Tuesday, April 21, 2009
Minnesota Court Addresses Validity of Consideration In Companion Non-Compete Cases (Softchoice v. Schmidt)
In a consolidated appeal, the Court of Appeals of Minnesota addressed the validity of consideration allegedly granted to two separate employees for non-compete covenants given by them to their employer, Softchoice. The issue of consideration is frequently litigated in "after-thought" covenant cases, where the employer asserts continued employment constitutes sufficient consideration for a non-compete.
In both Softchoice v. Schmidt and Softchoice v. Johnson, the court had occasion to address two novel consideration arguments, including one of first impression.
Softchoice v. Schmidt
The first appeal involved a non-compete clause granted in connection with an employee retention plan. Schmidt had been an employee of Software Plus when it was acquired by Softchoice. Prior to the acquisition, Schmidt was given the chance to participate in an employee retention plan into which Softchoice retained the discretion to deposit credits into a trust account.
The first covenant was contained within the plan document itself and provided that Schmidt had to forfeit any deposited retention credits if he left to compete with Softchoice anywhere in the State of Minnesota. The second covenant was a stand-alone covenant that barred Schmidt from competing with Softchoice in Minnesota following his termination. The only issue on appeal concerned the second covenant. It was not disputed the forfeiture provision in the plan itself was a valid provision. But Schmidt contended the stand-alone covenant lacked consideration, and the court agreed.
Of particular importance was the fact Softchoice retained absolute discretion to deposit retention credits in Schmidt's trust account. Nothing obligated Softchoice to do anything for Schmidt's benefit, though it ultimately did deposit $25,000 into the plan. The court agreed with Schmidt that the relevant point in time for analysis was at the time of contracting, and when the stand-alone covenant was signed, Softchoice had no binding return obligation with respect to the retention plan. As such, Schmidt's participation in the plan could not serve as valid consideration for the non-compete.
Softchoice v. Johnson
The Johnson case involved a promotion. Johnson was a sales representative who eventually was promoted to branch manager in early 2007. Johnson learned of the promotion before he signed a customer non-solicitation agreement, and the promotion was announced prior to the time the ink was dry on the contract. Eventually, Johnson signed the agreement and received a retroactive pay increase. The agreement provided Johnson's promotion was contingent on accepting the new terms and conditions of his employment.
He, like Schmidt, left in December of 2007. Johnson argued that the promotion could not serve as valid consideration for his non-compete since he signed it after the promotion was announced. The court had little trouble dismissing this argument, though it noted the issue was one of first impression. In particular, the court held that "a promotion serves as consideration for a non-compete agreement at the time when the terms of the promotion have been defined and the promotion has been formally offered and accepted in writing."
Court: Court of Appeals of Minnesota
Opinion Date: 4/7/09
Cite: Softchoice, Inc. v. Schmidt, 763 N.W. 2d 660 (Minn. Ct. App. 2009)
Favors: Schmidt case - Employee; Johnson case - Employer
Law: Schmidt case - Missouri; Johnson case - Minnesota