Quirky Question #226, One-Size-Fits-All National Non-Compete?

by Dorsey & Whitney LLP
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Question:

We are a business headquartered in Minnesota.  We plan to expand into other states but have concerns with investing the time and money in training new employees in a very competitive industry.  We currently have our Minnesota employees sign a form non-compete agreement.  Can we use that same form agreement for other states where we are expanding?

Answer

You are wise to give this issue some thought.  As this blog has discussed before, the enforceability of non-compete agreements is within the purview of each state, so before moving forward you should determine whether the states you are entering allow non-compete agreements, and, if so, what restrictions those states place on them.  This is an apt time to be considering this issue, as several states’ laws on non-compete agreements recently have changed or may be changing in the near future.

Before discussing those changes, however, the first point to emphasize is that state laws regarding non-compete agreements vary considerably.

  • In some states, non-compete agreements are generally unenforceable, while others allow extremely broad non-competes.
  • Some states have strict, specific geographical and durational limitations, some base enforceability decisions on the “reasonableness” of the restrictions.
  • States differ as to what interests of an employer may be protected by the non-compete agreement – trade secrets, confidential business information, business goodwill, customer or supplier relationships, and others.
  • Some states allow continued at-will employment to provide sufficient consideration to support a new non-compete agreement, while other states require that an existing employee be given some consideration on top of continued employment to make that employee’s new non-compete agreement valid.
  • And, in some states, courts are permitted to “blue pencil” an agreement to narrow terms the court deems are overly broad and unreasonable.  In other states, if any term is unenforceable, the entire agreement must be thrown out.

In your home state of Minnesota, non-compete agreements are enforceable if they protect a legitimate employer interest, and are reasonable in scope, duration, and geographic territory, and are supported by adequate consideration.  Legitimate employer interests can include the protection of the confidential information or trade secrets, the protection of customer goodwill and relationships, and any specialized training the employee receives.

I understand you’d like your form agreement, which presumably complies with Minnesota law, to be used for employees located in other states.  Hopefully the brief summary above shows why this is not possible.  You might be thinking, though, who cares if state laws vary – contracts frequently have provisions that require a specific state’s law to apply to the contract, or that require all lawsuits regarding the agreement to be brought in a specific state – so why can’t you include those provisions in your Minnesota agreements used in other jurisdictions?  As with the content of non-compete agreements, courts in different states take varying approaches to the types of “choice-of-law” and “choice-of-forum” clauses you might be considering.  There’s just no guarantee these clauses would make your non-compete agreements enforceable against an employee in another jurisdiction.

If this variety in state law treatment of non-competes and of “choice-of-law” and “choice-of-forum” clauses were not enough, several states’ laws have recently changed or may be changing dramatically in the near future.  In Illinois, the state supreme court recently refused to review a state appellate court’s decision that held at-will employment may be valid consideration for a non-compete agreement only if the employee is actually employed for at least two years after signing the agreement.  Previously, Illinois law allowed an employer to ask a new employee to sign a non-compete agreement and not offer any additional consideration beyond the at-will employment.  But in Fifield v. Premier Dealer Services, Inc., 993 N.E. 2d 938 (Ill. App. Ct. June 24, 2013), the court upended that long-standing rule.  Now, Illinois employers that require new hires to sign a non-compete agreement but don’t offer additional consideration for signing arguably can enforce the agreement only after the employee has worked for two years.  Adding to the confusion, however, at least one Illinois federal court, Montel Aetnastak, Inc. v. Miessen, No. 13 C 3801 (N.D. Ill. Jan 28, 2014), has already questioned the Fifield decision.  The court based its decision to uphold a non-compete agreement – signed upon commencement of employment and without additional consideration – not on a strict two-years-of-employment requirement, but on a more malleable “substantial period” of employment standard.

In Massachusetts, Governor Deval Patrick is currently pushing that state’s legislature to pass a bill to prohibit all employee non-compete agreements that are broader than a  restriction on  working with former customers, save for a few exceptions, like agreements made in connection with the sale of a business.  Interestingly, Massachusetts is one of only a handful states that has not adopted the Uniform Trade Secrets Act, which generally protects workers from taking companies’ intellectual property to other businesses but leaves them free to join or launch competitors, so Governor Patrick’s proposed compromise is to ban non-compete agreements, but add the trade secrets law.  If Governor Patrick is successful, Massachusetts will join the collection of states that prohibit or greatly restrict employee non-compete agreements, including California, Montana, North Dakota, and Oklahoma, and other states with significant limitations, like Colorado (only for executives, management, or professionals), Louisiana (only within a specified parish or municipality and for no more than two years), and Nebraska (only to restrict former employees from working with customers of the former employer with whom they had personal contact).

With all this in mind, it becomes pretty clear that a one-size-fits-all “form” non-compete agreement is not going to work for your expanding business.  Rather, you will be best served by having your non-compete agreements be tailored to each employee’s individual circumstances – including the employee’s position, the interests you wish to protect, and the state in which the employee works.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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