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Protecting Your Business from Departing Executives and Key Employees

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Jeffrey B. Oberman

Oberman Thompson & Segal, LLC

One Financial Plaza

120 South Sixth Street, Suite 1700

Minneapolis, MN  55402

Telephone: 612-217-6441

joberman@obermanthompson.com

 

 

BUSINESS LAW INSTITUTE

Minnesota State Bar Association Continuing Legal Education

 

May 9-10, 2012

 

These materials are provided for educational and informational purposes only.  They are not intended to constitute legal advice in any particular situation.

I.                   INTRODUCTION.[1]

  • TREND: During the economic downturn, non-compete disputes continued to trend upwards.  As the economy has started to improve, this increase has accelerated. Executives and other key employees have become more mobile, many new opportunities have opened, and employers are looking to hire experienced and well-connected employees – many of whom are parties to non-compete agreements and other protective covenants.

The economic downturn led to major cuts in compensation and benefits, reductions in force, and unprecedented employment terminations, leaving many highly talented  and well- connected executives and other key employees anxious to find new jobs.  As the economy has started to improve, even key employees (and independent contractors[2]) who kept their jobs are seeing new and better opportunities.  Key employees are highly incentivized to leverage their knowledge and contacts with new employers. Although many of them have non-compete or other protective covenants, hiring employers are increasingly willing to take risks to make good hires.

The impact and enforceability of restrictive employment covenants are not subject to a simple “bright line” test, and courts have been very willing to declare them unenforceable, or at least unenforceable to the extent they are written.  Attorneys 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, traps and trends, and offer strategies for attorneys representing businesses who want to improve their odds in the non-compete world. 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 the new employer – “NEWCO.”

II.                OLDCO’S GOALS IN DRAFTING AND IMPLEMENTING AGREEMENTS

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.

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.

 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 and counter-claims the employee and NEWCO can lodge in opposition.

D.    Business Strategy. 

OLDCO may decide to pursue its legal options in order to let its employees and competitors know that it is willing to do so. If OLDCO is known for walking away, it risks increasing challenges to its business protection programs.

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

TRAP: Overly aggressive non-compete programs and agreements are primed to be ignored and/or successfully challenged.

Non-compete agreements in the employment context are generally disfavored.[3]  Notwithstanding their obvious economic appeal to employers, courts consider them partial restraints of trade and construe them narrowly.[4]  This is particularly true during the recent economic struggles. 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.[5]  Generally, companies have protectable interests in (1) customer goodwill, (2) confidential information, (3) trade secrets, and (4) customer contacts.[6]  However, the agreement must not impose any greater restriction on the employee than is necessary to protect the employer’s business.[7]

A.                Unreasonableness of the Restrictive Covenant.

The reasonableness inquiry occurs on a case-by-case, fact-specific basis.[8]  Different jurisdictions use various methods of addressing overly broad and unreasonable covenants.  Some states hold unreasonably restrictive covenants totally unenforceable,[9] as a way to encourage employers to write more narrowly-tailored covenants.[10]  In other jurisdictions, the courts will modify invalid portions of the agreement under the “blue pencil” doctrine, and enforce the rest as written.[11]  Minnesota courts utilize a modified blue pencil doctrine and will, at their discretion, rewrite portions to make them reasonable.[12] However, Minnesota courts have not, to date, applied the blue pencil doctrine to agreements that are invalid for reasons other than the reasonableness as to time, geography or other factors, such as a failure of consideration.[13]

Minnesota courts have historically reviewed two types of restrictions for their reasonableness: temporal and geographical.[14]  A covenant whose restriction extends too far into the future or across too broad of a geographical area might be invalidated or modified.[15]

  • STRATEGIES: 
  • Do not overuse non-compete agreements; be selective. Overuse can dilute the effectiveness of non-compete agreements. If there is little likelihood that OLDCO 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 OLDCO should avoid putting itself into a position of arguably “waiving” or otherwise “not enforcing” its non-compete program.[16] Worse, if OLDCO’s litigation effort to enforce the non-compete is unsuccessful, the case may create a bad legal or internal “precedent.” 
  •  Generally, require non-compete agreements only from executive-level, management-level, sales, key technical employees and others with substantial access to confidential information and/or customers.
  • Avoid broad and long non-competes that “go too far.” They tend to get ignored, challenged, and are often fully or partially invalidated.  OLDCO is better off being able to articulate, from the start, what it needs to protect and why its non-compete agreement is reasonable and necessary.
  • Do, however, require confidentiality agreements of virtually all employees as part of an overall program to protect OLDCO’s property, trade secrets, and other proprietary information. [17]  

Time.

  • TRAP: Requiring more than a one-year non-compete period is inviting a challenge; and a partial victory is likely not worth the time and expense.

Non-compete agreements must be reasonable in their temporal scope, or they will not be enforced.[18]  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.[19]  Although Minnesota courts have enforced non-compete agreements for periods of two or three years[20] 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 are generally 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.[21]  In contrast the Court “has consistently found one-year restrictions that are limited to a former employee’s sales area to be reasonable.”[22] 

Geographical territory.

  • TRAP: Classic geographical restrictions about a former employee’s location may be meaningless. Commuting distances have grown and increased roles of electronic communications often make office location irrelevant. E.g., forcing someone to office outside of Minnesota does not necessarily prevent them from soliciting business in Minnesota.

Employment-related covenants restricting competition must be reasonable from a geographic standpoint as well, or they will not be enforced.[23]  In the past, global restrictions have generally been unenforceable as unreasonably broad,[24] but this is changing as the world marketplace develops.  The factors courts take into account when judging the reasonableness of a geographical limitation include: (1) reasonable trade area; (2) area where employee actually performed duties; (3) employer’s actual business area; and (4) location of employer’s customers.[25]  However, the Court of Appeals has declined to enunciate a per se rule barring the enforceability of non-compete covenants that contained no territorial limitation. “Territorial limitations…are but one of several factors a [district] court is to consider in determining the reasonableness of a restrictive covenant.”[26]  Geographical restrictions should be clearly tied to the employer’s legitimate business interests, keeping in mind that the increased roles of telephones, emails, and the Internet can make geographic restrictions irrelevant in many industries.

  • STRATEGY: Avoid using classic geographical restrictions except for local businesses that only serve local customers.

 Customer-Based Restrictions.

Customer restrictions may substitute for or complement a geographic restriction.  Often, these make far more sense than pure geographic restrictions since customers may be all over the country or even the world.  Basing a territorial restriction on the presence of customers in a certain area enhances the reasonableness of a non-compete agreement.[27]

  • STRATEGIES: 
  • Use customer-based restrictions.
  • Many agreements provide that the employee may go to work for a competitor, as long as the employee 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 is greatly enhanced.

Product-Based Restrictions.

Under the right circumstances, product-based restrictions may also substitute for or compliment a geographic restriction.  Even a world-wide non-compete agreement may be deemed reasonable under the circumstances of the case, where the non-compete covenant prevents the employee from working on competitive products.[28]

 IV.             IMPLEMENTATION OF NON-COMPETES IS CRITICAL.

TRAP: Many defenses to non-compete agreements result from improper implementation of an otherwise legitimate and enforceable non-compete agreement. Administrative errors are common, often caused by treating the non-compete as “just another form.”

Even if an agreement is by its terms reasonable, it may nevertheless fail for lack of sufficient consideration.  The cases below demonstrate that consideration is an argument pressed – and won – by many former employees.

A.                Timing of Consideration. The validity of consideration can depend on when it was offered to the employee.  OLDCO should use extreme care to avoid timing problems that can nullify the non-compete agreement.

Non-Compete Offered 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.  It is not enough for the employer to give the employee notice about the non-compete agreement without actually presenting it prior to or in tandem with the job offer.[29]  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.[30]  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,[31] or where the employee had the opportunity to fully negotiate and discuss the non-compete, offered to draft the agreement, and filled in and typed up the terms of the agreement prior to employment, although he did not sign it until after he started working.[32]  Under these circumstances, courts appear less concerned that the employer is taking advantage of the parties’ unequal bargaining power.

Mid-Stream Non-Compete Agreement.

A non-compete agreement executed after an employee has commenced employment is unenforceable unless supported by “independent consideration.”[33]

  • STRATEGIES:
  • The best time to get a signed non-compete agreement is up front.
  • 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 employment begins.

B.                 Consideration Must Constitute “Real Benefits.”

Independent consideration consists of real benefits that are bargained for between the employee and the employer.   “Real benefits” mean more than those to which the employee is already entitled to by virtue of employee status or a separate contract.[34]  Continued employment is not sufficient consideration for a non-compete:[35] Even when an employee receives some amorphous long-term benefits as a result of signing the non-compete, the non-compete is still invalid if the employee is not aware that the benefits were in exchange for the covenant not to compete.[36]  Real benefits might include: midstream (or post-termination) benefit agreements, promotions, or a cash payment.

Benefit-Related Agreements.

In recent years, more employers are conditioning mid-stream or post-termination 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 illusory.[37]

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.[38]  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.”[39] 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. 

  • STRATEGIES:
  • 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.

Promotions.

  • TRAP: A promotion followed by a non-compete agreement likely nullifies the argument that the promotion was the consideration for the non-compete.

A promotion to a higher position with more authority and responsibility is generally viewed as adequate consideration.[40]  In fact, a promotion may be adequate consideration even if the employee makes less money after the promotion.[41]

However, 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.[42]  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.[43]  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. 

  • STRATEGIES:
  • 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. 

Cash payments. 

Cash payments can be 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,[44] the 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.

V.                Remedies that Deter Violations.

Non-compete agreements are usually signed when the relationship is positive and mutually beneficial.  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.

Inclusion of additional contractual  remedies in a non-compete agreement furthers all 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; recovering damages for the loss caused by an employee’s violation of the agreement; and sending a message to employees and competitors.

  •  TREND: In addition to the traditional language that an injunction is possible, many employers are adding increasingly 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.

A.                Injunctive Relief.

Non-compete agreements have historically stated that injunctive relief would be appropriate in the event of a breach and that irreparable harm would result absent injunctive relief.[45]  In recent years, non-compete agreements have been upping the ante in many ways, some of which are discussed below.

OLDCO may try to enjoin the employee and NEWCO from violating a restrictive covenant.  Minnesota state law considers the five Dalhberg Brothers factors to determine whether to grant injunctive relief: (1) parties’ relationship; (2) balance of harms between the plaintiff and the defendant; (3) likelihood of success on the merits; (4) public policy expressed in federal and state statutes; and (5) administrative burdens involved in judicial supervision and enforcement of the temporary decree.[46]  In a non-compete case, courts typically focus on the balance of harms and the likelihood of success on the merits.[47]  The federal courts in Minnesota generally refer to the Dataphase factors identified by the Eighth Circuit in evaluating whether to issue injunctive relief: (1) the threat of irreparable harm to the movant; (2) the balance of the harms between the parties; (3) the probability that the movant will succeed on the merits; and (4) the public interest.[48]  The United States Supreme Court recently emphasized that a preliminary injunction “is an extraordinary remedy never awarded as a matter of right.”[49]

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 a full accounting by the former employee of all activities with the new employer and full payment of various types of damages.  OLDCO might choose to sue for damages rather than or in addition to injunctive relief. Monetary damages can be recovered ancillary to equitable relief granted.[50]  The damages caused by a former employee’s breach of a non-compete agreement are measured by the business loss actually suffered as a consequence of the breach.[51]  OLDCO may also seek a full accounting of all of the employee’s activities with NEWCO, which in and of itself can hurt NEWCO.

C.                Attorney’s Fees. 

  • TREND: Non-compete agreements increasingly state that OLDCO can recover attorney’s fees.

Statutory or Contractual.

Generally, attorney’s fees are recoverable only if a statute or contract authorizes such recovery.[52]  However, Minnesota state courts have held that if OLDCO succeeds on a claim of tortious interference against NEWCO, NEWCO may be forced to pay OLDCO’s attorney’s fees under the “third-party exception” to the American rule, since NEWCO’s tortious interference directly causes OLDCO to enter litigation against its former employee to protect its rights under the non-compete agreement.[53]  Similarly, the Minnesota Uniform Trade Secret Act authorizes attorney’s fees to the successful party.[54]

Reasonableness of Fees.

Minnesota uses the “lodestar method” to establish reasonable attorney fees.[55]  This procedure “requires the court to determine the number of hours ‘reasonably expended’ on the litigation” multiplied by “a reasonable hourly rate.”[56]  Courts must consider “all relevant circumstances” in making a reasonableness determination.[57]  Factors include: “the time and labor required; the nature and difficulty of the responsibility assumed; the amount involved and the results obtained; the fees customarily charged for similar legal services; the experience, reputation, and ability of counsel; and the fee arrangement existing between counsel and the client.”[58]

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.  Upward departures from the lodestar amount are warranted only in “rare cases of exceptional success” and must be supported by “specific evidence in the record and detailed findings by the district court.”[59]

D.                Liquidated damages.  

  • TRAP: Liquidated damage provisions can do OLDCO far more harm than good.

Enforceability of liquidated damages provisions.

A liquidated-damages clause is prima facie valid, based on the assumption that it does not represent a penalty for nonperformance but rather fair compensation for breach-related damages caused by a party’s nonperformance.[60]  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.[61]  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.”[62]  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.[63]  The court concluded that the provision (granting $14,000 to the employer for five months of competition by the employee) was reasonable and was not an unenforceable penalty.[64]

Appellate courts will uphold an award of liquidated damages even where neither party can prove actual damages, so long as it finds that the liquidated-damages clause is valid.[65]  However, an employer injured by an employee’s violation of a non-compete agreement must mitigate its losses in order to receive the full liquidated-damages amount.[66]

Effect of liquidated damages on injunctive relief and other damage claims.

An interesting question that arises is whether the existence of a liquidated-damages provision in a non-compete would preclude OLDCO from seeking injunctive relief or additional damage claims.  Arguably, an employee who breaches a non-compete agreement should not have to suffer the further damage of an injunction. Under a theory of “efficient breach” it is acceptable for an employee to breach the contract once performance becomes more costly than damages.  The employee has already contracted with OLDCO for a possible future breach, so there is no need for further relief by way of an injunction.

In the author’s experience, this argument is very persuasive.  For example, one court observed in dicta that the existence of a liquidated-damages provision obfuscated 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.[67]  The Minnesota Court of Appeals cited the existence of a liquidated-damages clause as proof that the employer would not suffer irreparable injury if a temporary injunction was not granted.[68]  However, the law is not entirely settled on the issue: other cases appear to conclude that a liquidated-damages provision does not preclude pursuit of injunctive relief.[69]

Also, 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 make the choice easier for them and more detrimental to OLDCO.

  • STRATEGIES:
  • 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 provides OLDCO with a full recovery of its damages.

E.                 Forfeiture of Benefits. 

  • TREND: Non-compete agreements and/or other benefit plans increasingly contain 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 the plan/agreement states 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.  An important drafting tip is to make it clear in the agreement that the forfeiture provisions are not OLDCO’s sole remedy and are not to be considered liquidated damages; rather, they are collateral to any other injunctive and legal relief available to OLDCO.

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.[70]

The second group of jurisdictions is willing to enforce forfeiture provisions only if they pass a test of reasonableness.  For example, 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 violation of a non-compete agreement.[71]  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.[72]  By contrast, a forfeiture provision that was “not limited as to time, harm to the employer, or geographical area” was found to be an unreasonable restraint of trade.[73]

Finally, a third group of courts holds that forfeiture provisions are restraints of trade and are per se unreasonable.[74]  Some states have even passed statutes prohibiting them.[75]

  • STRATEGIES: 
  • If OLDCO uses forfeiture provisions in benefit plans/agreements, put clear language in the plans/agreements up front.
  • Beware of language preserving OLDCO’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.

F.                 Bonds.

  • TREND: Non-compete agreements increasingly contain bond waiver provisions.

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.[76]  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.[77]

The language of Federal Rule of Civil Procedure 65(c) and Minnesota Rule of Civil Procedure 65.03(a) indicates a mandatory bond requirement in an amount sufficient to cover damages to the defendant.  Minnesota state courts have discretion over the amount of the bond or whether to waive the security requirement altogether.[78]  By contrast, Minnesota federal district courts are not entitled to waive the bond requirement completely, although they may reduce the bond to a nominal fee.[79]

The concern for OLDCO is the vast discretion a judge has over the amount of bond to be set.  Each bond is determined on a review of the particular facts of the case, so predictability and consistency are at a minimum.  Compounding this confusion, 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.[80]  Minnesota state courts have not yet ruled on this issue.

Even if the court requires a bond, OLDCO may argue any one of several exceptions to the rule that that the bond must be high enough to cover the enjoined party’s potential losses.  First, OLDCO may argue under a “no harm, no foul” exception to Rule 65(c) that in situations where the injunction is unlikely to cause any pecuniary loss to the employee, an injunction bond need not be set too high.[81]  Second, the court may set a low bond amount in a case where the plaintiff is likely to succeed on the merits—a “likelihood of success” exception.[82]  Finally, the “financially solvent plaintiff” exception circumvents the requirement by observing that OLDCO’s assets are sufficient to make the employee whole for any losses occasioned by the preliminary injunction if the employee prevails in the litigation.[83]

Appellate courts are almost universally unwilling to alter the bond amount set by a district court.  Often, employees appealing from grants of injunction will argue that the district court set the bond too low.  These arguments are typically rejected.[84]  

  • STRATEGY: Rather than a full bond waiver provision, consider agreeing that the bond will be no more than a set amount.

VI.             Preserving the Non-Compete Agreement.

  • TRAP: The non-compete agreement may no longer be binding when OLDCO later needs to enforce it.

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 will survive the occurrence of future events or new contractual obligations.

A.                Non-Compete Covenant Must Survive the Termination of Employment.

If the non-compete clause is part of a larger agreement – for example, an employment agreement – which contemplates and allows for termination “of the agreement,” it may not be clear that the non-compete obligations survive termination of the underlying agreement.  Post-termination obligations must expressly survive termination of employment.[85]  Also, OLDCO should avoid language that allows either party to “terminate the Agreement,” since this might apply to the non-compete.

B.                 OLDCO Must Preserve Right to Assign.

Non-competes are assignable in Minnesota.[86] However, because non-competes are generally disfavored and therefore narrowly construed, a court will not assign a non-compete absent explicit language permitting assignment.[87]  Also, the language in particular contracts may require the employee’s consent to an assignment, in order for the restrictive covenant to be enforceable by an assignee of the former employer.[88]

C.                OLDCO Must Not Supersede Non-Compete.

Employers often draft merger clauses in subsequent agreements – for example, a separation agreement or release of claims – which by their terms supersede and thus render unenforceable, an employee’s continuing non-competition obligations.[89]  In cases where the later writing contains a merger clause, the Minnesota Supreme Court has noted that the merger clause “establishes that the parties intended the writing to be an integration of their agreement.”[90] In other words, if there is a merger clause, integration is presumed.

Even if there is not a merger clause, the court may find that integration was intended.  “Where there is no written merger agreement, a determination of whether the written document is a complete and accurate “integration” of the terms of the contract is not made solely by an inspection of the writing itself, important as that is, for the writing must be read in light of the situation of the parties, the subject matter and purposes of the transaction, and the attendant circumstances.”[91]

D.                Choice of Law and Forum Selection Clauses. 

  • TRAP: Failure to include both choice of law and forum selection clauses may lead to litigation across the country – perhaps under another state’s laws.

There are many conflicts among state laws pertaining to non-compete agreements.  This has led to creative efforts by transitioning employees and their new employers to relocate the employee to a state that refuses to enforce restrictive covenants,[92] in order to sustain a challenge by OLDCO.  This leads to many “race to the courthouse” situations and fascinating legal and strategic disputes.[93]  

OLDCO should include a choice of law provision and a forum selection clause, to best protect it from multistate issues.  Generally, courts have enforced such provisions.[94]  Further, 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.[95]

E.                 Notice Provisions. 

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.

VII.          POSSIBLE CLAIMS AGAINST EMPLOYEE AND/OR NEWCO.

  • TRAP: OLDCOs often fail to consider potential claims against the employee and/or NEWCO, and give up too soon.

OLDCO can assert several claims directly against the employee and NEWCO, as well as others against the employee that will impact NEWCO indirectly.  

A.         Breach of the Restrictive Employment Covenant.

The most obvious claim against an employee is for breach of one or several restrictive covenants, including: a non-compete agreement,[96]  a customer non-solicitation agreement,[97] an agreement not to solicit OLDCO’s employees,[98] or a confidentiality agreement.[99]

B.          Tortious Interference with Contract or Prospective Business Relations.

OLDCO may assert a claim of tortious interference against NEWCO for violating any restrictive employment covenant.[100]  The elements of a cause of action for tortious interference with a contract are: (1) the existence of a contract; (2) the interfering party’s knowledge of the contract; (3) intentional procurement of a breach; (4) lack of justification; and (5) damages.[101]  NEWCO may also be required to indemnify OLDCO for attorney’s fees incurred by OLDCO in litigation to enforce the non-compete agreement.[102]

C.         Respondeat Superior.

OLDCO can argue that NEWCO is responsible for its employee’s competitive activities in violation of a non-compete agreement under the doctrine of respondeat superior, which holds an employer “vicariously liable for the wrongful acts of its employees committed within the scope of their employment.”[103]  To establish that an employee’s acts occurred within his or her scope of employment, the conduct must be “in furtherance of the interests of the employer.”[104]  For example, NEWCO may be liable for the misappropriation of OLDCO’s trade secrets by one of its employees.[105]  NEWCO’s liability will depend on whether the wrongful conduct (1) is related to the employee’s duties; and (2) occurs within work-related limits of time and place.[106]    

D.         Violation of Trade Secret / Confidentiality Laws.

  • TREND: Regardless of the existence of agreements, OLDCO may have direct or indirect claims against the employee and/or NEWCO for violations of trade secret and/or confidentiality laws.  Hiring employers often fail to insulate themselves from OLDCO’S secrets, and many former employers are suing (and doing extensive discovery) to address these violations.

Courts have recognized that “[i]n the absence of a covenant not to compete or a finding of actual disclosure or an intent to disclose trade secrets, former employees ‘may pursue their chosen field of endeavor in direct competition’ with their employer.”[107] However, the employee has a duty to protect the secrecy of OLDCO’s confidential information, and NEWCO cannot benefit from a violation of that duty.  

Employees’ Common Law Duties to Maintain Confidentiality.

Minnesota common law provides protection to employers from employees who misuse the employer’s confidential information or attempt to compete with the employer while still employed.[108]  But the employer-employee relationship creates a common law duty of confidentiality only as to information that the employer treats as secret.[109]  Further, a common law claim of misappropriation of confidential information requires an affirmative showing that the employee intended to misappropriate the employer’s confidential information.[110] 

Trade Secret Misappropriation.

The Minnesota Uniform Trade Secrets Act (“MUTSA”) displaces all conflicting tort law and serves to preempt the common-law tort of misappropriation.[111]  Misappropriation is defined as “improper acquisition, disclosure, or use of a ‘trade secret’”[112]; the existence of a proven trade secret and a confidential relationship are prerequisites to an action for misappropriation.  In addition to monetary damages, OLDCO can seek temporary or permanent injunctive relief; the critical question in such actions is whether OLDCO can demonstrate that it will likely “succeed on the merits” of its misappropriation claim.[113]  To qualify as a trade secret, 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.[114]  Both federal and state courts in Minnesota use the Electro-Craft three-part test to determine whether information merits trade-secret protection.

Customer Lists as Trade Secrets.

Minnesota federal courts frequently conclude that customer lists are not confidential or trade-secret information because such information is readily available through reasonably diligent research.[115]  An important exception to this general rule emerged in Surgidev Corp. v. Eye Technology, Inc.[116]  In that case, the court found that  maintaining the secrecy of high-volume customers’ identities was a practice embraced by the entire industry in which the plaintiff and defendant did business.  Therefore, such information would not be readily accessible and would likely be a trade secret.  Surgidev also concluded that the identities of individual contacts at customers’ facilities can be a trade secret, since in the sales industry the goodwill of a customer frequently attaches to the employer’s sales representative personally.[117]  Several plaintiffs have argued, unsuccessfully, that Surgidev supports their claims of the trade-secret status of customer information.[118]  However, on a couple of occasions, the court has found an industry-wide practice of confidentiality toward customer lists and concluded that such information was a trade secret.[119]

In contrast to Minnesota federal court, state-court plaintiffs seek to protect their customer information by reference to Cherne Industries, Inc. v. Grounds & Associates rather than Surgidev to claim trade-secret protection.[120]  Regardless, Minnesota state courts frequently rely on federal precedent and reasoning to reject claims of trade-secret status over customer lists.[121]

Even if information is not readily available and has economic value, Electro-Craft demands that a plaintiff seeking trade-secret protection demonstrate that it took reasonable efforts to protect the secrecy of that information.[122]  “Although absolute secrecy is not required, the confidential measures must be reasonable under the circumstances.”[123]  In Surgidev, the court provided a list of protective activities that indicate “reasonable efforts”: asking employees to sign confidentiality or non-disclosure agreements; restricting visitors to sensitive areas of a plant or manufacturing facility; separating sensitive departments or processes from the central facility; keeping secret documents in locked files; and distributing allegedly secret materials on a strictly “need-to-know” basis.[124]  

Inevitable Disclosure Doctrine.

The exception to the above general rule is the “inevitable disclosure doctrine,” under which courts presume that certain departing employees will “inevitably” reveal trade secrets to a new employer, regardless of the employee’s intent to disclosure.  Therefore, courts will enjoin such employees from working for a competitor, and may even grant damages, in the absence of a non-compete agreement.[125]  In Minnesota, generally a court may issue an injunction only where there is misappropriation or threatened misappropriation of trade secrets.[126]  Relief may be obtained under the doctrine only after a showing of a “high probability” of disclosure.[127]  The doctrine applies only to those employees with “intimate familiarity with corporate policies and strategies.”[128]

E.          Violation of Patent Rights. 

In the absence of an express contractual agreement defining ownership rights in inventions, the employer’s right to claim ownership in discoveries made by an employee depends on both the nature of the discovery and the nature of the employment relationship.  An employer can require an employee to assign ownership rights in past and future inventions, and should do so in writing.[129]

The general rule is that “an individual owns the patent rights to the subject matter of which he is an inventor, even though he conceived it or reduced it to practice in the course of his employment.”[130]  There are two widely recognized exceptions to the general rule:  “First, an employer owns an employee’s invention if the employee is a party to an express contract to that effect; second, when an employee is hired to invent something or solve a particular problem, the property of the invention related to this effort may belong to the employer.”[131]

F.          Breach of Duty of Loyalty.

  • TREND: Regardless of the existence of agreements, during the recruiting and application phase, NEWCO and the transitioning employee may “cross the line” and trigger a claim for breach of duties.

All employees owe a duty of loyalty to their employers.[132]  Among other things, the duty of loyalty prohibits an employee “from soliciting the employer’s customers for herself, or from otherwise competing with her employer, while she is employed.”[133]  This duty exists regardless of whether the employee has a non-compete agreement with the employer.[134]

G.         Breach of Fiduciary Duty; Usurpation of Corporate Opportunity.

Partners in partnerships, and officers, directors, and shareholders in closely held corporations, owe fiduciary duties to OLDCO, which are higher than the duty of loyalty.[135]  For example, although offering a job to an at-will employee is not considered improper interference with an at-will employment contract, if the person offering the job has a fiduciary duty to OLDCO, a different result is likely.  It would generally be considered a breach of fiduciary duty or tortious inference with contract if a fiduciary, while still employed, solicits other employees.[136]

Also, the fiduciary duty includes a duty not to usurp a corporate opportunity.  When an opportunity related to OLDCO’s business is presented to an employee with a fiduciary duty, he or she may not take it for personal benefit, or direct it to another person without first making the opportunity available to OLDCO.[137]  Courts use a two-part test from Miller v. Miller to determine whether an opportunity was usurped: first, the party challenging the transaction must show that the new business opportunity is “closely related to the existing or prospective activity of the corporation”;[138] second, the burden shifts to the interested fiduciary to prove that the transaction was either ratified or was fair and reasonable.  NeoNetworks, Inc. v. Cree offers an example of the court considering each factor of the Miller test.[139]

Regarding the “financial ability” of the Miller test, the general rule is that a corporate officer has no duty to pledge his own funds to enable the corporation to obtain an opportunity.[140]  However, in a recent case the Eighth Circuit concluded that a managing partner had usurped a corporate opportunity by declining, on the partnership’s behalf, to increase the partnership’s interest in another business from minority to majority, and then personally purchasing the interest.[141]  Given the significance of the opportunity (majority interest), the court found that if the managing partner could finance the deal, “the partnership could probably also have done so.”

VIII.       POTENTIAL DEFENSES TO OLDCO’S CLAIMS.

In the event OLDCO tries to enforce its restrictive covenants through litigation, the employee and NEWCO have several defenses, which OLDCO needs to factor into its decisions.

  • TREND: Increasing numbers of  hiring employers are willing to  look at all potential defenses before passing on a candidate solely because that person has a “non-compete” agreement. There are many absolute defenses, which may prohibit the non-compete from being enforced at all; and others, which may restrict the enforcement to a reasonable and manageable level. 

A.                The Non-Compete is Not Necessary and/or Reasonable.  See Section III.

B.                 Lack of Consideration. See Section IV.

C.                The Requested Remedies are Not Enforceable. See Section V.

D.                The Agreement Is No Longer Binding. See Section VI.

E.                 OLDCO Breached.  

It is axiomatic that if one party breaches a contract, the other party is excused from performance.[142]  If OLDCO materially breached an employment contract with the employee, the non-compete agreement may be defeated.[143]

F.                 OLDCO Waived.

If OLDCO failed to enforce non-compete agreements against other similarly positioned employees, OLDCO may have waived its right to future enforcement of the agreement.[144] However, the waiver may need to be in writing in order for the statute of frauds to be satisfied.[145]

G.                Other Contract Defenses. 

Legal contract defenses, such as fraudulent inducement and misrepresentation, can be asserted as defenses to non-compete agreements.[146]   

 H.                Defense to Tortious Interference with Contract.

A party does not wrongfully interfere with a contract if the party asserts in “good-faith” a legally protected interest of his own believing that his interest may otherwise be impaired or destroyed by the performance of the contract or transaction.[147] Justification is generally a factual question.  In March 2012, the U.S. District Court summarized the analysis needed as follows:[148]

“Generally, a defendant’s actions are justified if it pursues its legal rights via legal means.” Id. (citing Langeland v. Farmers State Bank of Trimont, 319 N.W.2d 26, 32–33 (Minn.1982)); Kjesbo v. Ricks, 517 N.W.2d 585, 588 (Minn.1994) (“There is no wrongful interference with a contract where one asserts in good faith a legally protected interest of his own * * * believ[ing] that his interest may otherwise be impaired or destroyed by the performance of the contract or transaction.” (internal quotation marks omitted)). “The general rule with which we are concerned is that one has the right to be secure in his contracts and to pursue his business … free from the interference of others except where such others act in pursuance of a superior or equal right.”  Noble Sys. Corp., 543 F.3d at 983 (quoting Bennett v. Storz Broad. Co., 270 Minn. 525, 134 N.W.2d 892, 897 (Minn.1965)); Bennett, 134 N.W.2d at 897 (“Liability for wrongful interference may be avoided by showing that the defendant was justified by a lawful object (sic) which he had a right to assert”).  Interference with a contract is unjustified, however, “when it is done for the indirect purpose of injuring the plaintiff or benefitting the defendant.” Furlev Sales & Assoc., Inc. v. N. Am. Auto. Warehouse, Inc., 325 N.W.2d 20, 27 (Minn. 1982).  “Ordinarily, whether interference is justified is an issue of fact, and the test is what is reasonable conduct under the circumstances.”  Kjesbo, 517 N.W.2d at 588 (citing Bennett, 134 N.W.2d at 900).

Interestingly, the Minnesota Court of Appeals recently ruled that a defendant’s assertion of attorney-client privilege as the basis for refusing to disclose why it believed that a non-compete was unenforceable was “fatal” to its claim that it had a good-faith belief that the non-compete was unenforceable.[149]

I.                   Defense to Claims for Breach of Duty of Loyalty; Breach of Fiduciary Duty.

All employees owe a duty of loyalty to their employers.[150]  However, a current employee of OLDCO will not incur liability by merely preparing to enter into competition with OLDCO. [151] While an employee may conceal his plans to compete with his employer, he may not, in preparing to compete, commit fraudulent, unfair, or wrongful acts, such as solicitation leading to a mass resignation of the firm’s employees.[152] There is no bright line between prohibited competition and permissible preparation for competition.[153]  Instead, the courts conduct a balancing analysis between the employer’s and employee’s respective interests.[154]  Signergy Sign Group v. Adam is an excellent example of a court’s balancing analysis.[155]

Generally, merely offering a job to the employee of another does not constitute improper interference with another’s contract.[156]  However, this general rule may not apply if the offeror owes a fiduciary duty to the employer.  It is likely improper for a corporate fiduciary to offer the corporation’s employees competing jobs; and a fiduciary’s intentional offer of a competing job (while still a fiduciary) likely constitutes tortious interference with contract.[157]

 J.                  Equitable Defenses. 

Since employers are usually seeking an equitable remedy from the courts (injunction, etc.), equitable defenses may apply, such as the equitable defense of “unclean hands.”[158]

K.                OLDCO Did Not Keep Its Secrets Secret.

The entity seeking protection of the trade secret must make a “reasonable effort under the circumstances” to maintain secrecy.[159]  One example of measures that signal that an employer intends to keep information confidential is to require every employee to sign non-disclosure agreements.[160]  If OLDCO failed to make efforts to keep its alleged secrets private, they likely will not be considered trade secrets.

IX.             POTENTIAL COUNTER-ATTACKS AGAINST OLDCO.

  • TREND: Employees and NEWCOs are asserting counterclaims for over-pursuit of claims by OLDCO.

In addition to risking counter-claims for employment claims by the employee (breach of contract, commission or bonus disputes, other legal violations), OLDCO risks additional counter-attacks.  Increasingly, employees and their new employers are challenging the former employers for over-pursuit of their claims.

For example, in Select Comfort Corp,[161], the defendant in a recent trade secret action alleged that the plaintiff’s cease-and-desist letter to a third party constituted tortious interference with the defendant’s contract with that third party.  The defendant claimed that the cease-and-desist letter was an improper and unjustified demand, which intentionally procured the breach of (defendant’s) contract with (the third party).[162]  Although the defendant was unsuccessful in that case, the decision did not entirely close the door on this type of claim.

The court in Select Comfort held that the Noerr-Pennington doctrine immunizes pre-suit demand letters, so long as the demand letter is not a sham.[163] “The ‘sham exception’ applies when a lawsuit (or threatened lawsuit) is so ‘objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits.’”[164]  “But ‘[i]f an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome, the suit is immunized under Noerr.’  Even when the litigation is objectively meritless, the inquiry does not end there—the court must then ‘examine the litigant’s subjective motivation.’  To defeat a claim of Noerr immunity, a party must ‘demonstrate[e] both the objective and the subjective components of a sham. ’”[165]

Another example of an aggressive counter- attack occurred in Best Medical International, Inc. v. Spellman, a recent case in Pennsylvania.[166] Plaintiffs often assume, believe and/or allege that the former employee took trade secrets, but lack any evidence of that at the time they commence the action. This often leads to very interesting discovery disputes and may lead to awards.  In Best Medical International, the defendant successfully pursued a counter-claim against the plaintiff for asserting a claim of misappropriation of trade secrets in bad faith.  The defendant was awarded attorney’s fees. Although that case was decided under the Pennsylvania Uniform Trade Secret Act, the same argument could be made under the Minnesota Trade Secret Act.

Another possible avenue for counter-attack may include a tort claim for abuse of process, which under Minnesota law has two elements:  (1) the existence of an ulterior purpose; and (2) the act of using the process to accomplish a result not within the scope of the proceedings in which it was issued, whether or not the result might otherwise be lawfully obtained.[167]  In Questar, the plaintiff in a trade secret case (OLDCO) sought and obtained a subpoena duces tecum in Minnesota against Questar (a non-party), claiming that it needed discovery from Questar to determine whether its former employee had misappropriated certain of its trade secrets. Responsive documents were produced by Questar subject to an attorney’s eyes only protective order.  Eleven days before trial, SMG dismissed its trade secrets claim against its former employee.  Because of this, and the fact that it had spent a lot of time (and likely money) resisting and then complying with the subpoena, Questar asserted that OLDCO subpoenaed it only to obtain otherwise confidential and proprietary information and sued it for, among other things, abuse of process.  The court ultimately ruled against Questar primarily because it failed to provide sufficient facts to support the claim, but the Court did not reject the possibility that a claim for abuse of process is possible in this situation.

In the right factual situation, a later malicious prosecution claim is also possible.  To state a claim for malicious prosecution a plaintiff must demonstrate that:  (1) the action was brought without probable cause or reasonable belief that the plaintiff would ultimately prevail on the merits; (2) the action must be instituted and prosecuted with malicious intent; and (3) the action must terminate in favor of the defendant.[168]

If the employee or NEWCO are successful in an abuse of process or malicious prosecution claim, they may be able to recover legal fees incurred in defending the wrongful proceeding. [169]

If OLDCO pursues litigation in bad faith, that may also lead to claims for bad faith under the Rule 11 of the Federal Rules of Civil Procedure, Rule 11 of the Minnesota Rules of Civil Procedure and/or Minn. Stat § 549.211.

X.                OLDCO’S POST-TERMINATION STRATEGIES.

  • ACT IMMEDIATELY:
  • Delays will likely expose OLDCO to greater damages and will make it far more difficult to get a TRO or injunctive relief later. 
  • Follow through. Do not accept delays. 
  • Written Notice: 
  • Send written notice to the employee (and NEWCO if possible) of the obligations, provide a copy of the agreement and seek assurances required by the agreement.   
  • If OLDCO suspects violations, immediately send cease and desist letters.
  • Send written notice to the employee and NEWCO of their obligations to preserve evidence and risk of sanctions for destroying evidence. 
  • Consider Early Good Faith Negotiations for a “Win-Win”:
  • Seek a freeze and a stand-still agreement while the parties are negotiating. 
  • Get the business people involved in the negotiations. Traditional “lawyer to lawyer” negotiations rarely succeed in resolving non-compete disputes.
  • Consider face-to-face meetings, with all knowledgeable people and decision makers present.
  • Consider pre-litigation mediation or arbitration. 
  • Make reasonable proposals. They may be accepted. Even if they are declined, a Court may view the concessions as a reasonable compromise under the circumstances and rule accordingly. 
  • AGREEMENT STRATEGIES: 
  • 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. 
  • PRE- LITIGATION STRATEGIES:
  • Regardless of settlement prospects, prepare for possible litigation. 
  • Be ready for a quick complaint, TRO motion, expedited discovery, and/or preliminary injunction hearing.
  • Gather existing documentary and electronic evidence and know what key witnesses will say. 
  • Plan internal and external communications. 

XI.             CONCLUSION.

OLDCO should carefully draft, and systematically implement reasonable policies, practices, and agreements to protect itself from unfair competition and solicitation of its employees, and to protect its trade secrets and other confidential information.  If 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.  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] Thanks to Allison Lange Garrison (former Law Clerk to Oberman Thompson & Segal, LLC; now practicing law with Gislason & Hunter, LLP ) for her superb work in helping the author research and prepare a 2010 article, portions of which are reproduced in this article.

[2] In the past, non-compete covenants seemed to be treated the same in independent contractor agreements as they were in employment contracts.  See e.g. Sealock v. Petersen, No. A06-2479, 2008 WL 314146 at *4-6 (Minn. Ct. App. Feb 5, 2008).  However, in late 2010, the Minnesota Court of Appeals held, in an unpublished decision, that the post-employment independent consideration requirement that exists in the employment context does not apply to independent contractors.  Schmit Towing, Inc. v. Frovik, No. A10-362, 2010 WL 4451572 at *3 (Minn. Ct. App. Nov. 9, 2010).  Thus, at least the “mid-stream” issues in the employment context appear not to apply in the independent contractor context.  It is unclear whether the Court would go so far as to hold that a non-compete agreement with an independent contractor does not require independent consideration at all.  Query whether the Court in Schmit Towing has opened the door for even more legal distinctions.

[3] Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626 (Minn. 1983).  It should be noted that Minnesota law recognizes a difference between non-compete agreements associated with employment contracts and those arising as part of the sale of a business.  See, e.g., Sealock v. Peterson, No. A06-2479, 2008 WL 314146, at *4 (Minn. Ct. App. Feb. 5, 2008).  The reasonableness of a non-compete agreement in the sale of a business is determined by a three-part test: (1) whether the restriction exceeds the protection necessary to secure the goodwill purchased; (2) whether the restriction places an undue hardship on the covenantor; and (3) whether the restriction has a deleterious effect on the interests of the general public.  Kunin v. Kunin, No. CO-99-206, 1999 WL 486814, at *3 (Minn. Ct. App. July 13, 1999) (citing Bess v. Botham, 257 N.W.2d 791, 795 (Minn. 1977).

[4] Bennett v. Storz Broad. Co., 134 N.W.2d 892 (Minn. 1965); Lemon v. Gressman, No. 08-00-1739, 2001 WL 290512 at *1 (Minn. Ct. App. Mar. 27, 2001).

[5] Bennett, 134 N.W.2d at 898; Medtronic, Inc. v. Sun, Nos. C7-97-1185, C9-97-1186, 1997 WL 729168, at *3 (Minn. Ct. App., Nov. 25, 1997).

[6] 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).

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

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

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

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

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

[12] See Davies, 298 N.W.2d at 134; Dean Van Horn Consulting Assoc. v. Wold, 395 N.W.2d 405 (Minn. Ct. App. 1986); Ikon Office Solutions, Inc. v. Dale, 170 F. Supp.2d 892, (8th Cir. 2001); see also Klick v. Crosstown State Bank of Ham Lake, Inc., 372 N.W.2d 85 (Minn. Ct. App. 1985) (observing that courts are not required to modify non-compete agreements that appear unreasonable).

[13] Guercio v. Production Automation Corporation, 664 N.W.2d 379, 384, N.2 (Minn. Ct. App. 2003).

[14] Metro Networks Comm. v. Zavodnick, No. Civ. 03-6198, 2004 WL 73591 (D. Minn. Jan. 15, 2004) (enforcing a one-year restriction on competition in the Twin Cities metropolitan area); Universal Hosp. Serv., Inc. v. Hennessy, No. Civ. 01-2072 (PAM/JGL) 2002 WL 192564, (D. Minn. Jan. 23, 2002) (restricting an employee from competing within a 100-mile radius of the employer for one year).

[15] See, e.g., Ikon Office Solutions, Inc., 170 F. Supp.2d 892, 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 at 410 (modifying a three-year restriction to one year).

[16]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”).

[17] 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).

[18] See, e.g., Webb Publishing Co. v. Fosshage, 426 N.W.2d 445, 448 (Minn. Ct. App.1988) (citing Dahlberg Brothers, Inc. v. Ford Motor Co., 137 N.W.2d 314, 321?22 (Minn. 1965)).

[19] Vital Images, Inc. v. Martel, No. Civ. 07-4195, 2007 WL 3095378 at *3 (D. Minn. Oct. 19, 2007) (eighteen months); Timm & Assoc., Inc. v. Broad, No. Civ. 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).

[20] See notes 17-19.

[21] See, e.g., recent Court of Appeals decision in Medtronic v. Hughes and St. Jude Medical, A10-998, 2011 WL 134973 (Minn. Ct. App. Jan. 18, 2011) (shortening non-compete from two years to one year, despite ruling in favor on all other issues in the case.)

[22] Boston Scientific Corporation v. Kean, Civ. No. 11-419 (SRN/FLN), 2011 WL 853644 (D. Minn. March 9, 2011) (quoting Guidant Sales Corp v. Baer, No. 09-CV-0358 (PJS/FLN), 2009 WL 490052, at *4 (D. Minn. Feb. 26, 2009).

[23] See, e.g., Ring Computer Sys. v. Paradata Computer Networks, No. C4-90-889, 1990 WL 132615 (Minn. Ct. App. Sept. 18, 1990).

[24] 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).

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

[26] Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 799 (Minn. Ct. App. 1993).  (Instead of a per se rule, “[t]he covenant must be scrutinized as a whole to determine whether it is reasonable.” Id. at 800.  Medtronic v. Hughes and St. Jude Medical, A10-998, 2011 WL 134973 (Minn. Ct. App. Jan. 18, 2011).

[27] 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).

[28] Medtronic v. Hughes and St. Jude Medical, A10-998, 2011 WL 134973 *2 (Minn. Ct. App. Jan. 18, 2011) (world-wide scope was deemed reasonable because it was limited to certain cardiology products, and the confidential information that the employee obtained while working with the former employer would be potentially relevant to his sales of products at the new employer in any market).

[29] 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, No. Civ. 02-402RHKSRN, 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., No. Civ. 01-2041RHKJMM, 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); Drummond American LLC v. Share Corporation, Civ. No. 08-5077JRTRLE, 2010 WL 3167326 (D. Minn. July 23, 2010) (recent summary of Minnesota decisions regarding the independent consideration requirement and great example of the factual analysis needed).

[30] Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161 (Minn. Ct. App.1993); see also TestQuest, Inc. v. La France, No. C0-02-783, 2002 WL 196287 (Minn. Ct. App. Aug. 27, 2002) (upholding mid-stream agreement allowing the employee to continue working and obtain additional vested stock options, which constituted sufficient consideration).

[31] Progressive Tech. Inc., v. Shupe, No. A04-1110, 2005 WL 832059 (Minn. Ct. App. April 12, 2005).

[32] See also Tonna Heating Cooling, Inc., v. Waraxa, No. CX-02-368, 2002 WL 31687601, at *3 (Minn. Ct. App. Dec. 3, 2002).

[33] Jostens, Inc. v. Nat’l Computer Sys., Inc., 318 N.W.2d 691, 703 (Minn. 1982). However, in late 2010, the Minnesota Court of Appeals held, in an unpublished decision, that the post-employment independent – consideration requirement that exists in the employment contexts does not apply to independent contractors.  Schmit Towing, Inc. v. Frovik, No. A10-362, 2010 WL 4451572 at *3 (Minn. Ct. App. Nov. 9, 2010). Thus, at least the “mid-stream” issues in the employment context appear not to apply in the independent contractor context.

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

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

[36] 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., No. A07-0421, 2008 WL 314535, at *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).

[37] Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626 (Minn. 1983); BFI-Portable Services. Inc. v. Kemple, No. C5-89-1172, 1989 WL 138978 (Minn. Ct. App. Nov. 21, 1989).

[38] Softchoice, Inc. v. Schmidt, 763 N.W.2d 660, at *4 (Minn. Ct. App. 2009) (applying Missouri law).

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

[40] Guidant Sales Corp. v. Baer, No. 09-CV-0358, 2009 WL 490052, at *2 (D. Minn. Feb. 26, 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).

[41] See Guidant Sales Corp., No. 09-CV-0358, 2009 WL 490052, at *3 (D. Minn. Feb. 26, 2009). (“[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”).

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

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

[44] Tenant Const., Inc. v. Mason, No. A07-0413, 2008 WL 314515, at *2 (Minn. Ct. App. Feb. 5, 2008).  From a careful reading of this case, the author infers that the court may have been concerned about deception by the employee regarding his departure to a competing employer.  Had the employee been more straightforward with his employer before he terminated his job, it is possible that the court would have viewed the $500 consideration differently.

[45] 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).

[46]See Webb Publishing Co. v. Fosshage, 426 N.W.2d 445, 448 (Minn. Ct. App.1988) (citing Dahlberg Brothers, Inc. v. Ford Motor Co., 137 N.W.2d 314, 321?22 (Minn. 1965)).

[47]See Webb Publishing Co., 426 N.W.2d, at 448.

[48]See Dataphase Sys., Inc. v. C.L. Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981); Boston Scientific Corporation v. Kean, Civ. No. 11-419 (SRN/FLN), 2011 WL 853644 (D. Minn. March 9, 2011). (recent U.S. District Court summary and analysis of the factors).

[49] Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 129 S.Ct. 365, 376, 172 L.Ed.2d 249 (2008), as quoted by CHS, Inc. v. Petronet, LLC, Civ. No. 10-94RHK/FLN, 2010 WL 4721073 (D. Minn. Nov. 15, 2010) (which contained an extensive and informative analysis regarding the factors considered in granting injunctive relief).

[50] See, e.g., B & Y Metal Painting, Inc. v. Ball, 279 N.W.2d 813, 817 (Minn. 1979).

[51] See Lemon v. Gressman, No. C8-00-1739, 2001 WL 290512 at *3 (Minn. Ct. App. Mar. 27, 2001) (citing Faust v. Parrott, 270 N.W.2d 117, 120 (Minn. 1978)).

[52] See Tenant Const., Inc. v. Mason, No. A07-0413, 2008 WL 314515 (Minn. Ct. App. Feb. 5, 2008) (upholding grant of attorney’s fees to employer in non-compete agreement); Tonna Heating Cooling, Inc. v. Waraxa, No. CX-02-368, 2002 WL 31687601 at *5 Minn. Ct. App. Dec. 3, 2002) (denying an employer’s request for attorney’s fees, despite employee’s violation of the non-compete agreement, because the agreement did not provide for the payment of attorney’s fees); Barr/Nelson, Inc. v. Tonto’s, Inc., 336 N.W.2d 46, 53 (Minn. 1983).

[53] Kallok v. Medtronic, Inc., 573 N.W.2d 356, 363 (Minn. 1998).

[54] Minn. Stat. § 325C.04.

[55] Milner v. Farmers Ins. Exchange, 748 N.W.2d 608, 620 (Minn. 2008).

[56] Anderson v. Hunter, Keith, Marshall & Co., 417 N.W.2d 619, 628 (Minn. 1988) (quoting Hensley v. Eckerhart, 461 U.S. 424, 433 (1983)).

[57] Id.

[58] Id.

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

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

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

[62] Gorco, 99 N.W.2d 69 at 74.

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

[64] 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).

[65] Dean Van Horn Consulting Assoc. v. Wold, 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] Sutley, P.A. v. Selchow, D.D.S., No C9-95-860, 1996 WL 733, at *3 (Minn. Ct. App. Jan. 2, 1996).

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

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

[69] Frank B. Hall & Co. v. Alexander & Alexander, Inc., 974 F.2d 1020 (8th Cir. 1992) (arguing that the liquidated-damages clause in a Settlement Agreement between competing employers was not the sole remedy if one employer breached the agreement by inducing an employee to compete); H&R Block Enterprises, Inc. v. Short, No. Civ. 06-608, 2006 WL 3437491 (D. Minn. Nov. 29, 2006) (concluding 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).

[70] See, e.g., Rochester Corp. v. Rochester, 450 F.2d 118, 123 (4th Cir. 1971); Everett v. Nefco Corp., No 3:06-CV-00047, 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); 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); Eastern Carolina Internal Medicine, P.A. v. Faidas, 564 S.E.2d 53 (N.C. App. 2002).

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

[72] Id. at *4.

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

[74] 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).

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

[76] 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).

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

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

[79] 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).

[80] 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”).

[81] See, e.g., Norshor Experience, Inc. v. City of Duluth, MN, 442 F. Supp. 2d 713, 719 (D. Minn. 2006); cf. Metro Networks Comm’cns, LP v. Zavodnick, No. Civ. 03-6198, 2004 WL 73591 (D. Minn. Jan. 15, 2004) (considering the ten-month duration of the injunction and the fact the employee’s skill set would give him job opportunities in areas outside the scope of the non-compete in setting bond at $25,000).

[82] See Teamsters Local No. 120 v. Marathon Petroleum Co. LLC, No. 06-3431, 2006 WL 2971667 (D. Minn. Aug. 29, 2006) (grounding the decision to issue a $20,000 injunction bond in the likelihood that the plaintiff will succeed on the merits).

[83] Contiental Oil Co. v. Frontier Refining Co., 38 F.2d 780, 782–83 (10th Cir. 1964).  While the logic of this exception appears sound, commentators are concerned that defendants may have to bring separate actions to recover damages in the event of a finding of wrongful injunction.  In addition, the exception circumvents the policy goal of deterring plaintiffs from seeking injunctive relief in inappropriate cases.  See James T. Carney, Rule 65 and Judicial Abuse of Power: A Modest Proposal for Reform, 19 Am. J. Trial Advoc. 87, 116–17 (1995).

[84] Tonna Heating Cooling, Inc. v. Waraxa, No. CX-02-368, 2002 WL 31687601, at *4–5 (Minn. Ct. App. Dec. 3, 2002) (rejecting a request for a several million dollar bond in favor of the district court’s $50,000 bond); TestQuest, Inc. v. Lafrance, No. C0-02-783, 2002 WL 1969287, at *6 (Minn. Ct. App. Aug. 27, 2002) (rejecting a request for a bond higher than $2,000).

[85]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) (review denied June 13, 2000).

[86] Saliterman v. Finney, 361 N.W.2d 175, 178 (Minn. Ct. App. 1985).

[87] Inter-Tel, Inc. v. CA Commc’ns, Inc., No. Civ. 02-1864PAMRLE, 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).

[88] Guy Carpenter & Co., Inc. v. John B. Collins & Assoc., Inc., No. 05-1623, 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).

[89] Cf. Western Form, Inc. v. Pickell, 308 F.3d 930 (8th Cir. 2002). (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. When the employee eventually quit and started to compete with the employer, he was under no valid non-compete agreement.)

[90] Alpha Real Estate Co. of Rochester v. Delta Dental Plan of Minn., 664 N.W.2d 303, 312 (Minn. 2003).

[91] Great America Leasing Corporation v. Dolan, Civ. No. 10-4631 JRTJJK, 2011 WL 334829 (D. Minn. Jan. 31, 2011). (citing Arizant Holdings, Inc. v. Gust, 668 F.Supp.2d 1194, 1202 (D. Minn. 2009).

[92]See, e.g., Advanced Bionics Corp. v. Medtronic, 29 Cal. 697 (2002) (observing that while California courts cannot enjoin a lawsuit in another state, even where the out-of-state action seeks to enforce a broad non-compete provision against a California resident, the courts might be permitted to decline to honor the resulting judgment by the other state’s court).

[93]See, e.g., St. Jude Medical S.C., Inc. v. Hasty, No. Civ. 06-4547, 2007 WL 128856 (D. Minn. Jan. 12, 2007); Metro Networks Comm’cns L.P. v. Zavodnick, No. Civ. 03-6198 (RHF/AJB), 2004 WL 73591 at *4 (D. Minn. Jan. 15, 2004); Medtronic, Inc. v. Camp, No. Civ. 02-285 (PAM/JGL), 2002 WL 539073 (D. Minn. Apr. 1, 2002);. Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 452-453 (Minn. Ct. App. 2001); ELA Medical, Inc. v. Arrhythmia Management Associates, Inc., Civ. No. 06-3580, 2007 WL 892517 at *1 (D. Minn. March 21, 2007); Cook Sign v. Combs, A07-1907, 2008 WL 3898267 (Minn. Ct. App. Aug. 26, 2008).

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

[95] Id.

[96] See Bennett v. Storz Broad. Co., 134 N.W.2d 892 (Minn. 1965).

[97] See Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 452 (Minn. Ct. App. 2001); Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 800 (Minn. Ct. App. 1993).

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

[99] See, e.g., Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890 (Minn. 1983); Tenant Const., Inc. v. Mason, No. A07-0413 2008 WL 314515 (Minn. Ct. App. Feb. 5, 2008).

[100] See, e.g., Kallok v. Medtronic, Inc., 573 N.W.2d 356 (Minn. 1998); Nat’l Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 741 (Minn. 1982); United Wild Rice, Inc. v. Nelson, 313 N.W.2d 628, 632 (Minn. 1982); Bennett v. Storz Broadcasting Co., 134 N.W.2d 892, 897 (Minn. 1965); Ultra Lube, Inc. v. Dave Peterson Monticello Ford-Mercury, Inc., No. C8-02-658, 2002 WL 31302981 (Minn. Ct. App. Oct. 15, 2002); Medtronic v. Hughes and St. Jude Medical, A10-998, 2011 WL 134973 (Minn. Ct. App. Jan. 18, 2011).

[101] Kallok v. Medtronic, Inc., 573 N.W.2d 356 at 362 (Minn. 1998).

[102] Kallock, 573 N.W.2d at 363; Medtronic, A10-998, WL 134973 at *9 (affirming an award for attorney’s fees and expenses in the amount $615,958 against the new employer for procuring an anticipatory breach and then a breach of a non-compete covenant.)

[103] Oelschlager v. Magnuson, 528 N.W.2d 895, 902 (Minn. Ct. App. 1995).

[104] Hentges v. Thomford, 569 N.W.2d 424, 427 (Minn. Ct. App. 1997).

[105] Hagen v. Burmeister & Assoc., Inc., 633 N.W.2d 497, 504 (Minn. 2001).

[106] Id. at 505 (citing Fahrendorff ex rel. Fahrendorff v. North Homes, Inc., 597 N.W.2d 905, 910 (Minn. 1999)).

[107] I.B.M. Corp. v. Seagate Tech., Inc., 941 F. Supp. 98, 101 (D.Minn.1992) (citing Surgidev, 648 F. Supp., at 695). “[A] claim of trade secret misappropriation should not act as an ex post facto covenant not to compete.”  Seagate Tech, 941 F. Supp. at 101 (citing E.W. Bliss Co. v. Struthers-Dunn, Inc., 408 F.2d 1108, 1112–13 (8th Cir. 1969)); see also Lexis-Nexis v. Beer, 41 F. Supp. 2d 950, 959 (D. Minn. 1999) (following Seagate and refusing to grant injunction allowing employer to “obtain, through the back door of trade-secret law, the kind of unreasonable restriction it could not obtain via its original non-compete agreement”).

[108] See Eaton Corp. v. Giere, 971 F.2d 136, 141 (8th Cir. 1992) cert. denied, 506 U.S. 1034 (1992).

[109] Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 903 (Minn. 1983) (finding no misappropriation where employer never treated information as secret, despite existence of agreement prohibiting the taking of secrets).

[110] Conus Comm’cns Co. Ltd. P’ship v. Hubbell, No. C5-99-2131, 2000 WL 979133, at *3 (Minn. Ct. App. 2000)  (refusing to find intent where employer did not provide notice that information was confidential, had no agreement with employee to that effect, and failed to implement adequate safety measures to protect confidential information).

[111] See Minn. Stat. §§ 325C.01–08 (setting out the statutory definition of trade secret misappropriation).

[112] Id. § 325C.01, subd. 3.

[113] See Dataphase Sys., Inc. v. C.L. Sys. Inc., 640 F.2d 109, 113 (8th Cir. 1981) (providing the test for entitlement to injunctive relief in the Eighth Circuit); Dahlberg Bros., Inc. v. Ford Motor Co., 137 N.W.2d 314, 321–22 (Minn. 1965) (setting out the Minnesota state test for injunctive relief).

[114] Electro-Craft Corp., 332 N.W.2d at 899–901.

[115] 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); 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); 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.”).

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

[117] Id.  But see Lasermaster Corp. v. Sentinel Imaging, 931 F. Supp. 628, 637 (D. Minn. 1996).

[118] See, e.g., id.; Guy Carpenter & Co. v. John B. Collins & Assocs., No. 05-1623, 2006 WL 2502232 (D. Minn. Aug. 29, 2006) (refusing to protect client identities, preferences, and purchasing history); 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.”)

[119] See Cenveo Corp. v. S. Graphic Sys., Inc., No. 08-5521, 2009 WL 161210 (D. Minn. Jan. 22, 2009) (protecting job history information that included records of transactions and internal costs given by a former employee to Southern Graphic, a competitor of Cenveo); Equus Computer Sys., Inc. v. Northern Computer Sys., Inc., No. 01-657, 2002 WL 1634334 (D. Minn. July 22, 2002) (protecting the identity of “designated systems group” (DSG) customers—manufacturers who incorporate Equus computers into their products and systems—as well as information compiled by Equus about non-DSG customers’ buying, payment, marketing, and pricing history, though not their identities).

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

[121] 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, 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).

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

[123] Lasermaster Corp. v. Sentinel Imaging, 931 F. Supp. 628, 636 (D. Minn. 1996).

[124] Surgidev Corp. v. Eye Technology, Inc., 648 F. Supp. 661, 663, 693–94 (D. Minn. 1986), aff’d 828 F.2d 452 (8th Cir. 1987).

[125] See, e.g., PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995).

[126] See I.B.M. Corp. v. Seagate Tech., Inc., 941 F. Supp. 98, 101 (D.Minn.1992); Minn. Stat. § 325C.02(a).

[127] NewLeaf Designs, LLC v. BestBins Corp., 168 F. Supp. 2d 1039, 1044–45 (D. Minn. 2001).

[128] Lexis-Nexis v. Beer, 41 F. Supp. 2d at 955.

[129] 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).

[130] See, e.g., Banks v. Unisys Corp., 228 F.3d 1357, 1359 (Fed. Cir. 2000).

[131] Id.

[132] See, e.g., Eaton Corp., 971 F.2d at 139; Sanitary Farm Dairies, Inc. v. Wolf, 112 N.W.2d 42 (Minn. 1961).

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

[134] See id.

[135] See, e.g., Triple Five of Minnesota, Inc. v. Simon, 404 F.3d 1088, 1095 (8thCir. 2005); Gunderson v. Alliance of Computer Professionals, 628 N.W.2d 173, 186 (Minn. Ct. App.2001). 

[136] Viking Produce, Inc. v. Northstar Produce, LLC, No. A11-635, 2012 WL 171391 (Minn. Ct. App. Jan. 23, 2012).

[137] See, e.g., Matter of Villa Maria, Inc., 312 N.W.2d 921, 922 (Minn. 1981); Diedrick v. Helm, 14 N.W.2d 913, 919 (Minn. 1944).

[138] Factors relevant to the “line of business” prong of the test include: (1) whether the corporation had an interest or expectancy in the opportunity growing out of a contractual right; (2) whether the opportunity was related to the corporation’s current business purposes and activities; (3) whether the opportunity represented an area of logical and natural expansion for the corporation; (4) whether the opportunity raised the specter of unfair or prospectively harmful competition; (5) whether the corporation had the financial ability and resources to acquire or implement the opportunity; and (6) whether the opportunity included activities within the fundamental knowledge, experience, facilities, personnel, equipment, and abilities of the corporation. Miller v. Miller, 222 N.W.2d 71, 81 (1974).

[139] NeoNetworks, Inc. v. Cree, Nos. A07-0729, 2008 WL 2104161, at *5 (Minn. Ct. App. May 20, 2008).

[140] See A.C. Petters Co., Inc. v. St. Cloud Enters., Inc., 222 N.W.2d 83, 86–87 (Minn. 1974).

[141] Triple Five of Minnesota., Inc. v. Simon, 404 F.3d 1088 (8th Cir. 2005).

[142] See, e.g., Associated Cinemas of America v. World Amusement Co., 276 N.W.2d 7, 10 (Minn. 1937).

[143] See Marso v. Makato Clinic, Ltd., 153 N.W.2d 281, 290 (Minn. 1967); Webb Pub. Co. v. Fosshage, 426 N.W.2d 445, 449 (Minn. Ct. App. 1988) (holding that a wrongful termination may preclude enforcement of a restrictive covenant) (citing Edin v. Josten’s Inc., 343 N.W.2d 691, 694 (Minn. Ct. App. 1984)); Prow v. Medtronic, Inc., 770 F.2d 117, 121 (8th Cir. 1985) (holding that an employer does not breach its compensation obligations to an employee when it reduces an employee’s sales territory—and by extension his earnings—because the purpose of the reduction was to alleviate employee “burn-out” and encourage employees to remain with the employer); Hart Forms & Sys., Inc. v. Goettsch, No. C3-90-1791, 1990 WL 195473, at *3 (Minn. Ct. App. Dec. 11, 1990) (recognizing that wrongful termination can constitute a breach of an employment contract but concluding that the employer’s termination of the employee was not wrongful because it provided the employee with the requisite notice of poor performance prior to termination).

[144] See Minn. Mining and Mfg. Comp. v. Kirkevold¸ 87 F.R.D. 324, 336 (D. Minn. 1980).

[145] Northwest Publications, L.L.C. v. Star Tribune Company, No. C6-07-003489 (Ramsey Co. Dist. Ct. Sept. 18, 2007).

[146] See Empiregas, Inc. of Ardmore v. Vernon Hardy, 487 So.2d 244, 249 (Ala. 1985), cert denied, 476 U.S, 1116 (1986); Richardson v. Permacel Tape Corp., 244 F.2d 80, 83-4 (5th Cir. 1957).

[147] Medtronic v. Hughes and St. Jude Medical, A10-998, 2011 WL 134973 (Minn. Ct. App. Jan. 18, 2011), citing Kjesbo v. Ricks, 517 N.W.2d 585, 588 (Minn. 1994) (quoting Restatement (Second) of Torts § 773 (1979)).

[148] Select Comfort Corp. v. Sleep Better Store, LLC, Civ. No. 11-621 (JNE/JSM), 2012 WL 716667 (D. Minn. March 2, 2012).

[149] Medtronic v. Hughes and St. Jude Medical, A10-998, 2011 WL 134973 (Minn. Ct. App. Jan. 18, 2011).

[150] See, e.g., Eaton Corp., 971 F.2d at 139; Sanitary Farm Dairies, Inc. v. Wolf, 112 N.W.2d 42 (Minn. 1961).

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

[152] Benfield, Inc. v. Moline, No. Civ. 04-3513, 2006 WL 452903 (D. Minn. Feb. 22, 2006) (internal quotation marks omitted).

[153] Id.

[154] See Sanitary Farm Dairies, Inc. v. Wolf, 112 N.W.2d 42, 47–48 (Minn. 1961).

[155] Signergy Sign Group v. Adam, Nos. A04-70, A04-147, 2004 WL 2711312 (Minn. Ct. App. Nov. 30, 2004) (holding that an employee did not breach his fiduciary duty, because even though he contemplated starting his own business for several months and had spoken to two suppliers prior to his departure, the bulk of the work on the new business took place after he left); see also Reliastar Life Ins., Co. v. KMG Am. Corp., No. A05-2079, 2006 WL 2529760 (Minn. Ct. App. Sept. 5, 2006) (concluding that the employees had not breached their duty of loyalty). But see Workers’ Compensation Recovery, Inc. v. Marvin, No A03-1549, 2004 WL 1244404 (Minn. Ct. App. June 8, 2004) (upholding a temporary injunction after finding that an employer would likely succeed in proving that a former employee breached her duty of loyalty by notifying the employer’s biggest customer that she would soon be starting a business that would compete with the employer).

[156] See, e.g. Hough Transit, Ltd. v. Nat’l Farmers Org., 472 N.W. 2d 358, 361 (Minn. Ct. App. 1991).

[157] Viking Produce, Inc. v. Northstar Produce, LLC, No. A11-635, 2012 WL 171391 at 3 (Minn. Ct. App. Jan. 23, 2012).

[158] See H & R Block v. Majkowski, 410 F. Supp. 2d 1, 3 (D.D.C. 2006); Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438 (Minn. Ct. App.2001); Edin v. Jostens, Inc., 343 N.W.2d 691 (Minn. Ct. App.1984).

[159] See Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 901 (Minn. 1983) (quoting Minn. Stat. § 325C.01, subd. 5(ii)).

[160] Surgidev Corp. v. Eye Tech., Inc., 648 F. Supp. 661, 693–94 (D. Minn. 1986).

[161] Select Comfort Corp. v. Sleep Better Store, LLC, Civ. No. 11-621 (JNE/JSM), 2012 WL 716667 (D. Minn. March 2, 2012).

[162] Id. at *2.

[163] Id. at 7.

[165] Id. At *7.

[166] Best Medical International, Inc. v. Spellman,  Civ. Nos. 07-1709, 08-1404, 09-1194, 2011 WL 6749036 (W.D.Pa. Dec. 22, 2011).

[167] Questar Data Systems, Inc. v. Service Management Group, Inc., 502 F.Supp.2d 960, 963 (D. Minn. 2007), citing, Hoppe v. Klapperich, 28 N.W.2d 780, 786 (1947).

[168] Kellar v. Von Holtum, et al., 568 N.W.2d 186, 192 (Minn. Ct. App. 1997).

[169] See, Progress Aviation, A.G. v. Republic Airlines, WL 15157 (D. Minn. December 12, 1986); Dollar Travel Agency v. Northwest Airlines, 354 N.W.2d 880, 883 (Minn. Ct. App. 1984); Paidar v. Hughes, 615 N.W.2d 276, 281 (Minn. 2000).

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