“Selective Enforcement” May Provide Defense to Minnesota Non-Compete Agreement:
If an employer attempts to enforce a Minnesota non-compete agreement, the attorney for the ex-employee will often attempt to demonstrate that the employer has not consistently enforced its non-compete agreements against other similarly situated employees in the past. This defense, often called “selective enforcement,” is relevant on two levels:
· First, the failure of the employer to consistently enforce its non-compete agreements arguably may operate as a waiver of its right to enforce the agreement against other employees.
· Second, the employer’s failure to enforce the non-compete agreement in the past may serve as evidence that the restrictions contained in the agreement are not truly necessary to protect the employers’ legitimate interests.
This article provides insight into when the affirmative defense of “selective enforcement” may be successful in defeating a non-compete agreement under Minnesota law. While the defense has worked on occasion, in practice it can be difficult to establish. Thus, while employers are wise to draft narrowly tailored non-compete agreements and consistently enforce them, the failure to prosecute every breach of a non-compete agreement may not prove fatal to future enforcement activity.
Recognition of the “Selective Enforcement” Defense Under Minnesota Law:
The court’s decision in Surgidev Corp. v. Eye Tech, Inc., 648 F. Supp. 661 (D. Minn. 1986), illustrates the “selective enforcement” defense under Minnesota law. In Surgidev, a medical device company sued four officers in order to enforce covenants which prohibited their unfair competition and misappropriation of trade secrets.
The individual defendants were all at one time key employees of Surgidev’s marketing and sales division. Between February and August of 1985, they all resigned from their positions at Surgidev and subsequently joined the newly formed Eye Technology, Inc., a competitor of Surgidev in the intraocular lenses industry. While employed at Surgidev, each of the individual defendants signed non-disclosure agreements.
In Surgidev, the court admitted evidence of selective enforcement on the basis of waiver and equitable estoppel. The court stated that the evidence overwhelmingly established that Surgidev had permitted its employees, including key sales and marketing personnel, to leave Surgidev and to take employment with competitor companies. The court ultimately concluded that it would be inequitable to allow the employer to rely on a non-compete agreement that it had so “blithely” ignored in the past.
Rejection of the “Selective Enforcement” Defense Under Minnesota Law:
Although the Surgidev court accepted the “selective enforcement” defense, other Minnesota courts have rejected the defense. The court’s decision in Minnesota Mining and Manufacturing Company v. Kirkevold, 87 F.R.D. 324 (D. Minn. 1980), demonstrates the difficulty of asserting the selective enforcement defense under Minnesota law.
In Kirkevold, the plaintiff, Minnesota Mining and Manufacturing Company (3M) moved for a preliminary injunction against the defendant, Kent A. Kirkevold, a former employee of 3M. Kirkevold worked as a chemist and technician for 3M from 1964 to 1979. On February 24, 1964, Kirkevold signed an employment agreement with 3M that contained a covenant not to disclose confidential information and a covenant not to compete.
In Kirkevold, the defendant argued that 3M had waived its contractual rights or should be estopped for equitable reasons from asserting its rights under the employment agreement based on the failure of 3M to advise Kirkevold that it would attempt to enforce the covenant not to compete prior to his departure from 3M and the failure of 3M to attempt to enforce such restrictive covenants against other former employees who possessed knowledge of 3M's confidential information. The court rejected the employee’s argument that the former employer’s failure to enforce restrictive covenants against other former employees who possessed comparable confidential information constituted an estoppel or waiver by the former employer of its right to enforce the restrictive covenant.
The court stated that there were many differences between the defendant and the other employees. First, the court noted that there were differences in the type of work the other employees did. Second, the court stated that there was a difference in the sensitivity of the information to which the other employees had access. Also, there were differences in choice of law issues, which factored into the employer’s decision not to seek to enforce the other restrictive covenants.
Ultimately, the court stated that the employer’s failure to attempt to enforce similar covenants against other former employees was “not overly probative of any intent to relinquish its contractual rights or to knowingly mislead so as to estop” enforcement of the covenant. The court also stated that “to hold otherwise would effectively place employers in the precarious position of being compelled to enforce all such restrictive covenants with respect to all its former employees, which might encourage attempts to restrain trade, and which might undermine labor relations.”
Treatment of the “Selective Enforcement” Defense in Other Jurisdictions:
While these two Minnesota cases provide helpful guidance, the absence of other Minnesota cases on the issue leaves the law of selective enforcement in Minnesota unsettled. As demonstrated by the three cases discussed below, there is no consistent treatment of the defense in other jurisdictions.
In a New York case, Estee Lauder Companies, Inc. v. Batra, 430 F. Supp. 2d 158, 181 (S.D.N.Y. 2006), the court stated that the employee demonstrated that the employer rarely enforced a one year restriction for its entirety. The court stated that the employer routinely negotiated much shorter post-separation restraints with other former employees. The court then stated that based upon the company’s past practice of reducing its own restrictive covenants with other departing executives, the company’s general behavior suggests that a one year restriction is generally unnecessary.
In a New Jersey case, Laidlaw, Inc. v. Student Transportation of America, Inc., 20 F. Supp. 2d 727, 751 (D.N.J. 1998), the New Jersey federal district court deferred to the employer’s discretion in determining the best interests of its business. Applying the rationale of the Minnesota federal district court in Minnesota Mining and Manufacturing Company v. Kirkevold, 87 F.R.D. 324 (D. Minn. 1980), the court stated that requiring an employer to enforce every restrictive covenant, without regard to cost-effectiveness or individual circumstances, was impractical and unfair to the employer and other former employees who had not competed as aggressively as the defendants in question. The court went on to state that whether a restrictive covenant may be enforced depends on its reasonableness under the particular circumstances, and the primary inquiry is whether enforcement of the covenant is reasonable (not whether the employer enforced other covenants).
A case from Illinois appears to align with the rationale of Kirkevold. In Kempner Mobile Elecs., Inc. v. Southwestern Bell Mobile Sys., LLC, No. 02-C-5403, 2003 WL 1057929, at *26 (N.D. Ill. Mar. 10, 2003), the court cited Surgidev Corp. v. Eye Tech, Inc., 648 F. Supp. 661 (D. Minn. 1986) for the proposition that to establish a waiver, the employee must show that the employer’s actions in failing to enforce the non-compete provisions amount to a complete disregard for those provisions. In Kempner, the court stated that while there is evidence that the employer did not sue certain agents who breached particular provisions, the evidence did not satisfy the “complete disregard” standard adopted in Midwest Television, Inc. v. Oloffson, 699 N.E.2d 230, 237 (Ill. App. 3d 1999) (3d Dist. 1998) (adopting Surgidev waiver standard and holding that a question of fact existed as to whether defendant employer waived the non-compete provision by selective enforcement).
While there are different views of the “selective enforcement” defense around the country, it appears that the defense succeeds most often where the employer has consistently and blatantly failed to enforce its prior restrictive covenants.
Takeaways for Minnesota Employers:
While sometimes difficult to establish in practice, “selective enforcement” may provide a defense to enforcement of a non-compete agreement under Minnesota law under appropriate circumstances. To guard against this potential defense, Minnesota employers should follow these guidelines when drafting and enforcing their non-compete agreements:
1. Minnesota employers should carefully decide which employees will be required to sign non-competition agreements or other restrictive covenants in the first place. In general, Minnesota employers should not require every employee in the company to sign an identical non-compete agreement. This strategy may backfire if the employer establishes a track record of ignoring violations of the agreement. A much better strategy is to draft a narrowly tailored non-compete agreement for the key employees of the company (e.g., upper level management, employees with access to technical information and trade secrets, and salespersons).
2. Minnesota employers should customize their restrictive covenant agreements based upon each employee’s job position, duties, and competitive threat. As a general rule, employees holding the same position should sign the same type of agreement. The same template agreement, however, may not be appropriate for each position:
- For some lower-level employees, a simple non-disclosure agreement may suffice.
- For other positions (e.g., salespersons), a non-disclosure and non-solicitation of customers agreement may be more appropriate, but it may not be necessary to prohibit the employee from working for a competitor altogether.
- For technical employees with access to sensitive confidential information but having no customer contact (e.g., scientists and engineers), a non-disclosure and non-competition agreement may be appropriate, while a clause prohibiting solicitation of customers may be unnecessary.
- For upper-level management with access to all of the company’s sensitive information and substantial customer contact, a more comprehensive non-disclosure, non-solicitation, and non-competition agreement may be appropriate given the significant competitive threat the employee can pose if allowed to work for a competitor or call on the employer’s customers.
3. Minnesota employers should audit their workforce to ensure that all similarly situated employees have signed similar non-competition agreements. If this is not the case, the employer should seek legal counsel regarding how best to rectify the situation. This may involve amending non-compete agreements for certain employees (to obtain their signatures on the most recent version of the company’s non-compete agreement). In other cases, this may involve asking current employees to sign a non-compete agreement for the first time. Because these strategies involve some sophisticated planning, and may require the employer to offer “independent consideration” (such as a raise or bonus) in order to be enforceable, a thorough understanding of Minnesota law is needed before these strategies are carried out.
4. Minnesota employers should establish a consistent practice of conducting exit interviews of all employees who have signed non-competition agreements. During the exit interview, the employer should (1) ask the employee to return all company information, files, and property; (2) instruct the employee not to remove or keep copies of any confidential information or trade secrets; and (3) remind the employee of his/her obligations under the non-competition agreement. The employer should document the date, time, and results of the exit interview.
5. Minnesota employers should establish a consistent practice of sending a letter to ex-employees who have signed non-competition agreements attaching a copy of the agreement, reminding the employee of the exit interview, and reminding the employee of his/her obligations.
6. Minnesota employers should typically send a copy of the ex-employees’ non-competition agreement to their new employer, if the employer is a competitor. This will put the new employer on notice of the non-compete restrictions and bolster a claim of “tortious interference” if the new employer encourages the employee to violate the agreement.
7. Minnesota employers should send a “cease and desist” letter to all ex-employees who appear to be violating the terms of their non-competition agreement. Even if the employer does not commence legal action to enforce the agreement, it will be harder for other employees to assert the “selective enforcement” defense in future cases if such a letter has been delivered.
8. For serious violations of the non-compete agreement, the employer should often commence a lawsuit at least to recover damages arising from the employee’s breach of the agreement.
9. For egregious violations of the non-compete agreement, the employer should strongly consider starting a lawsuit and seeking an immediate temporary restraining order (“TRO”) or temporary injunction to prevent the ex-employee from continuing to violate the agreement.
10. If the employer becomes aware that an employee is violating a non-compete agreement, but the employer chooses not to prosecute the breach for some business or legal reason, the employer should be prepared to explain why it chose not to enforce the agreement.
In closing, because the “selective enforcement” defense will often be raised by defense counsel, and may be recognized by the court under certain circumstances, Minnesota employers should strive to draft narrowly tailored restrictive covenant agreements, customized for particular positions, and establish a track record of consistently enforcing such agreements.
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