Generally speaking, employee restrictive covenants in Minnesota are enforceable only to the extent that their scope – in terms of both time and geographic area – is “reasonable.” But what does “reasonable” mean? As with most difficult legal questions, it depends. As will be discussed below, courts will look closely at a number of factors relating to the employee, the employer, and the industry at issue in determining whether a specific act of competition is inside or outside the scope of what the law will protect.
The time limitation contained in a restrictive covenant agreement is often front of mind for both employees and employers. It determines how long after the end of the employment relationship that the employee will be in some way restricted from competing. In determining how long is too long, a court will generally look to the amount of time it will likely take for key insider information possessed by the employee to become stale. For instance, a salesperson employee may have confidential information customer preferences or pricing which could be used against their former employer for a period of time. But that insider information will inevitably grow stale and be of little use after a period of months or years. After it becomes stale, it will be difficult for an employer to enforce the restriction.
In my experience, a one-year limitation period is most common, and – assuming there are no other issues – is generally enforced by Minnesota courts. Time periods up to two years may be appropriate for certain types of employees with access to extremely high-value confidential information, such as top-level executives. Time periods beyond two years are rarely seen or enforced, except in certain business sale situations.
Most employers I speak to want to insist upon the longest restrictive period allowed by law. My general advice in that situation is not to overreach, and instead to look at a one-year or even six-month period. In reality, the vast majority of enforcement attempts happen almost immediately, in situations where the employee leaves and joins a competitor right away. Anything after six months is rare, and I have never once seen an attempt after a year. That being the case, the employer loses very little by limiting the temporal scope to some time period under a year, unless extraordinary circumstances call for a longer restrictive period.
This analysis examines the geographic extent to which a restrictive covenant can extend. In making a decision on the “reasonableness” of a geographic restriction, courts will look generally to the area where the employee actually has insider information that could hurt the employer. This area can vary dramatically depending on the employee’s job description and the industry involved.
In a typical outside salesperson scenario, the geographic scope of the restriction will generally be the same as the territory in which the employee operated and made their sales. Outside of that area, the assumption would be that the employee would not have the sort of insider information about customers, market strategy, etc. which could really hurt the employer’s business.
For other types of employees with more generalized roles, particularly those in company leadership or those involved in making inventions, a broader geographic scope is often appropriate and enforceable. In the modern economy, many companies sell to customers throughout the country and even throughout the world. If the scope of the employer’s business is really that broad, and the employee is directly involved in business efforts on that scale, a geographic scope that spans the country or the world can sometimes be enforceable.
Of course, most businesses do not draw upon customers from that far afield. In fact, most litigation surrounding geographic scopes of restrictive covenants involves an examination of “reasonableness” on a very small scale. Perhaps the most contentious cases involve personal service professionals such as doctors, hairstylists, and the like. These employees draw upon customers in comparatively small geographic areas, and therefore are unable to enforce restrictions further than 10 or 20 miles away from their location.
If you have any questions about whether the scope of your restrictive covenant is “reasonable” or not, you should consult with an attorney experienced in this area. Please feel free to contact me at 952-460-9245 or [email protected] if you would like to discuss any issues surrounding restrictive covenants. And stay tuned for further installments in this series, addressing other key legal issues surrounding restrictive covenants.