In a decision marked not-for-publication, a Minnesota Appeals Court affirmed the trial court’s invalidation of a two-year non-competition agreement signed by a long time employee. He was discharged 11 years after he signed. He then went to work for a competitor of his former employer. The majority reasoned that the non-compete lacked independent consideration since it was not executed by 100% of similarly situated employees who had been asked to sign it.
Summary of the Case
In April 1999, Nott Company (a supplier of fluid-power components and systems) notified all outside salespeople by letter that the company would be implementing a new compensation program effective May 1, 1999. That program, which included a two-year non-compete covenant replacing a one-year agreement, added the possibility of a bonus to the prior salary-plus-commission arrangement. The letter directed each recipient to sign and return the covenant by April 30. All of the outside salespeople except one executed the new, longer term agreement. In 2010, Nott discharged Eberhardt, a signer of the two-year covenant, who went to work for a Nott competitor. Nott sued Eberhardt and his new employer. At trial, at the close of Nott’s case, the court entered judgment for the defendants partially on the ground that Eberhardt’s non-compete was invalid. The judgment was affirmed on appeal. Nott Co. v. Eberhardt, Case Nos. A13-1060 and 1390 (Minn. App., 6/2/14) (Hudson, J.) (Stauber, J., dissenting).
The Signers and Non-signers
Prior to 1999, all of Nott’s outside salespersons were signatories to one-year non-competition agreements. One of those signatories, Cable, signed in 1995. Eberhardt did not become an outside salesman until 1999.
All of the outside salespersons, except for Cable, executed the new two-year covenant. The date Eberhardt signed was disputed. Nott claimed he signed in April 1999, before the new program went into effect on May 1. He insisted that he did not sign until September 1999.
The Lower Court and Appellate Decisions
The trial court found three reasons for tossing Nott’s case. The appellate tribunal unanimously held that the lower court erred with respect to two of those reasons, but the third, lack of independent consideration, was upheld by a 2-1 vote.
a. Opinion of the Court of Appeals majority: The majority emphasized that Minnesota courts disfavor and scrutinize non-compete covenants. Relying largely on a 1983 Minnesota Supreme Court decision (Freeman v. Duluth Clinic, Ltd., 334 N.W.2d 626), the majority said that Eberhartdt’s covenant was not supported by independent consideration. They reasoned that since Cable, the non-signer, was given the same new compensation package as all the signers, the “court cannot find that an employee’s signing of the non-compete agreement was a condition of receiving the compensation plan.”
b. The Freeman case: Freeman involved a medical clinic. A 1979 employment contract replaced an earlier, nearly identical, agreement but added a non-compete covenant. All of the physicians received the same benefits. Of the 70 physicians in 1979, only 56 — including Dr. Freeman — signed the covenant. In 1982, the clinic fired Dr. Freeman, and he started his own private practice. The clinic sued and won at trial. With two justices dissenting, the Supreme Court reversed, holding that the provision was unenforceable for lack of consideration. The majority wrote: “[T]he covenant signed by Dr. Freeman was not bargained for. Absolutely no distinction was made between [the 56] signers and [the 14] non-signers.”
c. Judge Stauber’s dissent in Eberhardt: Judge Stauber quoted the comment by the dissenting justices in Freeman that there was “a mutuality of promises, which has always been held to be adequate consideration in contract cases.” He noted that Nott’s and Eberhardt’s employment relationship under the new contract lasted more than a decade, with benefits to each, before he was terminated. The judge added that 14 physicians in Freeman, not just one outside salesman in Eberhardt, failed to execute the covenant. Finally, Judge Stauber stated that “a holding that one-hundred percent of all similarly situated employees must execute a non-compete agreement for its viability is not commercially practical in a free and competitive society.”
Takeaways
A recent New York Times article reported that judges appear to be getting annoyed by a seeming avalanche of non-competition violation lawsuits, and many covenants are being invalidated. Perhaps annoyance was an under-current of the Eberhardt decision. In any event, the lessons to be learned are that, when a current employee is asked to sign a new covenant, (a) to be safe an employer should give something valuable in exchange (in Eberhardt, the opportunity to receive a bonus was new; nothing new was given in Freeman), and (b) the covenant should recite just what the consideration is. On the other hand, some courts hold that employment itself may be adequate consideration for a covenant signed prior to starting work.