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

Minnesota Court of Appeals Holds that Non-Compete is Not Enforceable When Some Employees Do Not Sign

In Nott Co. v. Eberhardt, 2014 WL 2441118 (Minn. Ct. App. June 2, 2014), the Minnesota Court of Appeals held that since some employees received the same new compensation plan even though they did not sign the company’s non-compete agreement, the non-compete agreement was invalid. Under Minnesota law, non-compete agreements entered into with current employees must be supported by independent consideration such as a promotion, bonus, raise, or more favorable compensation terms. In Nott, the court held that an employer’s new compensation plan did not serve as independent consideration for a non-compete agreement because one employee began receiving payments under the plan even though he was not required to sign the non-compete agreement. The Nott decision highlights the dangers of treating “signers” and “non-signers” the same when it comes to non-compete agreements.

Facts of Nott
In 1993, Dean Eberhardt began working for Nott Company, a supplier of fluid-power components and systems. In January 1999, Eberhardt was promoted to an “outside sales position” and at the time of his promotion Eberhardt negotiated a compensation plan that included a base salary and a commission. Nott did not require Eberhardt to sign a non-compete agreement as a part of this compensation package.

On April 7, 1999, Nott sent letters to all outside salespeople informing them that it was instituting a new compensation plan and a new non-compete agreement effective May 1, 1999. Eberhardt signed the agreement, although there was a dispute between the parties about the date of his signature.
One outside salesperson, Gary Cable, was allowed to participate in the new compensation plan without signing the new non-compete agreement. Cable, like all outside salespersons except Dean Eberhardt, had an existing non-compete agreement. Unlike the two-year restriction in the new non-compete agreement, Cable’s 1995 non-compete agreement contained only a one-year restriction on employment. Because the additional year’s restriction was material to the company, Nott told all outside salespersons, including Cable, that they must sign the 1999 non-compete agreement. Cable, however, never signed the new agreement.
Both Eberhardt and Cable began receiving compensation under the new compensation plan.

In 2010, Nott fired Eberhardt, who then began working for a competitor. Nott then sued Eberhardt for breach of contract, tortious interference with contract, and tortious interference with prospective business relationships.

The District Court’s Holding
A jury trial was held in September and October 2012. At the close of Nott’s case-in-chief, the district court granted judgment as a matter of law, finding that no consideration supported the non-compete agreement.

The Court of Appeals’ Holding
On appeal, the Minnesota Court of Appeals affirmed the district court’s grant of JMOL because the district court correctly determined that Eberhardt did not bargain for the new non-compete agreement.

The court began its analysis by stating that continued employment alone is not sufficient to support a non-compete agreement. Nat’l Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982). The non-compete agreement must be “bargained for and provide the employee with real advantages.” Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626, 630 (Minn. 1983). A non-compete agreement that has not been bargained for lacks consideration and is not enforceable. In Freeman, three employees signed the new covenant not to compete, but fourteen other employees did not. Nevertheless, all employees – signers and non-signers alike – received identical benefits and were compensated under the same formula. The Minnesota Supreme Court held that the non-compete agreement was invalid because “[a]bsolutely no distinction was made between signers and non-signers.”

The court did not agree with Nott’s argument that Freeman is inapposite because Cable, who had an existing non-compete agreement in place, was not a “non-signer” under Freeman. Although Cable had a prior non-compete agreement in place, the difference between the two agreements was important enough that Nott asked all outside salespeople with existing non-compete agreements to sign the new non-compete agreement.

Applying the holding of Freeman, the court concluded that the new 1999 compensation plan did not serve as independent consideration for Eberhardt’s non-compete agreement. Nott’s own records suggested that not all employees promptly returned the signed non-compete agreement and it was undisputed that Cable was paid according to the new compensation plan without signing the 1999 non-compete agreement. Based on these facts, the court concluded that Nott intended to launch the new plan without regard for whether all of the outside salespeople actually signed the 1999 non-compete agreement. Consequently, the court held that Eberhardt did not bargain for the 1999 non-compete agreement, and it is not supported by consideration as a matter of law.

Lessons for Employers and Employees

The Nott decision highlights the dangers of treating “signers” and “non-signers” the same when it comes to enforcing non-compete agreements in the State of Minnesota.

  • If an employer rolls out a new non-compete agreement to a group of employees in exchange for a new compensation plan, commission plan, or incentive bonus plan, the employer should not provide the same benefits to employees who do not sign the non-compete agreement.
  • An employer should not begin paying employees under the new compensation plan until the employee returns a signed copy of the non-compete agreement. Applying the new compensation terms to employees who fail to return the agreement may demonstrate that “signers” received nothing of value.
  • If you are an employee who signed a non-compete agreement in exchange for participation in a new compensation plan, find out if other similarly situated employees were allowed to participate in the plan without signing the agreement. If so, your agreement might be invalid following the logic of Nott.

If you have questions about the Nott decision or the enforceability of your non-compete agreement, contact any of the non-compete attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota non-compete attorney 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 Trepanier MacGillis Battina P.A. is a Minnesota non-compete law firm located in Minneapolis, Minnesota.