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Business Law for Banks 101: Non-Compete Agreements

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With the recent flood of mergers and acquisitions in the banking industry and the ever present movement of bankers from one bank to the next, non-compete agreements are being used more now than ever before.  However, despite their wide spread use, many bankers do not have a clear idea whether and to what extent non-competes are even enforceable.

Under Minnesota law, non-compete agreements are enforceable if properly written, but Minnesota courts disfavor their use and closely scrutinize them.  Speaking generally, if the agreement is clear, reasonable and supported by adequate consideration it will be enforced.  If it is not, then it may be invalidated entirely or a court may reform it to be more reasonable. 

So, what does it mean for a non-compete agreement to be “clear”?  Basically, it means the agreement needs to spell out precisely what the employee cannot do in the future, for how long, and where.  Example, saying “the employee cannot work as a commercial lender for 1 year after the termination of employment anywhere within a 50 mile radius of the bank” is far clearer and more enforceable that simply saying “employee is prohibited from competing against employer.”

Next, what does it mean to be “reasonable”?  While the concept of “reasonableness” is very elusive, basically it means that agreement’s duration is for 3 years or less, that it covers only the activities the employee actually engaged in during employment, and that it has a limited geographic scope (usually within 100 miles of the job site).  Simplified further – does the agreement seem fair on a gut level or did the lawyer who drafted it make it unnecessarily over protective?

Finally, what does it mean to be “supported by adequate consideration”?  It means that the employee was given something of value for entering into the agreement.  For new employees, simply getting the job is enough.  For existing employees who do not yet have a non-compete agreement, mere continuation of employment is not enough.  Instead, that existing employee must be given some type of independent consideration, such as a sum of money, in order for the non-compete agreement to be enforceable.

While there are many more subtle nuances to the analysis, the bottom line is this – if the non-compete is fair, reasonable and supported by adequate consideration it will be enforceable.  If not, the agreement may be subject to legal challenge and potential invalidation or reformation.