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Non-Compete Agreements: Recent & Developing Trends, Traps & Strategies

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Non-Compete Agreements: Recent & Developing Trends, Traps & Strategies

Jeffrey B. ObermanOberman Thompson & Segal, LLC

One Financial Plaza

120 South Sixth Street, Suite 850

Minneapolis, MN  55402

Telephone:  612-217-6441

joberman@obermanthompson.com

BUSINESS LAW INSTITUTE

Minnesota State Bar AssociationContinuing Legal Education

May 10–11, 2010

TABLE OF CONTENTS

 

I. Introduction…………………………………………………………………………………. 3
II. OLDCO’S Goals in Drafting and Implementing Agreements…………………………….. 3
III. Non-Compete Agreements Must Be Necessary and Reasonable..……………………….. 4
IV. Reasonableness.………………………………………….………………………………….. 5
V. Consideration………………………………………………………………………………… 8
VI. Remedies that Deter Violations…………………………………………………………….. 12
VII. Preserving the Non-Compete Agreement…………………………………………………. 18
VIII. OLDCO’S Post-Termination Strategies…………………………………………………… 19
IX. Conclusion…………………………………………………………………………………… 23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. I. INTRODUCTION.[1]

 

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—offered at a time when employees have unequal negotiating leverage and little reason to balance their present value with the future consequences of restriction on their employment activities.  Upon termination at the current job, however, employees (and the potential new employers who hire them) face potential liability for utilizing the expertise, contacts and information they gained from the previous employer.

 

With the economic downturn, major cuts in compensation and benefits, reductions in force and other changes in the workplace have led to unprecedented employment terminations— triggered by both employers and employees—of highly productive employees.   The impact and enforceability of restrictive employment covenants has become an increasingly important issue for both businesses and the transitioning individuals.  With diminishing stability in the economy and the workplace, employees have more incentive to leverage their knowledge and contacts in seeking employment at a competing employer, and competing employers have more incentive to risk legal exposure.

 

If the parties cannot resolve their differences on their own and litigation is started, the court will apply the law and weigh the balance of harms between the employer seeking to protect its business and the employee and new employer who are trying to survive.  Courts will likely take the fact of an involuntary termination and the difficulty of finding replacement employment into account when making this balance-of-harms determination (though research has not produce so overt a statement in any Eighth Circuit or Minnesota court’s reasoning).

 

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.[2] Notwithstanding their obvious economic appeal to employers, courts consider them partial restraints of trade and construe them narrowly.[3] 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.[4] Generally, companies have protectable interests in (1) customer goodwill, (2) confidential information,     (3) trade secrets, and (4) customer contacts.[5] The agreement must not impose any greater restriction on the employee than is necessary to protect the employer’s business.[6]

 

PRACTICE TIPS:

 

  • Do not overuse non-compete agreements; be selective.[7] 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.[8] 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 contract meet a minimum level of reasonableness. This reasonableness inquiry is on a case-by-case, fact-specific basis.[9] Different jurisdictions use various methods of addressing overly broad and unreasonable covenants.  Some states hold unreasonably restrictive covenants totally unenforceable,[10] as a way to encourage employers to write more narrowly-tailored covenants.[11] In other jurisdictions, the courts will modify invalid portions of the agreement under the “blue pencil” doctrine, and enforce the rest as written.[12] Minnesota courts utilize a modified blue pencil doctrine and will, in their discretion, rewrite portions to make them reasonable.[13] 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.[14] 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.[15] A covenant whose restriction extends too far into the future or across too broad of a geographical area might be invalidated or modified.[16]

 

  1. A. Time.

 

Non-compete agreements must be reasonable in their temporal scope, or they will not be enforced.[17] 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.[18]

 

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[19] 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.[20] In the past, global restrictions have generally been unenforceable as unreasonably broad,[21] 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.[22]

 

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?  If you successfully force someone to move an office to Hudson, Wisconsin, that does no good if the goal is to keep the person from soliciting customers in St. Paul, Minnesota. Similarly, 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.[23] 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.[24]

 

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.[25] 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.[26]

 

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,[27] 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.[28] 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.[29] 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 to by virtue of employee status or a separate contract.[30]

 

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.[31]

 

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.[32] 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.”[33] 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.

 

2. Promotions.

 

A promotion to a higher position with increased authority and responsibility is generally viewed as adequate consideration.[34] In fact, a promotion may be adequate consideration even if the employee makes less money after the promotion.[35]

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.[36]

 

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.[37] 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.

 

3. 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.[38] 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.[39]

4. 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,[40] 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.[41] 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.[42] Courts adhere very strictly to this rule.[43] Since very few statutory grants of attorney fees favor employers,[44] 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.

 

Minnesota uses the “lodestar method” for determining the reasonableness of attorney fees, which “requires the court to determine the number of hours ‘reasonably expended’ on the litigation” multiplied by ‘a reasonable hourly rate.’”[45] In cases where the lodestar amount is “either unreasonably low or unreasonably high,” courts may use a multiplier to adjust the lodestar amount upward or downward.[46] Courts must consider “all relevant circumstances” in making a reasonableness determination.[47]

 

  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.

 

Three distinct perspectives have developed among state and federal courts on the enforceability of forfeiture provisions.  The first camp concludes that a forfeiture provision in a non-compete agreement is not a restraint of trade and does not need to be scrutinized for reasonableness.[48]

 

The second group of courts has demonstrated a willingness to enforce forfeiture provisions only if they pass a test of reasonableness.  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.[49] 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.[50] 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.[51] 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).[52]

 

Finally, a third group of courts holds that forfeiture provisions are restraints of trade and are per se unreasonable.[53] Some states have even passed statutes prohibiting them.[54] In such states, the issue that arises (and has not been settled) is the validity of forfeiture provisions in stock-option agreements.[55]

 

 

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.[56] 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.[57]

 

The language of Rules 65(c) and 65.03(a) indicates a mandatory bond requirement in an amount sufficient to cover damages to the defendant.  However, Minnesota state courts have discretion over the amount of the bond or whether to waive the security requirement altogether.[58] 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.[59]

 

The concern for OLDCO is the vast discretion a judge has over the amount of bail to be set.  There is little predictability or consistency in cases where injunctive relief is sought because each bond is determined on a review of the particular facts of the case.  Compounding this confusion is the reality that district-court opinions rarely contain discussions of the reasoning behind the amount of bond set.  As a result, it will be difficult for OLDCO to get a clear idea of the probable range of bond amounts.

 

For these reasons, 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.[60] 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.

 

A contract’s liquidated-damages clause is prima facie valid, and therefore can contractually establish damages in advance.   This rule is based on the assumption that it represents not a penalty for nonperformance but fair compensation for breach-related damages caused by a party’s nonperformance.[61] 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.[62] 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.”[63] For example, in Tenant Const., Inc. v. Mason, the court of appeals reviewed a contractual provision requiring the employee to pay $2500 for each calendar month that he violated a non-compete agreement, as well as an amount equal to three times the $500 consideration that the employee received in exchange for signing the non-compete.[64] The court concluded that the provision, which granted $14,000 to the employer for five months of competition by the employee, was reasonable and was not an unenforceable penalty.[65]

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.[66] 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.[67]

 

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.[68] 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.[69]

 

Regardless whether a liquidated damage clause bars injunctive relief, an employer injured by an employee’s violation of a non-compete agreement may have to mitigate its losses in order to receive the full liquidated-damages amount.  In Sutley, P.A. v. Selchow, D.D.S., an employer seeking to enforce a non-compete agreement against a former employee “did nothing to limit his losses” by hiring a replacement for the former employee.[70] As a result, the court concluded that the employer was not entitled to the full liquidated damages amount.

 

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 the 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.  All of these provisions have been reviewed with favor by Minnesota federal and state courts.

 

Of course, no agreement is solid without provisions to maintain its existence.  The next section will suggest clauses that will ensure that the non-compete agreement survives the occurrence of future events or new contractual obligations.

 

  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.[71]


 

  • The agreement should preserve OLDCO’s right to assign, in the event of later changes in business circumstances (mergers, acquisitions, etc.).[72]

 

  • 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.[73]

 

  • 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.[74]

 

  • 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. OLDCO’S POST-TERMINATION STRATEGIES.

 

  1. A. Follow Up with Departing Employee and NEWCO.

 

As part of the exit process, OLDCO should remind the departing employee (and NEWCO if possible) orally and in writing of the obligations under the non-compete agreement, provide a copy of the agreement (and document that it did so), and ask for specific assurances as allowed under the agreement.

 

If OLDCO suspects violations, immediately put the employee and NEWCO on notice of the suspected violation and send needed cease and desist letters.

Follow through quickly.  Delays will likely expose OLDCO to greater damages and will make it far more difficult to get a TRO or injunctive relief later.

 

  1. B. Consider All of Your Claims

 

OLDCO can assert several claims directly against NEWCO, and others against the executive or employee that will impact NEWCO indirectly.  Breach of contract[75] is only the first of many claims that OLDCO can bring to recover for violation of the non-compete agreement.  OLDCO should be prepared to assert every claim reasonably available to it, including:

 

  • Tortious Interference with Contractual Relations / Prospective Business Relations. If NEWCO hires an employee who is under a non-compete, NEWCO may be liable for damages and attorney fees.[76]

 

  • Breach of Confidentiality Agreement or Common-Law Confidentiality Violations.[77] Even if there is no non-compete agreement, or if it is unenforceable, a claim for violations of confidentiality may get OLDCO the same results.

 

  • Respondeat Superior. NEWCO may be liable if OLDCO can show that the employee acted within the scope and in furtherance of his employment at NEWCO in violating the non-compete agreement.[78]

 

  • Trade Secret Misappropriation. OLDCO may be able to protect information about its customers on the ground that such information is a trade secret.  The Minnesota Uniform Trade Secrets Act protects certain types of information through an action of misappropriation.[79] To qualify as a trade secret under Minn. Stat. § 325C.01, the party asserting misappropriation must prove: (1) the information is not generally known or readily ascertainable; (2) the information derives independent economic value from its secrecy; and (3) the plaintiff makes reasonable efforts to maintain secrecy.[80] Minnesota federal courts frequently conclude that customer lists are not confidential or trade secret information for the simple reason that such information is readily available through

 

reasonably diligent research.[81] Minnesota state courts have often held that customer lists may constitute trade secrets.[82] However, Minnesota courts frequently rely on federal precedent and reasoning to reject claims of trade-secret status over allegedly confidential information.[83]

 

  • Violation of Patent Rights.[84]

 

  • Breach of the Duty of Loyalty. An employee’s duty of loyalty extends to a prohibition on “soliciting the employer’s customers for herself, or from otherwise competing with her employer, while she is employed.”[85] This duty exists regardless of whether an employee has a non-compete agreement with her employer.  However, an employee will not incur liability against an employee who merely prepares to enter into competition with the employer.[86] There is currently no bright line between prohibited competition and permissible preparation to compete.[87]

 

  • Breach of Other Fiduciary Duties: Usurpation of Corporate Opportunity; Solicitation of Former Employees. Partners in partnerships, and officers, directors and shareholders in close corporations owe even higher fiduciary duties to OLDCO, including a duty not to usurp a corporate opportunity.[88] The fiduciary duty may also include a duty

 

not to recruit other employees to leave OLDCO.[89]

 

  1. C. Consider Early Good Faith Negotiations for a “Win-Win.”

 

Consider fast, creative, multifaceted business solutions to try to get all parties what they really need and avoid litigation risks and expenses.

 

PRACTICE TIPS:

 

  • Seek a freeze and a stand-still agreement while the parties are negotiating.

 

  • Consider face-to-face meetings, with all knowledgeable people and decision makers present.

 

  • Consider pre-litigation mediation or arbitration.

 

  • Document any resolutions in an enforceable way. This may include an extensive three-way agreement; perhaps even a stipulated court order.

 

  • Make sure that the employee and NEWCO are both on full, written notice of their prospective obligations.

 

  1. D. Prepare for Expedited Litigation.

 

OLDCO may need to move quickly to protect its interests.  It needs to anticipate all possibilities.  Quick complaints and TRO motions are common.  Even where TROs are not sought, expedited discovery and preliminary injunction hearings are common.  Even if OLDCO is only suing for damages, non-compete/confidentiality litigation is usually viewed and treated as “urgent.”  Even if OLDCO thinks it may settle, it needs to prepare for possible litigation.

 

PRACTICE TIPS:

 

  • Send a cease-and-desist letter, and also put the former employee and NEWCO on notice of their obligations to preserve evidence.

 

  • Gather existing documentary and electronic evidence.

 

  • Know what key witnesses will say, and consider whether statements are needed.

 

  • Consider your internal and external communications plans, before and during the litigation.

 

 

 

  1. IX. 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.  Failing that, OLDCO has many other opportunities to obtain business protections, as a condition to giving generous enhanced benefits to existing employees.  Finally, if OLDCO still does not have them in place as of the end of the employment relationship, business protections (as well as a release of claims) can be a condition of any post-termination packages.


[1] Many thanks to Allison Lange (J.D. candidate 2010, University of Minnesota Law School) for her superb work in

helping the author research and prepare this article.

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

[3] 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).

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

[5] 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).

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

[7] 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).

[8] 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”).

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

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

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

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

[13] 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).

[14] 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).

[15] 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).

[16] 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).

[17] 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)).

[18] 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).

[19] See id note 18.

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

[21] 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).

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

[23] 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).

[24] 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).

[25] 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).

[26] 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).

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

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

2002)

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

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

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

138978 (Minn. App. 1989).

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

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

[34] 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).

[35] 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”).

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

future promise).

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

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

[39] 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).

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

[41] 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).

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

[43] 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).

[44] A number of Minnesota statutes authorize attorney fees in employment actions: for, example, age

discrimination (§ 181.81, subd. 2); sex discrimination (§ 181.68, subd. 2); adverse employment action following a

polygraph test (§ 181.75, subd. 4); use of false statements to induce person to enter employment (§ 181.65);

whistleblowers (§ 181.935); discrimination against an employee who exercises a right under OSHA (§ 181.669);

wrongful termination of sales representatives (§ 325E.37, subd. 5); and many more.  See Matt Gehring, Minn.

House of Representatives Research Dept., Attorney Fee Awards in Minnesota Statutes (2008), available

at http://www.house.leg. state.mn.us/hrd/pubs/attyfee.pdf (listing all Minnesota statutes that award attorney fees).

[45] Milner v. Farmers Ins. Exchange, 748 N.W.2d 608, 620 (Minn. 2008); Anderson v. Hunter, Keith, Marshall &

Co., 417 N.W.2d 619, 628 (Minn. 1988) (quoting Hensley v. Eckerhart, 461 U.S. 424, 433 (1983)).

[46] Milner, 748 N.W.2d at 624 (striking down the use of a multiplier) (internal quotation marks omitted).

[47] See, e.g., Milner, 748 N.W.2d at 624 (remanding where it was not clear that the district court took into

consideration the “results obtained”); Anderson, 417 N.W.2d at 630 (same, for “fees incurred on unsuccessful

claims”); Specialized Tours, Inc. v. Hagen, 392 N.W.2d 520, 542 (Minn. 1986) (same, for “results obtained”).

[48] See, e.g., Everett v. Nefco Corp., No 3:06-CV-00047(VLB), 2007 WL 2936210, at *2 (D. Conn. Oct. 9, 2007)

(quoting Spitz v. Berlin Indus., Inc., No 93 C 6355, 1994 WL 194051, at *3 (N.D. Ill. May 13, 1994); Fernandes v.

Manugistics Atlanta, 582 S.E.2d 499 (Ga. App. 2003); Eastern Carolina Internal Medicine, P.A. v. Faidas, 564

S.E.2d 53 (N.C. App. 2002); Rochester Corp. v. Rochester, 450 F.2d 118, 123 (4th Cir. 1971); Van Pelt v. Berefco,

Inc., 208 N.E.2d 858 (Ill. App. 1965); Hudson v. N.C. Farm Bureau Mut. Ins. Co., 208 S.E.2d 416 (N.C. 1974);

Dollgener v. Robertson Fleet Servs., Inc., 527 S.W.2d 277, 280 (Tex. Civ. App. 1975).

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

[50] Id. at *4.

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

[52] 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.”).

[53] See Food Fair Stores, Inc. v. Greeley (285 A.2d 632 (Md. 1972); Grebing v. First Nat’l Bank of Cape Girardeau,

613 S.W.2d 872, 875 (Mo. App. 1981); Almers v. S.C. Bank of Charleston, 217 S.E.2d 135 (S.C. 1975); Holsen v.

Marshall & Isley Bank, 190 N.W.2d 189 (Wis. 1971).

[54] See, e.g., Cal. Business and Professions Code § 1660.

[55] Compare Edwards v. Arthur Andersen LLP, 189 P.3d 285, 292 (Cal. 2008) (invalidating a non-compete

agreement contained in a stock-option agreement), with IBM Corp. v. Bajorek, 191 F.3d 1033 (9th Cir. 1999)

(holding that a forfeiture provision was valid despite California’s statute prohibiting non-competes).

[56] 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).

[57] See James T. Carney, Rule 65 and Judicial Abuse of Power: A Modest Proposal for Reform, 19 Am. J. Trial

Advoc. 87 (1995).

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

1975).

[59] 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).

[60] 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”).

[61] Gorco Constr. Co. v. Stein, 99 N.W.2d 69, 74 (Minn. 1959).

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

[63] Gorco, 680 N.W.2d at 74.

[64] Tenant Const., Inc. v. Mason, No. A07-0413, 2008 WL 314515 (Minn. App. Feb. 5, 2008).

[65] 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).

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

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

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

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

[70] Sutley, P.A. v. Selchow, D.D.S., No C9-95-860, 1996 WL 733, at *3 (Minn. Ct. App. Jan. 2, 1996).

[71] 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).

 

[72] Non-competes are assignable in Minnesota.  Saliterman v. Finney, 361 N.W.2d 175, 178 (Minn. Ct. App. 1985).  However, because non-competes are generally disfavored and therefore narrowly construed, 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).

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

[74] 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.

 

[75] Non-compete agreement (Bennett v. Storz Broad. Co., 134 N.W.2d 892 (Minn. 1965)); non-solicitation agreement

(Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 452 (Minn. App. 2001)); and agreement not to solicit

former employees (Frank B. Hall & Co., Inc. v. Alexander & Alexander, Inc., 974 F.2d 1020, 1025 (8th Cir. 1992)).

[76] Kallok v. Medtronic, Inc., 573 N.W.2d 356 (Minn. 1998); Ultra Lube, Inc. v. Dave Peterson Monticello Ford-

Mercury, Inc., 2002 WL 31302981 (Minn. App. 2002).

[77] See, e.g., Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890 (Minn. 1983); Tenant Const., Inc. v.

Mason, 2008 WL 314515 (Minn. App. 2008).

[78] Hagen v. Burmeister & Assoc., Inc., 633 N.W.2d 497, 504 (Minn. 2001); Hentges v. Thomford, 569 N.W.2d 424,

427 (Minn. App. 1997); Oelschlager v. Magnuson, 528 N.W.2d 895, 902 (Minn. App. 1995).

[79] See Minn. Stat. §§ 325C.01–08.

[80] Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 899–901 (Minn. 1983).

[81] See Fox Sports Net North, LLC v. Minn. Twins P’ship, 319 F.3d 329, 336 (8th Cir. 2003) (holding that obsolete

information and knowledge of industry contact people are not trade secrets, because the former has no economic

value and the latter is readily ascertainable); Ad Associates, Inc. v. Coast to Coast Classifieds, Inc., No. 04-3418,

2005 WL 3372968 (D. Minn. Dec. 12, 2005) (holding that customers’ names and fax numbers are not trade secrets

because readily ascertainable from many public sources); Blackburn, Nickels & Smith, Inc. v. Erickson, 366

N.W.2d 640, 645 (Minn. Ct. App. 1985); see also Internet Inc. v. Tensar Polytechnologies, Inc., No. 05-317, 2005

WL 2453170, at *9 (D. Minn. Oct. 3, 2005) (“[C]ustomer lists, even with specific information about those

customers attached to them, are generally not considered to rise to the level of a trade secret.”).  But see Surgidev

Corp. v. Eye Technology, Inc., 648 F.Supp. 661 (D. Minn. 1986), aff’d 828 F.2d 452 (8th Cir. 1987).

[82] Cherne Indus., Inc. v. Grounds & Assocs., 278 N.W.2d 81, 90–91 (Minn. 1979).

[83] See, e.g., Reliastar Life Ins. Co. v. KMG America Corp., No. A05-2079, 2006 WL 2529760 (Minn. Ct. App. Sept.

5, 2006); United Prods. Corp. of America, Inc. v. Cederstrom, No. A05-1688, 2006 WL 1529478 (Minn. Ct. App.

June 6, 2006).  But see Kratzer v. Welsh Cos., LLC, A06-2284, 2008 WL 1747607 (Minn. Ct. App. Apr. 15, 2008),

reversed on other grounds 771 N.W.2d 14 (Minn. 2009) (distinguishing the case from Fox Sports and Lasermaster

and concluding that Welsh’s customer lists are trade secrets because they are not readily available and are

considered by the relevant industry to be highly proprietary).

[84] At the time such an agreement is made, the employer must provide the employee with written notice that the agreement “does not apply to an invention for which no equipment, supplies, facility or trade secret information of the employer was used and which was developed entirely on the employee’s own time, and (1) which does not relate (a) directly to the business of the employer or (b) to the employer’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the employee for the employer.”  Minn. Stat. § 181.76.  Existing employees should be provided independent consideration to support such agreements.  See Eaton Corp. v. Giere, 971 F.2d 136, 139-40 (8th Cir. 1992).

[85] See, e.g., Eaton Corp., 971 F.2d at 136; Sanitary Farm Dairies, Inc. v. Wolf, 112 N.W.2d 42 (Minn. 1961);

Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301, 304 (Minn. App. 1987).

[86] Rehabilitation Specialists, 404 N.W.2d at 304.

[87] Id.

[88] Miller v. Miller, 222 N.W.2d 71 (1974); see also NeoNetworks, Inc. v. Cree, Nos. A07-0729,

2008 WL 2104161, at *5 (Minn. Ct. App. May 20, 2008) (applying Miller to a case with a non-compete agreement).

[89] See, e.g., Tappe Const. Co. v. Siedow, No. C6-01-731, 2001 WL 1646653, at *4 (Minn. Ct. App. Dec. 26, 2001).

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