Our business clients often seek our advice regarding agreements not to compete. Agreements not to compete are often found in Minnesota between businesses and key employees, but are also properly used in other contexts. Such agreements are also often known as Covenants not to Compete, Non-Solicitation Agreements or Restriction covenants. The common element of such agreements is a restriction prohibiting a party from competing on some level with their former employer or company following separation from the company.
Non-Compete Agreements are treated differently than most contracts in court because most courts consider them so called “partial restraints of trade". Courts therefore disfavor Non-Compete Agreements because they limit the free marketplace. In some states, Non-Compete Agreements are not enforceable at all. In Minnesota they are enforced, but with certain conditions and limitations unique to the subject.
One condition Minnesota courts impose on enforcing Non-Compete Agreements is in regard to consideration. In contracts, the term consideration refers to the value given by a party in exchange for the agreement. Traditionally a contract would not be enforced by courts unless the party seeking endorsement gave consideration to support the contract. As such, promised gift from one party would not be enforceable as contract. In contract law today, courts typically do not analyze the adequacy of consideration and the phrase “for value received" or “for valuable consideration" would suffice to establish that adequate consideration supports the argument.
Unlike in other contracts, Minnesota courts carefully scrutinize the adequacy of consideration in determining the validity of Non-Compete Agreements. The key inquiry by Minnesota courts on this topic is whether the Non-Complete Agreement was executed at the outset of the relationship as a condition or was otherwise supported by new value provided by the employer/business.
Minnesota courts will not enforce a Non-Compete Agreement that was introduced to an employee after the start of the employment relationship unless the agreement was accompanies by a material pay raise or promotion.
Reasonability of Scope
Minnesota courts also limit their enforcement of Non-Compete Agreements only to the extent they are deemed reasonable in terms of the scope of the proposed restrictions. Minnesota courts have adopted a so-called “blue-pencil doctrine" in regards to imposing this limitation. The blue-pencil doctrine allows courts to modify otherwise valid Non-Compete Agreements so as to limit the scope of the restrictions to a point where they do not exceed the reasonable business interests of the business or former employer.
Examples of courts exercising the blue-pencil doctrine would include reducing a 5 year restriction to 2 years or reducing a geographic restriction from a 100 radius to a 25 mile radius.