These days it is all too common to hear of cases where a key person, and indeed increasingly, not seemingly “key” persons, in a Minnesota business whose access to the company’s trade secrets, confidential information, customers or customer lists, vendors or vendor lists, marketing strategy, product specifications, customer or customer histories or data; leaves the company either to join a competitor or to start a competing business, relying upon the exposure gained while employed from the previous employer.
In our practice we have found this especially true in new high-tech companies which have developed new and unique technologies, giving them a special advantage or niche in a particular product market. Interestingly, our firm finds this is also true in very small non high-tech business settings. This article uses the terms agreements and covenants interchangeably.
Essentially, an employment agreement should have two critical covenants that are relevant to this: (1) a non-compete covenant, and (2) a non-disclosure covenant. Although non-disclosure covenants are vital, the Minnesota Trade Secret Law can still protect you, regardless, as an employer; and you should be aware this as an employee, in the absence of any covenant or agreement. Companies often face devastating losses and are broken up if a person is not bound by a non-compete agreement. Despite even the existence of such an agreement, the employer or employee is not knowledgeable of the law in other means to address the circumstance absent an agreement.
To protect the company, and indeed, this could even be a sole proprietorship who hires only one employee, it is highly recommended that every business which enters into an employment agreement with a key person, or indeed with almost any employee with access to important data, require as a condition of employment the execution of a non-compete agreement. This must be assigned prior to commencement of work.
Despite the statutory protection, a non-disclosure covenant is also important as the probabilities of enforcement of such covenants in court (or non-court negotiations) after the wrongful acts have occurred are often greatly enhanced by the particular language that is used, especially the definition of confidential information which can exceed that as set forth in the Minnesota statutes.
Non-competition agreements are enforceable under Minnesota law as long as the restrictions they impose, prohibiting the right to compete within a certain time frame and geographical area and/or product area, are reasonable.
Minnesota Courts normally attempt to strike a balance between two competing policies: one of which favors the right of individuals under our system to freely earn a livelihood; the other which recognizes the right of a business to protect itself and its assets.
Even though non-compete agreements represent a restraint of trade by definition, and therefore are cautiously considered and carefully scrutinized, they are nevertheless enforced by the courts through strategies necessary for protection of the business or goodwill of the business or employer, and if the agreement imposes no greater restraint on the employee than is reasonably necessary to protect the employer’s business.
It is important to know that courts have much power or discretion, essentially an equitable power afforded by case law, to redraft key portions of the agreement to narrow it. Minnesota has adopted this “blue pencil rule” reflecting this authority of the judge. 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 geographical area, such as the State of Minnesota, or even a two mile radius of the business headquarters, can be deemed a reasonable restriction and be enforced. However, a broad five-year restriction covering the North American continent often is less likely to be enforced. Judges rule on such covenants on a case-by-case basis and are empowered to employ the blue pencil, as indicated above.
Generally, non-compete restrictions will not apply to an unskilled laborer who would not normally have access to trade secrets or be in a position to exploit these secrets to the detriment of the employer; and who has a greater need to earn a living without restrictions.
In contrast, non-compete covenants are often strictly applied to professional or skilled employees with high-tech skills and to well-compensated employees who understand the business trade secrets and technology, and who could use those to the detriment of the employer.
Moreover, for a non-compete covenant 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. Normally, the actual offer of employment and accompanying employment recited in the agreement is adequate.
Critically, if non-compete agreements are later introduced or modified in the employment setting, the employment agreement should be amended, with a separate agreement entered and additional consideration or payment made, or benefits afforded to the employee that are clearly delineated. While there are some variations or exceptions to this, wise planning suggests these fundamentals be addressed.
Normally, in order to enforce these agreements by litigation, the employer must file a Complaint with the District Court and request a remedy called a “temporary restraining order” and/or a “temporary injunction,” prohibiting the employee from competing in the geographical area, or for the length or time, or for the market or products stipulated in the non-compete agreement. It is not a prerequisite to obtain a temporary restraining order or temporary injunction (sometimes termed by the courts “extraordinary relief”). However, if the “cat is out of the bag,” substantial credibility is added by filing for this extraordinary relief. Indeed, when there is a likelihood of winning on the merits, applying for temporary injunction at the outset provides leverage worth the effort. At least a very strongly worded, hand-delivered, certified mail letter should be send by the employer and/or the employer’s attorneys to preserve the rights.
The decision whether to grant an injunction or restraining order involves a balance of harm, and the Court must find that the employer will suffer “irreparable harm” if the covenant is violated and not enforced. 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 client in a way which created a personal hold on the goodwill of the company, for example.
It is important when drafting a non-compete agreement that the employer also specify that the employee’s job position allows the employee access to customer’s confidential information, product development, technological secrets and marketing strategy which have been developed with the care and assistance of the company. Generally, the more explicit the non-compete agreement is in this regard, the more likely it will be enforced. Like most litigation, unfortunately, there can be no guarantees as to the outcome.
Non-Compete Agreements and the New Employer’s Risks
Minnesota law allows the employer to enforce a non-compete agreement and otherwise commence litigation against the new employer. An example of such an action is reflected in the outcome of Kallok v. Medtronic, Inc., 573 N.W. 2d 356 (Minn. 1998), when the Minnesota Supreme Court held that the original employer can obtain damages if it shows that the new employer who hired away the 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 damages, including attorneys’ fees the former employer occurs in prosecuting the suit.
In technical terms, the Supreme Court in that case held that interference with the non-compete agreement by a third party is a tort (called “tortuous interference with contract”) for which damages are recoverable. Any business contemplating the hiring of an employee from another company must carefully investigate and exercise due diligence to determine whether the employee has signed a non-compete agreement which prevents that person from being employed by the new employer.
Non-Disclosure Covenants and Trade Secret Law
As mentioned, in the absence of an employment agreement, or the existence of an employment agreement that does not contain a non-disclosure covenant, Minnesota statutory law and case law developed around the Minnesota statutes has afforded employers the opportunity to sue an employee who walks off with trade secrets or confidential information. The statute provides the definition of “confidential information” upon which such a suit can be based. Importantly, employers who hire an employee having trade secrets, and who use those secrets, also run the risk of liability, separate from the employee who is left. Similarly, careful investigation and due diligence of the new employee who may have or use trade secrets is vital. The employee who selects to leave must use good planning beforehand to avoid problems.
Employee Obligations to Employer Often Overlooked
Separate from the employment agreements containing non-disclosure and non-compete covenants; and separate from the trade secret law itself, it is important to note that Minnesota law imposes other duties of employees to employers. This is especially true as the level of compensation or responsibility of the employee becomes greater. Corporate laws indeed impose several obligations for officers and directors.
Officers and directors are bound by traditional corporate governance law, such as fiduciary duties and duties of care and obligations to follow corporate statutes, norms, bylaws, and employment agreements overall. However, there are other obligations for which suit can be brought which include but are not limited to employee’s violations of duties of loyalty, and duties of honesty. Employee productivity duties can be set forth in job descriptions, compensation plans, and accompanying rules. There are also duties involving inventions and copyrights, and potential duties regarding assignment of inventions and copyrights, avoidance of conflicts of interest, reimbursement.
Readers may refer to the Summer 2005 issue of Law Currents published by the law firm in this regard. Employers must be careful with the administration of disciplinary rules regarding employee duties, potential counterclaims or suits, including those for defamation, potential negligent infliction of mental distress, human rights legislation and rule violation, for example.
For questions pertaining to Minnesota employers and employees, please call Boris Parker at (612) 355-2201 for a free telephone consultation.