Marshall's Law

Three Appellate Rulings Constrict Competition

By Marshall H. Tanick, Attorney at Law

Non-compete clauses apparently are being used with rising regularity - and litigated with growing frequency - in Minnesota.

Those trends were reflected in a trio of recent cases concurrently decided by the Minnesota Court of Appeals. 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 were also noteworthy. All three competing employees lost, which may indicate the courts' aversion to constricting competition is decreasing.

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 Feb. 5, 2008) (unpublished).

A Hennepin County District Court judge 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 Court of Appeals 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, reflect 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 Court noted that advertising in the Yellow Pages or on the Internet, "which have large circulation areas that only incidentally enter the restricted geographic areas" would not be violative of the non-compete clause.

However, the newspaper advertisements that were targeted within the restricted area did 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 negated the claim that the non-compete agreement is "contrary to the general public's interest."

Medical Matter

Another medical-related decision upholding a non-compete agreement occurred in Witzke v. Mesabi Rehabilitation Services, Inc., 2008 WL 314535 (Minn. App. Feb. 5, 2008) (unpublished).

A St. Louis County District Court refused to enforce a non-compete agreement that was entered into by a rehabilitation consultant. The agreement had preceded the employee receiving support, training, and promotions at the company. Therefore, when he left 17 years later, the trial court refused to enforce the non-compete agreement on grounds that it lacked consideration.

But the Court of Appeals 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, which 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 the employee 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

A Hennepin County District Court judge enforced a non-compete clause entered into by a supervisor of a construction for retail stores in Tenant Construction, Inc. v. Mason, 2008 WL 314515 (Minn. App. Feb. 5, 2008) (unpublished). The agreement 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 caselaw, the $500 payment constituted a "real" advantage for the employee that, combined with the continued employment, warranted enforcement of the non-compete agreement.

The trial court's award 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.

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.