Minnesota is set to ban noncompete provisions in employment contracts as part of a new omnibus bill headed to Governor Tim Walz’s desk. The bill will have a significant impact on Minnesota employers by banning true employment noncompete provisions entered into on or after July 1, 2023, but this bill would not apply retroactively to existing noncompete provisions and also would not apply to other common types of provisions used by Minnesota employers to protect trade secrets, to protect confidential information, and to protect against soliciting customers or employees.
Quick Hits
- Minnesota legislature passes ban on covenants not to compete between employers and employees.
- The ban, if enacted, would exclude nondisclosure agreements, agreements to protect trade secrets or confidential information, and agreements not to solicit customers or employees.
- This ban would not invalidate noncompete agreements entered into before July 1, 2023.
Covenants Not To Compete
On May 17, 2023, the Minnesota legislature forwarded omnibus bill SF 3025, which includes a ban on employee noncompete provisions, to Governor Tim Walz’s desk. Specifically, these provisions would make any future “covenant not to compete contained in a contract or agreement … void and unenforceable.” The bill defines a “covenant not to compete” as an agreement between an employer and an employee “that restricts the employee, after termination of the employment, from performing:
- work for another employer for a specified period of time;
- work in a specified geographic area; or
- work for another employer in a capacity that is similar to the employee’s work for the employer that is party to the agreement.”
Exclusions
Covenant not to compete provisions would still be valid if they are reached as part of the “sale of a business” or in the “anticipation of the dissolution of a business.” Under the bill, the seller of a business or the former parties involved in a business accordingly can be restricted from forming a competing business “within a reasonable geographic area and for a reasonable length of time.”
But perhaps more importantly for employers, the bill would specifically exclude the following:
A covenant not to compete does not include a nondisclosure agreement, or agreement designed to protect trade secrets or confidential information. A covenant not to compete [also] does not include a nonsolicitation agreement, or agreement restricting the ability to use client or contact lists, or solicit customers of the employer.
This exclusion is a critical saving grace for employers, as it would still allow Minnesota employers to protect against a former employee’s solicitation of customers or employees. This exclusion also would still allow Minnesota employers to protect against the taking or using of confidential information, trade secrets, client lists, and contact lists. Notably, a high percentage of restrictive covenant lawsuits, arbitrations, and informal disputes include allegations that the former employee is soliciting clients or employees. Thus, Minnesota employers would continue to have some vital tools to protect against the theft of business by former employees.
Plus, this bill states that it shall not be “construed to render void or unenforceable other provisions in a contract or agreement containing a void or unenforceable covenant not to compete.” This language presumably means that an unlawful noncompete provision would not render an otherwise lawful agreement (including an agreement with nonsolicitation or confidentiality provisions) to be unenforceable.
Choice of Law and Remedies
The bill would prohibit employers from requiring that an employee who “primarily resides and works in Minnesota” agree to (as a condition of employment) a provision that either requires a claim or controversy arising in Minnesota to be adjudicated (in litigation or arbitration) outside of Minnesota or deprives an employee of the “substantive protection for Minnesota law.” Any such provision is voidable “at any time by the employee,” and the resulting matter shall be decided in Minnesota under Minnesota law.
The bill further allows courts to award an employee enforcing their rights to “reasonable attorney fees,” in addition to injunctive relief and other available remedies.
No Retroactivity
The bill, if enacted, will be effective July 1, 2023, and will only apply to contracts agreed and entered into after that date. Thus, noncompete provisions entered into before July 1, 2023, would still be valid and enforceable (provided they meet the longstanding common law requirements of noncompete provisions, including being narrowly tailored to protect the employer’s legitimate business interest, etc.).
Next Steps
The Minnesota noncompete ban, once enacted, would have a significant impact on employers that regularly use noncompete agreements with employees to protect their businesses. Unlike other noncompete restrictions in other states, this bill does not contain an income threshold that would allow noncompetes for employees who have an income over a certain amount (e.g., $200,000) to be enforceable.
Although Minnesota employers may still protect against the theft of confidential information, theft of customers, and theft of employees, if the governor signs this bill, employers would have fewer options for protecting against senior executives—who may not control customer relationships but who do run the business—from immediately joining a competing business. Otherwise stated, employers would still be able to protect against stolen customers by sales employees, but it is possible that employers would no longer be able to adequately protect against the company president jumping ship to run a competing business (while knowing the strategies and confidential information of the company).
As a result of this seismic shift in Minnesota noncompete law, employers may want to review their template restrictive covenant agreements and (1) remove any true noncompete provisions; and (2) bolster any (or add a) provision prohibiting solicitation of customers and employees, along with a confidential information provision. Employers may also want to remind employees who signed an agreement with noncompete provisions prior to July 1, 2023 that they are still subject to those provisions, particularly for employees who leave a company.
