The Legislature’s Prohibition of Covenants Not to Compete

On May 16, 2023, the Minnesota legislature issued a conference committee report on a bill that would render void and unenforceable “covenants not to compete” in agreements between employers and employees.  Governor Walz is expected to sign the bill into law imminently.  Assuming he does, Minn. Stat. § 181.988’s prohibition on covenants not to compete will be effective on July 1, 2023.  It will not apply to agreements entered into before that date.

So what, exactly, is a covenant not to compete?  The legislature has defined covenant not to compete as “an agreement between an employee and employer that restricts the employee, after termination of employment, from performing:  (1) work for another employer for a specified period of time; (2) work in a specified geographical area; or (3) work for another employer in a capacity that is similar to the employee’s work for the employer that is a party to the agreement.”

Such provisions have previously been enforced by Minnesota courts provided that the employer could demonstrate that the restrictions were supported by a legitimate business interest (i.e., protecting confidential information or customer goodwill) and that they were reasonably tailored, including in duration and geographic scope.  Many employers that have relied on non-compete provisions to protect their business interests for decades will have to choose a new approach. 

Exceptions to the Ban on Covenants Not to Compete

Minn. Stat. § 181.988 does leave some avenues to protect legitimate business interests open.  For example, it does not prohibit employers from requiring that employees refrain from moonlighting or competitive work while employed.  Moreover, the statute expressly indicates that covenants not to compete do not include confidentiality agreements and agreements that restrict the ability to solicit an employer’s customers.  

Section 181.988 is also limited to covenants not to compete with employees, broadly defined to include independent contractors.  Section 181.988 does not prohibit the use of covenants not to compete in agreements relating to the sale of a business.  Indeed, it expressly provides that sellers and buyers of a business may agree to a covenant not to compete provided that it is reasonable in geographic and temporal scope.  Similarly, the statute provides that covenants not to compete in anticipation of a business dissolution may be enforceable.  Presumably common law regarding the enforceability of restrictive covenants will continue to apply in the sale and dissolution contexts.

The Costs of Trying to Enforce an Unenforceable Covenant Not to Compete

Not only will covenants not to compete be unenforceable in Minnesota, but there will also be teeth to the prohibition.  The statute expressly permits both injunctive relief and an award of attorneys’ fees against an employer when an employee seeks to enforce their rights under Minn. Stat. § 181.988.

Prohibition on Attempting to Circumvent the Statute

Also noteworthy is Section 181.988’s language regarding choice of law and venue.  The statute expressly prohibits application of another jurisdiction’s choice of law in an effort to get around the protections found in the statute.  It similarly prohibits requiring an employee to adjudicate a claim arising in Minnesota in another state.  In the event that an employer purports to require application of another state’s law or litigation in another state, the employee may void the choice of law or forum at the employee’s election.

Next Steps

The statute leaves some potentially litigable issues unaddressed.  For example, how Minnesota courts will ultimately interpret undefined terms such as “nondisclosure agreement” and “nonsolicitation agreement,” which are permitted under the new statute, remains to be seen.  Minnesota courts will doubtlessly clarify the scope of the statute over the course of the coming years. 

Regardless, employers are well advised to discontinue the use of employment agreements containing covenants not to compete with Minnesota-based employees as of the end of June 2023.  Employers should also take stock of their other restrictive covenants, making appropriate revisions to better ensure the enforceability of their agreements and the protection of their legitimate business interests.