Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
These agreements often consist of an agreement by one party not to compete against the other party. They frequently restrict competitive activities in a specified geographic territory and for a specific period of time. And they should contain a description of the type of competitive activities that are restricted.
Non-compete agreements protect the employer in situations where the other party has access to customers and proprietary information; this could apply to employees or independent contractors. These agreements are also used in the sale of a business so that the buyer can restrict the seller from competing against the business.
That being said, there are important elements of a non-compete agreement that increase its validity and enforcement should it be challenged in court.
Where’s the benefit?
Any contract must be supported by consideration in order to be legally valid. Consideration is a benefit that one party receives from another. This could be money, a promotion, a new title or other benefits such as the transfer of assets to a buyer.
The most common reason that non-compete agreements are not legally enforceable is because an existing employee was not given consideration connected to the agreement not to compete.
Cases decided in Minnesota courts have involved employees who were not informed of a non-compete agreement before they were hired. Once they are made aware of the agreement, employees must be compensated with additional bargained consideration such as a raise, promotion or other benefits.
If other employees receive the same increased benefits whether or not they sign the non-compete agreement, then the benefits cannot constitute consideration and the agreement is not enforceable.
Is it reasonable?
Employers also cannot ?spring? the agreement on an employee on the first day of work. If the non-compete agreement is included as part of the initial job offer, then the job offer itself can constitute consideration. The candidate must be aware of the non-compete agreement and sign it before or shortly after agreeing to start work.
Minnesota court cases have held that non-compete agreements must be reasonable in size and length; the restriction must be no greater than what is necessary to protect the other party?s legitimate interest.
Reasonableness is a matter of opinion. The extent of enforceability often varies from judge to judge depending on the judge?s own opinions on the issue. Two equally valid principles are at play: free competition and legal protection for business owners.
How these two principles are resolved is highly dependent on the facts of each case. They include:
? Length and time of restriction compared to length and time of the contract;
? Relationship between restricted territory and employer?s current territory;
? Nature of the work performed by the restricted party;
? Amount of customer contact by the restricted party;
? Resources furnished by the employer;
? Similarity of restricted party?s current position to the former position;
? Training provided by the employer.
Minnesota has also adopted a ?blue pencil doctrine? that allows the court to redraft the parties? non-compete contract to make it reasonable rather than refuse to enforce it as it stands.
Typical non-compete contracts include time restrictions of one to two years, and some have been enforced for as long as three years. Courts frequently limit the restricted geographic area to where the former employer currently engages in business.
Courts also frequently refuse to enforce restrictive covenants that cover more activities than reasonably necessary to protect the employer or buyer?s interest.
A well-drafted non-compete agreement will include the following items:
? Outlining of the consideration (offer of employment, raise, benefits);
? Reasonable time restriction with a clear start date;
? Reasonable territorial restriction (such as within a 10-mile radius);
? Clearly defined restricted activities;
? Explanation of titles or roles that are restricted (employee, associate, partner);
? An acknowledgement that the restrictions are reasonable and necessary;
? Acknowledgement of the need for injunction in the event of a breach;
? The governing body that will interpret and enforce the agreement (Minnesota).
The agreement might also include an attorney?s fee provision that allows the prevailing party to recover costs in a lawsuit. It might call for arbitration or mediation of disputes rather than a lawsuit. Specific damages awarded in the event of a breach could be addressed as well as the preferred venue for dispute resolution.
In any case, consult an attorney practicing in employment law or business transactions when drafting non-compete agreements. Well-drafted agreements can close the loopholes and improve communication with employees and other business partners.
