Is the Future Uncertain for Non-Compete Agreements?
In November 2019, Minnesota Attorney General Keith Ellison
joined attorneys general from about 20 other states in asking
the Federal Trade Commission (“FTC”) to adopt a new rule that would deem non-compete agreements an “unfair method of competition” and illegal for low-wage workers and in situations where the provision was not specifically negotiated.
The states’ request to the FTC represented a reaction to perceived employer abuses of non-compete agreements with respect to low-wage employees, such as the delivery employees of the Jimmy John’s sandwich chain who were at one time required to sign non-compete agreements as a condition of employment. In response to the request, the FTC held a public workshop on January 9, 2020. As of March 1, 2020, the FTC has yet to take any further action on this issue.
Efforts to Modify Existing Non-Compete Law in Minnesota
Another effort to limit the enforceability of non-compete agreements recently played out at the Minnesota Legislature. DFL legislators proposed a bill to cut back Minnesota non-compete law by prohibiting the use of such agreements for physicians. While the bill progressed in the DFL-majority House, it did not receive a hearing in the GOP-controlled Senate, and has not become law.
Varying Approaches Among the States
States have adopted widely differing approaches to the enforceability of non-compete agreements. Some states, such as California and North Dakota, prohibit non-compete agreements or strictly limit their enforcement. Other states, including Minnesota, generally enforce non-compete agreements if they are reasonable in scope and necessary to protect a legitimate interest of the employer. Broadly, the trend is toward restricting enforcement of non-compete agreements. In recent years, at least six states have moved in this direction.
Challenges in Enforcing Non-Compete Agreements Under Minnesota Law
While neither the FTC nor Minnesota’s Legislature has forbidden non-compete agreements, recent court decisions in Minnesota illustrate the challenges that an employer can face in seeking to enforce these types of contracts.
- In one case, the court refused to enforce a non-compete agreement that an employee signed on his second day on the job. The employer failed to mention the non-compete provision in its earlier job offer. For that reason, the court determined that the non-compete agreement was unenforceable unless the employer provided the employee with “independent consideration,” i.e., additional money or value, in return for the restriction.
- In another case, the court denied an employer’s request for an injunction to enforce a non-compete provision. The court found insufficient evidence that the company which sought to enforce the agreement had a legitimate interest that was genuinely threatened by its former employee’s work for a competitor. The court was unconvinced that there was a genuine threat simply because the employee worked in sales jobs with both companies.
- In another decision in which an employer’s attempt to enforce a non-compete agreement was unsuccessful, a Minnesota court held that the employer did not have a legitimate interest in enforcing a covenant that prohibited solicitation of business from “prospective customers” of the employer. The prospective nature of the relationships caused the court to conclude that there was an insufficient threat of harm to justify enforcing the non-compete restriction through an injunction.
- In a ruling in which the court enforced a customer non-solicitation provision through a temporary injunction, the court also held that the former employee subject to the injunction was entitled to know the names of all “off-limits” customers, information which the former employer had been unwilling to provide.
The recent developments summarized above reflect the competing policy interests implicated by non-compete agreements. On one hand, employers have a legitimate interest in protecting their confidential information and customer relationships. On the other hand, employees naturally expect to be able to maximize their earnings, which may mean taking their experience and skills to a competitor. There is also a broader societal interest in favoring robust business competition.
Given the changing landscape of non-compete law, it is important to work with a qualified attorney when drafting or reviewing non-compete agreements and related issues. Moss & Barnett attorneys work frequently with employers and employees in navigating these issues. Please contact your Moss & Barnett attorney if we can assist you in this area.