MN Non-Compete Law Update – “Independent Consideration” in Schmit Towing, Inc. v. Frovik

Before a non-competition agreement between an employer and employee will be valid in Minnesota, the non-competition agreement must either be presented as a condition of employment, or some independent consideration – such as a small bonus or increase in salary – must be provided if the employee enters into a non-competition agreement after their employment commences.  Between employers and employees, Minnesota law is clear on this issue.

What was not so clear was whether the “independent consideration” rule also applied to non-competition agreements with regard other business relationships, such as between businesses or with respect to independent contractors.

In an unpublished opinion, the Minnesota Court of Appeals held that the “independent consideration” rule does not apply outside the employer / employee relationship, and specifically found that it does not apply to independent contractors.

In Schmit Towing, Inc. v. Frovik, the defendant operated a business towing vehicles and received work from the plaintiff pursuant to an independent contractor agreement.   The first agreement contained no non-compete clause; however, the second contract, which took effect on the same day that the parties terminated the first agreement, precluded the defendant from providing its services to plaintiff’s competitors.

The Court of Appeals refused to extend the “independent consideration” rule outside the employer / employee relationship, and instead found that such non-competition agreements are to be analyzed under general principles of non-competition law.  The Schmit Towing decision provides some clarity to businesses contracting with small businesses and other independent contractors with respect to the manner in which the Minnesota courts will apply non-competition law to those relationships.  Such businesses can take some comfort knowing that the stringent requirements applicable to non-competition agreements in the employer / employee context do not apply to their relationships with independent contractors.

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