Minnesota Case Highlights Two Important Pitfalls to Avoid in Drafting Non-Compete Agreements

In GreatAmerica Leasing Corp. v. Dolan, Civ. No. 10-4631, 2011 WL 334829 (D. Minn. Jan. 31, 2011), the U.S. District Court for the District of Minnesota denied a motion for a temporary restraining order (“TRO”) and preliminary injunction in an employment non-compete dispute involving two former employees. Concerning one employee, the court found that the non-compete agreement was wiped out by the integration and merger clause contained in a subsequent settlement agreement. Concerning the second employee, the court found that the non-compete agreement could not be enforced by a successor company due to the absence of an assignability clause in the original non-compete agreement. The GreatAmerica Leasing case highlights the importance of avoiding common pitfalls when drafting non-compete, separation, and settlement agreements with employees.

Background
The employment contracts at issue in GreatAmerica Leasing were entered into by defendants Jeff Grissler (“Grissler”) and Robert Dolan (“Dolan”) (collectively, “Defendants”), former employees of Grandview Financial, Inc., a beauty salon equipment financing business (“Grandview”). In 2004, Grissler and Grandview entered into an initial employment agreement. Grissler later entered into an executive employment agreement, which contained a confidentiality clause and a two-year, post-employment non-compete clause. Dolan also entered into an employment agreement with Grandview. The agreement between Dolan and Grandview contained a confidentiality and non-solicitation clause.

In 2010, disputes arose between the parties as to the compensation owed by Grandview to Grissler and Dolan. Ultimately, Grandview terminated both employees. Shortly thereafter, both Grissler and Dolan began working for Castelton, a competing beauty salon equipment financing company within the same market as Grandview. Castleton was owned by Grissler’s brother.

On October 5, 2010, GreatAmerica Leasing Corp. (“GreatAmerica”) purchased the assets of Grandview. GreatAmerica asserted that it was a successor in interest to the employment agreements entered into between Grandview and the Defendants. As such, GreatAmerica brought a motion for TRO to enforce the non-compete and non-solicitation clauses in the employment agreements.

The court denied the motion for TRO and temporary injunction, determining that GreatAmerica was not likely to succeed on the merits of its claims for the reasons outlined below.

The Court Holds That Grissler’s Non-Compete Was Superceded by Settlement Agreement
In examining whether GreatAmerica was likely to succeed on the merits in enforcing the restrictive covenants in Grissler’s employment agreement, the court considered the impact of a settlement agreement entered into between Grissler and Grandview in the fall of 2010. The court examined whether the settlement agreement constituted the full and final agreement between Grissler and Grandview and whether there was an integration of all previous contracts between the two parties. The settlement agreement contained a merger clause stating, “There are no other agreements or promises other than what are contained in this Agreement.”

GreatAmerica argued that the purpose of the settlement agreement was solely to address the deferred compensation clause of Grissler’s employment agreement, and that the merger clause in the settlement agreement did not represent an intention for a full integration. The court noted, however, that the existence of a merger clause in the later-executed settlement agreement leads to the presumption that integration was intended and that the restrictive covenant was, therefore, superseded by the settlement agreement. The court gave added weight to the merger clause because Minnesota courts closely scrutinize non-compete agreements in employment contracts. As such, the court refused to issue a TRO or enjoin Grissler from working at a competing company.

The Court Holds that Dolan’s Non-Compete Could Not Be Assigned
In examining whether GreatAmerica was likely to succeed on the merits in enforcing the restrictive covenants in Dolan’s employment agreement, the court considered whether the non-compete agreement was assignable from Grandview to GreatAmerica. The court noted that in Minnesota, a non-compete agreement may be assignable, but the assignability depends on the language contained in the non-compete agreement and the circumstances of each case. See Saliterman v. Finney, 361 N.W.2d 175, 178 (Minn.Ct.App.1985); Guy Carpenter & Co., Inc. v. John B. Collins & Assocs., Inc., Civ. No. 05–1623, 2006 WL 2502232, at *4 (D. Minn. Aug. 29, 2006). (For a detailed discussion of the assignability of non-compete agreements under Minnesota law, read our article here: Non-Compete Agreements: Are They Assignable Under Minnesota Law?).
Here, the court declined to issue a TRO in favor of GreatAmerica for three reasons. First, Dolan only worked for Grandview and not for GreatAmerica. Second, Dolan’s non-compete agreement did not contain a successor or assignability clause. Third, in light of Minnesota courts’ scrutiny of non-compete agreements, the merger clause holds more weight in the consideration of the enforceability of the non-compete agreement. As such, the court determined that GreatAmerica was unlikely to succeed on the merits of this claim.

Takeaways
The court’s decision in GreatAmerica Leasing highlights two key pitfalls for Minnesota employers to avoid when drafting non-compete agreements.
First, when entering into a written agreement with an employee (e.g., amended employment agreement, separation or severance agreement, or settlement agreement), the employer should ensure that the agreement does not supersede a prior non-compete agreement. For example, the subsequent agreement could state that it supersedes and replaces all prior agreements or understandings between the parties except the employee’s non-compete agreement dated (insert date).

Second, the employer should include a successors and assigns clause in all non-competition, non-solicitation, and non-disclosure agreements with employees. This will allow the employer to transfer the rights under such agreements to a buyer in connection with the sale of the business.

For additional advice on noncompetition agreements, employment contracts, and other employment law issues, contact the Minnesota employment law attorneys of Trepanier MacGillis Battina P.A.
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About the Author:
Trepanier MacGillis Battina P.A. is a Minnesota employment law firm located in Minneapolis, Minnesota. Their employment law attorneys can be reached at 612.455.0500.