In Softchoice, Inc. v. Schmidt, 763 N.W.2d 660 (Minn. Ct. App. 2009), the Minnesota Court of Appeals addressed two significant issues in a consolidated appeal.
First, the court held that under Missouri law, an employee’s participation in an employee-retention plan could not serve as consideration for a non-compete agreement because the employer was not required to contribute into the plan at the time the employee signed the non-compete agreement. Of significance to Minnesota employers, however, the court suggested that such an agreement might be enforceable under Minnesota law if the employer later makes contributions into the plan, thereby providing the employee with real benefits.
Second, the court held that a promotion served as consideration for a non-compete agreement entered into with a current employee even though the employer informally announced the promotion before presenting the employee with the non-compete agreement. The court ultimately held that because the non-compete agreement was presented when the terms of the promotion were formally offered and accepted in writing, the promotion still served as independent consideration for the agreement despite the earlier announcement.
Facts of Schmidt
In Schmidt, the employee was offered the opportunity to participate in an employee-retention plan. The retention plan provided that Schmidt would potentially receive monetary retention credits that would be paid out if certain events occurred. The plan stated that retention credits would be allocated “in amounts as determined solely in the board’s discretion.” The retention plan contained a non-competition clause and Schmidt was also told that it was necessary to sign a stand-alone non-competition agreement if he wished to participate in the retention plan. Schmidt signed both agreements. A month after he signed the agreements, the employer deposited $25,000 in his account. One year later, Schmidt resigned and began working for a competitor shortly thereafter. On appeal, Schmidt contended that the stand-alone non-compete clause lacked consideration and was therefore unenforceable.
Court Holds That the Non-Compete Lacks Consideration Under Missouri Law
In Schmidt, the court held that Schmidt’s participation in the employee-retention plan could not serve as consideration for the non-compete agreement, because an employer must be obligated to contribute something of value into the plan at the time the employee enters the plan under Missouri law in order to serve as consideration for a non-compete agreement. Because the decision to place retention credits into Schmidt’s account at the time Schmidt entered into the employee-retention plan rested solely with Softchoice, the non-compete lacked consideration.
The Outcome of Softchoice May Have Been Different Under Minnesota Law
The court acknowledged that $25,000 was deposited into Schmidt’s account shortly after Schmidt signed the agreement. The court concluded under Missouri law, however, the proper analysis is to look at the parties’ obligations at the time a contract is entered into when determining whether consideration is present. Importantly for Minnesota employers, however, the court emphasized that its decision may have been different under Minnesota law. This language suggests that, under Minnesota law, permitting employees to participate in a discretionary bonus or incentive compensation plan may be sufficient consideration to support a non-compete agreement provided that the employer eventually makes contributions into the plan.
Facts of Johnson
In Johnson, Softchoice hired Johnson as a sales representative in 2001. In 2007, Johnson was interviewed for a branch manager position. Later in the day after the interview Johnson was informed that he had received the promotion and that he would receive a formal offer from HR and that it would finalize everything. Johnson had not yet received any information regarding the terms and conditions of his new position. Nine days later, Softchoice’s human resources department sent a formal offer letter to Johnson. The offer letter contained a non-solicitation agreement. Johnson signed and returned the letter to Softchoice a day later. Roughly a year later, Johnson informed his supervisor that he was resigning from Softchoice and subsequently joined a competitor.
Promotion is Independent Consideration at the Time of Formal Offer Letter
Under Minnesota law, an employer ordinarily must provide independent consideration to an employee in exchange for a non-compete agreement entered into during the course of the employment relationship. Generally, a promotion to a higher position is viewed as adequate consideration. Guidant Sales Corp. v. Baer, No. 09-CV-0358, 2009 WL 490052, at *2 (D. Minn. Feb. 26, 2009) (finding independent consideration for non-compete agreement where the employee received a promotion to a management position with increased authority and responsibility).
In Johnson, there was a dispute surrounding the timing of Johnson’s promotion that was a matter of first impression before the court. Johnson argued that he was promoted when he was first informed that he would receive the promotion. The court stated that if Johnson had been promoted prior to signing the offer letter, then the promotion could not serve as consideration for the non-solicitation agreement because it was not presented until later.
Ultimately, the court held that a promotion serves as consideration for a non-compete agreement at the time when the terms of the promotion are defined and the promotion is formally offered and accepted in writing. The court stated that while the delineation between when an employee is informed that he will be promoted and when he is actually promoted may not always be clear, the key inquiry is when the promotion provides the employee with “real advantages.” See Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127, 130–31 (Minn.1980). The court stated that Johnson did not receive any “real advantages” from Softchoice when he was informed on the date of his interview that he would be promoted. At this time, he did not receive an increase in compensation, duties, or benefits. See Nat’l Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740–41 (Minn. 1982). The court stated that it was only after Johnson signed the offer letter containing the terms of his new position and the non-solicitation agreement that he received any “real advantages.” Accordingly, the court concluded that the promotion served as “independent consideration” for the non-compete agreement.
Lessons for Employers and Employees
The Softchoice decision provides several important lessons for both employers and employees in Minnesota:
- Employers should typically offer independent consideration in return for a non-compete agreement entered into following the original offer of employment (i.e., “mid-stream” agreements with current employees).
- Employers should be aware of which state’s laws will govern their non-compete agreements. Under Missouri law, the consideration must obligate the employer in some way at the time the agreement is entered into. In contrast, Minnesota law might recognize after-the-fact payments as consideration.
- A promotion may serve as independent consideration for a non-compete agreement entered into with a current employee. Ideally, the employer will not notify the employee of the promotion before providing the employee with a copy of any required non-compete agreement. Under Softchoice, however, the promotion might still serve as consideration for the non-compete agreement provided that the agreement is presented when the formal written offer of the promotion is made and the terms are set forth.
- Employers should identify whether existing non-compete agreements with current employees lack independent consideration and are therefore unenforceable. Solutions may be to have the employees execute new non-compete agreements supported by independent consideration, or possibly reaffirm the old agreement in exchange for new consideration. Any action should be taken carefully and with the aid of legal counsel to avoid the appearance that the prior non-compete agreements may not be enforceable.
- Employees whose non-compete agreement was entered into during employment in exchange for participation in a discretionary bonus or incentive compensation plan may have a defense to enforcement.
If you need assistance reviewing the enforceability of your non-compete agreement, contact any of the non-competition law attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota non-compete lawyer Craig W. Trepanier represents both employers and employees in unfair competition matters, including disputes over non-competition agreements, non-solicitation agreements, and non-disclosure agreements. Craig may be reached at 612.455.0502 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota non-compete law firm located in Minneapolis, Minnesota.