Does a Non-Solicitation Agreement Need Independent Consideration?

The question is whether a non-solicitation agreement in Minnesota requires consideration similar to that required of non-compete agreements. The short answer is yes, non-solicitation  agreements do require independent consideration similar to that required of non-compete agreements.

However, in some situations, independent consideration is not required for either a non-solicitation agreement or non-comepte agreement, such as when the employee is employed for many years, advances within the company, and is given increased responsibilities.

Standard Non-Solicitation Agreement

If you want to know the basis for this conclusion, here is the long answer analyzing the current state of the law in this area. A common form of a non-solicitation clause is as follows:

Non-Solicitation Agreement. As used in this Agreement, the term “Person” means any individual, corporation, joint venture, partnership, limited liability company, association or other entity. From and after the date hereof and continuing until eighteen (18) months after the voluntary or involuntary termination of Employee’s employment with the Company, with or without cause, Employee covenants and agrees that he will not, whether for his own account or for the account of any Person, directly or indirectly, interfere with the Company’s relationship with, or endeavor to divert or entice away from the Company any Person who or which at any time during the term of Employee’s employment by the Company is or was an employee, independent contractor or customer of or otherwise in the habit of dealing with the Company. Furthermore, Employee agrees from the date hereof and for a period of eighteen (18) months after the voluntary or involuntary termination of Employee’s employment with the Company, with or without cause, Employee covenants and agrees that he will not attempt to sell or market any products to any person who has been a customer of the Company at any time during Employee’s employment with the company. Provided, however, that Employee shall not be prohibited from selling or marketing products to any person if the products are not competitive with the products marketed or sold by the Company.

There are minor variations in the language of the non-solicitation  provisions in the various agreements.  Al’s Cabinets, Inc. v. Thurk, 2003 WL 891419 (Minn. Ct. App. 2003).

Non-Solicitations are Viewed with Disfavor by Minnesota Courts

Generally, restrictive covenants such as non-solicitation  clauses are looked upon with disfavor, cautiously considered, and carefully scrutinized.  Bennet v. Storz Broadcasting, Co., 270 Minn. 525, 533, 134 N.W.2d 892, 898 (1965).  Such covenants are upheld nonetheless if the restriction is necessary for the protection of the business or the good will of the employer.  Id.

Contracts Require Independent Consideration

Contracts generally are valid if they include consideration.  Witzke v. Mesabi Rehabilitation Services, 2008 WL 314535 (Minn.Ct.App. 2008), citing Franklin v. Carpenter, 309 Minn. 419, 422, 244 N.W.2d 492, 495 (1976).  Employment agreements are contracts.  Kvidera v. Rotation Engineering & Manufacturing Co., 705 N.W.2d 416, 421 (Minn.Ct.App. 2005).  When an employment agreement includes a restrictive covenant, such as a clause prohibiting an employee to solicit the employer’s clients or to compete with the employer’s business, and the restrictive covenant is not ancillary to an employment agreement, there must be independent consideration for the covenant.  Sanborn Manufacturing Co. v. Currie, 500 N.W.2d 161, 164 (Minn.Ct.App. 1993).  A restrictive covenant is not ancillary to an employment agreement when it is presented to an employee after the employee begins working.  National Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982).

Sometimes Continued Employment is Sufficient Consideration

In some situations, the continuation of employment can serve as consideration.  Davis & Davies Agency, Inc. v. Davies, 298 N.W.2d 127, 130 (Minn. 1980).  The general rules is that continuation of employment alone can be used to uphold coercive agreements, but the agreement must be bargained for and provide the employee with real advantages.  However, this is only the case where the employee is employed for many years, advances within the company, and is given increased responsibilities.  Satellite Industry, Inc. v. Keeling, 396 N.W.2d 635, 639 (Minn.Ct.App. 1986), review denied (Minn. Jan. 21, 1987).

Do you own a business and want to require your employees to keep your business’s information confidential? Are you an employee who is being asked by your employer to sign a confidentiality agreement?

Purpose of Confidentiality Agreements

A confidentiality agreement is a contract. Contracts are promises. Confidentiality agreements are used in situations where someone will learn confidential information of another but that other person wants to make sure that the information is not further disclosed.

For example, an employee may hire an employee. During the course of the employee’s employment, the employee will necessarily learn some secrets of the employer.

An employer’s secrets may be trade secrets. An employer’s secrets may be secret information about the identity of clients, secret information about a recipe used by the employer, or secret information contained in documents in the employer’s possession. An employer’s secret information can be anything that is unknown to the public, the competition, or others from whom the employer wants it to remain secret. Therefore, the employer may require that the employee sign a confidentiality agreement.

Substance of Confidentiality Agreements

In order to protect secret information, a confidentiality agreement will state that the person who is about to learn this information promises not to disclose it to others. The person about to learn this information may not disclose it now, or at any time in the future as long as it is still secret information.

Often times a confidentiality agreement will define confidential information, or the secret information, as relevant information that is not generally known or available to the public or known to competitors. The contract may list some of the following as confidential information: financial condition, invoices, contracts, forms, research, price lists, vendor information, marketing materials, advertising materials and developments, sales materials and reports, copyrighted materials, trade secrets, designs, manufacturing processes, client lists, client preferences, client needs, client identities, potential client identities, and any other data.

Breaking a Confidentiality Agreement

When a person signs a confidentiality agreement the person is promising to abide by the terms of that agreement. Failure to abide by the terms of that agreement results in a breach of the contract.

When a person breaches a confidentiality agreement, the other person is entitled to monetary or other relief. Often times a confidentiality agreement will have a paragraph explaining the remedies for breach of the agreement. By signing the confidentiality agreement the parties are agreeing to those remedies in the event of a breach of the agreement.

Few people can run a business alone. Most business owners need the assistance of employees, vendors, and other independent contractors in order to run their businesses.

However, the inclusion of other people in the affairs of a business necessarily includes others in the circle of people who know certain information about the business not generally known to the public or to competitors. Certainly the disclosure of certain information to the public or competitors will be more damaging to some businesses than others, but there are few businesses that would be willing to share every aspect of the business, its finances, and its operations.

Blind Trust Isn’t Sound Business Judgment

Should a business just trust its employees, independent contractors, and other people with whom the business shares information to keep it to themselves and use their own discretion regarding when and where that information may be disclosed? Most businesses would say that tactic is dangerous to the future of the business and incredibly risky. Therefore, many businesses require other people who are to learn secret information of the business to agree to keep that information confidential.

What is Confidential Information?

Confidential information may be a trade secret. However, confidential information does not have to be a secret recipe or the design for a new type of technology. Sometimes confidential information is merely the pay structure of the business’ employment contracts or its customer information.

Secret information can be anything that is unknown to the public, the competition, or others from whom the employer wants it to remain secret.

Specifics of Confidentiality Agreements

In order to protect secret information, a confidentiality agreement will state that the person who is about to learn this information promises not to disclose it to others. The person about to learn this information may not disclose it now, or at any time in the future as long as it is still secret information.

Often times a confidentiality agreement will define confidential information, or the secret information, as relevant information that is not generally known or available to the public or known to competitors. The contract may list some of the following as confidential information: financial condition, invoices, contracts, forms, research, price lists, vendor information, marketing materials, advertising materials and developments, sales materials and reports, copyrighted materials, trade secrets, designs, manufacturing processes, client lists, client preferences, client needs, client identities, potential client identities, and any other data.

Breach of Confidentiality Agreements

A person who has entered a confidentiality agreement and breaks that agreement is liable to the other party for breach of contract.  A court of law may require the party breaking the contract to pay money damages to the other party, or a court may order some other type of remedy.

A solicitation is defined as a request, an enticement, or an allurement. Non-solicitation agreements prohibit requesting, enticing, or alluring someone to do something.

Contractual Agreements Not to Request, Entice, or Allure

Non-solicitation agreements are used by many Minnesota businesses. A non-solicitation agreement is a contract. It may be one provision in a contract, or it may contain the entire contract.

When a company conducts business with another party, or enters a contract with another party, the company will often have to provide the other party with some confidential information of the company in order for the other party to complete the job requested by the company. Employees learn information about the companies in which they are employed. Independent contractors learn information about the companies with which they contact. This is the cost of doing business and engaging in agreements with others.

Benefits of Non-Solicitation Agreements

Non-solicitation agreements protect Minnesota businesses from having the company’s own confidential information used in a way that may harm the company.

For instance, nonsolicitation agreements are used in situations where someone, maybe an employee, will learn information of another, or of a business, but the business or employer first wants to make sure that the employee cannot use the information to solicit other employees. For example, a person may hire a worker to perform a job. In doing the work required by the job, the worker may learn information about other people who conduct business with the person who hired the worker. This information may be contact information of customers.

Specifics of Non-Solicitation Agreements

In order to prevent the stealing away of other customers, for example, a non-solicitation agreement may state that a person who is about to learn certain information promises not to use it to solicit others. A non-solicitation agreement may say, for example, that one person agrees not to directly or indirectly, alone or on behalf of another, provide services to, call upon, solicit, sell, divert, take away, deliver to, accept business or orders, or otherwise deal with the past, present, or prospective customers of the other party to the agreement, or assist anyone else in doing so.

Limits to Non-Solicitation Agreements

Non-solicitation agreements generally have limits. Courts will not likely uphold non-solicitation agreements that say a person may never, in his or her lifetime, anywhere in the world, solicit business, employees, or anything else. That agreement would be too broad. A court probably would uphold a non-solicitation agreement with limits in duration and with geographical limits. These limits should be contained in the non-solicitation agreement.

Breach of a Non-Solicitation Agreement

Failure to comply with a non-solicitation agreement is a basic failure to comply with the promises a person made in a contract. If you cannot live with the terms, you should not enter the agreement.

When a person breaches a non-solicitation agreement, the other person is entitled to monetary or other relief, and may no longer have to fulfill their own obligations under the contract. Often times a non-solicitation agreement will have a section explaining the remedies for breach of the agreement. By signing the non-solicitation agreement the parties are agreeing to those remedies in the event of a breach of the agreement

As an attorney, I get two types of questions related to noncompete agreements:

1. Is this contract not to compete enforceable?
2. Would you draft a noncompete agreement for me?

In the sections below, I answer these questions by explaining an overview of Minnesota law related to noncompete agreements.

1. Enforceability of NonCompete Agreements

Whether the contract is called a “noncompete” or “do not compete” agreement, the intent is the same: the employer seeks to bind the employee from leaving employment and competing with the employer. Whether they are enforceable depends on a number of factors to be analyzed by an attorney. These factors include:

1. Independent Consideration - Was the employee paid independent consideration (compensation) for signing the noncompete agreement? This generally means financial compensation, but training and promotions can sometimes be sufficient.
2. Geographic Limitation - Is the geographic limitation in the noncompete agreement reasonable or too broad? This depends on the type of business. Local businesses are narrow, and international businesses are broad. The test is whether the employer has a legitimate business interest deserving protection.
3. Enforcement Period - How long is the noncompete agreement in force after the employment relationship is terminated? Two years or less is generally okay. Longer is suspect.

Before you ignore a noncompete agreement, you should consult with an attorney to analyze the contract. An attorney can give you a legal opinion regarding whether the noncompete is enforceable. The consequences of breeching a noncompete agreement may include a temporary restraining order preventing you from working in violation of the noncompete along with a lawsuit for monetary damages.

2. Drafting NonCompete Agreements

The laws involving noncompete agreements varies across the United States. A noncompete agreement that is enforceable in one state may not be enforceable in another. For this reason, understanding Minnesota law is important. Also, noncompete contract forms purchased on the internet may be inadequate for parties in Minnesota.

When I draft a noncompete agreement, the process involves carefully applying relevant Minnesota law to ensure the contract remains enforceable. Properly written noncompete agreements are routinely enforced by courts in Minnesota. However, mistakes can void the agreement. For this reason, you should consult with an attorney if you need a noncompete agreement drafted.

2009 Update Affecting Employees

Three 2008 Minnesota court cases may make noncompete agreements easier to impose on employees and enforce on ex-employees who signed noncompetes. Three Minnesota Court of Appeals cases upheld noncompete provisions under a variety of circumstances:

• Tenant Construction, Inc. v. Mason, 2008 WL 314515 (Minn. Ct. App., Feb 5, 2008) (unpublished).
• Sealock v. Petersen, 2008 WL 314146 (Minn. Ct. App., Feb 5, 2008) (unpublished).
• Witzke v. Mesabi Rehabilitation Services, Inc., 2008 WL 314535 (Minn. Ct. App., Feb 5, 2008) (unpublished).

Witzke is especially interesting because the court held that “continued employment” for a long duration after signing the noncompete will qualify as “consideration.” Previously, the general rule was that a noncompete must be accompanied by “independent consideration” (normally some sort of financial compensation) to be enforceable on a current employee.

Other Minnesota law firms have also written good articles on Minnesota noncompete law:

• Will Your Noncompete Clauses Stand Up in Court? by Marshall H. Tanick
• Litigating Covenants Not to Compete, by William Christopher Penwell

In the end, whether a noncompete agreement is enforceable is often unclear because every situation is different. There is no clear line.  For this reason, even most attorneys who are not experienced with noncompete agreements will defer to the analysis of an experienced noncompete lawyer. Thus, it goes without saying that, if you are not an attorney, you should consult with an experienced noncompete attorney to determine whether your noncompete contract is enforceable.

2011 Update Affecting Independent Contractors

There was recently an important development in Minnesota law regarding noncompete agreements with independent contractors.

The Minnesota Court of Appeals held that the the doctrine of independent consideration (which generally requires independent payment to an employee for a noncompete agreement to be valid) did not apply to independent contractors.

The case is Schmidt Towing, Inc. vs. Chris Frovik d/b/a FTR Towing and Recovery, 27-CV-09-6303 (Minn. Ct. App. Nov. 9, 2010).

The Minnesota Court of Appeals did not say that noncompete agreements with independent contractors are always invalid. Rather, the Court of Appeals directed the district court to examine the enforceability of the noncompete agreement using “the legal principles that generally govern noncompete agreements.”

About the Author: Attorney Aaron Hall routinely represents employees and employers with noncompete agreement disputes and drafting noncompete agreements.  He is available to analyze noncompete agreements or represent parties seeking to understand their legal rights and options. Aaron is licensed to practice law in Minnesota state and federal courts. His work is largely in the Twin Cities, Minneapolis and St. Paul, MN.