Enforcement Of Non-Competition Agreements

ENFORCEMENT OF NON-COMPETITION AGREEMENTS

It is all too common these days to hear of cases where a key man or woman in a Minnesota business, who has had access to the company’s confidential information, marketing strategy, product specifications, customer lists, and trade secrets, leaves the company either to join a competitor or to form a competing business, relying upon the knowledge, expertise, and exposure gained while employed. This is especially true in new high-tech companies, which have developed new and unique technology, giving them a special advantage or niche in a particular product market.

A company could, therefore, face devastating losses in the market if the key person, who does not have a non-compete agreement in his or her contract, leaves the company, forms a competing business, and takes with them the trade secrets, customer lists, and market strategy.

To protect the company under these circumstances, it is highly recommended that every business, which enters into an employment agreement with a key person, require as a condition of employment the execution of a non-compete agreement. These agreements are enforceable under Minnesota law as long as the restrictions they impose, prohibiting the right to compete within a specific time frame and geographic area, are reasonable.

The Minnesota Courts have consistently struck a balance between two competing policies: one of which favors the right of individuals under our system to freedom in earning a livelihood; the other which recognizes the right of a business to protect itself from unfair competition, particularly where an employee has access to highly sensitive confidential or secret data.

Even though non-compete agreements represent a restraint of trade and therefore are cautiously considered and carefully scrutinized, they are nevertheless enforced by the Courts if the restraint is necessary for the protection of the business or goodwill of the employer, and if the agreement imposes no greater restraint on the employee than is reasonably necessary to protect the employer’s business. Thus, for example, a non-compete agreement that restricts the employee from working for a competitor, or from starting a competing business, for a one-year period within a particular geographic area, i.e. the State of Minnesota, will be deemed a reasonable restriction and will be enforced. However, a five-year restriction within all of North America might not be.

Generally, however, these restrictions will not apply to an unskilled laborer, who would not normally have access to trade secrets or be in a position to exploit those secrets, and who has a greater need to earn a living without restrictions. Rather, non-compete agreements apply to professional or skilled employees with special high-tech skills, who understand the business’ trade secrets and technology, and who could use those to the detriment of the employer in a competing business.

Moreover, for a non-compete to be enforceable, the Courts require that the employee receive adequate consideration, or something of value, in exchange for giving up the right to compete. In this regard, an employee’s agreement to continue employment can be sufficient consideration if his contract is bargained for, and provides the employee with advantages, such as gaining knowledge of product development and marketing as a result of the employment, or being given access to trade secrets and confidential information about the company’s products and clients.

In order to enforce these non-compete agreements, the employer must file a Complaint with the District Court, and request a remedy called a temporary restraining order or a temporary injunction, prohibiting the former employee from competing in the geographic area and for the length of time stipulated in the non-compete agreement. The decision whether to grant an injunction or restraining order always involves a balance of harm, and the Court must find that the employer will suffer “irreparable harm” if the agreement is violated. Such harm can be inferred if the employer will lose the goodwill of a limited customer base where the employee developed a relationship with the clients in a way which created a personal hold on the goodwill of the company.

It is important when drafting a non-compete agreement to specify that the employee’s job position allows the employee access to product development, technological secrets, marketing strategy, and confidential client information, which could serve as consideration for the non-compete agreement. The more explicit the non-compete agreement is in this regard, the easier it will be to enforce.

Not only does Minnesota law allow the employer to enjoin the employee from violating the non-compete agreement, but under an important Minnesota case, Kallok v. Medtronic, Inc., 573 N.W. 2d 356 (Minn. 1998), the Minnesota Supreme Court held that the original employer can obtain damages if it shows that the new employer who hired away the key person knew of his or her non-compete agreement, but hired the employee anyway. Indeed, if the original employer is forced to sue the new employer to enforce the non-compete agreement, it can obtain as damages the attorneys’ fees it incurs in prosecuting the lawsuit.

In technical legal terms, the Supreme Court held that interference with a non-compete agreement by a third-party is a tort (called tortious interference with contract) for which damages, including attorneys’ fees, are recoverable. Therefore, any business contemplating the hiring of a key employee from another company must first carefully investigate and exercise due diligence to determine whether that employee has signed a non-compete agreement which prevents that person from being employed by the competing business.

All businesses dealing with key employees should, therefore, review their contracts and, if they do not currently have a non-compete agreement, should consult with their attorneys to make sure that such a carefully drafted provision is included in all employment contracts. In these highly competitive times, failure to do so could have devastating consequences on the future of the company.

For questions pertaining to litigation involving non-competition agreements, please call Boris Parker at (612) 355-2201 for a free telephone consultation.