Non-compete agreements (also called covenants not to compete or restrictive covenants) are contracts intended to protect businesses from unfair competition by former employees and the competitors who hire them. Non-compete agreements are generally disfavored because they are a partial restraint on trade in the marketplace and negatively impact an individual’s ability to earn a living. Still, they continue to be a useful tool for many employees to protect confidential information and maintain their competitive edge. Although decided on a case-by-case basis, Minnesota courts will typically enforce non-compete agreements provided they: (1) protect a legitimate business interest such as preventing disclosure or misuse of confidential information/trade secrets or prevent the loss of customer good will; and (2) are reasonable in scope, duration and geography. While every non-compete agreement should be specifically tailored to fit your particular business, listed below are a few suggestions to maximize the effectiveness and enforceability of your non-compete agreements.
2. Geography. Make sure to specify the prohibited territory in the non-compete. To maximize the probability of enforcement, you may want to limit the non-compete to the market in which your business operates, the region where the employee will work or the territory of your customer base. For example, Minnesota courts are less likely to enforce a nationwide non-compete agreement in favor of a company conducting business and servicing customers exclusively in Minnesota.
3. Duration. Minnesota courts have generally determined that non-competes containing a 1-2 year time restriction are reasonable. Non-compete agreements containing temporal restrictions greater than 2 years risk heightened scrutiny and possible invalidation.
4. Non-Solicitation of Customers. Consider limiting the contact and solicitation of customers/clients to those with whom the former employee had direct contact, particularly if the employee was not management or did not have access to the customer list. Courts are more likely to find the scope of your non-compete reasonable if it does not completely preclude the individual from working. As a practical matter, the former employee will probably have little success obtaining a customer with whom he has no personal relationship. Attaching a copy of specific customers to the non-compete who are “off limits” will help prevent any confusion at the beginning of the employment relationship.
5. Confidential information. If your business does not utilize a separate confidentiality/non-disclosure agreement, include a specific section in the non-compete defining and prohibiting the disclosure of confidential information. An important companion provision should be included requiring the employee to return all records and property upon termination, resignation or at the employer’s request and should also define the term “property.”
6. Liquidated damages clause. Liquidated damages provisions are frequently placed in non-compete agreements since damages arising from a breach of the agreement can be difficult to ascertain or prove. A liquidated damages clause can take the form of a specific dollar amount or be based upon a percentage of sales/revenue from business obtained in violation of the agreement. Be aware that a liquidated damages clause for breach of a non-compete may preclude injunctive relief to enforce the covenant.
7. Assignability. Put a provision in the non-compete reserving the right to assign the non-compete to another entity or party. Any purchaser or successor in interest to your business will want the right to enforce the covenants against the employees.
8. Attorneys’ Fees. Every non-compete agreement should provide for the recovery of attorneys’ fees and costs in the event of a breach. First, your business will likely end up consulting with an attorney regarding a perceived violation of a non-compete. Secondly, this provision will act as an additional deterrent for would-be violators.
9. Notice of Re-Employment. A provision requiring a former employee to notify you in writing of any offer of employment during the non-compete period can help monitor compliance. This section should also obligate the employee to provide an authorization so that you may contact the prospective employer. Additionally, make sure to provide a copy of the non-compete to all prospective employers.
10. Independent consideration. Minnesota law requires that covenants not to compete be supported by independent consideration (something of value) if not presented with the initial employment package. Minnesota courts have made it difficult for employers to enforce non-compete agreements after the employer accepts the position or actually begins employment absent a clear demonstration that the employee received a significant economic advantage in exchange. Employers can avoid this uncertainty by making sure to discuss the non-compete agreement during the interview process and including it as part of the job offer or employment contract. The prudent employer will put the offer of employment in writing and make it expressly contingent upon the execution of the non-compete agreement. If you elect to put the non-compete in an employment contract, you must also state that all of the terms and conditions of the non-compete survive expiration of the employment contract.
11. Wrongful discharge. Recognize that an employee’s wrongful termination (such as discrimination) may invalidate an otherwise valid and enforceable non-compete.
