Decades ago, restrictive covenants were inserted into employment contracts to stop scientists, inventors, or high-level executives from usurping confidential information or inventions of a company. The employment contracts were generally between high-paid professionals, who were compensated for agreeing not to compete.

Not so today. An estimated 30 million Americans—or 1 in 5 employees—are now bound by noncompete clauses. Dog sitters, tree trimmers, laborers, hair stylists, day care workers, doctors, sales people, mid-level financial professionals, and even Jimmy John’s sandwich shop makers and Amazon warehouse workers have all been required to sign noncompete clauses that limit their ability to work for competing businesses.

Some states—like California, where there are lots of technology companies that have trade secrets—prohibit restrictive covenants in employment contracts. Other states—like North Dakota, Oklahoma, Montana, and Colorado—severely restrict their use.

Minnesota is one of the more conservative states on this subject. Dozens of court decisions have been issued by Minnesota courts on the merits of restrictive covenants. For more information about the public policy arguments concerning restrictive competition agreements, please see www.loriswansonwritings.com and look for a column entitled “Upside Down Economy”.

It turns out, the restrictions in such agreements are not always as enforceable as employers would think. Several issues can negate a restriction and allow the employee to leave and compete. These include the following:

• Was the agreement subject to Minnesota law or the laws of a different state? (As noted above, each state treats restrictive covenants differently.) Where did the parties sign the agreement? Did the parties agree which state would have jurisdiction?
• Was the employee given a copy of the restrictive agreement before being employed?
• If the restriction was agreed to after the employee commenced employment, did the employee receive adequate compensation in exchange for signing the agreement?
• Was the employee given the opportunity to understand the restriction before signing it?
• Is the restriction reasonable in terms of the duration in which the employee is restricted after leaving the employer?
• Is the restriction reasonable in terms of any geographic limitations in which the employee may compete?
• Is the restriction reasonable in terms of the product or services it is designed to protect or is it instead so broad that it is not merely used as a device to handcuff the employee from seeking other employment? A restriction on a scientist at a medical device firm that develops newly-minted patents will be given more consideration than one restricting a sandwich maker at a Jimmy John’s restaurant. In other words, is the non-compete more restrictive than reasonably necessary to protect the employer’s business?
• Can the restriction be interpreted as simply a confidentiality agreement concerning customer lists and information?
• Is the restrictive covenant part of an agreement to sell a business?
• Is the person being restricted an employee or independent contractor?
• Has the employer breached or otherwise interfered with the employee’s ability to use his/her skills in the marketplace such that it would be inequitable for a court to enforce the restrictive covenant?

Lori Swanson and Mike Hatch practice law at Swanson Hatch, P.A. They sequentially represented Minnesota as Attorney General for 20 years. Mr. Hatch was Minnesota Commissioner of Commerce from 1983 to 1990, where he regulated the insurance, real estate, securities, banking, and financial services industry. Ms. Swanson was Chair of the Federal Reserve Board’s Consumer Advisory Council. Ms. Swanson and Mr. Hatch have been involved in dozens of cases involving restrictive competition agreements.

If you are a party to a restrictive covenant or need help with one to better understand your rights, feel free to review your situation with Ms. Swanson or Mr. Hatch by calling 612-315-3037.