What does “Voluntary Resignation” Mean in A Non-Compete, and How Much Consideration is Enough?

Non-compete and non-solicitation agreements, called post-employment restrictive covenants in the law, are special contracts interpreted by court-made rules. The law that governs non-compete agreements continues to change as courts rule on new cases. One case, the 2017 decision of Valspar Corp. v. Mueller, No. A16-1113, 2017 WL 1210132 (Minn. Ct. App. Apr. 3, 2017) is notable for two reasons. First, it provides guidance on how to interpret non-competes that are triggered by “voluntary resignation” clauses. Second, it discusses when a non-compete that an employee signs during a job (rather than at the start of a new job) is enforceable.

What legal standard applies determining whether an employee voluntarily resigns?

Non-competes are special kinds of contracts, which must be interpreted under the law of contracts rather than a standard borrowed from a different area of the law. That is the takeaway from Valspar, in which the Minnesota Court of Appeals affirmed a lower court decision declining to enforce a former employer’s request for a temporary injunction to enforce a non-compete. The agreement at issue only applied to employees who “voluntarily resign” or are fired for cause.  After being demoted from manager to “individual contributor,” Defendant Mueller, a long time Valspar employee, went to work for a direct competitor of the company.  In the ensuing lawsuit, Mr. Mueller argued that the non-compete did not apply because his changed status and duties amounted to an “involuntary resignation.”  In deciding this issue, the District Court declined Valspar’s invitation to apply of the stringent “constructive discharge” standard, which requires that plaintiff employee prove a defendant employer’s unlawful discrimination “created intolerable working conditions and that the employer either intended to force the employee to quit or could have reasonably foreseen that its conduct would force the employee to quit.” Coursolle v. EMC Ins. Grp., Inc., 794 N.W.2d 652, 660 (Minn. Ct. App. 2011). The court concluded that a trial was needed to determine the parameters of “voluntariness” under the non-competition agreement at issue.  Although not emphasized in the court’s written opinion, the ruling reinforces Minnesota’s longstanding policy that non-competes are disfavored under the law.

How much consideration is required to support a mid-stream non-compete?

The court in Valspar also waded into the relatively uncharted waters of sufficiency of consideration. (Consideration is a fancy legal term for something given in exchange for something else). As a rule, a “mid-stream” non-compete, meaning one signed after the employee’s first day of employment, is enforceable under Minnesota law only if the employer gives the employee something of value in exchange for his/her signature that the employee would not otherwise have received. See AutoUpLink Techs., Inc. v. Janson, No. A17-0485, 2017 WL 5985458 (Minn. Ct. App. Dec. 4, 2017)(continued employment and increases in pay not enough, where pay raises were in accordance with formula already in place and bonus formula remained unchanged). Here, Valspar’s claimed consideration was an upgraded bonus program, switching the plaintiff employee from conventional stock options to Restricted Stock Units (“RSUs”). Unlike conventional stock options, RSUs are not subject to a loss of value because they can never go under water. In concluding that this benefit was no better, and possibly worse than its predecessor, the court emphasized that RSUs under Valspar’s plan were subject to forfeiture if the employee resigned. By contrast, stock options could be exercised any time within 30 days of an employee’s resignation. Accordingly, the non-compete lacked consideration necessary to support a mid-stream noncompete.

So how much consideration is enough? The courts in Minnesota have provided little guidance to date. Presumably, a token, de minimus payment of, say, five dollars, will not be enough. But fifty? One hundred? Presumably $1,000 would be enough for the average employee. But for a seven-figure executive? Notably, the Court of Appeals declined to endorse or reject the District Court’s ruling on sufficiency of consideration, deferring to the lower court’s discretion in making its ruling: “There is sufficient record evidence to support the district court’s findings, and we may not disregard its findings, even if this court does not agree with the district court.” (Emphasis added). Stay tuned.

Contact Our Minnesota Employment Lawyers

If you have questions about a non-competition or non-solicitation agreement you signed in connection with employment, please contact the employment lawyers of Wanta Thome PLC to discuss your rights and obligations.