I. LEGAL STANDARD

A. INTRODUCTION

1. What is a Restrictive Covenant?
   
   The term "restrictive covenant" is commonly used to refer to contractual non-compete agreements or contract clauses that prohibit or restrict a current employee from starting a competing business or working for a competitor after that employee leaves employment. Both Minnesota and Wisconsin courts dislike enforcing restrictive agreements or contract clauses because they "limit an individual's right to work and earn a livelihood." Both states impose strict requirements on restrictive agreements and will not usually enforce a non-compete agreement unless it complies with those requirements. Therefore, it is important to draft the agreement carefully and make sure that you have satisfied all of the legal requirements for an enforceable agreement.
   
   
2. Types of Restrictive Covenants:
   
   
   • Traditional "straight" non-compete agreements: employee promises not to work for the employer's competitors for a specified time period after the employee leaves.
     
     
   • Confidentiality agreement/non-disclosure: employee promises not to use or disclose employer's confidential information for specified time period after employee leaves.
     
     
   • Non-solicitation agreement: employee promises not to steal employer's customers or other employees for a specified time period after employee leaves.
     
     
   • Licensing agreements: "exclusive" or at least mutually advantageous arrangement between various levels of distribution of goods or services.
     
     
   • "Non-compete": can often be used to encompass A, B, and C, so beware of terminology.
   
   
   
3. Examples of Agreements:
   
   For a period of 18 months from termination of employment, I shall not, directly or indirectly, engage in or solicit or have any interest in any person, firm, corporation or business that engages in or solicits, the publication or marketing of any custom publication, promotion piece, catalog, calendar, or any other printed material for any customer that has done business with the custom publishing division of Webb within the period of one year immediately prior to my termination of employment. Webb Publishing Co. v. Fosshage, 426 N.W.2d 445 (Minn. App. 1988).
   
   Employees will not, either directly or indirectly, be involved in the amusement park business within a 20-mile radius of the present location of Employer for a period of 4 years. . . and employees further will not become engaged, either directly or indirectly, in the amusement park business within a one mile radius of the present location of Employer for an additional 2-year period after the initial 4-year period. Beach v. Anderson, 417 N.W.2d 709 (Minn. App. 1988).
   
   
4. Non-Contractual Other Sources Obligations For Employees and Employers.
   
   Private contract is not the only source of law restricting a current employee from starting a competing business or working for a competitor after that employee leaves employment. Most notably, the Uniform Trade Secrets Act, Minn. Stat. §§ 325C, articulates and clarifies much of the common law concerning trade secrets and confidential information, allowing the protection of certain types of information through an action for misappropriation. The act has been interpreted to require the party seeking protection to show both the existence of and the misappropriation of the trade secret. To qualify as a trade secret under the act, information (1) must not be generally known nor readily ascertainable; (2) must derive independent economic value from secrecy; and (3) must be the subject of reasonable efforts to maintain its secrecy.

1. Appropriate Type of Employee.
   
   Any employee can sign a non-compete agreement. However, in order to enforce that agreement against the employee, the employer must show that it has been harmed by the former employee's violation of the agreement. Usually, only an employee who has had access to confidential business information, customer lists, pricing information etc. can use that information later to harm his former employee.
   
   For example, a court may enforce an agreement against a former salesman but may not enforce the same agreement against an individual who just worked in the mailroom sorting mail. In the case of the salesperson, the employer will probably be able to establish that the salesperson had access to the employer's customers, built up relationships with those customers, knew the employer's pricing structure and inventory, etc. On the other hand, it is unlikely that an individual who simply sorted mail had usable access to the employer's confidential information.
   
   Example: Duluth/Superior Communications v. Shouts, Minnesota Court of Appeals (2004): Non-compete held unenforceable against former employee technician where former employee had no special relationship with former Employer's customers had former Employer made no showing that former Employee would otherwise be making use of any use of confidential information.
   
   Example: Alpine Glass v. Adams, Minnesota Court of Appeals (2002): Non-compete held unenforceable against former employee telemarketers who required no education or experience for the job, where rate of turnover for the position was very high and former Employees would otherwise be making no use of confidential information.
   
   Example: Como Gas Sales v. Downs, Minnesota Court of Appeals (1999): Non-compete held unenforceable against former propane sales manager who went to work for local propane sale competitor.
   
   
2. Restrictions Imposed by the Agreement.
   
   a. All restrictions must be "reasonable."
   
   "Reasonable" is usually the Court's way of saying, "we can't give you an exact definition, but we'll know it when we see it." The general test applied when examining an agreement is "whether the restraint imposed is necessary for the protection of the business or goodwill of the employer." Bloc v. Dynamic Air, Inc. , 502 N.W.2d 796 (Minn. App. 1993); See Minn. Stat. § 325D.51 and Wis. Stat. § 103.465. ¹
   
   
   • Types of Restrictions.
     
     A non-compete agreement usually imposes two separate restrictions on the employee: a time limit on how long the employee is prohibited from competing against the former employer and a geographic restriction defining the area where the former employee may not compete. Courts have established some general principles to use when examining each of these restrictions.
     
     (1) Time:
     
     The amount of time an agreement can restrict an employee depends, in large part, on the nature of the position. However, the time restriction should be no longer than necessary for the employer to find and train a replacement for the employee, and for the employee's customers to become accustomed to the employee's replacement.
     
     (2) Geographic Scope:
     
     The geographic scope of the restriction must also be "reasonable." Usually, an employer will be required to show that it does or has recently done business within the defined area and that the former employee had access to information which would allow the employee to effectively compete in that area with his former employer if not restricted from doing so. Typically, the agreement states that the employee is prohibited from competing "within a radius of (10, 50, 100) miles from (cities where the employer is engaged in business)." However, the agreement is not required to specifically define the territory provided that there is some limitation on scope of contact. (i.e., restricted from contacting current customers or customers with whom employee had contact.)
     
     (3) Blue Penciling:
     
     If the restrictions imposed by an agreement are not reasonable (time is too long, geographic scope is too expansive), the Court can "blue pencil," or modify, the agreement. In other words, the Court changes the agreement to make it "reasonable." Thus, an agreement with an unreasonable geographic scope could be changed to include only the area where the employee performed duties, the employer's business area, the employer's customers or a reasonable geographic area.
     
     For example, in one case, the Court "blue penciled" the agreement where the original agreement provided that the employee would not work for a competitor within a 50-mile radius of Minneapolis, St. Paul or Duluth (or five years after termination of employment). Because the employer did not do a significant amount of work outside of Hennepin County and because the Court found that five years was unreasonably long, it modified to prohibit the employee from working in Hennepin County for one year after termination of his job. See, Davies & Davies Agency Inc. v. Davies, 298 N.W.2d 127 (Minn. 1980).
     
     Important Note: This option is not available in Wisconsin. Wis. Stat. 103.465 states: Any restrictive covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to so much of the covenant or performance as would be a reasonable restraint. Therefore, in Wisconsin, if one part of the agreement is unreasonable, the entire agreement is unenforceable.
   
   
   Example: Fung v. Riemenschneider, Minnesota Court of Appeals (2003): 6 year, 5 mile dental practice non-compete found reasonable in connection with the sale of a dental practice.
   
   Example: Sonju Two Harbors v. Hayes Subaru, Minnesota Court of Appeals (2003): 2-year, 120-mile non-compete for auto general sales manager reasonable in scope, but former Employer denied relief because no showing was made that former Employee would be damaged by Former Employee's sale of competitor automobiles.
   
   Example: Tonna Heating & Cooling, Inc. , Minnesota Court of Appeals (2002): 3-year, 15- county (southeastern Minnesota) non-compete found reasonable for former general manager of HVAC contractor.
   
   Example: Lemon v. Gressman, Minnesota Court of Appeals (2001): Court used "Blue Pencil" doctrine to reduce 10-year, 1-mile restaurant operation non-compete down to a 5-year, 1-mile restriction.
   
   
3. After You Have Drafted a "Reasonable" Agreement, Then What?
   
   a. New Employee:
   
   (1) When must the agreement be presented to a new prospective employee?
   
   Before or at the time the employee starts work. Further, before the employee is offered the job, the employee should be told that the employee will be required to sign a non-compete agreement and should be made aware of the terms of that agreement.
   
   For example, in one case, an employee knew he would be required to sign a non-compete agreement before he started work. However, he was not aware of the terms of the agreement and did not get a copy of it until 11 days after he began work. The Court found that the agreement was not enforceable against him. See, Davies & Davies Agency Inc. v. Davies, 298 N.W.2d 127 (Minn. 1980).
   
   (2) What if the employee signs the agreement within a few days or weeks of starting work?
   
   The employee is not a "new employee," therefore, the agreement is not enforceable unless the employee has received additional, independent consideration. See next section.
   
   b. Existing Employee:
   
   (1) Must receive consideration.
   
   A non-compete agreement signed after an oral employment agreement and after the employee has started work can be sustained only if supported by independent consideration. National Recruiters Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982); NBZ, Inc. v. Pilarski, 185 Wis.2d 827; 520 N.W.2d 93 (Wis. App. 1994).
   
   (2) What is consideration?
   
   "Consideration may consist of either of a benefit accruing to one party or a detriment suffered by another party."
   
   (3) What constitutes consideration to support non-compete agreement?
   
   It all depends. As long as the employee received some additional benefit from signing the agreement, the agreement will generally be enforceable. Consideration can be an increase in pay, a bonus, stock options, increased responsibility, additional training, access to new customers, etc. The key is that it must be something that the employee would not have received if the employee did not sign the agreement.
   
   (4) Is continued employment itself sufficient consideration to support the agreement?
   
   Maybe, maybe not. I wouldn't count on it.
   
   (a) The law:
   
   Continued employment alone can be used to uphold a non-compete agreement, but the agreement must be bargained for and provide the employee with real advantages. Freeman v. Duluth Clinic, Ltd. , 334 N.W.2d 626 (Minn. 1983); NBZ, Inc. v. Pilarski, 185 Wis.2d 827; 520 N.W.2d 93 (Wis. App. 1994).
   
   (b) The reality:
   
   Courts have rarely found that continued employment alone is sufficient to support a non-compete agreement. The only cases where courts have enforced such agreements are cases where the employee worked for the employer for a long time after signing the agreement and received additional promotions within the company.
   
   For example in one case, the employee signed the agreement two weeks after he began work. He did not receive anything at the time for signing the agreement. However, he worked for the employer for 11 years and steadily advanced through the company eventually becoming the vice president of sales. His employer provided the employee with training and the employee gained substantial knowledge about the design and marketing of his employer's product. The court found there was sufficient consideration to support the agreement. See, Satellite Industries, Inc. v. Keeling, 396 N.W.2d 635 (Minn. App. 1986).
   
   In another case, the employee had not been shown the agreement and did not sign it until 4 months after beginning work. However, Court found that the employee derived substantial economic and professional benefits from the agency after signing the contract: He continued his employment for 10 years and advanced to a selling position within the agency which would not have been open to him if he had not signed the contract. He received informal training . . . was supported by the agency in his license applications, and had sole responsibility for many of the agency's customers. Further, the employee's brother, who refused to sign the agreement, was limited to a clerical-type position in the agency. See, Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127 (Minn. 1980).
   
   On the other hand, in a situation in which the employee progressed up the company, received increases in salary of $11,600 and given supervisory responsibilities, continued employment alone was not sufficient because there was no evidence that these benefits were attributable to anything other than the performance that was expected of him. See, Sandborn Manufacturing Co. v. Currie, 500 N.W.2d 161 (Minn. App. 1993).
   
   Therefore, because it is impossible to know ahead of time how long an employee will work for the company and what benefits that employee will ultimately derive from his employment, continued employment should not be counted on to support an agreement. An existing employee should always be given additional consideration at the time the employee signs the agreement.
   
   
4. Does Terminating an Employee Affect Enforceability of Agreement?
   
   Not usually. Termination of an employee does not preclude enforcement of a restrictive covenant, at least where the employer has not taken undue advantage of his right to terminate. However, it may affect enforceability if the employee was wrongfully terminated. For example, in one case, the employer required the employee to sign renewal contracts every two years. At the expiration of the employee's 1980-1982 contract, employer's management induced the employee not to sign the new 1982-1984 contract until certain provisions could be clarified. While the employee was waiting for clarification, he was terminated for failing to timely sign his renewal contract. He then went to work for a competitor and his employer brought suit to enforce a non-compete clause. The Court refused to enforce the clause because the employer had engaged in misconduct.
   
   
5. BEWARE: As a new Employer, you could be liable for your new employee's violation of a non-compete with the Former Employer, or your new employee's other violation of the Minnesota Uniform Trade Secrets Act. You will certainly be liable if the Former Employer can prove that you were aware of the valid non-compete agreement and intentionally induced your new employee to violate it. You may also be liable if the new employee's misconduct is deemed to have been reasonably foreseeable.

1. What is a Temporary Restraining Order?
   
   A temporary restraining order (TRO) is an order issued by the court prohibiting someone from doing something or ordering someone to do something. A restraining order can be issued without a formal hearing but is only in effect for a very limited period of time.
   
   
2. What are the Requirements for Obtaining a TRO?
   
   The party requesting the TRO must be able to show that they will suffer "immediate and irreparable injury, loss, or damage." MRCP 65.01; Wis. Stat. 813.025. In Minnesota, the party requesting the TRO may also be required to post a bond "in such sums as the court deems proper for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained." MRCP 65.03. The amount of the bond must be at least $2,000.00. See Minnesota General Rules of Practice for District Courts 135.

1. What is a Temporary Injunction?
   
   It is similar to a TRO. However, before it is granted, the court holds a hearing during which both parties are allowed to argue for and against the granting of the injunction.
   
   
2. What are the Requirements for Obtaining a Temporary Injunction?
   
   The party seeking the injunction must show that:
   
   a. That harm that party will suffer if the injunction is denied is greater than the harm inflicted on the employee if the injunction is granted.
   
   b. That party will win at trial. This usually requires that the employer establish that the terms of the agreement are reasonable and that the agreement is enforceable.
   
   
3. If I Get It, How Long is the Temporary Injunction in Effect?
   
   a. The temporary injunction is in effect until trial or until it expires by its own terms, which ever is first. For example, if the non-compete agreement restricted the employee's activities for only six months, the injunction would likely automatically expire at the end of the six-month period, regardless of the fact that a trial had not yet been held.
   
   b. At trial, the employer will be required to prove:
   
   • that the restrictive covenant is reasonable;
     
   • that the agreement is enforceable;
     
   • that the employer has suffered, or will if the injunction is not granted, damage.
   
   
   
4. Possible Problems in Obtaining an Injunction.
   
   a. Are monetary damages sufficient?
   
   Some courts have decided that monetary damages are sufficient to compensate an employer when an employee breaches a non-compete agreement. Therefore, the court has refused to issue an injunction.
   
   b. The employee may counter-claim against you.
   
   If you sue an employee for breach of a non-compete, the employee may counterclaim (or sue you in return) for his attorneys fees, etc. incurred in defending against "this frivolous lawsuit." The employee might also counterclaim seeking damages for tortious interference with contract or restraint of trade. If that happens, and you do not get your injunction, or if you do get an injunction but it expires within a short time, you may be left defending yourself against the employee's lawsuit.

1. A Temporary Restraining Order and an Injunction prohibiting the employee from violating the terms of the non-compete; and
   
   
2. Money damages:
   
   The employer must establish by a preponderance of the evidence that (a) profits were lost; (b) the loss was directly caused by the breach of the covenant not to compete; and (c) the amount of such causally related loss is capable of calculation with reasonable certainty.

• MUST PROTECT SOME LEGITIMATE BUSINESS INTEREST
  
  
• MUST BE BARGAINED FOR
  
  
• MUST BE REASONABLE IN SCOPE AND DURATION
  
  
  
  ¹ Minn. Stat. § 325D.51 provides: "A contract, combination or conspiracy between two or more persons in unreasonable restraint of trade or commerce is unlawful."
  
  Wis. Stat. § 103.465 provides: "A covenant by an assistant, servant or agent not to compete with his employer or principal during the terms of the employment or agency, or thereafter, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal.
  
  
  

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