What is a Non-Solicitation Agreement?
A non-solicitation agreement is an arrangement between two parties, often an employer and an employee or an owner of one business entity and another business entity, whereby one party agrees that they will not enter into competition with the other for a specified period of time after their business relationship has ended. The general idea behind a non-solicitation clause or agreement is to prohibit either party from "stealing business" from the other during or after the period in which they are involved in or providing business services to each other. According to the Minnesota non-solicitation clause statute , a non-solicitation agreement is simply a contract for which "a person may not solicit or cause to be solicited any customer of another to withdraw or withhold their business from that other person." Minnesota Statute 325D.10.
Significance of Non-Solicitation Agreements in Minnesota
Non-solicitation agreements in Minnesota are used by employers and business owners to protect their relationships with their employees, customers/clients, and vendors after they leave the employment of that company. Employers and business owners seek protection from former employees taking their skills, experience, knowledge, lists of current and past clients, and other confidential information to compete with their former employer for the purpose of diverting customers, clients, or business from their former employer.
For businesses who rely heavily on their customer/clients and the individuals that work closely with those customers and clients, ensuring that former employees cannot take advantage of their relationships is extremely important. In the situation where a former employee takes a customer and uses their relationship to divert business from their prior employer for their new employer or their own competing business, the prior employer has been harmed by the conduct. Business relationships take years to build and a short period of time can be enough for former employees to move around a large number of customers or clients. The non-solicitation agreement provides the prior employer with leverage to stop the conduct or the ability to go after the person that was making the solicitations.
Intellectual property is the backbone of many companies, and the use of non-solicitation agreements can be helpful in keeping that backbone from being exploited. Many employees have access to sensitive information that, if not protected, will allow for the easy exploitation of the intellectual property of the employer. Non-solicitation agreements can help retain some of that intellectual property if the employee leaves to work for a competing business or to start their own.
Legal Requirements for Minnesota Non-Solicitation Agreements
While Minnesota courts rarely invalidate non-solicitation agreements outright, that does not mean they blindly enforce such agreements even if the employer does not deserve it – for example, in Great American Dist. v. FCT of Minnesota, Inc., 273 N.W.2d 63, 66 (Minn. 1978) a non-compete agreement was struck down because it required employees to surrender all customer contacts for all customers and industry associations – not just the employer’s customers and client lists (which may indeed be protectable). In Minnesota, as in most states, non-solicitation agreements must be reasonable as to geographic scope, time, and subject matter. See, for example, Allen v. H.K. Porter Co., 48 F.3d 59, 62 (8th Cir. 1995) (non-compete requiring one-year (1) prohibition on competition in the region of Nebraska, Kansas, South Dakota, North Dakota, and Oklahoma held overbroad in terms of geographic scope because the employer had failed to demonstrate that plaintiff was sufficiently involved with the employer’s business to justify the overbroad restrictions). Generally, non-solicitation agreements are more likely to pass muster than non-compete agreements when they are limited to prohibiting solicitation of customers and former employees and employees who have been employed for at least a year. See Bob Nelson, Unfinished Business: Employee Non-Solicitation Provisions, (S.B. Finn et al., eds., 2002) at 6. See also, Benfield v. Mothers Work, Inc., No. 10-cv-925, 2011 U.S. Dist. LEXIS 69618 (D.Mn. June 30, 2011) (non-solicit and confidentiality covenant unenforceable because it prohibited the employee from soliciting any former employee or independent contractor, thereby restricting his use of general market knowledge in the field); Fossum v. Brandl, 556 N.W.2d 95, 100 (Minn. Ct. App. 1996).
Common Terms in Minnesota Non-Solicitation Agreements
The exact terms and provisions of a Minnesota non-solicitation agreement vary among employers. Most commonly, an agreement will look to the employee’s home office location. For example, a company with outlets across the Midwest may only be able to restrict a former employee from soliciting or accepting solicitation in the state which is the home base of the employee. Companies that operate internationally or offer e-commerce that touches multiple jurisdictions have the most flexibility in determining reasonable geographic scope.
Non-solicitation clauses are generally limited in duration to between one and three years. Agreements lasting between three and five years are likely to be challenged where the business does not have a legitimate reason for a longer duration. Even where a company has a legitimate reason, and can meet the applicable burden to prove it, a clause lasting for as long as five years is very likely to invite litigation.
Many Minnesota non-solicitation agreements are drafted to specifically include a definition of the term "solicit." The purpose of the definition is to provide clarity to the employee concerning what types of behavior are subject to the restrictions. For example, a blanket restriction on soliciting anyone in any manner would be overly broad. A specific definition, however, can allow a company to limit the agreement to only targeted solicitation for specific purposes.
Enforcement Issues in Non-Solicitation Agreements
Challenges in Enforcing Non-Solicitation Agreements in Minnesota
Even with their widespread use and relative effectiveness, non-solicitation agreements can be met with some legal hurdles in the state of Minnesota. When the terms of a non-solicitation agreement have been violated also, the scope and nature of the restriction can bear on how readily it can be enforced. Courts may perceive some non-solicitation prohibitions as more administrative than protective, and may object if such an agreement imposes unreasonable restrictions on a former employee.
The best protection from a legal challenge results when a non-solicitation agreement meets the Minnesota standard for reasonableness. A Minnesota non-solicitation provision should take into account what it strives to protect against, what trade secrets a business needs to maintain confidentiality on in order to keep a competitive edge, which employees are subject to the non-solicitation and for how long and under what circumstances will the restriction be enforced.
In some instances , however, there simply may be no way around a legal challenge by a disgruntled employee. Typically, these issues arise in larger employment sectors, such as those for sales, manufacturing and service workers, when many people are covered by the non-solicitation agreement and the affected employee is popular or well-liked by others in the company or industry. Customers may grudgingly accept working with a new sales person or may even abandon a known and trusted sales representative to work with an employee that has moved to a competitor. A potentially thorny legal issue in enforcing non-solicitation is whether a company has an assumed contract with the former employee that the business will provide security in the form of employment that will last for at least the period of the non-solicitation provision. If so, the outcome of the legal challenge may depend on when the employee terminated his or her employment with the company, compared to the duration of the non-solicitation restriction period.
Recent Minnesota Cases and Precedents on Non-Solicitation Agreements
Courts in Minnesota have repeatedly held that the reasonableness of noncompete covenants or agreements, including non-solicitation agreements, is a question of law to be decided by the court. The Minnesota Supreme Court has set forth interpretation of the particular statute that governs covenants not to compete (Minnesota Statute 325D.09) and reflects the most important considerations in determining enforceability. While initially Minnesota courts were reluctant to enforce post-employment restraints, in the past 20 years there has been an increasing willingness to enforce reasonable noncompetition covenants and agreements, including nonsolicitation agreements and provisions in Minnesota.
In 2016, for example, the Minnesota Court of Appeals in Allied Container Systems, Inc. v. Schuster used the best balance test to determine that a noncompetition covenant that was limited to the precise activity that directly competed with the employer and was of limited duration was reasonable. The test balances the employee’s right to earn a living against the need of the employer to protect their legitimate business interests.
The exact wording of a non-solicitation clause in a covenant not to compete is also important. When drafting non-solicitation provisions and all other restrictions in an employer produced covenant, care should be taken to alleviate any doubt regarding applicability and enforceability.
In the case of Fennell v. Minnesota Department of Agriculture, the Minnesota Supreme Court examined whether a nonsolicitation provision of a covenant not to compete was binding and enforceable. The Supreme Court considered the key language used to restrict the behavior of the former employee and found that the employee restriction to not "willfully encourage or otherwise induce" customers to discontinue doing business with the employer was too vague and overbroad to be if no measure or level of encouragement was required to trigger applicability. As a remedy to the issued language in the covenant, it was with the amendment of two phrases stated even further that the agreement was deemed enforceable. In this case, it was the amendment of the words "willfully encourage or otherwise induce" to "directly induce or solicit" that made the non-solicitation provision of the covenant not to compete enforceable.
How to Create a Viable Non-Solicitation Agreement
Minnesota non-solicitation agreements are subject to the reasonableness test. The reasonableness test is performed by the courts and has three steps. The Court evaluates: Because the first two prongs of that test are fairly easily met for non-solicitation agreements, it is the third prong—the interests of the employee versus the employer—that is often where a court will find a reason to invalidate a non-solicitation agreement when determining whether the agreement is enforceable under Minnesota law.
A non-solicitation agreement is not easy to draft because it must be industry-specific and customized for each situation. If a non-solicit agreement is written too broadly as to its terms, the court could strike down the entire provision as unenforceable. However, if it is restricting too much for an employer, the court could strike it down as being overly broad. In contrast, if placed too leniently, the employee could challenge whether it provides him or her with sufficient freedom to carry on business. In addition, Minnesota courts look closely at how to define the scope of prohibited solicitation against customers and employees. In general, Minnesota courts will look at whether the defined customers or employees are defined sufficiently broadly or not. Again, the line is a fine one. For example, if defined too narrowly, an employee could argue that an employer may be overreaching the contract’s scope. Enforcing all or part of a non-solicitation agreement will most likely depend upon how the restriction is defined in the first place. Thus, it is important to clearly define the prohibited conduct carefully so that it passes the reasonableness test while not being overly broad. It is important that the defined restriction is in line with what is considered reasonable in your particular industry. To be enforceable in Minnesota, a non-solicitation agreement needs to be clear and precise in the definition of all relevant terms. It helps to include a definition section. In the definition section you may want to define terms like "employee", "customer", "proprietary" or "clients" as these terms may not be recognizable on their own to a layperson in a legal document. It is important to use consistent terms throughout the agreement (i.e., do not use the term "customer" in some parts of the non-compete agreement, and "client" in others). The agreement should be consistent as to when a person or customer is in fact considered to be a "protected person" under the agreement.
Alternatives to Non-Solicitation Agreements
In addition to non-solicitation agreements, an employer can use a variety of additional strategies – including a well-drafted confidentiality agreement where the focus is on protecting confidential and trade secret information. Although the enforceability of these agreements may be state-specific, in Minnesota a confidentiality agreement that is sufficiently focused may not be preempted by Minnesota’s restrictive covenant statute.
Employers can also encourage former employees to sign a separation agreement – usually as part of a severance package – or include a specific provision in an employment agreement which governs the activities after the employment ends. The principle consideration with any of these alternatives is the same consideration that applies to every legal contract – make sure that the agreement is well-drafted and clearly specifies its terms and limitations.
Alternatives to non-solicitation agreements may include:
• A confidentiality agreement where the focus is on protecting confidential and trade secret information;
• An agreement where an employee agrees not to recruit former employees to join them , rather than agreeing not to recruit clients; or
• A separation agreement where the employee consents to a specified period of non-solicitation of clients.
A business’s consideration of a non-solicitation agreement is one of balance. The business must balance its need and desire to protect a legitimate competitive interest with the often conflicting need of the employee to earn a living without restraint.