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.
Employers want to ensure that their customer goodwill and valuable confidential information don’t walk out the door when an employee resigns. One method of protecting — or attempting to protect — a business’s interests is use of non-compete agreements or other similar types of agreements, which are collectively known in the legal field as restrictive covenants.
As a lawyer who counsels businesses and employers on a daily basis, this is probably the most frequent question I am asked about restrictive covenants. Not to sound like a lawyer, but the answer is: “It depends.”
In Minnesota, courts will enforce a non-compete agreement if it meets three basic criteria: (1) It must be reasonable in scope; (2) It must protect a legitimate business interest; and (3) It must be supported by consideration – a legal term that means something of value was given in exchange.
What is reasonable? Courts use a number of factors in this determination, and each case is different. However, narrowly tailored geographic and temporal restrictions are often enforced.
In general, defining a geographic restriction to the actual area the employee was working, or where the clients s/he served are located, will usually be upheld as a reasonable geographic restriction. A restriction of 25 miles might be considered reasonable for a chiropractor to open a competing clinic, but not for a hairdresser to open a competing salon. The entire state of Minnesota might be a reasonable scope for a salesperson who covered a state-wide territory, but not for one who only worked the seven-county metro area. Nationwide and global restrictions are almost universally held invalid.
But some positions do not lend themselves to geographic restrictions. Courts routinely find using a customer-based restriction to be reasonable. If the theory is that the employer has an interest in customer goodwill, then keeping a former employee from contacting them for a period of time helps protect that interest. It doesn’t matter if the customer is located in Duluth or Dublin or Dubai, so long as the company has an interest in that customer relationship.
Temporal restrictions also must be narrowly drawn. In the employment context, courts routinely uphold restrictions of up to a year. Depending on the other circumstances of the employment and how narrowly drawn the geographic restriction is, a court will sometimes enforce a two-year covenant.
Courts will consistently enforce restrictive covenants that seek to protect a business’s customer goodwill and its confidential information. Confidential information need not be so confidential as to be considered a trade secret — which has its own statutory protections regardless of the existence of a non-compete agreement. Customer lists, pricing information, research and development and other items that the company truly treats as confidential can usually be protected.
Industry-specific circumstances might also factor into an agreement’s enforceability. Entry-level employees, those without access to research and development information, and those who aren’t tasked with cultivating client relationships will be less likely to be bound. A court is not going to put a line cook out of work for a year by saying she cannot walk across the street and work for another restaurant. Attempts by businesses to overreach in this regard are met with disfavor.
Merely trying to prevent your employees from defecting to your competition is also not a protectable interest.
The final (but often overlooked) element to enforcing a restrictive covenant is consideration. Something of value must be given in exchange for the employee’s agreement to be bound. In Minnesota, employment that is expressly conditioned upon signing a restrictive covenant is sufficient consideration. However, businesses must be extremely careful on how this is done. If an employee accepts employment, begins working, then is presented with a non-compete agreement, that is not sufficient consideration under the law. It’s best to consult with your trusted human resources or legal adviser if you have questions on how to accomplish this the correct way.
But what if your key employees never had a non-compete agreement, and now you wish to put one in place? All is not lost. You can offer a financial or other work-related incentive (raises, promotions, stock options, additional fringe benefits) as consideration for an agreement.
Does your company ask candidates for higher-level positions if they are bound by a previous employer’s restrictive covenant? You should. Onboarding a new employee, only to be slapped with a cease-and-desist letter a month later, is a costly and painful disruption to your business. If the former employer sues, the company can be on the hook for damages and attorney fees if it is shown that it knowingly hired someone in violation of a restrictive covenant.
In the context of a sale of a business, courts are far more likely to enforce broader restrictions on competition. From a business perspective, it makes sense. If you pay me $1 million for my business, but I can walk across the street, open a competing shop, and eat your lunch, where is the value? Longer — often much longer — temporal restrictions will be considered enforceable. Five- and 10-year restrictions, depending upon the industry, are not uncommon. Courts will also be more generous with geographic restrictions, especially in the case of brick-and-mortar businesses.
Sometimes the Venn diagram between what is legally acceptable and what makes good business sense overlaps and sometimes it doesn’t. Requiring a reasonable non-compete from your key employees can be an excellent business decision; overreaching or aggressive enforcement can affect employee morale and the culture of your business. Tread lightly.
