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The most obvious claim against an employee is for breach of one or several restrictive covenants, including: a non-compete agreement, a customer non-solicitation agreement, an agreement not to solicit OLDCO’s employees, or a confidentiality agreement. B.This article and the related presentation will review NEWCO’s legal exposure and tough issues that it faces, highlight key legal defenses to OLDCO’s claims, and provide strategies and practical suggestions to help NEWCO accomplish its goals while minimizing its risks.
Generally, courts have enforced such provisions. Further, the Minnesota Court of Appeals recently concluded that forum selection clauses in non-compete agreements bind not only the former employees but NEWCO as well, where NEWCO is “closely related” to the dispute between OLDCO and the employee. IV.
Some states hold unreasonably restrictive covenants totally unenforceable, as a way to encourage employers to write more narrowly-tailored covenants. In other jurisdictions, the courts will modify invalid portions of the agreement under the “blue pencil” doctrine, and enforce the rest as written. Minnesota courts utilize a modified blue pencil doctrine and will, at their discretion, rewrite portions to make them reasonable. However, Minnesota courts have not, to date, applied the blue pencil doctrine to agreements that are invalid for reasons other than the reasonableness as to time, geography or other factors, such as a failure of consideration. Minnesota courts have historically reviewed two types of restrictions for their reasonableness: temporal and geographical. A covenant whose restriction extends too far into the future or across too broad of a geographical area might be invalidated or modified. Non-compete agreements must be reasonable in their temporal scope, or they will not be enforced. Courts consider a variety of factors in determining whether a restrictive covenant is reasonable from a temporal standpoint, including: (1) nature of the work; (2) time necessary to train new employees; (3) time necessary to allow customers to become familiar with new employees; and (4) time necessary to obliterate the identification between the employer and the employee in the minds of the employer’s customers. Although Minnesota courts have enforced non-compete agreements for periods of two or three years after the termination of employment, these cases are more likely the exception than the rule.
This has led to creative efforts by transitioning employees and their new employers to relocate the employee to a state that refuses to enforce restrictive covenants, in order to sustain a challenge by OLDCO.
When the contract expired, the non-compete began to run—and ran out—even though the employee was still working for the employer in a different capacity – and refused to sign a new non-compete agreement.
With diminishing stability in the workplace, employees (and independent contractors) are incentivized to leverage their knowledge and contacts to seek employment at a competing employer, and competing employers have more incentive to risk legal exposure.
NEWCO wants to learn about its risks before, not after, they occur.
As a result, potential new employers (“NEWCO”) often want to hire people who have signed such agreements – and face difficult issues and decisions.
In recent years, more employers are conditioning mid-stream or post-termination benefit agreements (for stock grants and options, bonuses, change of control benefits, severance benefits and other incentives) on the execution of non-compete agreements.
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