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Trepanier MacGillis Battina P.A. 8000 Flour Exchange Building 310 Fourth Avenue South Minneapolis, MN 55415 612.455.0500

Avoid Drafting Mistakes and Ensure the Enforceability of Your Company’s Non-Compete

Two cases demonstrate how drafting errors in a non-compete agreement can invalidate the agreement. In Burke v. Fine, the court concluded that a non-compete clause terminated with an employment agreement because the non-compete clause did not contain any “survival” language. In Western Forms v. Pickell, poor drafting of an employment agreement led the court to determine that the non-compete provision expired while an employee was still working for the company. By following some basic steps to avoid the mistakes made by the employers in these cases, your company can maximize the enforceability of your non-compete agreements under Minnesota law.

Burke v. Fine
In one non-compete case, Burke v. Fine, 608 N.W.2d 909, 911 (Minn. Ct. App. 2000), an employee was hired pursuant to a written employment agreement for a two-year term. The employment agreement contained a non-compete clause in which the employee agreed not to work for a specified employer for a period of two years after the termination of his employment. The employee continued working after the two-year term ended, and then decided to leave and work for the employer specified in the non-compete agreement. After the employer said he would seek to enforce the non-compete provision, the employee commenced a declaratory judgment action in district court.

The district court stated that it could not harmonize two provisions of the agreement; an automatic renewal provision, and a provision stating that the agreement would terminate at the end of the term unless extended. The court further stated that the modification provisions of the agreement that required any modifications to be in writing were evidence that extension of the agreement should not be automatic. Because of this, the district court reasoned that the term of the employment agreement was not extended by the conduct of the parties, and the employee’s continued employment after the two-year period ended was on an at-will basis. The district court held that the language of the agreement specifying that the agreement would terminate at the end of its term applied to the entire employment contract, including the non-compete covenant. Therefore, the non-compete covenant was not enforceable.

The employer appealed the decision of the district court to the Minnesota Court of Appeals, arguing that the express terms of the non-compete agreement prohibited the employee from working with the specified employer for two years following termination of employment, and that the court “rewrote” the agreement when it found the non-compete provision no longer enforceable. The Court of Appeals disagreed, concluding that when the employment contract expired, its terms were no longer binding on the parties. The court recognized that a contractual provision could survive the expiration of the underlying contract, but found no such survival language in the non-compete agreement at issue. Accordingly, the Minnesota Court of Appeals affirmed the decision of the district court, holding that the non-compete provision was unenforceable.

Western Forms v. Pickell
In another non-compete case, Western Forms v. Pickell, 308 F.3d 930, 933 (8th Cir. 2002), decided by the Eighth Circuit Court of Appeals, an employee signed two documents at the start of his employment as a sales representative: an employment agreement and an addendum containing a non-competition provision. The employment agreement provided that it would terminate after one year, unless extended by written notice. The non-compete agreement contained certain covenants not to compete “for a period of two (2) years from and after the voluntary or involuntary termination of such employment.” A merger clause in the employment agreement provided that it and the addendum together embody the whole agreement.

The employee worked for the employer for two years, and was then appointed to another position within the company. At that time, the employee signed a new employment agreement. Immediately after this appointment and then again two years later, the employer requested that the employee sign another non-compete agreement. The employee refused in both instances. Several years later, the company drafted a revised non-compete agreement: the employee refused to sign this one as well. The employee was later appointed to a different position within the company, asked to sign a non-compete agreement, and refused again. Two years later, the employee resigned and went into business in competition with his former employer.

The employer filed a complaint against the employee in district court seeking enforcement of the original non-compete agreement. The district court concluded that the terms of the agreement were unambiguous. As evidenced by the merger clause and the reference in the employment agreement to the non-compete addendum, the district court concluded that the non-compete was ancillary to the employment agreement and must be construed in harmony with it. The language in the non-compete provided that it was triggered at the termination of “such employment.” The court reasoned that “such employment” referred to the only employment relevant at the time the agreement was signed (i.e., the sales representative position), not to employment generally. It was not a contract entered into to govern the employment relationship into the indefinite future regardless of the employee’s position within the company.

Thus, the court reasoned, either at the end of the second year or at least at the time the employee was appointed to a new position within the company, the original employment agreement had expired. The expiration of the employment agreement triggered the running of the non-compete provision. This conclusion led to the strange result that the non-compete began to run and eventually expired while the employee was still employed with the company.

The Eighth Circuit Court of Appeals affirmed the decision of the district court, holding that the outcome was a direct consequence of poor drafting on the company’s part, and construing the drafting error against the company. The court also observed that the company compounded its own drafting error when it allowed the employee to remain with the company despite his continued refusal to sign a new non-compete agreement.

Takeaways for Minnesota Employers

  1. Use consistent language throughout your non-compete agreement. In Burke, the agreement was found ambiguous by stating it would “automatically renew” in one place but later stating that any extension had to be “in writing.”
  2. Be careful when including an expiration date in your employment agreement or non-compete agreement. If the agreement contains an express expiration date, absent an extension of the agreement by the parties, the non-compete covenant may no longer be enforceable once the agreement expires.
  3. Clearly state that the non-compete agreement governs the employer’s employment relationship with the employee into the indefinite future regardless of his or her position with the company.
  4. Include survival language. Unless you specifically state that the non-compete provision survives the termination of the agreement, the non-compete covenant will likely terminate with the agreement.
  5. Consider drafting a separate non-competition, non-solicitation, and non-disclosure agreement that stands apart from any employment agreement setting forth the employee’s duties, compensation, benefits, and other terms of employment. This minimizes the chance that the employer’s breach of the employment agreement, or its inadvertent expiration, will invalidate the stand-alone non-compete covenant.

By reviewing your non-compete and employment agreements for consistency with the above guidelines, you can maximize the likelihood that your company’s non-compete provisions will be enforceable and fully protect your company’s confidential information, trade secrets, and customer goodwill.

If you have questions about the enforceability of your Minnesota non-compete agreement, please contact one of the employment law attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota non-compete lawyer Craig W. Trepanier represents both employers and employees in a variety of employment law matters, including drafting, negotiating, and litigating non-competition, non-solicitation, and non-disclosure agreements. Craig may be reached at 612.455.0502 or Trepanier MacGillis Battina P.A. is a Minnesota non-compete law firm located in Minneapolis, Minnesota.