Editor’s note: No one wants banks and their employees to end up in disagreements over restrictive covenants. Yet disagreements arise. What happens then and how do the courts handle these cases? Attorney Ansis Viksnins from Monroe Moxness Berg in Minneapolis provides insight. This is part two of a two-part series on restrictive covenants. See part one, which answered common questions about restrictive covenants.
Q. Employers commonly carve out restricted activities from a new employee’s duties until a previous restrictive agreement becomes inactive. What happens when a previous employer thinks a former employee is still violating an agreement?
Ansis Viksnins: The first step is that the former 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 former employer has to decide if it is worth the time, money and effort to enforce the agreement in court.
These types of lawsuits can involve the new employer as well. If the new employer knows about the restrictive covenant and chooses to the ignore it, there can be an interference with contract claim made by the old employer. In order for an old employer to bring a case against a new employer, however, it would need to show that 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 a case where the old employer can prove these things, the court will probably come down pretty hard on the employee and their new employer.
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 the new employer interfered, the measure is the lost profits from lost accounts. A past employer could argue they have lost the customer forever and have been deprived of a 10-year income stream. The new employer’s counterargument could be that after a year, the client would have left anyway.
Q. How do these types of disagreements play out in court?
A.V.: Minnesota law says restrictive covenants are enforceable but they are disfavored and are 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, employers do win, though it is not always the result they were originally looking for.
In Minnesota, a judge has the ability to “blue pencil” the agreement, meaning 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. The employee would not be barred from working in the industry but the employee could not call on those customers for the term of the agreement. This is a common result for these court cases.
Previous employees and employers can often save money by coming to this kind of agreement first. 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 gives the old employer some protection.
Restrictive covenant laws vary by state. In the Upper Midwest – Iowa, Minnesota, North Dakota, South Dakota and Wisconsin – there is varied treatment of restrictive covenants. Minnesota and Iowa are relatively similar. In Wisconsin, the court doesn’t have a blue pencil. The agreement will either be enforceable or 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.
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; its law says these covenants restrict free trade. You cannot have a non-compete in North Dakota.
Ansis Viksnins is an attorney with Monroe Moxness Berg, Minneapolis. Email him at [email protected]. Chris Wrecza is an executive bank recruiter and president of ExecuSearch, Minneapolis. Email him at [email protected].