A recent Minnesota Court of Appeals decision has confirmed that a former employee who signed an unenforceable non-compete agreement may bid goodbye to his employer and start his own auction business without consequence.
Employee is going, going, gone
Bartley Kyte took a job with Oberfoell Auctioneers, a live auction operator, right when Oberfoell began to operate an online-auction. In time, Kyte assumed responsibility for all of the computer work related to the online-auction aspect of the business. After working for Oberfoell for just under year, Kyte signed an “Association Agreement” with a non-compete clause imposing a five-year restriction on Kyte’s ability to engage in general auction and real estate sales within a 150-mile radius of Mt. Iron, Minnesota.
After working for Oberfoell for roughly six years, Kyte left and created his own auction business. Two other Oberfoell employees also left and began working for Kyte. Oberfoell then sued Kyte, alleging that he violated the non-compete agreement and the Minnesota Uniform Trade Secrets Act, among other claims. The trial court a sided with Kyte, prompting Oberfoell to appeal to the Minnesota Court of Appeals.
Court Not Sold on Employer’s Argument
The Appeals Court ruled that Kyte did not violate his non-compete agreement, finding first that Oberfoell had no legitimate business interest protected by the non-compete. Oberfoell provided no evidence that customers left to follow Kyte, or that this was a realistic possibility since Kyte worked behind the scenes and was not the “face” of Oberfoell’s online business.
Similarly, the Court rejected Oberfoell’s claim that the non-compete clause should be enforced to bar Kyte’s access to their customer lists, training manuals, and other similar documents. They found that for the reasons stated below, Oberfoell had not taken reasonable steps to protect their secrecy so Kyte should not be prohibited from accessing them.
The Court of Appeals also found that the non-compete agreement was unreasonable in scope and therefore unenforceable. For one thing, barring Kyte from working within a 150-mile radius was unreasonable because there was no evidence that Oberfoell’s customers lived within those parameters. Indeed, in the context of an on-line auction, the court found the 150-mile restriction to be “arbitrary.”
The five year restriction also was too much for the court, so much so that they simply invalidated that provision rather than using their “blue pencil”, the colloquialism for a court’s right to edit down the scope of a non-compete to more reasonable parameters.
Court Doesn’t Buy Trade Secret Claims
Oberfoell also contended that Kyte violated the Minnesota Uniform Trade Secrets Act by appropriating their client list, training manuals, processes, and documents.
To have information protected as a trade secret, the information must (1) not be generally known or readily ascertainable by others, (2) derive independent economic value from secrecy, and (3) be the subject of efforts that are reasonable under the circumstances to maintain secrecy.
In this instance, the Appeals Court found that Oberfoell’s business information “is not overly complex, is generally known and is readily ascertainable” and that they did not take reasonable steps to protect its secrecy. For example:
– The client list was available to all employees, as well as independent contractors and an outside vendor who provided services to Oberfoell;
– Copies of the seller list were available on front desk computers, which were accessible without passwords, and all salespeople had access to this list upon request;
– Hard copies of the seller list were available in the reception areas of its offices, where members of the public had access and might see the list;
– Employee and independent contracts were never asked to sign a confidentiality policy; and
– Training manuals, processes, and documents were never marked “confidential,” were distributed to Oberfoell’s employees and its affiliates, and were not password protected.
This case reminds us of several important factors in the enforceability of non-compete agreements. First, non-competes cannot be used for just any job. There must be some interest that the employer needs to protect in order to maintain a fair competitive position against the departing employee (e.g. the chance for a new sales employee to build a relationship with customers before the departed sales employee can solicit them).
In addition, for information to be a protectable trade secret, it must be treated like a secret by identifying it as confidential, restricting access to it and insuring that others understand their obligations to maintain its confidentiality.
Finally, as always noncompetes must be reasonable in their duration and geographic scope.
If an employer tries to enforce an agreement that does not satisfy these requirements, a court is likely to just consign it to the dustbin.