You did the hard work and built your business from the ground up to be the successful company that it now is. You started without any employees or perhaps a few. Eventually you needed help at the top of the company. You were nervous to bring on an upper-level employee because you were concerned of sharing all of your business secrets with them.
To quell your fears, you had the new employee sign a confidentiality, non-solicitation, and non-competition agreement, likely drafted by yourself without consultation of an attorney because you felt it was straightforward (something I very commonly hear).
The employee worked in the upper level position for a year and then left the company to work for the competitor down the street and now you want to enforce the agreement.
For purposes of the questions below, the phrase “non-competition agreement” includes typical non-competition (you cannot work for a competitor), non-solicitation (you cannot take my employees or clients), and confidentiality agreements (prohibition of divulging confidential information).
Here is what I would say:
First, every single state looks unfavorably upon non-competition agreements, many states outright prohibit them except in very limited circumstances. You will face an uphill battle to enforce this agreement.
Second, the general rule is all parties pay their own attorney fees to fight this action. Even if you have an attorney fee provision, in the agreement, that requires the employee to pay your fees, ultimately you cannot collect blood from a turnip. It is not uncommon for both sides to spend $30,000-$50,000 to litigate one of these agreements and, if this were to go to trial fees can easily exceed $100,000 or more. The expenses may deter an employee from litigation and may give some leverage to enforce the agreement and/or reach a compromised settlement. Is this an expense you are ok paying?
Next, we would go through a series of questions:
1. Which state does the employee work? Which law applies?
Why: All states have their own laws about when a non-competition agreement is enforceable. The law between Minnesota and Wisconsin is substantially dissimilar and we need to know which state we are looking to in order to determine whether the agreement is enforceable.
2. What consideration was given to the employee to sign the agreement?
Why: In order to enforce these agreements, the employee must be given some kind of consideration. For instance, the promise of continued employment, an offer of employment, a bonus, higher wages, a promotion, etc. Be aware that what is required differs in each state. In Wisconsin, the offer of continued employment in exchange for signing the document is sufficient (Note: if they refuse you must be prepared to terminate their employment). In Minnesota, the offer of continued employment for an existing employee is NOT sufficient. In Minnesota, a non-competition agreement for a new employee must be provided PRIOR to the employee accepting employment and starting working. If it was provided after accepting employment, the employee must receive additional consideration.
3. How long does the non-competition agreement last after employment?
Why: The duration must be reasonable. Most courts find that a term of 1 year is reasonable, but all courts vary. Minnesota courts frequently say that 3+ years are unreasonable.
4. What is the geographical territory the employee is prohibited from working in/soliciting clients?
Why: This must be reasonable and not extend beyond the actual threat to the company. If a company is global, this does not automatically mean that the prohibition can be global. All territorial limits must be reasonable.
5. What is the scope of the non-competition agreement?
Why: The scope must also be reasonable. This means many things including the kind of work you are prohibiting them from doing and the clients/employees you are prohibiting them from taking. You generally cannot prohibit any and all solicitation of employees, only those employees that have the potential to harm your business. This is the janitor rule because prohibiting an employee from soliciting the janitor will likely not harm your business. You probably also cannot prohibit an IT employee from doing sales work because it is non-similar.
6. Ok, so portions of your self-drafted agreement are likely overbroad. Does that mean the entire agreement is thrown out? Can the court modify the agreement?
Why: It depends. Wisconsin has a law that says “any covenant imposing an unreasonable restraint is illegal, void an unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.” You may be able to keep a separate covenant if they are appropriately distinguished (although this is not likely language that a self-drafted covenant includes). Minnesota does allow blue-penciling.
7. Have you enforced these agreements before, when other employees left?
Why: If not, the employee can make the argument that the agreements are not actually that important to you and that the agreement should be invalid.
8. What risk are you willing to take? How much are you willing to spend to enforce?
Why: Some states (like Colorado) make it a criminal offense to attempt to limit someone from seeking other lawful employment. In addition, as stated above these agreements are extremely difficult to enforce. If you did not have an attorney draft the agreement it is likely that portions of your agreement are overly broad, based on the questions above we need to look at the likelihood of prevailing and the expense to get that result.
Using non-competition agreements for all employees will make it less likely that the agreement with your ONE KEY employee will be enforceable. Having an overly broad agreement with your KEY employee may mean that you have zero enforcement mechanism. Attempting to enforce an overbroad agreement could subject you to criminal penalties.
What is the moral of this story? Consult with an attorney when you are drafting a non-competition agreement. The agreement must be narrowly tailored to protect your business interest and must consider the law applicable to you.
Questions About this Topic?
If you have any questions about the content of this article or are looking for assistance in evaluating employee wage decisions, please contact Labor & Employment attorney Lida Bannink at 651-351-2116, or email at lbannink@eckberglammers.com.