If you are currently bound by a noncompete agreement, don’t feel alone. Once reserved for only a handful of executive positions, recent surveys indicate that approximately one in five Americans work under a noncompete. Not surprisingly, this increase in the use of noncompetes has spurred a growth in litigation challenging such agreements, which has nearly tripled since 2000. See Conor Dougherty, How Noncompete Clauses Keep Workers Locked In, N.Y. Times (May 13, 2017).
Under Minnesota law, noncompetes are generally disfavored and narrowly construed by the courts. The test they apply is a balancing of interests between the protection of the employer’s business and customer relations on one hand, and the right of the employee to earn a living on the other. The courts weigh the right of the employee heavily and will closely scrutinize noncompetes viewed to be excessive. This creates several avenues for fighting a noncompete in court.
Contract-Based Challenges to a Noncompete
Ultimately, a noncompete agreement is still a contract and must satisfy all the elements of such. If one of the elements is not satisfied, the noncompete may be thrown out completely. To start, the employee must accept the terms of the agreement. Most commonly, a noncompete will be a part of an employment contract or handbook, although it may be a separate document. Signing an agreement is the most common form of demonstrating acceptance, but it is not the only way. Minnesota courts may construe actions, such as continuing to work for an employer after the noncompete is put forward, as acceptance of the terms of the noncompete.
A noncompete must also be supported by independent consideration — something of value for the employee that turns a mere promise into an enforceable contract. Sometimes consideration may include the continuation of employment, however, if the noncompete is introduced after employment begins, the employer must offer something new. This may include a pay raise, new fringe benefits, additional training or a bonus. If you agreed to noncompete after your employment started and received no additional benefit, your noncompete may be invalid.
Challenges to the Alleged Interest Protected by a Noncompete
A person constrained by a noncompete may also challenge the validity of the business interest allegedly protected by the noncompete. Without a genuine interest to protect, the noncompete may not stand up to the court’s scrutiny. Minnesota courts typically recognize two legitimate business interests that may warrant a noncompete: confidential information or trade secrets, and customer goodwill.
Confidential information, including trade secrets, is that which is unique to the company and provides a competitive advantage. Examples of confidential information include technical information, unique manufacturing methods, customer information and financial information. The employer has a burden of proving that the information meets the requirements of being confidential.
An employer may also claim a genuine interest in customer goodwill, particularly for jobs where the former employee is the “face of the company” to the customer. It is the employer’s burden to demonstrate the loss of goodwill. This interest rarely covers positions that lack specialization or training, or those in which little time has actually been spent developing customer relationships.
Challenges to the Scope of a Noncompete
The most common challenges to noncompete agreements dispute the reasonableness of their scope, which may include the duration, geographic limits or substantive scope. Minnesota courts tend to balance these dimensions against each other. For instance, the longer the duration of the noncompete, the less restrictive the geographic or substantive scope must be.
There are some rules of thumb that Minnesota courts follow. When determining a reasonable duration, the courts frequently accept noncompetes that last one year (or less) and have shown a willingness to find those that last two years as reasonable. Courts rarely enforce noncompetes that are intended to last three or more years, unless a very clear interest is demonstrated.
Similarly, Minnesota courts viewing the reasonableness of its geographic scope are most sympathetic to those noncompetes that restrict themselves to the former employer’s business footprint. In some cases, this may be a 10-mile radius, in other cases, it may be an eight-state region. A bar against soliciting the former employer’s existing customers may take the place of a geographic restriction. However, the total absence of a geographic restriction is often fatal to a noncompete agreement.
If a court finds the scope of a noncompete too broad, it may not invalidate the agreement completely. At its discretion, a court may apply the “blue pencil doctrine” and modify the terms of the noncompete in a manner it finds reasonable. While this is not a complete victory, a reduction in the scope of the noncompete may mean getting back to work sooner, or being able to take a position in a related industry.