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MARSHALL'S LAW

Appellate Court Splits On Two Recent Non-Compete Cases

By Marshall H. Tanick

"They warmed me twice - once while I was splitting them . . ."

Henry David Thoreau, Walden (1854)

Non-compete contracts seem to be increasing as the economy recedes.

Recessionary times generally breed more non-compete agreements, and the current recession is no exception. The Minnesota Court of Appeals recently addressed a pair of non-compete cases, following a trio of decisions earlier this year upholding non-compete clauses. See "Concurrent court cases curtail competition," in the April 7, 2008, edition of Minnesota Lawyer.

The latest pair of non-compete cases resulted in differing decisions. The appellate court upheld one of the non-compete clauses but overturned a jury finding in another case. The split in the two cases reflects the fissure that characterizes non-compete litigation.

Competition Curtailed

Although the appeal was "arguably moot," the Minnesota Court of Appeals upheld a non-compete provision in Cook Sign Co. v. Combs, 2008 WL 3898267 (Minn. App. Aug. 26, 2008) (unpublished). The Ottertail County District Court upheld a non-compete agreement signed by a salesman for a company that was in the business of designing, fabricating, installing, and servicing custom-manufactured signs.

The agreement was signed on the date the claimant began his employment, coupled with a "signing bonus" of $2,500 upon execution of the agreement and additional $2,500 a year later if his income did not reach a certain level. After leaving the job, he accepted a competing position, despite the one-year non-compete agreement, which the trial court upheld via a temporary injunction.

The Appellate Court affirmed, although noting that the case was "arguably moot," because the one-year non-compete period had expired by the time the Appellate Court rendered a ruling. The employee's "personal interest in lifting the temporary injunction" by the trial court was no longer viable because "the non-compete agreement was over." But the Appellate Court nonetheless addressed the issues because there were unresolved issues and damages remaining before the trial court.

The threshold issue was which law applies: Minnesota, as stated in the non-compete agreement, or North Dakota, where the employee now works.

In Minnesota, they are looked upon with disfavor, but upheld if "reasonable." Neighboring North Dakota, however, "does not recognize non-compete contracts." After "careful and thorough analysis," the Appellate Court upheld the trial court's determination that Minnesota "was the proper choice of law." Balancing the five "guiding factors" for determination of the choice of law, the court concluded that Minnesota law applies.

Under Minnesota law, the non-compete agreement was enforceable through a temporary injunction, under the five factors set fort in Dahlberg Brothers, Inc. v. Ford Motor Co., 272 Minn. 264, 137 N.W.2d 314 (1965). Those considerations, consisting of the relationship between the parties, the balance of harm, the likelihood of success on the merits, public interest, and the administrative burdens, all weighed in favor of injunctive relief. The most important consideration was that the employee had received adequate consideration, consisting of the signing bonus and a minimal "income guarantee" after he signed the non-compete agreement. By enjoining the employee from working for a competitor, the trial court, "did not abuse its discretion" under those "five factors."

Therefore, the non-compete agreement was enforceable. Although its terms expired by the time the Appellate Court got around to affirming the trial court decision, the case was remanded to determine damages.

Conspiracy Case

But the Appellate Court overturned a jury's finding of conspiracy in a non-compete case in GSS Holdings, Inc. v. Greenstein, 2008 WL 4133384 (Minn. App. Sept. 9, 2008) (unpublished). A jury in Hennepin County found that an attorney who had drafted a non-compete agreement for an employee conspired with the employer and her employer to interfere with the agreement and allow its breach. But it also determined that the language did not "intentionally interfere" with the non-compete or cause its breach.

The trial judge rejected a post trial motion to overturn the verdict, but the appellate court reversed. Because the employee and her new employer had settled with the former employer, evidence to show an intentional tort by them "was of no consequence" as to the claim against the attorney. Since the "underlying claims of damages ... were not established," there could be no conspiracy claim, either.

Nor could the lawyer be found vicariously liable. Because the jury found the attorney did not "intentionally interfere with the [non-compete] ... there is no legal basis for liability premised on conspiracy..."

The split in these two cases show the divergence in legal doctrines involving non-compete agreements. While they are disfavored by the law, courts will uphold them, if reasonable and in compliance with Minnesota case law requirements.