Modifying Mid-Stream Non-Compete Agreements Under Minnesota Law

It is unclear under Minnesota law whether an employer who modifies an otherwise valid non-compete agreement with an existing employee must provide “independent consideration” to support the changes to the agreement. In National Recruiters, Inc. v. Cashman, 323 NW 2d 736 (Minn. 1982), the Minnesota Supreme Court held that restrictive covenants not ancillary to commencement of the initial employment relationship are invalid unless supported by independent consideration. Thus, in most cases, an employer must provide the employee with a promotion, raise, bonus, or other independent consideration to support a “mid-stream” non-compete agreement entered into with an existing employee. Under general contract law, however, new consideration typically is not required when parties modify an existing contract. The intersection of these two legal principles makes it unclear whether modifications to an existing non-compete agreement require independent consideration. As discussed below, a survey of general contract and non-compete principles demonstrates that there are arguments for each side.

Arguments for Not Requiring Independent Consideration:
There are two main arguments for the proposition that additional consideration is not required to modify an existing Minnesota non-compete agreement with a current employee.

First, under general contract law, modifications to an existing executory contact do not require new consideration. Mitchell v. Rende, 30 N.W.2d 27, 30 (Minn. 1947). Many non-compete agreements will be considered an executory contract – meaning a contract that has not yet been fully performed. Thus, applying this general principle, an employer could argue that no new consideration is required to modify an otherwise valid non-compete agreement.
Second, if the modifications to the non-compete agreement are more favorable to the employee in at least some respect, the beneficial changes could be viewed as the independent consideration. Under Minnesota law, the adequacy of consideration for a “mid-stream” non-compete agreement with a current employee is analyzed on a case by case basis, and a change could be consideration if it provides a “real advantage” to the employee. See Midwest Sports Mktg., Inc. v. Hillerich & Bradsby of Canada, Ltd., 552 N.W.2d 254, 265 (Minn. Ct. App. 1996). So, for example, if the employer modifies an existing non-compete agreement by including some changes that are beneficial to the employer (e.g., a stronger remedies provision allowing the employer to recover liquidated damages and attorney’s fees) but also includes some changes beneficial to the employee (e.g., shortening the duration or geographic scope), the court might conclude that the changes, on the whole, are supported by independent consideration.

Arguments for Requiring Independent Consideration:
There are three main arguments for the proposition that additional consideration is required to modify an existing Minnesota non-compete agreement with a current employee.

First, non-compete agreements are partial restraints of trade and take advantage of unequal bargaining power. See Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161, 164 (Minn. Ct. App. 1993). Because covenants not to compete are agreements in partial restraint of trade that limit an individual’s right to work and earn a livelihood, courts look upon them with disfavor and scrutinize them with care. Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626, 630 (Minn. 1983). If a non-compete agreement “is not made ancillary to the initial employment contract,” it is enforceable “only if it is supported by independent consideration.” Id. Based on these principles, the employee could argue that, given the special nature of non-compete agreements, the general rules of contract law governing contract modification are simply not applicable to non-compete agreements and the courts should always require independent consideration to support a restrictive covenant entered into following commencement of employment.

Second, the employee could argue that the changes to the non-compete agreement, if unfavorable to the employee, invalidate the entire agreement absent the receipt of independent consideration to support the changes (e.g., a promotion or bonus). In at least one federal district court decision, the court suggested that a significant change to an employee’s terms and conditions of employment could invalidate a previously signed non-compete agreement if the change was not bargained for. See Sempris, LLC v. Watson, No. 12-2454, 2012 WL 5199582, at *3 (D. Minn. Oct. 22, 2012) (stating that a change in compensation without bargaining may invalidate a non-compete agreement). Thus, depending upon whether the modification to the non-compete agreement was truly bargained for, the absence of independent consideration might jeopardize the entire agreement.

Third, the employee could argue that the change is not necessary to protect the employer’s legitimate interests and is broader than necessary. Under Minnesota law, to be enforceable, a restrictive covenant must protect a legitimate employer interest and be no broader than necessary. See Bennett v. Storz Broadcasting Co., 134 N.W.2d 892, 898 (Minn. 1965). The employee could argue that the changes to the non-compete agreement are not truly necessary, as evidenced by the fact that the employer previously did not require such restrictions.

Tips for Employers When Modifying an Existing Non-Compete Agreement:
To our knowledge, there is no published Minnesota appellate court decision squarely addressing whether independent consideration is required to merely modify an existing non-compete agreement. If the changes to the agreement are relatively minor and in keeping with the spirit of the original non-compete agreement, there is a better chance the courts will view the changes as modifications that do not require independent consideration. Conversely, if the changes are radical (such as moving from a 12-month restriction to a 24-month restriction), it is more likely that the courts will view the changes as an entirely new agreement requiring independent consideration. Further, when deciding whether new consideration is required, the courts may consider whether the parties framed the revised non-compete as a modification to the existing agreement rather than an entirely new agreement standing on its own.

Until the courts resolve whether independent consideration is required to modify an existing Minnesota non-compete agreement with a current employee, employers may wish to follow these guidelines:

Do not modify an existing non-compete agreement unless the modifications are important. Attempting to modify a valid non-compete agreement could potentially backfire and invalidate the agreement.

If the modifications are beneficial to the employee, the recitals to the amended non-compete agreement should explicitly identify which provisions benefit the employee.

The recitals to the amended non-compete agreement should make it clear that the changes are intended as a modification of an existing agreement rather than the formation of an entirely new agreement.

When modifying an existing non-compete agreement, it is always safer for the employer to provide some independent consideration. For example, an employer could include some non-monetary changes that are beneficial to the employee or provide at least a nominal financial payment (bonus, raise, higher PTO accrual, etc.) in exchange for receiving the employee’s signature on the new agreement.

Until this issue is resolved by the courts, employers should probably provide meaningful independent consideration when the modifications to the non-compete agreement are substantial. Courts are more likely to require independent consideration under these circumstances.

If you are an employer considering whether to modify an existing Minnesota non-compete agreement or you are an employee who has been presented with (or signed) amendments to your non-compete agreement, the Minnesota non-compete attorneys of Trepanier MacGillis Battina P.A. are available to consult with you.

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About the Author:
Minnesota non-compete attorney Craig W. Trepanier regularly represents Minnesota employers and employees in drafting, reviewing, and litigating non-compete agreements. If you have questions about your Minnesota non-compete agreement please contact him at 612.455.0502 or craig@trepanierlaw.com. Trepanier MacGillis Battina P.A. is a Minnesota non-compete law firm located in Minneapolis, Minnesota.