Marshall's Law

Three Appellate Rulings Constrict Competition

By Marshall H. Tanick, Attorney at Law

It appears non-compete clauses are being used with rising regularity - and litigated with growing frequency - in Minnesota.

Those trends were reflected in a trio of cases concurrently decided by the Minnesota Court of Appeals recently. While the tribunal ordinarily hears non-compete cases every quarter or so, the issuance of three non-compete decisions on a single day was remarkable, if not unprecedented.

The rulings themselves also were noteworthy. All three competing employees lost, which may indicate a decreasing aversion to constricting competition - a stance which has not been generally reflected in Minnesota non-compete law in the past.

Solicitation Stop

An optometrist who entered into a non-compete agreement after selling his business was enjoined from soliciting for clients after he began a new practice outside of the proscribed non-compete area in Sealock v. Petersen, 2008 WL 314146 (Minn. App. Feb. 5, 2008) (unpublished). The Hennepin County District Court enjoined the optometrist from soliciting new customers by advertising within the five-mile restricted geographic area of the non-compete agreement, even though his new business was located outside of the five-mile area.

The Appellate Court affirmed, agreeing with the trial court that the "plain and ordinary meaning" of the prohibition against the optometrist competing includes newspaper advertisements that constituted "an attempt to secure the business of third parties, which constitutes 'competition' or an attempt to 'compete.' Relying on the dictionary, the Court pointed to the definition of competition as "[r]ivalry between two or more businesses striving for the same customer or market," which accurately described the newspaper advertisements by the optometrist that were "certainly aimed for the same customers or market" as the buyer of the old business.

These advertisements, which "target readers in the restricted geographic areas" where the newspapers are published, reflects that the optometrist was trying "to take away business of its former customers from the practice that he sold ... and to compete ... for business in the restricted geographic areas."

The non-compete was enforceable, even though it imposed a claim of "undue hardship" on the optometrist. Advertising in the yellow pages or on the Internet, "which have large circulation areas that only incidentally enter the restricted the geographic areas," would not be violative of the non-compete clause.

However, the newspaper advertisements that were targeted within the restricted area do transgress the restrictive prohibition. Although some cases in other jurisdictions have refused to enforce non-compete agreements that restrict the availability of health care, in this case the non-compete agreement does not "hinder the ability of individuals located in the restricted geographic areas to obtain the services of optometrists," which negates the claim that the non-compete agreement is "contrary to the general public's interest."

Medical Matter

Another medicine-related case that resulted in the upholding of another non-compete agreement occurred in Witzke v. Mesabi Rehabilitation Services, Inc., 2008 WL 314535 (Minn. App. Feb. 5, 2008) (unpublished). The St. Louis County District Court refused to enforce a non-compete agreement that was entered into by a rehabilitation consultant at a facility and preceded the employee receiving support, training, and promotions at the company. When he left 17 years later, the trial court refused to enforce a non-compete agreement on grounds that it lacked consideration.

But the Appellate Court reversed, holding that the two non-compete clauses, one regarding solicitation and the other concerning competitive work, were enforceable because they were supported by the consideration stemming from "continued employment with the company for 17 years," along with professional support by the company and advancement within the business in terms of both "salary and responsibility," including the nearly trebling of salary, albeit extended over a 17-year period.

The existence of a hand-written exception in a non-compete agreement that allowed the employee to perform rehabilitation services for a local school district shows that the parties contemplated that the employee "would advance" in his position, which he did over time, "gaining significant professional advantages through the company." The multiple promotions he received, coupled with the salary increases, were the critical factor in upholding the validity of the non-compete agreement, although prior Minnesota case law has suggested that mere continuation of employment is not sufficient consideration for a non-compete agreement imposed upon an employee after the employment relationship begins.

Consideration Considered

The apparent lessening of the consideration requirement was considered outside of the medical field in Tenant Construction, Inc. v. Mason, 2008 WL 314515 (Minn. App. Feb. 5, 2008) (unpublished). The Hennepin County District Court enforced a non-compete clause entered into by a supervisor of a construction for retail stores, which had been signed six months after he began employment, for a consideration of $500.

The Court of Appeals affirmed, holding that the payment of $500 was sufficient consideration because it was "not an insignificant sum." Although the continued employment alone was not adequate to support a non-compete clause under well-established case law, the $500 payment constituted a "real" advantage for the employee that, combined with the continued employment, warranted enforcement of the non-compete agreement.

The lower court's award of damages of liquid damages of $14,000 also was upheld, together with an award of attorney's fees of $19,000. The liquidated damage award, which was contained in the employment agreement, was "valid based upon the assumption that it is not a penalty for non-performance but that it represents fair compensation for breach-related damages." The attorney's fees, which were called for in the agreement, also were appropriate because there was a finding of breach of contract by the employee.

But, barely a week later, an employee prevailed in a non-compete case in Federal Court in Bannister v. Bemis Company, 2008 WL 451019 (D. Minn. Feb. 15, 2008). The employee sued after his former employer failed to pay him under a non-compete agreement that required compensation to be paid over an 18-month period during which the employee is unable to find work due to the restrictive clause.

Applying Arkansas law, as called for in the contract, U.S. District Court Judge Richard Kyle held that the arrangement was "clear and unambiguous" in requiring said payments and that the ex-employee "substantially complied with the conditions precedent" of provided documentation of his inability to find other work on a monthly basis. The constricted employee also undertook adequate efforts and was sufficiently "aggressive" in seeking other work to activate the payment obligations each month, totaling more than $81,000 over a nine-month span.

Non-compete causes are an anathema to employees, and some employers, too. But this trio of cases suggests that Minnesota courts may be less reluctant to enforce them, overcoming past inhibitions based upon inadequacy of consideration and other factors.