The Risks of Hiring Someone Bound By a Noncompetition Agreement
By: ROBERT C. BOISVERT, JR.
March 2007
(This article originally appeared in the June 1998 Fredrikson & Byron Employment & Labor Law Focus Newsletter and was revised in March 2007)
You are about to hire a new employee when you learn that she signed a noncompetition agreement with her current employer. "No problem," you think, "courts never enforce those things. Besides, even if a court does enforce the noncompetition agreement, it will not affect me as the new employer because I did not sign the agreement."
Wrong on both counts. Not only do courts enforce noncompetition agreements, they sometimes prohibit the employee from working for the new employer and may assess attorneys' fees against the new employer.
A Minnesota Supreme Court case illustrates both points. In Kallok v. Medtronic, Inc., the Supreme Court affirmed the trial court's decision barring an employee from working for a competitor and holding the competitor who tried to hire the employee liable for the former employer's attorneys' fees.
The case involved a research scientist, Dr. Michael Kallok, who had signed several noncompetition agreements during his 16-year tenure with Medtronic, Inc. Kallok resigned to work for a competitor, Angeion Corp., and Kallok and Angeion sued to have a court determine Kallok's rights and obligations under the Medtronic agreements. Medtronic counterclaimed against Kallok for breach of contract and against Angeion for tortious interference with contract.
The trial court ruled for Medtronic enjoining Angeion from employing Kallok in any capacity for one year and ordering Angeion to pay Medtronic's attorneys' fees of $93,852.92. The Minnesota Court of Appeals affirmed the injunction but reversed the award of attorneys' fees.
The Minnesota Supreme Court reinstated the award of attorneys' fees against Angeion. The Court ruled that, by hiring Kallok, Angeion had tortiously interfered with Medtronic's noncompetition agreement. Angeion argued that it acted in good faith because it consulted outside counsel before hiring Kallok but the Court rejected this argument. The Court found that, although Angeion had consulted outside counsel, it had not fully informed outside counsel about Kallok's background at Medtronic or the intricacies of his noncompetition agreements. The Court noted that, had Angeion provided outside counsel with this information, it would have understood that hiring Kallok would have caused Kallok to breach his noncompetition agreements. The Court concluded that Angeion did not reasonably inquire into whether Kallok's noncompetition agreements with Medtronic prevented him from working for Angeion.
The good news for employers is there are many steps they can take to avoid the risks described in Kallok v. Medtronic, Inc., including the following:
- early in the hiring process, require applicants to provide copies of all employment, noncompetition, confidentiality, and nondisclosure agreements they have signed with their current employer or which may still be in force.
- if the applicant says that he or she did not sign any such agreements, confirm this representation in writing.
- if the applicant did sign a noncompetition, confidentiality, and/or nondisclosure agreement, obtain a legal review of the agreement.
- when obtaining a legal review, provide your attorney with all of the facts, including what the applicant's current job involves and what the new position would involve.
- if you are able to hire the applicant, institute a procedure to make sure the applicant abides by the noncompetition and confidentiality terms of their agreement.
- if the risk is too high, do not hire the applicant unless you are prepared for the risk and expense of litigation.