SESSION 904 Hiring a Person with a Non-Compete Agreement Jeffrey B. Oberman Oberman Thompson LLC Minneapolis These materials are provided for educational and informational purposes only. They are not intended to constitute legal advice in any particular situation. © 2019 Jeffrey B. Oberman Upper Midwest Employment Law Estate Institute – May 20-21, 2019 Minnesota CLE’s Copyright Policy Minnesota Continuing Legal Education wants practitioners to make the best use of these written materials but must also protect its copyright. If you wish to copy and use our CLE materials, you must first obtain permission from Minnesota CLE. Call us at 800-759-8840 or 651-227-8266 for more information. If you have any questions about our policy or want permission to make copies, do not hesitate to contact Minnesota CLE. All authorized copies must reflect Minnesota CLE’s notice of copyright. MINNESOTA CLE is Self-Supporting A not for profit 501(c)3 corporation, Minnesota CLE is entirely self-supporting. 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Table of Contents INTRODUCTION ...........................................................................................................................1 I. Discover the Agreement Before Making the Job Offer .......................................................1 II. Evaluate All Defenses to the Non-Compete Agreement Before Making the Job Offer ..............................................................................................................................1 III. Prepare NEWCO’s Sysdyne Defense to Potential Tortious Interference Claims ................................................................................................................................10 IV. Evaluate the Remedies Facing Employee and/or NEWCO ...............................................14 V. Don’t Make Matters Worse by Creating Additional Legal Claims ...................................18 VI. Define the Job Offer to Enhance Defenses/Blue Pencil Odds, Decrease Likelihood of Injunctions/Defeat and/or Minimize Damages to OLDCO ........................25 VII. Consider Proactive Negotiation Strategies ........................................................................25 VIII. Prepare for Quick Litigation ..............................................................................................26 CONCLUSION ..............................................................................................................................27 0 INTRODUCTION Very few job applicants for key positions are free to accept new jobs without any competition restrictions. Potential new employers (“NEWCO”) often want to hire an employee who has a non-compete agreement and other restrictive employment covenants with a former employer (“OLDCO”). NEWCO may be able to make the hire and still avoid extensive and expensive litigation costs and risks; or it may have to take some risks to make good hires. This article and the related presentation will summarize steps and practice tips to help NEWCO make the hiring decision, avoid litigation and minimize its legal risks and exposure. I. DISCOVER THE AGREEMENT BEFORE MAKING THE JOB OFFER. Hiring employers often fail to determine in advance if they are hiring a person with protective covenants, and/or make the mistake of thinking that hiring the employee is not their problem. These employers fail to identify their exposure and take critical steps to avoid or minimize legal risks. They often make matters worse than they need to be and/or learn of their problems after the fact. Hiring employers who fail to take steps to avoid knowledge of an agreement, or to do due diligence, may be as liable for interference claims as those with knowledge. “It is enough if the defendant had knowledge of facts which, if followed by reasonable inquiry, would have led to complete disclosure of the contractual relations and rights of the parties.” 1 NEWCO should be proactive to ensure that it identifies and addresses its risks before, not after, they are triggered. Many of the legal violations and exposure discussed in this article can be avoided – or at least minimized – with careful pre-hire analysis, planning and implementation. PRACTICE TIPS: o Ask about previous agreements during the application process. If there is an agreement, get it. o If the applicant says there is no such agreement, confirm that representation in the offer letter, and that the offer is contingent on the applicant’s ability to perform duties without violating non-compete or other agreements with OLDCO. o Also confirm that the employee may not use or share any of OLDCO’s property or confidential information with or on behalf of NEWCO. II. EVALUATE ALL DEFENSES TO THE NON-COMPETE AGREEMENT BEFORE MAKING THE JOB OFFER. The impact and enforceability of restrictive employment covenants is a critical part of the needed pre-hire analysis. Employees are incentivized to leverage their knowledge and contacts to seek employment at a competing employer, and competing employers may be willing to risk legal 1 McGrath v. MICO, Inc., A11-1087, 2012 WL 6097116 (Minn. Ct. App. Dec. 10, 2012), review denied (Feb. 19, 2013) (citing Kjesbo v. Ricks, 517 N.W.2d 585, 588 n. 3 (Minn.1994). 1 exposure. Hiring employers are increasingly willing to look at all potential defenses before passing on a candidate solely because that person has a non-compete agreement. There are many absolute defenses, which may prohibit the non-compete from being enforced at all; and others, which may restrict the enforcement to a reasonable and manageable level. For purposes of this article, it is assumed that Minnesota law applies, and that Minnesota courts have jurisdiction. It should be noted, however, that non-compete agreements increasingly contain both choice of law and forum selection clauses, which generally enable OLDCO to sue the former employee – and often NEWCO as well – in OLDCO’s jurisdiction and venue. Generally, courts have enforced such provisions.2 Further, the Minnesota Court of Appeals concluded that a forum selection clause in a non-compete agreement binds not only the former employee but binds NEWCO as well, where NEWCO is “closely related” to the dispute between OLDCO and the employee.3 However, if an agreement provides a choice of law provision in order to benefit from a more favorable law, but the parties do not have the requisite connections to that state, the courts can, and will, elect not to enforce such a provision.4 A. Minnesota Courts Disfavor and Heavily Scrutinize Non-Competes. Non-compete agreements in the employment context are generally disfavored.5 Minnesota courts consider them partial restraints of trade and construe them narrowly.6 More specifically, they have approached noncompetition agreements with “a concern for the average individual employee who as a result of his unequal bargaining power may be found in oppressive circumstances” because an employee is selling his labor and in certain circumstances “cannot well afford to raise any objection to any of the terms in the contract of employment offered him, so long 7 as the wages are acceptable.” 2 E.g., CH Robinson Worldwide, Inc. v. FLS Transportation, Inc., 772 N.W.2d 528 (Minn. Ct. App. 2009); Eagle Creek Software Servs., Inc. v. Jones, No. CIV. 14-4925 ADM/FLN, 2015 WL 1038534, at *3 (D. Minn. Mar. 10, 2015) (absent minimum contacts, due process “is satisfied when a defendant consents to personal jurisdiction by entering into a contract that contains a valid forum selection clause.” (citations omitted); Capsource Fin., Inc. v. Moore, 2012 U.S. Dist. LEXIS 88618, *9 (D. Minn. June 27, 2012) (a forum selection clause is enforceable unless it is invalid or enforcement would be unreasonable and unjust); Milliken & Co. v. Eagle Packaging Co., 295 N.W.2d 377, 380 n. 1 (Minn.1980); Bmc Software, Inc. v. Mahoney, No. 15-CV-2583 PAM/TNL, 2015 WL 3616069, at *5 (D. Minn. June 9, 2015). 3 CH Robinson Worldwide, Inc. v. FLS Transportation, Inc., 772 N.W.2d 528 (Minn. Ct. App. 2009); see also, e.g., ARP Wave, LLC v. Salpeter, 364 F. Supp. 3d 990 (D. Minn. 2019). 4 E.g., Menzies Aviation (USA), Inc. v. Wilcox, CIV. 13-2702 MJD/JJK, 2013 WL 5663187 (D. Minn. Oct. 17, 2013) (declining to apply more favorable Florida non-compete law where the record demonstrates no connection to Florida). 5 Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626 (Minn. 1983). Note, Minnesota law recognizes a difference between non-compete agreements associated with employment contracts and those arising as part of the sale of a business. Although the general rule is that non- compete agreements are strictly construed, the Supreme Court