Employees are often asked to sign noncompete agreements that limit the employee’s legal right to work for other employers or for themselves during and after their employment.
This is the first part of a three part blog about noncompetes. This first part discusses generally the enforceability of noncompetes. The second part will discuss considerations and negotiation tactics if you are asked to sign a noncompete. The third part will discuss considerations and options when an employee has already signed a non-compete and “wants out” of it.
Unfortunately, the answer to whether a noncompete is enforceable is complex, factually intensive and there is no way to know the answer until it goes to Court and a judge or jury makes a decision.
In general, noncompetes are viewed with disfavor by most states’ laws because they limit productivity and could result in individuals needing to rely on government assistance, such as unemployment, rather than being gainfully employed.
However, the laws on the enforceability of noncompetes vary drastically from state to state. For example:
• Governing Law. There is no statute governing noncompetes. The law on noncompetes has been developed by Courts making decisions.
• Enforceability. Noncompetes are enforceable if reasonably necessary to protect an employer’s legitimate interests. As of the date of this blog, Minnesota courts have recognized three types of legitimate employer interest: (1) the protection of confidential information or trade secrets; (2) the protection of customer goodwill and relationships; and (3) specialized training. In the analysis of what is “reasonably necessary,” Minnesota courts consider factors such as: the scope of conduct prohibited, the geographic scope of work prohibited, and the length of the enforcement period.
• Modification. Minnesota has a “blue pencil doctrine” that allows a Court to modify the non-compete to make its terms reasonable, and then to order those modified terms be enforceable.
• Consideration. Consideration is the exchange of value by both parties and is necessary for a contractual agreement to be enforceable, as compared to a promise for a gift that lacks consideration and is not enforceable. In Minnesota, continued employment alone is not sufficient consideration to enforce a noncompete.
In North Dakota:
• Governing Law. North Dakota Century Code 9-08-06 governs.
• Enforceability. The codified law provides that all contracts restraining business are void unless either: (1) A business owner sells the goodwill of a business to another and agrees that the owner will not compete within the “county, city or a part of either” as long as “any person deriving title to the goodwill from the buyer carries on a like business therein;” or (2) If a partnership is dissolved, the partners may agree to be prohibited from “carrying on a similar business within the same city” as the partnership. In 2001, the North Dakota Supreme Court refused to expand the letter of the law in Warner and Company.
• Modification. North Dakota holds covenants not to compete void.
• Consideration. Public policy prohibits noncompete clauses.
In South Dakota:
• Governing Law. South Dakota Codified Law 53-9-11 primarily governs.
• Enforceability. The codified law provides an employer and employee can agree to enter into a non-compete for any period not exceeding two years. There is no reasonableness inquiry.
• Modification. The issue of whether there is a “blue pencil doctrine” in South Dakota has not been decided.
• Consideration. The codified law provides a noncompete can be entered into prior to or during employment. Continued employment may constitute sufficient consideration to enforce a noncompete pursuant to a 1992 South Dakota Supreme Court case, Centrol, Inc.
• Governing Law. Wis. Stat. 103.465 primarily governs.
• Enforceability. Noncompetes are enforceable if reasonably necessary for the protection of the employer. Wisconsin Courts largely look at the same factors as Minnesota Courts when deciding whether a term is “reasonably necessary.”
• Modification. Wisconsin does not have a “blue pencil doctrine.” However, a 2009 decision by the Wisconsin Supreme Court in Star Direct arguably may open the door to the blue pencil doctrine insomuch as it held that a Court may look at provisions in a noncompete that are capable of being looked at independently and decide their enforceability individually.
• Consideration. Consideration is required. However, the Wisconsin Supreme Court in Runzheimer International, Ltd. held in 2015 that continued at-will employment may constitute lawful consideration to enforce a noncompete.
This blog provides general information and only and is not legal advice. You need to consult an attorney in the event you are faced with the question of whether a noncompete is enforceable.