We often hear of restrictive covenants in an employment setting, and typically these take the form of a non-compete and non-solicitation obligation in an employment agreement. In such agreements an employee may also be subject to confidentiality obligations and restrictions on use of proprietary information. Non-competes are often part of the consideration paid by a buyer to a seller in the purchase of a business. In this article, we’ll address restrictive covenants between an employer and employee.
Historically, restrictive covenants have been disfavored by courts because they have been viewed as a restraint on trade and as hindering the ability of a person to earn a livelihood. Modern courts will enforce them, however, after a careful review and sometimes ‘blue pencil’ revision. Under Minnesota law, restrictive covenants are legal and enforceable, so long as they meet certain requirements.
Minnesota courts use a ‘reasonableness’ standard and apply a multi-part analysis to non-compete and non-solicitation obligations on an employee or former employee. Restrictive covenants in employment agreements 1) must protect a legitimate interest of the business; 2) must be supported by adequate and timely consideration to the employee; and 3) must be limited in scope and duration.
A legitimate interest of the business would certainly include protecting a business’ sales revenues, its existing and potential customer base, its confidential and proprietary information, and its current employees. A business has a legitimate interest in not having a former employee solicit the business of its customers or entice its other employees to leave the business for a job with a competitor. Preventing the disclosure of confidential information and use of proprietary knowledge would also be considered a legitimate business interest.
Adequate and timely consideration means that the employee must have agreed to the restrictive covenants at the time of accepting the position with the employer. Timing is important, and an employer must include the terms of any restrictive covenants along with the initial job offer. It’s not reasonable for an employee to accept a job, resign from their current job, and then have a non-compete presented to them to sign on their first day. A court would likely find this to be unenforceable for lacking adequate consideration. If an employer wants an employee to sign a non-compete after they have accepted a position or after they have worked for the business, then new consideration must be paid in the from of a bonus, raise, or other additional compensation.
To be enforceable, restrictive covenants must be limited in scope and duration and to an extent that is reasonable based on the circumstances of the employment. Generally, a two-year restriction in a 50-100 miles radius of the location of the business will be enforceable. Greater restrictions may be permitted if the employee has a special skill set, an upper management position, has substantial knowledge of the company’s confidential and proprietary information, or the business serves a much larger geographic area.
In Minnesota, if a court finds part of a restrictive covenant to be unreasonable, it may ‘blue pencil’ the agreement. This means that the court may modify the agreement so that it passes the multi-part test and enforce it. So, a five-year non-compete may be shortened to two years, but otherwise enforced against the former employee.
What actions violate a non-compete or non-solicitation obligation? What should a business do if it finds that a former employee is violating an agreement? What should a business do if a person it wants to hire is subject to a non-compete? These questions we’ll save for a future article. As you can imagine, social media makes this a much more complicated area of the law, and the case law is developing.
Any requests for topic suggestions may be sent to email@example.com. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.
See the followup article, Non-Compete Agreements (Part 2).