Will a North Dakota court enforce this non-competition or non-solicitation covenant?
Almost never, outside two narrow exceptions. N.D.C.C. § 9-08-06 provides: "A contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void, except:" (1) a seller of a business's goodwill, together with "the person's partners, members, or shareholders," may agree with the buyer to refrain from competing within a reasonable geographic area and for a reasonable time, so long as the buyer keeps operating a like business there; and (2) partners, members, or shareholders may agree not to compete upon or in anticipation of a dissolution, or a partner's or member's dissociation, again within a reasonable geographic area. Warner Co. v. Solberg confirms North Dakota's courts apply the statute strictly rather than reading in a general reasonableness exception the way many other states do: the Supreme Court "decline[d]" to follow California decisions and an Eighth Circuit prediction under North Dakota law that let "less burdensome restrictions" survive, explaining that decision rested on "the plain language of the statute, the history of legislation in North Dakota concerning this issue, and because North Dakota has enacted trade-secrets legislation." The Court affirmed the judgment in part, reversed it in part and remanded: the clauses barring an attempt to affect the discontinuance of existing business and the writing of replacement policies were void, while the clause barring solicitation of the employer's own employees was not, and whether the employee's stock sale brought her inside the goodwill exception failed as a matter of law only because what she sold was 500 of 100,000 shares.
The trap
North Dakota has no general ancillary-and-reasonable safe harbor for an ordinary employee non-compete the way Texas, Idaho, or most other states do, and narrow drafting is not an answer. Warner v. Solberg held that a clause barring only an attempt to "affect the discontinuance" of the employer's existing business, "although more narrowly drawn" than the broad bans in the earlier cases, "nevertheless does not escape the broad prohibition in N.D.C.C. § 9-08-06, nor does the provision fall within the two exceptions allowed by that statute." Two things close to a non-compete did survive there, and a drafter should keep them apart from it: a clause barring solicitation of the employer's own EMPLOYEES, which the Court held "is not void as a restraint of trade," and the remainder of an agreement after an offending clause is cut out, because "it is well settled that if an unreasonable restraining clause can be separated leaving a reasonable agreement, it is valid to do so." The two exceptions have since been amended: the version Warner quoted in 2001 let a goodwill-seller agree not to compete only "within a specified county, city, or a part of either"; the current text instead allows a "reasonable geographic area" and expressly covers LLC members and corporate shareholders, not just partners: the amendment widened who may use the two exceptions and how their scope is measured, without creating any new exception for an ordinary employment non-compete.
13 authorities
- statuteN.D.C.C. § 9-08-06enactment date not established
The words that state the rule
A contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void, except:
- statuteN.D.C.C. § 9-08-06enactment date not established
The words that state the rule
A person that sells the goodwill of a business and the person's partners, members, or shareholders may agree with the buyer to refrain from carrying on a similar business within a reasonable geographic area and for a reasonable length of time, if the buyer or any person deriving title to the goodwill from the buyer carries on a like business in that area.
- statuteN.D.C.C. § 9-08-06enactment date not established
The words that state the rule
Partners, members, or shareholders, upon or in anticipation of a dissolution of a partnership, limited liability company, or corporation; upon or in anticipation of a dissociation of a partner or member; or as part of an agreement addressing the dissociation or sale of a partner, member, or shareholder's ownership interest, may agree that all or any number of them will not carry on a similar business within a reasonable geographic area where the partnership, limited liability company, or corporation business has been transacted, or within a specified part of the area.
The words that state the rule
The activity prohibited in Paragraph 6(a) of the agreement Solberg signed is any “attempt to affect the discontinuance” of any of Warner’s existing insurance business.
The words that state the rule
We hold a portion of the contract does violate N.D.C.C. § 9-08-06 and there are genuine issues of material fact precluding summary judgment with respect to the remaining portions of the contract. We affirm the judgment in part, reverse the judgment in part, and remand for further proceedings.
The words that state the rule
Recognizing this Court has applied N.D.C.C. § 9-08-06 to invalidate clauses in employment agreements that absolutely bar an employee from competing with a former employer or working for a competitor, the United States Court of Appeals for the Eighth Circuit, applying *71 North Dakota law, concluded less burdensome restrictions may survive.
The words that state the rule
Because of the plain language of the statute, the history of legislation in North Dakota concerning this issue, and because North Dakota has enacted trade-secrets legislation, we decline to do so.
The words that state the rule
Section 9-08-06, N.D.C.C., declares contracts that constitute a restraint of business are void, with two exceptions: Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void, except: 1. One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within a specified county, city, or a part of either, so long as the buyer or any person deriving title to the goodwill from him carries on a like business therein. 2. Partners, upon or in anticipation of a dissolution of the partnership, may agree that all or any number of them will not carry on a similar business within the same city where the partnership business has been transacted, or within a specified part thereof.
The words that state the rule
In contrast, Paragraph 6(a) of the contract between Warner and Solberg limits agents from leaving one agency and converting the same policies of the same customers to a new agency. Nevertheless, Paragraph 6(a), although more narrowly drawn than those in Werlinger, Spectrum and Olson , nevertheless does not escape the broad prohibition in N.D.C.C. § 9-08-06, nor does the provision fall within the two exceptions allowed by that statute.
The words that state the rule
These limitations constitute a restraint of trade and therefore the agreement is “to that extent void.” N.D.C.C. § 9-08-06. See Hawkins Chemical, Inc. v. McNea, 321 N.W.2d 918, 920 (N.D.1982) (stating “it is well settled that if an unreasonable restraining clause can be separated leaving a reasonable agreement, it is valid to do so”).
The words that state the rule
Paragraph 6(c) prohibits Solberg from soliciting or seeking to influence any employee of Warner to become the employee of Vaaler. This prohibition is narrowly drawn to penalize only Solberg’s actions of soliciting or influencing an employee to leave Warner and come to work for Vaaler and is not void as a restraint of trade.
The words that state the rule
Solberg’s sale of stock can constitute a sale of goodwill qualifying for the exception. Ordinarily, it is a question of fact whether the sale of stock was sufficiently connected to the agreement. Although the sale of stock can be less than a majority interest to qualify as a sale of goodwill sufficient for the exception, it is ordinarily a question of fact whether the sale of stock was sufficient to constitute a sale of goodwill. We believe the sale of only a small amount of stock may not be sufficient to qualify for the goodwill exception to N.D.C.C. § 9-08-06.
The words that state the rule
Solberg sold 500 of the 100,000 shares of stock issued in Warner. We agree with the trial court that, as a matter of law, the sale of a l/200th interest cannot be said to transfer the goodwill of the business.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.