What happens when disagreements arise about restrictive covenants?
By Chris Wrecza and Matthew Doffing
No one wants banks and their employees to end up in disagreements over restrictive covenants. But, what happens when disagreements do arise? And, how do the courts handle these cases?
This is second installment of my article series on retention and restrictive covenants. I am again interviewing Ansis Viksnins, shareholder at law firm Monroe Moxness Berg, Minneapolis.
In our first interview, Ansis answers six common questions about non-disclosure, non-solicit, and non-compete agreements, read it here.
Q. We closed the first part of our conversation with a question about the options available to employees who are job searching but who have signed a non-compete agreement. You explained that new employers will commonly carve out restricted activity from the duties of their new job until the agreement becomes inactive.
What happens when the previous employer thinks the employee is still violating the agreement?
Ansis Viksnins: The first step is that the employer will call me and I will send the employee a cease and desist letter, when appropriate. Generally speaking, such a letter will create discussion between the parties and things get worked out. However, if the activity continues after the letter without the parties reaching an agreement, the old employer has to decide if it is worth the time, money, and effort to enforce the agreement in court.
These types of suits can involve the new employer as well. If the new employer knows about the restrictive covenant and they choose the ignore it, then there can be an interference with contract claim made by the old employer. However, in order for the old employer to bring a case against the new employer, it would need show that new the new employer knew of the agreement, that they encouraged the employee to violate it, or that they turned a blind eye to violations of the agreement. In case where the old employer can prove these things, the court will probably come down pretty hard on the employee and their new employer.
Banks can avoid being pulled into such disagreements by asking to see candidates’ restrictive agreements. If they do hire the individual, they could then avoid the restricted activity.
Q. How much financial protection does a non-solicit or non-compete provide?
A.V.: If the old employer successfully makes a claim that the employee has violated their agreement and that the new employer interfered with the agreement, the measure of loss is the lost profits from lost accounts. An aggressive past employer could argue they have lost the customer forever and that they have been deprived of a 10-year stream of income. The new employer’s counter argument is that after a year, they would have left anyway. Sometimes these numbers can get pretty big.
Q. How do these types of disagreements play out in court?
A.V.: Minnesota laws says restrictive covenants are enforceable but they are disfavored and to be narrowly construed. Can employers win these cases? Yes, they do all the time. But, the courts look for ways to avoid a harsh result for the employee. Because of this, though employers do win all the time, it is not always the result they were originally looking for.
In Minnesota, a judge has the ability to “blue pencil” the agreement i.e. they can rewrite the agreement. They can say, for example, that it isn’t necessary to completely bar an employee from working for a particular bank for 12 months. But, the employee did have a hold on three specific customers. So, I am going issue an order that the employee is not barred from working the industry but the employee cannot call on or work with those customers for the term of the agreement. This is a common result for these court cases.
In that case, previous employees and employers can offend save money by coming to this kind of agreement between them. You might as well use your own blue pencil. Good lawyers will be able to craft something to allow the employee to work but that also give the old employer some protection.
Restrictive covenant laws are state by state. In the upper Midwest – Minnesota, Wisconsin, Iowa, North Dakota and South Dakota – we have varied treatment of restrictive covenant. Minnesota and Iowa are relatively similar.
In Wisconsin, the court doesn’t have a blue pencil. The agreement will either be enforceable or it’s not; you win or lose. In Wisconsin, that forces employers to be more measured in the scope of the agreement. There is no way for the court to save you by scaling the agreement back to make it more reasonable.
South Dakota has a statue about restrictive covenants. They cannot be longer than two years. They must state a specific geographic area like a county or a city that is subject to the restriction.
North Dakota will not enforce restrictive covenants; their law says these covenants restrict free trade. You cannot have a non-compete in North Dakota.