years of the execution of the employment contract was an enforceable contract for a fixed term, not an unenforceable restrictive covenant).  Appellate courts will uphold an award of liquidated damages even where actual damages are not proved by either party, so long as it finds that the liquidated-damages clause is valid. Dean Van Horn Consulting Assocs. V. Woldi, 367 N.W.2d 556, 560 (Minn. Ct. App. 1985), rev. denied (Minn. July 17, 1985).  But cf. Costello v. Johnson, 121 N.W.2d 70 (Minn. 1963) (holding that if the court determines that it can measure actual damages, it must deny liquidated-damages amounts that are manifestly disproportionate to the actual damages sustained.)

[88] Timm & Assocs., Inc. v. Broad, No. 05-2370, 2005 WL 3241832 (D. Minn. Nov. 30, 2005).

[89] Bromen Office 1, Inc. v. Coens, No. A04-946, 2004 WL 2984374 (Minn. Ct. App. Dec. 28, 2004).

[90] Frank B. Hall & Co. v. Alexander & Alexander, Inc., 974 F.2d 1020 (8th Cir. 1992).

[91] H&R Block Enterprises, Inc. v. Short, No. Civ. 06-608, 2006 WL 3437491 (D. Minn. Nov. 29, 2006).

[92] See, e.g., Burke v. Fine, 608 N.W.2d 909, 912 (Minn. Ct. App. 2000) (invalidating non-compete agreement where there was no explicit language stating that the non-compete survived the expiration of the contract).

[93] Non-competes are assignable in Minnesota.  Saliterman v. Finney, 361 N.W.2d 175, 178 (Minn. Ct. App. 1985).  However, a court will not assign a non-compete absent explicit language permitting assignment.  See Guy Carpenter & Co., Inc. v. John B. Collins & Assoc., Inc., 2006 WL 2502232, at *5 (D. Minn. Aug. 29, 2006) (refusing to assign a non-compete agreement to a new employer where the former employer failed to obtain consent from employees before assigning the non-compete to the new company, as specified in the employees’ contract); Inter-Tel, Inc. v. CA Commc’ns, Inc., 2003 WL 23119384, at *4 (D. Minn. Dec. 29, 2003) (refusing to assign a non-compete agreement where the contract was silent on the assignability of the agreement).

[94] CH Robinson Worldwide, Inc. v. FLS Transportation, Inc., 772 N.W.2d 528 (Minn. Ct. App. 2009).

[95] Cf. Western Form, Inc. v. Pickell, 308 F.3d 930 (8th Cir. 2002). In this case, a merger clause in a one-year employment contract incorporated a non-compete agreement into the contract.  When the contract expired, the non-compete began to run—and ran out—even though the employee was still working for the employer in a different capacity (and refused to sign a new non-compete agreement).  So when the employee eventually quit and started to compete with the employer, he was under no valid non-compete agreement.

 

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