In Aon Corp. v. Haskins, Civ. No. 11-12993, 2012 WL 1673141 (Minn. Dist. Ct. Feb. 2, 2012) (unpublished) (appealed on different grounds), the Minnesota federal district court held that a non-compete agreement entered into with a current employee was supported by independent consideration, and therefore enforceable, even though the incentive compensation plan provided to the employee could be canceled at any time. The court concluded that because the employee actually received payments and benefits under the plan, the employer performed its end of the bargain and the employee received something of value. Aon is significant because it clarifies that an employer’s performance under a discretionary compensation plan serves as independent consideration for a non-compete clause entered into with a current employee.
Facts of Aon
Plaintiffs Aon Corporation and Aon Risk Services Central, Inc. (“Aon”) sold insurance products and risk management consulting services. The three individual defendants all worked in Aon’s Bloomington, Minnesota office. One of the employees, Haskins, entered into a Restricted Stock Unit Agreement (the “RSU Agreement”). The RSU Agreement allowed employees to participate in a voluntary incentive plan whereby the participating employee received restricted stock units (“RSUs”) over the course of his or her employment. Initially, the RSUs were “unvested,” and the employee had no rights to transfer or sell his or her RSUs. After two years of employment following acceptance of the RSU Agreement, the employee’s RSUs “vested” and were converted into shares of common stock. During the pendency of the two-year vesting period, the employee received cash payments on a quarterly basis equal to any cash dividends paid on his or her corresponding number of common shares.
Haskins was “awarded” his RSUs one-month prior to accepting the agreement. In exchange for the RSU Agreement, Haskins agreed not to compete directly or indirectly in any way with the business of Aon for a period of two years after the end of his employment. Haskins also agreed not to induce or attempt to induce any Aon employee to quit for two years following the end of his employment.
Haskins eventually accepted employment with a competitor, Lockton, resigned from Aon, and assumed a position with Lockton holding the same responsibilities and objectives as his former position. Haskins left his employment prior to the two-year vesting period, roughly one year after accepting the RSU agreement. Haskins consequently did not receive any common shares.
The Court Holds That the RSU Agreement Provided Consideration for the Non-Compete Agreement
Defendants argued that the purported consideration given to Haskins for entering into the RSU Agreement was inadequate because the RSUs remained unvested for two years. The court disagreed, finding that Haskins received other independent consideration: three cash payments for the dividends paid on the RSUs. The court distinguished the present case from the case in MSC Industrial Direct Co., Inc. v. Steel, 2009 WL 2501762 (N.C. App. 2009), where the court found there was no valuable consideration for a non-compete, because the defendant, until his shares vested, had no right to vote, to alienate his shares, or to receive dividends. Conversely, Haskins immediately had the right to receive cash dividends and in fact actually received three payments. The court concluded that the RSU Agreement was supported by adequate consideration.
The court stated that notwithstanding a provision in the RSU Agreement that the plan could be canceled at Aon’s discretion, the non-compete agreement was still enforceable because Aon did not modify or terminate the stock incentive plan and fulfilled its end of the agreement by paying Haskins cash dividends.
The court held that because Aon performed the agreement, the agreement was binding on Haskins. The court cited Welsh v. Barnes-Duluth Shipbuilding Co., 21 N.W.2d 43, 45 (Minn. 1945), for the proposition that when a contract lacks mutuality based on one party’s illusory promise at the contract’s formation, “the contract is made binding on the promisor” as “a consequence of the promisee’s performance.”
The Court’s Holding Expands on Softchoice, Inc. v. Schmidt
The district court’s holding solidified a suggestion made by the Minnesota Court of Appeals in Softchoice, Inc. v. Schmidt, 763 N.W.2d 660 (Minn. Ct. App. 2009). In Softchoice, the Minnesota Court of Appeals held that in order for an employee-retention plan to serve as consideration for a non-compete agreement under Missouri law, an employer must be obligated to contribute something of value into the plan at the time its employee enters the plan. The court emphasized in a footnote, however, that its decision may have been different under Minnesota law and acknowledged that $25,000 was deposited into the employee’s account several days after he signed the agreement. The court’s decision in Aon seems to follow the Court of Appeals’ suggestion in Softchoice that a non-compete agreement might be enforceable under Minnesota law if the employer later makes contributions into a discretionary incentive compensation plan.
For a detailed discussion of the Softchoice decision, read our analysis here: Softchoice, Inc. v. Schmidt: Minnesota Court Addresses Enforceability of Two Non-Competes.
Lessons for Employers and Employees
- Under Minnesota law, non-compete agreements entered into with current employees must typically be supported by independent consideration beyond mere continuation of employment.
- Following the logic of Aon and Softchoice, an employee’s participation in a discretionary bonus or incentive compensation plan may serve as independent consideration for a non-compete agreement, provided that the employer actually makes contributions to the employee.
- If an employee signs a non-compete agreement in exchange for participating in a discretionary compensation plan, but the employee is never paid under the plan or the employer cancels the plan altogether, the non-compete agreement may be invalid.
If you need assistance drafting or interpreting your non-compete agreement, contact any of the Minnesota non-competition law attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota non-competition lawyer Craig W. Trepanier represents both employers and employees in a variety of employment law matters, including negotiation of non-compete agreements and litigating non-compete agreement claims. Craig may be reached at 612.455.0502 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota non-competition law firm located in Minneapolis, Minnesota.