Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In Minnesota

Minnesota courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect certain business interests of the employer such as confidential information and trade secrets. Factors considered when determining reasonableness include the hardship an agreement puts on the former employee, its effect on the general public and the restrictions placed on time, territory and activity of the former employee.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Minnesota courts have determined that the offer of initial employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate when the agreement is part of the original job proposal.  . An agreement signed after the employment has begun must be accompanied by “substantial economic and professional benefits” that were not part of the original offer of employment.

Reasonableness in Time and Geographic Scope

Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it may modify the agreement so that it does not unduly infringe on the former employee’s ability to work.

Examples of non-compete agreements that Minnesota courts have found to be reasonable include:

• A 1-year restriction against former employees who had been with the reinsurance employer for more than 10 years and had developed close relationships with customers because that period would give the employer time to work with each client through their renewal period.
• A 1-year restriction against former insurance and securities sales agents from soliciting or selling to clients in the territory where the agents had worked for the employer.
• A 1-year restriction against a former salesperson from doing business with specifically identified customers and leads, even though there was no geographic limitation.

The courts have found the following restrictive covenants unreasonable:

• A restriction against a former employee of a real estate broker because the employee had not gained any knowledge that the employer actively sought to keep confidential.
• For lack of consideration, a non-competition agreement signed on the employee’s first day of work instead of with the original job proposal, especially since the employee only worked for the employer for nine months afterward.
• Also for lack of consideration, an agreement signed after the employment relationship had begun where there were no additional benefits given to the employees who signed the agreement and those who did not sign one.

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.