Thursday, September 3, 2015

Court Rules that Minnesota Non-Competition Agreements Must Expressly Reference Consideration

The Minnesota Court of Appeals has made it a bit tougher to enforce certain non-competition agreements, but, with careful drafting, employers can safeguard themselves against the Court's ruling. In J.A.B., Inc. v. Naegle, 867 N.W.2d 254 (Minn. Ct. App. 2015), the Court of Appeals held that a two-year non-solicitation agreement that did not expressly recite the legal consideration for the agreement was unenforceable in light of Minnesota’s statute of frauds, set forth at Minn. Stat. §513.01.

Under fundamental principles of contract law, a contract must be supported by consideration – meaning an exchange by the parties of something of value – to be legally binding. The Minnesota statute of frauds requires that certain contracts be in writing and that the writing expressly recite the legal consideration for the contract. One type of contract covered by the statute of frauds is any “agreement that by its terms is not to be performed within one year from the making thereof . . . .” Minn. Stat. § 513.01(1).

Because the non-solicitation agreement at issue in the Naegle case contained a two-year restriction period, it could not be performed in a year and was subject to the statute of frauds. In addition, the agreement contained an “integration” clause (also known as a merger clause) providing that the written agreement contained the entire agreement between the parties regarding its subject matter. Integration clauses are designed to eliminate a party’s ability to claim that there are side agreements or different promises and obligations by the parties not reflected in the written agreement. However, such clauses also prevent the introduction of evidence outside the contract itself to show legal consideration for the contract. As such, the parties in the Naegle case could not introduce extraneous evidence beyond their written agreement to show legal consideration. Accordingly, in its succinct opinion in the Naegle case, the Minnesota Court of Appeals stated:

Because the agreement cannot be performed within one year from its making, Minn. Stat. § 513.01 applies. Thus, because the agreement does not express consideration and does include an integration clause stating that it “contain[s] the entire understanding between and among the parties,” it cannot be enforced, and, as the district court concluded, JAB’s action for breach cannot be maintained.

867 N.W.2d at 256-57.

Before the Naegle case, Minnesota courts had not previously applied the consideration component of the statute of frauds to non-competition and non-solicitation agreements. In light of the case, however, existing non-competition agreements that run for more than one year and do not reference legal consideration could be at risk. An employer can, however, try to avoid enforceability problems by working proactively with legal counsel to seek to amend any problematic agreements and, going forward, to draft agreements to expressly reference the legal consideration supporting the agreement. Non-competition agreements should also always be carefully tailored to the parties’ unique circumstances. The Naegle decision is an important reminder that careful drafting matters and the decision should cause employers to review their non-competition agreement practices to ensure they provide for enforceable protections.

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