Home | Minnesota Legislature Bans Non-compete Agreements
Minnesota Legislature Bans Non-compete Agreements
MINNESOTA LEGISLATURE BANS NON-COMPETE AGREEMENTS
"Whether it's Google or Apple or free software, we've got some fantastic competitors and it keeps us on our toes." -Bill Gates
***
Several months ago, we wrote about the Federal Trade Commission’s proposal to ban non-compete agreements in most employment contracts. That proposal is still pending. But this month, the Minnesota Legislature enacted a new law that does the same thing: bans non-compete agreements in most employment agreements. A senior policy analyst at the Minneapolis Federal Reserve Bank testified that an estimated 350,000 Minnesotans currently work under employment contracts with non-compete provisions.
The Basics. The new law states that a covenant not to compete is void and unenforceable. A “covenant not to compete” is an agreement that restricts an employee, after termination from employment, from performing work for another employer (1) for a specified period of time, (2) in a capacity similar to the employment with the current employer, or (3) within a specified geographical area. This prohibition extends to individuals who are independent contractors (i.e., who receive Form 1099s), as well as to employees (i.e., who receive W-2s).
How Minnesota Stacks Up. A growing list of states, such as Colorado, Illinois, Maine, Virginia, and others, prohibit non-compete agreements for lower wage earners. Other states limit non-compete agreements in certain industries. For example, the legislature and courts in Iowa have restricted the use of non-compete agreements for certain health care professionals. Three states—California, North Dakota, and Oklahoma, plus the District of Columbia—broadly prohibit the enforcement of most non-compete agreements. Minnesota now joins them with a broad ban.
Non-Solicitation and Confidentiality Agreements Okay. Non-disclosure agreements or agreements designed to protect trade secrets or confidential information are not prohibited. Similarly, non-solicitation agreements, or agreements restricting a former employee’s ability to use client or contacts lists or solicit customers of the employ are still permitted. This means that employers and businesses that contract with persons who are independent contractors may enter into confidentiality agreements to protect confidential information and may prohibit former employees from soliciting customers of the current employer.
The boundaries of how far confidentiality and non-solicitation provisions may reach under the new statute, however, will be defined by the courts in the months and years ahead. A provision that “overreaches” or that has the practical effect of stopping a departed employee from obtaining post-termination employment in an industry—even if given another name—will likely come under scrutiny.
Sale of Business Exceptions. The new law does not prohibit non-compete agreements agreed to during the sale of a business. However, those agreements must be “for a reasonable length of time” and “within a reasonable geographic area.” While there is already caselaw in Minnesota interpreting whether time and geographic restrictions are reasonable, the courts will be called on to define the boundaries of reasonableness under the new law. Similarly, when a business is dissolved, its members, shareholders may agree not to carry on a similar business within a reasonable geographic area.
Circumvention and Enforcement. An employer may not require an employee who primarily resides and works in Minnesota to agree to a provision that would require the employee to have their rights under the new law decided in another state or under another state’s laws. An employer may not ask an employee to waive their right to the substantive protections of the statute. A court may award reasonable attorneys’ fees to an employee who enforces their rights under the statute. If a law contains a void and unenforceable non-compete agreement, only the impermissible covenant—and not the whole contract—is void.
Next Steps. Companies should review their current employment agreement templates and templates with individuals who are independent contractors to make sure they conform to the new law. Non-compete provisions should be removed from such template contracts and forum selection/choice of law provisions for Minnesota employees may need to be updated.
Companies should also review any current confidentiality and non-solicitation agreements and NDAs for compliance and sufficiency. Companies may also wish to take the new law into consideration when strategizing whether to enforce existing non-compete agreements in court. While the new law applies to contracts entered into on or after July 1, courts have become increasingly skeptical of non-compete agreements in recent years and, depending on the facts, may look even more skeptically at a lawsuit to enforce a non-compete agreement in an older contract in light of the public policy expressed in the new statute.
The law firm of Swanson Hatch, P.A. represents businesses and professionals in regulatory, compliance, litigation, and enforcement matters, among other things. The firm regularly represents and advises businesses and individuals in matters involving non-compete and non-solicitation provisions. Prior to her twelve years as Minnesota Attorney General, Lori Swanson previously served as Solicitor General and Deputy Attorney General of the State of Minnesota and chaired the Federal Reserve Board’s Consumer Advisory Council in Washington, D.C. Before he became Attorney General, Mike Hatch previously served as Commissioner of the Minnesota Department of Commerce for eight years, where he was the primary regulator of the insurance, real estate, mortgage, and financial industries in Minnesota. Lori Swanson can be reached at lswanson@swansonhatch.com, or at 612-315-3037. Mike Hatch can be reached at mhatch@swansonhatch.com, or at 612-315-3037. The firm’s website is www.swansonhatch.com .
***
www.swansonhatch.com
431 S Seventh Street, Suite 2545
Minneapolis, MN 55415 612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
Several months ago, we wrote about the Federal Trade Commission’s proposal to ban non-compete agreements in most employment contracts. That proposal is still pending. But this month, the Minnesota Legislature enacted a new law that does the same thing: bans non-compete agreements in most employment agreements. A senior policy analyst at the Minneapolis Federal Reserve Bank testified that an estimated 350,000 Minnesotans currently work under employment contracts with non-compete provisions.
The Basics. The new law states that a covenant not to compete is void and unenforceable. A “covenant not to compete” is an agreement that restricts an employee, after termination from employment, from performing work for another employer (1) for a specified period of time, (2) in a capacity similar to the employment with the current employer, or (3) within a specified geographical area. This prohibition extends to individuals who are independent contractors (i.e., who receive Form 1099s), as well as to employees (i.e., who receive W-2s).
How Minnesota Stacks Up. A growing list of states, such as Colorado, Illinois, Maine, Virginia, and others, prohibit non-compete agreements for lower wage earners. Other states limit non-compete agreements in certain industries. For example, the legislature and courts in Iowa have restricted the use of non-compete agreements for certain health care professionals. Three states—California, North Dakota, and Oklahoma, plus the District of Columbia—broadly prohibit the enforcement of most non-compete agreements. Minnesota now joins them with a broad ban.
Non-Solicitation and Confidentiality Agreements Okay. Non-disclosure agreements or agreements designed to protect trade secrets or confidential information are not prohibited. Similarly, non-solicitation agreements, or agreements restricting a former employee’s ability to use client or contacts lists or solicit customers of the employ are still permitted. This means that employers and businesses that contract with persons who are independent contractors may enter into confidentiality agreements to protect confidential information and may prohibit former employees from soliciting customers of the current employer.
The boundaries of how far confidentiality and non-solicitation provisions may reach under the new statute, however, will be defined by the courts in the months and years ahead. A provision that “overreaches” or that has the practical effect of stopping a departed employee from obtaining post-termination employment in an industry—even if given another name—will likely come under scrutiny.
Sale of Business Exceptions. The new law does not prohibit non-compete agreements agreed to during the sale of a business. However, those agreements must be “for a reasonable length of time” and “within a reasonable geographic area.” While there is already caselaw in Minnesota interpreting whether time and geographic restrictions are reasonable, the courts will be called on to define the boundaries of reasonableness under the new law. Similarly, when a business is dissolved, its members, shareholders may agree not to carry on a similar business within a reasonable geographic area.
Circumvention and Enforcement. An employer may not require an employee who primarily resides and works in Minnesota to agree to a provision that would require the employee to have their rights under the new law decided in another state or under another state’s laws. An employer may not ask an employee to waive their right to the substantive protections of the statute. A court may award reasonable attorneys’ fees to an employee who enforces their rights under the statute. If a law contains a void and unenforceable non-compete agreement, only the impermissible covenant—and not the whole contract—is void.
Effective Date. The statute is effective on July 1, 2023 and applies to contracts entered into on or after that date. The statute will be codified at Minn. Stat. § 181.988. It is contained in Article 6 of S.F. 3035 (the lengthy Jobs and Economic Development and Labor Omnibus Budget Bill) and available online at https://www.revisor.mn.gov/bills/text.php?number=SF3035&version=latest&session=ls93&session_year=2023&session_number=0.
Next Steps. Companies should review their current employment agreement templates and templates with individuals who are independent contractors to make sure they conform to the new law. Non-compete provisions should be removed from such template contracts and forum selection/choice of law provisions for Minnesota employees may need to be updated.
Companies should also review any current confidentiality and non-solicitation agreements and NDAs for compliance and sufficiency. Companies may also wish to take the new law into consideration when strategizing whether to enforce existing non-compete agreements in court. While the new law applies to contracts entered into on or after July 1, courts have become increasingly skeptical of non-compete agreements in recent years and, depending on the facts, may look even more skeptically at a lawsuit to enforce a non-compete agreement in an older contract in light of the public policy expressed in the new statute.
www.swansonhatch.com
431 S Seventh Street, Suite 2545
Minneapolis, MN 55415
612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
Disclosure | Unsubscribe
Swanson | Hatch, P.A.
431 S. 7th Street, Suite #2545
Minneapolis, MN 55415
612-315-3037
www.swansonhatch.com