Sometimes an employer’s greatest legal concerns do not arise until after an employee has left the company. Unfortunately, it may be too late at that point for the employer to protect its interests adequately.
In the absence of a non-compete agreement in an employment agreement, commonly referred to as a restrictive covenant, a company’s former employees generally are free:
This relative freedom can result in great harm to the company, particularly in instances where the former employee had particularly strong relationships with customers, vendors, or other employees, or where the former employee had access to significant and potentially damaging business information. In short, unless a company requires that its employees execute a legally enforceable restrictive covenant, there may be no way to prevent former employees from putting the training and knowledge their prior employer provided them to work for a direct competitor.
In many other ways, restrictive covenants, like a non-compete agreement, are subject to the same basic requirements as other contracts. Restrictive covenants must be supported by sufficient consideration and the terms of the agreement must be specific to be able to be enforced. If a Minnesota employer desires to have a new employee sign a non-compete agreement, the company should provide written notice to the prospective employee at the time of the offer of employment is made and prior to when the applicant leaves the applicant's current job. If the Minnesota employer seeks to have a current employee enter into a non-compete agreement, the company must provide the employee some monetary consideration, which must not be nominal, and/or a promotion into a position in which the employee receives higher compensation and job opportunities. Ultimately, Minnesota courts will examine the adequacy of the consideration given to the individual in exchange for entering into the restrictive covenant.
In other ways, restrictive covenants differ from a regular contract. Restrictive covenants are restraints of trade. With the evolution of the information age, employers feel the need to protect their intellectual capital more than ever before. While an employer can never ask an employee to sign a non-compete agreement merely to control competition, an employer may enforce a restrictive covenant in order to protect a legitimate interest, such as customer goodwill and confidential information. In order to be enforced, the covenant must be written in a narrowly tailored manner to protect this interest. This means that the covenant cannot be broader than necessary to protect the employer’s legitimate interest, cannot impose an undue hardship on the employee, and cannot be injurious to the public generally. When drafting a non-compete agreement, therefore, it is important for an employer to consider exactly what interests it wishes to protect and how narrowly it can tailor a restrictive covenant to accomplish its goals.
When examining the enforceability of restrictive covenants, Minnesota courts evaluate four factors in addition to determining if sufficient consideration supports the agreement:
In evaluating the enforceability of a restrictive covenant, courts first examine the nature of the employer’s interest. The determination of whether a particular restrictive covenant is enforceable often turns on what is, in essence, a balancing of the employer’s interests protected by the covenant on one hand, and the burden the covenant will place on the employee’s ability to earn a living on the other.
Courts have deemed an employer’s legitimate interest to include protection of trade secrets, proprietary information, and certain customer relations. An employer’s interest in customer goodwill is commonly protected by non-compete agreements. This is a legitimate business interest whenever the employee’s relationship with customers is such that there is a substantial risk that the former employee may be able to divert all or part of the customer’s business to the employee’s new business or subsequent employer. Among other things, courts will examine the following:
For example, there is a legitimate business interest in customer contacts when an employee is the employer’s only representative in a particular locale, the employee services the customers in that locale frequently, and when personal contacts and a good service record are important in the employer’s line of business. For customer goodwill to be a legitimate interest, it is often important for the employer to show that it spent significant time and money in developing the relationship. When the facts support it, it is also helpful, but not essential, to show that the employer introduced the employee to the customers at issue.
The protection of an employer’s trade secrets or confidential information is also a legitimate business interest. Minnesota courts, however, do not generally permit the employer to define the term “trade secrets” within a contract in a way that would include all information obtained by the employee during employment. Whether particular information will be considered a trade secret by Minnesota courts is discussed in this chapter.
It is important to note that, although many non-disclosure covenants prohibit the disclosure of trade secrets, Minnesota’s Uniform Trade Secrets Act (MUTSA) also prohibits their misappropriation (including disclosure).
The scope of activities prohibited by a restrictive covenant must be stated with specificity. Overly broad restrictions on the scope of activities covered by the agreement can provide grounds on which an employee can attack the non-compete agreement. Also, the prohibitions within restrictive covenants must be clear and definite. Courts will construe a covenant narrowly and strictly against the employer. Any vague or unclear language will be interpreted in the employee’s favor.
There is no bright-line rule for what time and geographical limitations are acceptable. The ultimate question is whether the restrictions are limited to the extent necessary to protect the employer’s legitimate interest. The length of a justifiable time restriction will be measured primarily by the length of time necessary to reduce or eliminate the employee’s personal hold over customers or the confidential nature of information. This will often depend on the length of time the employee worked for the employer, as well as the extent of the employee’s contact with the customers during that period of time, and the time it takes any replacement employee to build a relationship with the affected customers. Alternatively, the employee’s access to and familiarity with confidential information could be at issue. Courts also consider factors such as the extent to which the covenant could alienate a new employer during the proscriptive period, and the relative equality of bargaining power between the parties. Context is key.
Instead of a specific geographic area, employers can substitute the employee’s former territory or customers. For example, if the employee’s territory is centered in Hennepin County, it may be reasonable to draft the covenant to cover only that area, or perhaps Hennepin and contiguous counties. On occasion, when the circumstances warrant, courts may be willing to enforce a covenant with a national or worldwide geographic scope. But employers must be careful when drafting covenants this broadly. If the business does not operate on that scale, then the court might see such a broad restriction as an attempt to stifle competition generally, and will invalidate any restriction. An employer who asks for too much may get nothing.
If a court finds that the terms of a restrictive covenant are unreasonable, the court may modify the provisions it finds unreasonable. For example, if the territorial restriction is overly broad, a court may reduce it using the “blue pencil” doctrine. While the court may modify the terms of the restrictive covenant, it is not required to do so and may choose to invalidate the entire restrictive covenant. In particular, where a covenant is so overbroad, the court will frequently decline to modify the language in order to make it enforceable in favor of an employer that attempted to overreach and instead choose to decline to enforce the covenant altogether.
A court order commanding compliance with or prohibiting enforcement of a restrictive covenant almost always is sought in restrictive covenant cases and is often the only issue that ends up being decided. Both the employer seeking to enforce a restrictive covenant and the former employee seeking to invalidate the covenant have the option of filing for a temporary restraining order, preliminary injunction and/or declaratory judgment. Monetary damages also are available and can include both lost profits and incidental damages flowing from any breach of the covenant. Under the Minnesota Municipal Trade Secrets Act, the court may award exemplary damages in an amount not to exceed twice the amount of any other awards issued if if the employee commits a willful or malicious misappropriation. Attorney’s fees may be awarded for breach of a restrictive covenant if they are specifically provided as a measure of damages in the contract.
It is not unusual for businesses to employ individuals outside the state where the business is incorporated or has its headquarters. The law in many states differs substantially from the law in Minnesota on what it takes to be able to enforce a non-competition agreement, what limitations are enforceable and for how long, or even whether such agreements are enforceable at all. Therefore, careful thought must be given before attempting to have every employee sign a company’s “standard” non-competition agreement. Employers should review such agreements with their counsel to make sure that the agreement will be enforceable in the particular circumstances and that seeking to have it signed as a condition of employment will not result in liability under the law of the other state.
Employers that do not secure any restrictive covenants may still have recourse in the event that a former employee discloses or uses certain proprietary information. If that information constitutes a "trade secret," the employer could invoke protections under both federal and state laws. Because the federal law does not attempt to preempt state laws, employers will be able to invoke the protection of whichever law best serves their purposes.
Like the vast majority of states, Minnesota has adopted a version of the Uniform Trade Secrets Act and protects information that amounts to a trade secret even in the absence of any written agreement. Whether or not information qualifies as a trade secret under the Minnesota Uniform Trade Secrets Act (MUTSA) depends on several factors, which are discussed below.
Until very recently, an employer had to rely solely on a variety of differing state laws for the protection of its trade secrets. That meant reference to 47 state versions of the Uniform Trade Secrets Act. All of this changed significantly on May 11, 2016 when former President Obama signed the federal Defend Trade Secret Act (“DTSA”). The new law went into effect immediately and applies to any misappropriation of trade secrets after that date.
The DTSA operates as an additional level of protection for an employer by enabling it, as the owner of a trade secret, to bring a civil action if the trade secret is related to a product or service used in, or intended to be used in, interstate or foreign commerce.
Trade secrets are broadly defined in the DTSA to mean all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if both of the following criteria are met:
The definition highlights the importance placed on efforts by the owner to keep the information a secret. Although customer lists may constitute a trade secret, an employer will be hard pressed to argue that point if key customers are identified on the company’s website. Simply put, companies must take a consistent approach when it comes to identifying and protecting their trade secrets or they may lose them.
Under the DTSA, the owner of a trade secret may bring a civil action if the trade secret is misappropriated. There are basically three ways in which a trade secret can be misappropriated:
One important carve out; however, is that discovering a trade secret through reverse engineering, independent derivation, or any other lawful means of acquisition is not a violation of DTSA and will not give rise to civil liability.
Several significant remedial provisions are contained in the DTSA that are not found in current state trade secret laws. The most potent of these is a civil seizure remedy under which an employer can obtain an order from the court providing for the seizure of property necessary to prevent the dissemination of the trade secrets. Such orders may be obtained ex parte, which means that only one side is present in court to make its case, but the statute makes it clear that these kinds of orders will be available only in extraordinary circumstances. In such cases, the DTSA requires clear proof that immediate and irreparable harm will occur if a seizure order is not issued. Any seizure order must provide for the narrowest seizure of property necessary to prevent irreparable harm and it must direct that the seizure be conducted in a manner to minimize any interruption of the business operations of third parties and, to the extent possible, does not interrupt the legitimate business operations of the person accused of misappropriating the trade secret. The DTSA also precludes the plaintiff from publicizing the seizure so as to provide some privacy protection to the individual accused of wrongdoing. When a civil seizure is ordered, a seizure hearing must be held within seven days of the order at which time the owner must prove the facts necessary to support the seizure order. An employer that obtains a seizure order will be required to post a bond set by the court which is adequate to cover any damages suffered as a result of a wrongful or excessive seizure or wrongful or excessive attempted seizure.
In exceptional circumstances that render an injunction inequitable, courts may condition future use of the trade secret upon payment of a reasonable royalty for no longer than the period of time for which such use could have been prohibited.
Other remedies a court may order include:
If the trade secret is willfully and maliciously misappropriated, the court may award exemplary damages in an amount not more than two times the amount of the damages awarded as described.
In enacting the DTSA, Congress addressed a concern that the extent of non-disclosure obligations in existing employment contracts might be acting to prevent employees from disclosing evidence of criminal conduct. As a result, the DTSA contains provisions to protect whistleblowers who disclose alleged trade secrets in confidence to the government. The DTSA provides civil and criminal immunity for the disclosure of a trade secret that is made “in confidence to a Federal, State, or local government official, directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law."
The DTSA requires employers to provide a notice of this immunity to any employee, contractor or consultant in any contract governing the use of trade secrets or other confidential information entered into or updated after May 11, 2016. An employer that fails to provide this notice will be deprived of exemplary damages and attorney fees in any successful lawsuit for misappropriation of a trade secret. The confidentiality agreement does not have to contain actual notice of immunity if the employer provides a cross-reference to a policy document that sets forth the employer's reporting policy for a suspected violation of law. Here is an example of the kind of notice the DTSA contemplates:
Misappropriation of the Company’s trade secrets may subject an employee to criminal liability under the Defend Trade Secrets Act of 2016 (the “DTSA”), entitle the Company to injunctive relief and require Employee to pay compensatory damages, double damages and attorneys’ fees. Employee is hereby notified that in accordance with the DTSA, Employee may not be held criminally or civilly liable for the disclosure of a trade secret that is made (i) in confidence to a federal, state or local government official or to an attorney when made solely for the purpose of reporting or investigating a suspected violation of law or (ii) in a complaint or other document filed in a lawsuit or other proceedings if such filing is made under seal.
By creating a new cause of action in federal court for misappropriation of trade secrets, the DTSA is expected to have a significant impact on this aspect of employment law. Instead of a hodgepodge of different state remedies, the DTSA makes available a more uniform, reliable and predictable means of protecting trade secrets throughout the country.
MUTSA defines a trade secret as information, including a formula, pattern, compilation, program, device, method, technique, or process, that both:
Ultimately, the determination of what is a trade secret is very fact-sensitive. Information commonly protected by courts as trade secrets includes specific customer information (e.g., buying history, decision-makers, etc.), computer software, highly specific scientific information and general business information that has some degree of novelty or reasonable use in the industry. Minnesota courts have identified several factors they will consider in determining whether information constitutes a trade secret. Those factors include, but are not limited to:
A trade secret is different from a secret of the trade. For example, every good locksmith knows how to pick a lock. This is a secret of the trade of being a locksmith, but it is not a trade secret. On the other hand, the list customers of the local locksmith service with specific information about buying history and contact information could qualify as a trade secret in the certain circumstances.
Companies that have trade secrets must take reasonable steps to protect them. A court will not issue an injunction or award damages against a former employee for disclosing the company’s customer list when the company freely displays the same information on its website.
In addition to defining the meaning of a trade secret, MUTSA also defines misappropriation as either:
MUTSA provides a variety of relief in the event that a trade secret is misappropriated. Specifically, Minnesota courts can prohibit an actual or even threatened misappropriation by issuing an injunction. The Act also provides for the recovery of damages. Damages can include both the actual loss suffered by the holder of the trade secret as a result of the misappropriation as well as the unjust enrichment enjoyed by the party that misappropriated the trade secret. Attorney fees are available under the MUTSA if the misappropriation is made in bad faith or is willful and malicious. Exemplary (punitive) damages are also available under the Act in instances where the misappropriation is “willful and malicious.”
Actions for the misappropriation of a trade secret under MUTSA must be brought within three years from the date when the misappropriation was discovered or should have been discovered by the exercise of reasonable diligence.
Evidence of the actual misappropriation of trade secrets is not required under Minnesota common law for a court to provide some protection. Courts can issue injunctions based upon demonstration of a likelihood that irreparable harm will result. The employer does not need to wait until its business has been damaged to obtain injunctive relief if the kind of harm it is about to suffer is one which cannot adequately be compensated in damages. Typically, the loss of trade secrets cannot be measured in money damages for the secret, once lost, is lost forever. When a former employee begins to solicit the same customers on behalf of a new employer and uses confidential information of the former employer to design sales programs that will be especially enticing, the loss of good will to the former employer is something that also cannot traditionally be measured in monetary damages, making injunctive relief appropriate.
In some contexts, it may appear to be inevitable that a former employee will either use or disclose a former employer’s trade secrets. When an employee leaves a company to go to work for its competitor in a similar capacity, it may be immediately apparent that the employee will inevitably draw upon the confidential information of the former employer in carrying out the responsibilities of the new job. When this occurs, courts will sometimes apply what has become known as the “inevitable disclosure” doctrine as a basis to enjoin the employee from taking the new job. Although the Minnesota Supreme Court has never specifically enjoined an employee from working for a competitor based on this doctrine, a line of federal cases and a state case seem to accept the doctrine. In Surgidev v. Eye Tech, Inc., a federal district court found that a trade secret cause of action could be sustained where “there is a high degree of probability of inevitable disclosure.” Surgidev has been cited with approval by state and federal courts applying Minnesota law. The doctrine’s use has been limited, however, to cases where the employee has “intimate knowledge” of the plaintiff’s business practices and a “substantial threat of impending injury … exist[s].” The inevitable disclosure doctrine is not one favored in the law and will be applied in those rare cases where the equities clearly favor protecting the former employer at the expense of the employee’s ability to earn a living.
The differences between federal and state trade secret laws create different protections depending on which law an employer chooses to invoke. As noted above, in certain circumstances Minnesota courts may recognize the “inevitable disclosure” doctrine under which an employee is prohibited from taking a job with a competitor if the similarity of duties and competitive relationship between the two employers make it almost certain that the employee would disclose or have to use trade secrets belonging to the prior employer. Under the DTSA, courts may not enjoin someone “from entering into an employment relationship,” but they may place conditions on an employee’s duties “based on evidence of threatened misappropriation and not merely on the information the person knows.” Employers operating in states that recognize the “inevitable disclosure” doctrine might bring claims under federal and state law, benefiting from the expansive scope of federal jurisdiction and then using the state law to provide additional remedies not authorized by the DTSA. Other remedial differences may also exist between federal and state laws.
Employers frequently think of post-employment restrictive covenants only in the context of protecting their business from unfair competition by others. This is far too narrow a view. Consideration should be given in the hiring process to whether the applicant is under valid restrictions to a prior employer. Not only could such restrictions limit the suitability of the individual for the new job, but the failure to address legitimate restrictions could result in having the new employer dragged into court as a defendant in a claim for unlawfully interfering with the prior employer’s contractual rights. While ignorance of such an obligation might protect the new employer from a claim for unlawfully interfering with the prior employer’s contractual rights, this will be small consolation to a company that has invested time and money in the hiring process only to have to begin again.
Additionally, an employer should take care to ensure that an overly-enthusiastic new hire does not upload onto the new employer’s computer system files or other documents that were wrongly acquired from a prior employer.
Employers should also review their restrictive covenant agreements, confidentiality agreements, and employment policies to ensure that they define trade secrets in a manner that courts will enforce. It is always wise to review periodically how confidential information is being handled to ensure that it does not lose legal protection that may otherwise be available.