Consider This – Minnesota Court Of Appeals Again Requires Proof Of Additional Consideration For Non-Compete Agreements For Existing Employees
In October and November of this past year, we wrote about two Minnesota court decisions – Mid-America Business Systems v. Sanderson et al.,Case No. 17-3876 (Dist. Minn. Oct. 6, 2017) and Safety Center, Inc. v. Stier, Case No. A17-0360 (Minn. App., Nov. 6, 2017) — that addressed the adequacy of consideration that is provided in exchange for entry into a non-compete agreement. The facts in those cases differed based on whether the individual subject to the non-compete agreement was a prospective or existing employee. The combined conclusion was that employment alone is adequate consideration only as to prospective employees, who must be presented with the agreement prior to acceptance of the offer of employment. Otherwise, proof of additional valuable consideration is necessary. More recently, in AutoUpLink v. Janson, Case No. A17-0485 (Minn. App., Dec. 4, 2017), the court hammered home that in the latter instance, the employer must clearly establish that the alleged additional consideration was conditioned specifically on execution of the non-compete agreement.
AutoUpLink (“AUL”) hired Lynn Janson (“Janson”) to develop a sales territory in Michigan. Several days into Janson’s initial job training, AUL’s co-founder held a meeting with Janson, during which the co-founder advised him of the following: (a) he must sign a non-compete agreement as a condition of employment, (b) he would be eligible to participate in the company’s 401K plan, (c) he would receive a computer allowance, and (d) he would be entitled to reimbursement for telephone usage. That was the first time AUL mentioned any of those subjects to Janson.
After signing the non-compete agreement, Janson went on to enjoy a successful employment tenure until he was involuntarily terminated approximately ten years later due to an alleged dispute over pay. Following his separation of employment, Janson joined a competing business founded by his wife, allegedly convinced several other AUL employees to join him, and allegedly solicited numerous AUL customers to follow him as well. AUL filed suit against Janson and moved for injunctive relief to bar further competition during the pendency of the legal proceedings. After granting an initial temporary restraining order against Janson, the court denied AUL’s motion for preliminary injunction on the grounds that the non-compete was not supported by independent consideration. The Minnesota Court of Appeals Agreed.
The Court’s Analysis
On appeal, AUL challenged the lower court’s finding that the non-compete agreement lacked adequate consideration. AUL argued that Janson was informed of several new benefits when he signed the non-compete agreement, including 401K plan eligibility, the computer allowance, and reimbursement of telephone costs. AUL further noted that after signing the non-compete, Janson received pay raises and gained additional responsibilities. According to AUL, those benefits, viewed individually or as a combination, constituted adequate and valuable consideration sufficient to support enforcement of the non-compete agreement.
In rejecting AUL’s argument, the court of appeals explained that “there is no independent consideration unless the benefits received go beyond what was already obtained in the initial employment agreement.” While the benefits cited by AUL could have served as adequate consideration for the non-compete agreement had they been granted to Janson in exchange for such agreement, AUL failed to establish that connection. Similarly, with respect to the alleged increase in pay and responsibilities, the evidence indicated that those changes were simply a reflection of Janson’s job performance and level of experience. In other words, in the court’s assessment, those changes had nothing to do with Janson’s agreement to the non-compete covenant.
The AutoUpLink decision offers an important reminder to Minnesota employers who seek to impose a non-compete agreement on an individual who has already accepted an offer of employment. Although it is necessary to show that additional benefits and/or pay were awarded to the employee upon execution of the agreement, the employer must go further in proving a connection between the execution of the agreement and the award of additional benefits and/or pay. Employers can help to establish the necessary link by expressly identifying any alleged consideration in the non-compete agreement itself.