Minnesota’s new law will take effect on July 1, 2023, prohibiting all noncompete agreements, except those entered during the sale of a business or in anticipation of the dissolution of a business. The law will not apply retroactively to void existing noncompete agreements and will not prohibit the continued use of non-solicitation, confidentiality, trade secret, or nondisclosure agreements

A renewed effort to ban noncompete agreements prevailed at the Minnesota legislature on Wednesday.  The new law will render void and unenforceable all future covenants not to compete, unless they meet certain limited criteria.  While this effort failed at last year’s legislative session, the new law has passed in the House and Senate and is headed to Governor Tim Walz for his signature, which he is almost certain to provide.  The law will take effect July 1, 2023, and will apply to all contracts and agreements entered into from that date forward.  The law will materially impact Minnesota employers’ ability to protect their confidential business information, trade secrets, and other intellectual property rights.

Noncompete agreements have historically been utilized to provide employers a way to protect trade secrets and proprietary information.  Until now, Minnesota did not have a statute directly restricting noncompetes, though they were generally disfavored under the law and only enforced by Minnesota state and federal courts to the extent necessary to protect legitimate business interests over confidential information and goodwill or relationships.  However, Minnesota’s move follows the Federal Trade Commission’s (FTC) recently proposed rule that would essentially ban noncompete clauses across the nation, as well as other states, like California, North Dakota, and Oklahoma which have already enacted statutes that render noncompete clauses void for almost all employees with very few exceptions.  Many states (Colorado, Illinois, Iowa, Kentucky, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington) have also acted short of an outright ban to restrict noncompetes, including by banning noncompete agreements for certain professions, low-wage workers or workers below a certain income threshold. 

Minnesota’s New Law Will Ban Most (But Not All) Noncompete Agreements

Minnesota’s new noncompete law will prohibit almost all noncompete agreements entered into with employees and independent contractors regardless of a person’s income, with the following limitations:

• The law does not apply retroactively and will not impact existing noncompete agreements.  The law will only ban noncompete agreements entered on or after July 1, 2023.  This is unlike the FTC effort to ban noncompetes, which, as proposed, would have a retroactive effect, and would require that employers notify all employees of the rescission of noncompete agreements that were signed prior to the effective date.    Existing noncompete agreements are expected to 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.
• The law bans all “covenants not to compete” which includes any agreement between an employee and employer that restricts the employee, after termination of the 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 party to the agreement.
• The law does not ban nondisclosure, confidentiality, trade secret, or non-solicitation agreements, and expressly excludes agreements with employees restricting their ability to use client or contact lists or restricting the solicitation of customers after employment ends.  While likely not as effective as noncompete agreements, 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.  This is particularly true where there is a trend in other states to ban these types of post-employment restrictions.
• The law does not apply to the sale of a business in which a noncompete agreement is reached between the buyer and seller of the business and is intended to prohibit the seller from carrying on a similar business within a reasonable geographic area for a reasonable period of time.
• The law does not apply in anticipation of the dissolution of a business in which the partners, members, or shareholders of the dissolving partnership, LLC, or corporation agree that all or any number of the partners, members, or shareholders will not carry on a similar business in a reasonable geographic area where the business operated.

Of note, the law does not render an entire agreement unenforceable if it otherwise contains a void or unenforceable covenant not to compete.  Only the impermissible covenant is rendered void.  In addition, the law provides that a court may award an employee enforcing rights under this law his or her reasonable attorney fees.

Despite being touted as broadly banning noncompete agreements, the law leaves a number of questions unanswered.  Notably, it does not include any restrictions on how long permissible noncompete agreements can last, or require that the noncompete include a territorial restriction, or a scope of activity restriction.  These concepts have been addressed by Minnesota courts, but it is unclear if this existing body of law will be applied to enforce noncompete agreements under Minnesota’s law.  The law also fails to address (1) whether noncompete agreements that are otherwise banned may be enforceable if they are designed to protect trade secrets and confidential information, (2) whether an employer may prohibit a former employee from performing unsolicited work for a former client; and (3) whether the sale of business exception allows a buyer to prohibit an individual seller from accepting employment with a competitor.  These questions will likely need to be answered by the courts in the coming years.

Next Steps

There is no need to wait until July 1.  Minnesota employers (including multi-state employers with Minnesota employees) should immediately take action to ensure that they have protections in place for their confidential information, customer relationships, and other goodwill in the form of non-solicitation, confidentiality, and nondisclosure agreements in Minnesota employment agreements.  Post-employment non-solicitation covenants that prohibit the employee from stealing customers that they solicited on behalf of the employer will be particularly crucial to protect customer relationships that the employee was compensated to cultivate on the employer’s behalf.  Employers may also want 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 and ultimately mitigate the risk of confidential information leaking out the door when employees leave for competitors.   

Employers should also review their current employee population to determine the work location and primary residence of their employees and identify which employees are subject to noncompete agreements and review the choice of law provisions contained in their employment agreements.  Employers should additionally review all template agreements and ensure that noncompete agreements are removed or otherwise revised, and choice of law provisions are revised to account for these impending changes to Minnesota law.

Finally, employers should continue to be mindful of the National Labor Relations Board’s (NLRB) recent decision in McLaren Macomb and subsequent guidance issued by the General Counsel of the NLRB, which reinstate a limit on the confidentiality, nondisclosure, and non-disparagement clauses that employers may include in severance agreements with most of their lower-level employees.  Although the NLRB is focused on confidentiality and non-disparagement provisions contained in severance agreements, the guidance may also apply to standard employee agreements containing noncompete or confidentiality provisions that are entered into at the start of or during employment.