Articles

Aaron Kolquist

Hiring a New Employee Subject to a Non-Compete

Non-competition agreements (“non-competes”) are increasingly utilized by employers to limit and control the competitive activities in which an employee may engage after his or her employment ends, especially with regard to key employees.  What happens when a prospective new employer (“hiring employer”) wants to hire a star candidate who is subject to a non-compete with his or her former employer?  The hiring employer in this situation risks being sued by the former employer for interfering with the non-compete.  However, if the hiring employer has strong enough defenses that the non-compete is invalid, this may be a risk worth taking in order to hire a valuable employee.  This article discusses how a hiring employer can minimize its legal exposure and reduce the odds of costly litigation before making its hiring decision.

“Interfering” With a Non-Compete

When an employee is hired in violation of a non-compete, the most common claim the former employer has against the hiring employer is a claim for tortious interference with the non-compete.  To succeed on an interference claim under Minnesota law, the former employer must prove that: (1) a valid non-compete exists between former employer and employee; (2) the hiring employer had knowledge of the non-compete; (3) the hiring employer caused a breach of the non-compete by hiring the employee; (4) the hiring employer has no legal justification for causing the breach; and (5) the former employer has realized damages as a result.

If the former employer is able to prove all of the above elements, the hiring employer may, under the right circumstances, be liable for the former employer’s lost profits resulting from the violation, its costs incurred to replace the employee, and its attorneys’ fees incurred to litigate the non-compete issues.  Also, in the early stages before litigation even takes off, the former employer may seek a temporary restraining order or injunction to try to prevent the hiring employer from hiring the employee in light of the non-compete.  Whenever a non-compete is in play, hiring employers should consult with a knowledgeable attorney to evaluate the former employer’s remedies and balance potential benefits with potential risks so they can determine whether or not the hire is a risk worth taking.

Critical Steps for Hiring Employers – Be Proactive!

The first step every hiring employer should take when considering a candidate is to determine whether the candidate is subject to a non-compete.  As mentioned above, the hiring employer must have knowledge of the non-compete to be liable for an interference claim.  That said, a hiring employer cannot simply bury its head in the sand to avoid knowledge of a non-compete.  In fact, failing to conduct due diligence to discover a non-compete makes a hiring employer just as liable for an interference claim as if the employer had outright knowledge.

Before making an offer to the candidate, ask whether the candidate has a non-compete or similar agreement with his or her former employer(s).  If any such agreements exist, obtain copies for review.  In the event the candidate states that no such agreement exists, it is wise to indicate that fact in the offer letter and make the employment offer contingent on the candidate’s ability to perform his or her job duties without violating the terms of a non-compete or other restrictive covenant with a former employer.

In the event the candidate is subject to a non-compete, the second step is to analyze all defenses that the hiring employer may have against the non-compete.  If a candidate has valuable talent and experience and presents an attractive upside, the hiring employer needs to know what cards it holds before dismissing the candidate solely because of the non-compete.   Certain defenses may prevent the non-compete from being enforceable at all, while others may limit the non-compete to a point that is manageable.

A number of defenses target the validity of the non-compete.  Keep in mind, non-competes are carefully scrutinized by Minnesota courts and the validity of a non-compete always depends on the specific facts in each case.  Here are a few examples of defenses targeting validity:

  • Inadequate Consideration. The former employer must have given the employee adequate consideration–– a benefit conferred to the employee in exchange for promising not to compete –– upon entering into the non-compete.  Timing of when the consideration is given may be critical.  Employment in and of itself may be adequate consideration for the non-compete as long as the non-compete is entered before or at the time of the job offer.  Non-competes entered after employment has begun must be supported by independent consideration.  Consideration may include a benefit ranging from continued employment to a promotion to a cash payments or some other benefit, but it must be a “real benefit,” meaning something other than what the employee is already entitled to receive.  In certain cases, the non-compete may be invalid if it fails to state the consideration in the agreement itself.

  • Vague or Unreasonable. Non-competes that are vague, ambiguous, and incomplete will be construed against the former employer and are often unenforceable.  Unreasonable non-competes that have overly restrictive terms (e., unreasonable time, geographic, customer, or product-based restrictions) are modified by Minnesota courts to make the non-compete reasonable.

  • Other Contract Defenses. Other ordinary contract defenses, such as waiver, misrepresentation, or fraudulent inducement by the former employer, may be asserted to invalidate a non-compete.

A hiring employer may also establish a justification defense to combat a non-compete.  One possible way to establish a justification defense is by seeking the opinion of outside legal counsel.  In Sysdyne Corp. v. Rousslang (2015), the Minnesota Supreme Court concluded that, under the right circumstances, a hiring employer may be justified in interfering with a non-compete where it makes a reasonable inquiry into the enforceability of the non-compete and honestly relies on advice of outside counsel that the non-compete is unenforceable.  Because this is a very recent decision, there are still questions left unanswered with regard to this justification defense.  Nonetheless, it is wise for hiring employers to consider whether this potential defense applies.

It is important to remember that all potential defenses are dependent on the specific facts of each case.  A hiring employer should consult with a knowledgeable attorney to determine what defenses, if any, the hiring employer may have.  In cases where a strong defense is available, it may be wise for the hiring employer to seek and obtain, or require the employee to seek and obtain, a declaratory judgment that the non-compete is invalid prior to hiring the employee.

Other Proactive Considerations

There are two more considerations with regard to hiring an employee with a non-compete that should be discussed briefly.  First, the hiring employer should take care in defining the job offer to the employee.  Specifically, the terms of the job offer should be drafted in a way that the employee’s activities and duties will not conflict with the non-compete.  A good faith effort to do so will likely minimize liability exposure and, in some cases, may even discourage the former employer from suing altogether.

Second, rather than hiding from the former employer, hiring employers should take a forward and open negotiating position, making the former employer aware of its intent to hire the employee.  The former employer will inevitably hear about the hire at some point, and they will likely be more upset by hearing it through the grapevine.  This forward approach allows the parties to make reasonable proposals and reach an agreeable compromise from the outset to avoid angered parties and expensive litigation.  The compromise can set forth reasonable limits on the employee’s activities that satisfy all parties.  Worst case scenario, even if a compromise is not reached, the hiring employer’s good faith will be noticeable and a court will be more likely to consider the hiring employer’s reasonable proposals and utilize them in making any rulings.

Ultimately, a hiring employer who seeks to hire an employee with a non-compete should proactively evaluate all risks and defenses and consider good faith ways to address the concerns of the former employer.  By doing so, the hiring employer is able to determine whether the hire is worthwhile, limit legal exposure and, at the least, increase its odds of being in the court’s good graces.

*** DISCLAIMER: This article should not be deemed legal advice. You should always consult with an attorney about your specific circumstances and legal rights and obligations. ***

Aaron Kolquist is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing primarily in the business, corporate, and labor & employment areas.