The increasing use of non-compete agreements is choking the hiring process for many companies. But employers recruiting an otherwise perfect job candidate who is subject to a non-compete should not panic. Nor should the employer simply ignore the non-compete. Employers need to work calmly through the situation. Anecdotal evidence suggests that roughly nine out of ten non-compete disputes can be resolved to the satisfaction of all parties without the need for expensive litigation.
Here are ten initial steps for the recruiting employer to follow:
- Ask if the candidate has a non-compete.
- Get a copy and read it.
- Check the choice of law. Non-compete law varies significantly from state to state.
- Review to see if it a true “non-compete” or merely a non-solicitation clause.
- Inquire if the candidate signed before or after starting the previous position. A non-compete signed after the inception of employment might not be enforceable under Minnesota law.
- Find out whether the candidate signed any other documents such as a severance or release. Sometimes severance agreements contain language superseding previous agreements.
- Determine the true scope of competition between the two companies – is this a Coke/Pepsi situation? Draw a Venn diagram where the overlap is true competition.
- Talk to the candidate how they think the former employer will react, but don’t assume they are correct.
- Read the cease and desist letter if there is one. What is the former employer actually demanding?
- Decide whether to consult an attorney.
Next, determine your leverage. Is there a legal defense? There are many potential defenses to a non-compete, including typographical error, lack of consideration and unreasonable terms.
Then, have the internal discussion. Ask these questions:
- How valuable is this candidate?
- Can he or she perform the job with certain restrictions?
- Is there a compromise that can be reached?
Make sure to maintain attorney-client privilege during this internal review process. Be careful about not promising to unconditionally defend the candidate if there is a lawsuit. Consider asking the candidate to get their own attorney. Also consider asking the candidate to obtain a waiver, in other words making it their problem to solve.
Be aware of potential liability for tortious interference.
In Minnesota a company can be sued by the former employer of a candidate if the company knowingly hires the candidate in breach of the non-compete. This is called “tortious interference.” It means wrongfully causing someone to breach a contract. The company can potentially avoid this liability by obtaining a letter from an attorney advising the company that the non-compete is not valid.
Reasons to reach a deal.
Lawsuits are expensive. Bringing or opposing a motion for an injunction can cost upwards of $10,000 in attorneys’ fees for each side. Nobody really knows how a judge will rule on a non-compete case. Litigation raises other concerns as well. Customers might be brought into the litigation as witnesses. Former employees might bring counter-claims against their former employer. There is also a risk to the former employer of losing the lawsuit and the message that sends to other employees about their non-competes. Finally, there is a risk to the former employee that he or she will be ordered by a judge not to work for a competitor. Each side therefore faces costs and risks in litigation that can be avoided by settlement.
How to reach a compromise:
Unlike some cases, non-compete disputes have multiple moving parts that allow parties to be creative and flexible when seeking a potential compromise. These variables include:
- Restrictions as to certain customers;
- Restrictions as to certain activities; and
Keep in mind that as long as all parties agree you can have terms that are completely different than the original non-compete agreement. For example, the new employer may agree to do or not do something as part of a settlement even though it was not a party to the original non-compete contract. Agreements between companies to not hire each other’s employees, however, may implicate anti-trust concerns.
Jim has a non-compete with the Dunder Company that prohibits him from working for an office supply company anywhere in the U.S. for one year. Jim worked exclusively in direct paper sales in Minnesota. He wants to work for the Scott Company as a sales manager covering the region of MN, WI, IA and the Dakotas.
Possible settlement terms (in exchange for Jim being able to work for Scott Company):
- Jim agrees not to do business with or solicit any of his former customers
- Jim agrees that his territory will not include Minnesota
- The Scott Company agrees to pay Dundler $10,000
- The Scott Company agrees not to solicit any other Dundler employees for a period of one year
- As a Sales Manager, Jim agrees not to be involved in direct sales for one year
- Jim agrees not to be involved in the sale of paper for one year but can sell other office supplies
- A combination of several terms.
About the Author:
Minnesota non-compete attorney V. John Ella has successfully resolved hundreds of non-compete disputes in Minnesota, Wisconsin, and Iowa. He can be reached at 621.455.6237 or at email@example.com. Trepanier MacGillis Battina P.A. is a Minnesota non-compete law firm located in Minneapolis, Minnesota.
This content was originally presented at the Minnesota State SHRM Conference on October 14, 2019.