Articles

Softchoice case means hard choices for employers and employees on non-compete agreements

On April 7, 2009, in the case of Softchoice, Inc. v. Schmidt, the Minnesota Court of Appeals scored a rare double play, making two decisions regarding the enforceability of employment non-compete agreements in one case. The case involved one employer, but two different scenarios involving non-compete agreements signed by two different employees.

Underlying the court’s analysis of the two situations was the doctrine in Minnesota that non-compete agreements signed by employees after commencement of the employment relationship must be supported by “consideration” other than the continuation of the existing employment relationship, i.e., the employee must receive something extra, such as a raise, a bonus, a promotion – something of value – that she didn’t have before.

“‘Show Me State’ Says Show Me the Money”

In the first situation, the court ruled that Softchoice’s employee was not bound by a non-compete agreement that he signed as a requirement of becoming eligible to participate in the company’s “employee retention plan.” The plan provided the potential for bonuses, but under the plan’s wording the granting of those bonuses was in the sole discretion of the company board of directors.

The case was litigated in Minnesota, but Missouri law governed the non-compete agreement and the retention plan. The Minnesota court cited Missouri law, which provides that “contracts which depend on performance on the wish, the will, or the pleasure of one of the parties are unilateral and cannot be enforced.” Because there was no way for the employee to enforce the retention plan, the court held that there was no consideration for the non-compete agreement and the employee was not bound by it.

While the case was decided under Missouri law, and the Court explicitly stated that its decision might have been different had it conducted its analysis under Minnesota law, it is reasonably likely that the decision would have been the same if the non-compete agreement was governed by Minnesota law since Minnesota law holds that “[a] promise is illusory when it fails to bind the promisor, who retains the option of discontinuing performance,” and Minnesota courts will not enforce illusory contracts.

“‘It’s Not Over ‘Until It’s Over’ and ‘It’s Not a Deal Until It’s a Deal”

The second scenario in the case involved a non-compete agreement that an employee signed as a condition of receiving a promotion. The crucial issue was the timing of the promotion in relation to the requirement that he sign the non-compete agreement. The employee was interviewed for a promotion and was informed in an e-mail the same day that he had received it. On the following day the employer sent an e-mail to all of the company employees in the United States and Canada informing them of the employee’s promotion. The employee did not yet, however, start performing his new duties. Nine days later, the human resources department sent a formal offer letter of promotion to the employee, who had still not begun to perform his duties under the promotion. The offer letter indicated that, among other things, that the promotion was conditioned on his signing the letter, which required him to sign a non-solicitation agreement. The letter finally provided that if the employee did not return the signed offer within three days, the promotion offer would become null and void.

The question that the court had to decide was whether the employee had “received” the promotion at the time he was informally told that he was accepted for promotion or at the time when he was formally offered the position. Stating that the key inquiry in these situations is when the promotion provides the employee with “real advantages,” the court held that a promotion serves as consideration for non-compete agreement at the time when the terms of the promotion have been defined, the promotion has been formally offered, and accepted in writing. It found that the employee did not receive any “real advantages” when he was informed on the day of his interview that he would be promoted because he did not receive any increase in compensation, duties, or benefits at that time (and, of course, he was still employed by the company).

Lessons

The decision’s lesson for employers is to make certain that they provide existing employees with something of real substance in return for the employees signing a non-compete agreement.

The lesson for both employers and employees is to be aware of how a hiring or promotion decision is offered. Employers should provide a cautionary statement that nothing is official until the potential employee signs an offer letter.

For an employee or potential employee, the lesson is to be careful about changing your position until you are sure of the terms of the new job. Be on the lookout for the cautionary statement that the “official” offer will be coming. If the official terms include your signing a non-compete agreement, be sure that you understand all of its implications when and if you leave the job. Most non-compete agreements provide that they may be enforced regardless of the reason that the employee leaves the job. If you are laid off or fired, you may still be bound to the terms of the agreement. If you quit because, for example, over the years you have become grossly underpaid in comparison to your counterparts in the industry, you may still be subject to the non-compete agreement if you leave for a competitor (who compensates you at market rate).

Hard choices, indeed.