The Minnesota federal district court recently refused to enforce a non-compete agreement, in part, because the employer failed to establish that the agreement was supported by valuable consideration. The decision, issued on October 6, 2017 in Mid-America Business Systems, v. Sanderson et. al., Case No. 17-3876, serves as an important reminder that, in Minnesota, there can be no shortcuts with restrictive covenant agreements. New employees must be presented with the non-compete agreement before accepting an offer of employment. Further, existing employees must receive something of additional value, beyond continued employment, as consideration.
By way of background, Mid-America Business Systems (“Mid-America”) claimed in its TRO request that it hired Kevin Sanderson as a temporary employee, subject to an “unwritten” probationary period. Mid-America did not require Sanderson to sign a restrictive covenant agreement when it first hired him. Months later, however, Mid-America allegedly converted Sanderson to a permanent position and required him to sign a non-compete. Mid-America stated that in consideration for signing the agreement, it increased Sanderson’s pay, provided him additional training, and gave him access to confidential information. In response, Sanderson denied that any increases in pay, training or access to information were tied to a non-compete, and further denied knowledge of any probationary period.
In rejecting the TRO request, the court concluded that Mid-America failed to prove the agreement was supported by adequate consideration. Importantly, the court agreed that increases in status, pay, and/or training could constitute adequate consideration for a post-hire non-compete. However, it found that Mid-America failed to demonstrate that it informed Sanderson of the alleged probationary period, or of any connection between the agreement and the alleged additional consideration. Therefore, for purposes of awarding injunctive relief, the court deemed the non-compete to be unenforceable.
For employers operating in Minnesota, the takeaway from this decision is that courts will look carefully for proof of adequate consideration before enforcing a non-compete agreement. In particular, when asking an existing employee to sign a non-compete, employers must offer additional consideration beyond continued employment, and must ensure that the employee understands the terms of agreement. The absence of clear documentation seemed to be a critical factor in this case.