Ideas for Consideration: An Update on Non-Compete Law in Minnesota

Given today’s business climate, it is no surprize that the attorneys at Foley & Mansfield have seen a dramatic increase in queries surrounding non-compete agreements. To help clarify the issues, we revisit a previously published article.

Question: Are non-compete agreements enforceable in Minnesota? In early February 2008, the Minnesota Court of Appeals affirmed the enforceability of a non-compete prepared and litigated by several of our attorneys.

Background of the Case

The facts of this case are not uncommon or unique. The Employee was employed by Corporation for $75,000.00 per year. After four months of employment, the Corporation requested that the Employee sign a non-compete in exchange for continued employment and $500.00. The employee accepted the $500.00 and signed the non-compete.

Approximately nine months later, the Employee quit work and was hired by a Competitor. Upon leaving of the new employment, the Corporation initiated a lawsuit against Employee and immediately received an order restraining the Employee from working for the Competitor until the lawsuit was concluded. The Corporation then asked the Court to permanently restrain the Employee until the non-compete expired and for a judgment against the Employee for damages, costs and attorneys’ fees incurred in enforcing the non-compete.

In response, the Court entered a judgment of $14,000.00 against the Employee for damages, plus attorneys’ fees incurred by the Corporation. The Employee appealed and in February 2008, the Court of Appeals unanimously affirmed the trial court.

Key Rulings from the Court of Appeals

The Court of Appeals decided several issues. The most significant issues were:

  • Can an employee be bound by a non-compete signed after the start of employment in exchange for continued employment and $500.00; and

Can an employee and employer agree, in a non-compete, on the amount of damages the employer will recover if the employee violates the non-compete?

With respect to the first question, the Court of Appeals answered “Yes”. A non-compete is a contract that must be supported by independent consideration (a benefit exchanged). Under ordinary principals of contract law, if any independent consideration exists, inquiry into its adequacy is forbidden. According to the Court of Appeals, however, non-compete agreements prompt a modified analysis in that the adequacy of the consideration depends on the facts of each case. The Court of Appeals determined that $500.00 was “not an insignificant sum,” and if the Employee felt $500.00 was insufficient, he should have negotiated a larger amount. As such, the Court of Appeals ruled that the $500.00 paid to the Employee (along with continued employment) was sufficient for the Corporation to enforce its non-compete.

With respect to determination of whether a non-compete agreement may contain an enforceable pre-determined damages clause, the Court of Appeals also answered “Yes”. In this case, the Employee and Corporation agreed that if the Employee violated the non-compete, the Employee would pay a certain amount to the Corporation for the Employee’s violation. The Court of Appeals found that the provision fairly represents fair compensation for damages caused by the Employee’s violation, even if proof of the actual damages could not be made. As such, the Court of Appeals upheld the trial court’s award of $14,000.00 in damages.

Non-competes are enforceable under Minnesota law. Although the law pertaining to non-competes is highly technical and often confusing, so long as the right steps are taken and agreements are carefully crafted, a non-compete can be a very powerful business tool. The attorneys at Foley & Mansfield can help you enforce your non-compete and ensure that your business has the appropriate and necessary protection.  Contact Tom Pahl for more information at 612-338-8690.

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