My Employer Was Acquired: Is My Non-Compete Agreement Enforceable?
May 14, 2021
You may have a non-competition or non-solicitation agreement with a Minnesota company that has gone through a change in ownership, via merger, acquisition or some other business combination. The impact on your non-compete’s legal enforceability will depend on a variety of circumstances, as discussed in this article.
Which state’s law applies?
Before addressing the immediate question, one must determine which state’s law to apply. If you live and work in Minnesota for an out of state employer, your non-compete or employment contract containing post-employment restrictive covenants may designate the employer’s home state’s law as governing disputes under the non-compete. Minnesota courts generally enforce such choice of law clauses, and to a somewhat lesser extent venue designation clauses (setting forth the jurisdiction in which any dispute must be resolved). All that is required is that the employment be related in some way to the designee state. This might include location of headquarters or major operations, or regular visits for work purposes.
The law of non-competes varies fairly widely from state to state. Some (think Delaware, Texas) favor non-competes and generally find them enforceable. Others (think California, North Dakota) prohibit them outright. Minnesota falls roughly in middle. The same applies to assignability. Of the states in which the question has been judicially resolved, a little more than half permit employer assignments of non-competes without an employee’s consent. The remainder require it.
Does the non-compete agreement address changes in ownership?
Non-competes frequently contain assignment clauses, indicating that the employer’s rights under the agreement may be assigned or transferred to any successor. The following formulation is typical: “This Agreement shall be binding on, and inure to the benefit of, and may be enforced by, any and all successors or assigns of the Employer.” Federal courts applying Minnesota disagree on whether non-competes lacking these magic words are enforceable. Wells Fargo Ins. Servs. USA, Inc. v. King, No. 15-CV-4378, 2016 WL 299013 (D. Minn. Jan. 25, 2016) (not requiring consent) with Great Am. Leasing Co. v. Dolan, No. 10-4631, 2011 WL 334829 (D. Minn. Jan. 31, 2012) (requiring consent). What the Courts do agree on is that a non-compete permitting assignment will allow the new owners to enforce the non-compete. This applies even if the original non-compete was presented on a “take-it-or-leave-it” basis, with no opportunity for the employee to negotiate terms.
Of course, the non-compete still must be legally enforceable. It must be supported by consideration, a fancy legal term for something given in exchange for something else. In Minnesota, this can be in the form of a signing bonus, raise, additional PTO, promotion or significant expansion of duties. Or if the non-compete is ancillary to employment, meaning it was signed prior to the onset of employment agreement and the employee was informed of it when he or she was offered the job. Timm & Associates, Inc. v. Broad, 2005 WL 3241832 (D. Minn., November 30, 2005). Second, it must be reasonably necessary to protect an employer’s legitimate business interests.
If your non-compete lacks an assignment clause, or states that it “may” be assigned, one must determine whether an assignment actually occurred. When a company changes hands, it takes the form either of a sale of assets or exchange of ownership units (usually shares of stock). In the former scenario, enforceability may depend whether the employee’s non-compete was actually transferred. That is the case where the purchase agreement includes the sale of “all contracts.” If it only includes a schedule of contracts from which the non-compete is absent, the employee may have an argument against enforceability. No Minnesota court to date has addressed that specific scenario.
Was there consideration for the non-compete?
Owners of newly purchased businesses frequently require that employees sign a new non-compete as a condition of continued employment. Often, these new non-competes are attached to or referenced in an offer letter on the new company’s letterhead. Enforceability, again, depends on whether consideration was provided. Was a bonus or benefit given to employees who signed the agreements not available to those who didn’t? If not, was it signed after the closing documents’ effective date of new ownership? This technical detail may not be immediately apparent.
Frequently when businesses change hands, nothing at all changes. Same chairs, same desks, same supervisors. If the signing post-dated the change in ownership by as little as a day, in the absence of additional consideration, a court applying Minnesota law would likely deem such a “mid-stream” non-compete unenforceable. National Recruiters v. Cashman, 323 N.W.2d 736 (Minn. 1982) (non-compete signed four days after start date unenforceable). Which raises in turn the question of whether a predecessor non-compete (assuming there is one) signed with the original owners remains binding and on the employee. The answer will be no if the new, unenforceable non-compete arises in an employment agreement that contains an integration clause.
The following is an example of one: “This Agreement embodies the entire agreement and understanding of the parties relative to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter.”
Contact Our Minnesota Employment Lawyers
Minnesota non-compete law contains several traps for unwary employers. If you have any question about the enforceability of a non-competition or non-solicitation agreement you signed in connection with employment, please contact the employment lawyers of Baillon Thome Jozwiak & Wanta LLP for a free initial consultation.