Minnesota Is Poised to Enact a Law Banning Virtually All Non-Compete Agreements
Posted: May 15, 2023
A proposed law banning virtually all covenants not to compete (also known as non-compete agreements) is headed to the Minnesota State Senate and House of Representatives, where it is widely expected to pass.
Once it arrives on Governor Tim Walz's desk, he is almost certain to sign the proposed bill into law. With the enactment of a law banning non-compete agreements, Minnesota would join the ranks of California, Oklahoma, and North Dakota as the fourth state to make non-compete agreements completely void and unenforceable by statute. This development would materially impact Minnesota employers' ability to protect their trade secrets, confidential business information, and other intellectual property. If the proposed bill becomes law as expected, Minnesota employers would need to take immediate action to address this seismic change and implement new strategies to protect their invaluable intellectual property, customer relationships, and investment in employee training.
Minnesota's Ban on Non-Compete Agreements Is Expansive in Scope
The proposed Minnesota law is sweeping in scope. If passed in its current form, the bill would prohibit all non-compete agreements with an employee or independent contractor working for the employer. Unlike other states that have passed laws that restrict non-compete agreements only with employees earning below a certain salary or income threshold, the proposed Minnesota law creates a complete prohibition on non-compete agreements between the employer and workers, regardless of the person's income. This means that employers would no longer have the ability to restrict even C-Suite executives or key employees from working for a competitor — despite that these employees are the ones most likely to have access to the trade secrets and highly sensitive information that would be most valuable to a competitor. As a result, the proposed law would dramatically disincentivize businesses from making and keeping their headquarters in Minnesota, where they would have far more difficulty safeguarding trade secret and highly sensitive information from competitors.
The proposed Minnesota law provides for only two limited exceptions to the ban on non-compete agreements. The proposed bill does not outlaw non-competition agreements that are agreed to (1) during the sale of a business where the agreement prohibits the seller from carrying on a similar business within a reasonable geographic area for a reasonable period of time; or (2) in anticipation of the dissolution of a business in which the dissolving partnership or entity agrees that the partners, members, or shareholders will not carry on a similar business in a reasonable geographical area for a reasonable period of time. In all other respects, the law makes clear that any covenant not to compete contained in any contract is void and unenforceable.
It is noteworthy that inclusion of an otherwise void or unenforceable covenant not to compete in an agreement with a Minnesota employee would not render the entire agreement unenforceable. The proposed law banning non-compete agreements provides that only the impermissible covenant would be rendered void, not the entire contract in which the non-compete agreement is contained. However, the proposed law expressly allows a court to award attorneys' fees to an employee that is required to enforce their rights under the law, meaning that employers would be well advised to remove impermissible non-compete agreements from contracts with employees to avoid exposure to an attorneys' fee award.
Customer Non-Solicitation and Confidentiality Non-Disclosure Agreements Remain Enforceable
There may be one silver lining in which Minnesota employers can take some comfort. The proposed Minnesota law's definition of a "covenant not to compete" does not include nondisclosure, confidentiality, trade secret, or non-solicitation agreements, expressly including agreements with employees restricting their ability to use client or contact lists or restricting the solicitation of customers after employment ends. This is an important point, as it leaves intact a powerful tool that employers commonly use to protect customer relationships that the employee was compensated to cultivate on the employer's behalf, namely, post-employment restrictive covenants that prohibit the employee from stealing customers that they solicited on behalf of the employer.
Further, the ability to protect a company's confidential information by contract allows employers to mitigate the risk of losing business-critical information that may not otherwise merit protection as a trade secret. This will make it easier for companies to protect their intellectual property by contract and allow enforcement through breach of contract claims (which are generally easier to prove than trade secret claims under either the federal Defend Trade Secrets Act or the Minnesota Uniform Trade Secrets Act). While not nearly as effective as non-compete agreements (that prevent the employee from being in a position to disclose the information to a competitor in the first place), the ability to continue to include post-employment restrictions on solicitation of clients/customers and disclosure of confidential information is a critical victory for Minnesota employers.
Non-Minnesota Forum Selection Clauses
Minnesota's proposed non-compete ban also includes limitations on the right of Minnesota employers to contract with employees to have a non-Minnesota forum decide disputes with employees or apply non-Minnesota law. The proposed law prohibits employers from requiring employees who reside and work in Minnesota to agree, as a condition of employment, to a provision in an employment agreement that (1) requires the employee to adjudicate a claim arising in Minnesota outside of Minnesota; or (2) deprives the employee of the substantive protection of Minnesota law with respect to any dispute arising in Minnesota. Notably, the ban on foreign choice of law and forum selection clauses does not apply just to non-compete agreements. The proposed ban on foreign choice of law and forum selection clauses applies to all contracts between an employer and an employee (including, for example, permissible customer non-solicitation agreements and confidentiality non-disclosure agreements). Many employers in Minnesota that do not currently use non-compete agreements would still need to amend template agreements to comply with this part of the proposed law.
When Would the Ban of Non-Compete Agreements Become Effective?
Assuming the current bill passes both houses of the Minnesota Legislature and Governor Walz signs it into law, the provisions will take effect on July 1, 2023.
What About an Employer's Existing Non-Compete Agreements with Employees?
The proposed law is not retroactive in effect, meaning that any agreements entered into between employers and employees before the effective date would remain enforceable in Minnesota. And unlike the rule proposed by the FTC to ban non-competes, the Minnesota bill would not require that employers notify all employees of the rescission of non-compete agreements that were signed prior to the effective date. The proposed law prohibits employers only from prospectively requiring employees to enter into agreements containing covenants not to compete. Thus, non-compete agreements entered into prior to the effective date of the new law would continue to be evaluated by Minnesota courts based on the established body of case law providing for enforcement of covenants not to compete that are reasonable in scope.
Next Steps for Minnesota Employers with Non-Compete Agreements
There are a whole host of questions that remain unanswered by Minnesota's proposed ban on non-compete agreements, questions that will likely need to be answered by the courts in the coming years. But the gravity of the proposal is clear — going forward, if the bill is signed into law, companies operating in Minnesota would no longer be allowed to rely on non-compete agreements as one of the primary means of allowing a competitor to gain an unfair competitive advantage.
Accordingly, Minnesota employers can begin to take action in anticipation of the possible July 1 effective date by:
- Conducting an audit of the current employee population to determine who currently is subject to a non-compete agreement and evaluating whether the company needs to take additional measures to mitigate the risk of key employees leaving for a competitor (such as, for example, by offering retention incentives or other compensation and benefits to incentivize the employee to remain). Given the risk that pre-existing non-compete agreements may be subject to greater vulnerability to challenge than in the past, relying on pre-existing non-compete agreements with key employees may not be a sound strategy;
- Reviewing template agreements to remove non-compete provisions and addressing forum selection/choice of law provisions that may apply to Minnesota employees;
- Ensuring that any customer non-solicitation and confidentiality provisions are robust and provide meaningful protection of customer relationships, goodwill, and the employer's trade secrets and other intellectual property; and
- Preparing for the post-non-compete world in Minnesota. Minnesota employers would no longer be able to prevent employees from disclosing trade secrets and confidential information with the same certainty provided by a non-compete agreement. Employers would need to reevaluate employee access to trade secrets and consider different strategies to ensure that employees have access only to information that is truly necessary for performing their jobs. This may mean implementing new digital resources that limit, control and track access to critical company information to mitigate the risk of confidential information leaking out the door when employees leave for competitors.
We will continue to monitor developments in Minnesota and will provide an update if the bill is signed into law. We also intend to conduct a complimentary client webinar when and if the bill is signed into law to discuss the impact of the new law and strategies companies should consider to protect the competitive advantage provided by maintaining secrecy of their trade secrets and other confidential information. But one thing seems relatively certain: the potential passage of Minnesota's ban on non-competes would change the competitive landscape for employers. All Minnesota companies may need to rethink their strategy for protecting their most valuable trade secrets, confidential information, and customers.
Posted In: Human Resources, General; Minnesota; Non-Compete Clause (Restrictive Covenant)
Want to know more? Read the full article by Jeremy D. Sosna, Kurt J. Erickson, and Margaret Fitzpatrick at Littler Mendelson