In May of 2023, Minnesota enacted a new law that broadly bans employee non-compete agreements with few exceptions and also limits the use of forum-selection and choice-of-law clauses in employment agreements. You can read that law here (jump to 66.12).
Note: the Federal Trade Commission is also contemplating a ban on employee non-compete agreements, but we don't know what that will look like until the final rule is published. We've written about the FTC's proposed rule here and here.
In other words, Minnesota is the new California, which already broadly bans non-competes and prevents employers from getting around California law with forum-selection and choice-of-law clauses to obtain a more favorable law or a more receptive judicial audience outside the state. We've been advising both employers and employees on California's non-compete law for almost a decade.
That isn't to say Minnesota's law is now exactly the same as California's, which we've discussed at length in the past. Here's a quick and dirty run-down of Minnesota's new law.
- Minnesota's new non-compete law becomes effective July 1, for new agreements only
Minnesota's new non-compete law becomes effective July 1, 2023. But it only applies prospectively, i.e. to agreements executed on July 1, 2023 or later. This means that employers can still seek to enforce their existing employment non-compete provisions.
It's important to keep in mind, though, that a sea change in legislative policy like this can often affect judicial decisions relating to the old policy (i.e. existing agreements) down the road. When the Minnesota courts get used to the new paradigm, their view of the old paradigm is likely to change.
- Minnesota's new non-compete ban is broad
The ban is quite broad-it prohibits all non-compete agreements between employers and employees, including executives, those who otherwise have access to trade secrets and other proprietary information, and those who could take considerable customer goodwill with them when they leave.
It also applies to workers, whether they are employees or independent contractors.
There are two direct exceptions: non-competes in connection with the sale of a business, and non-competes in connection with the dissolution of a business.
- But Minnesota's new non-compete ban has limits
The new law is quite specific in two ways: it applies to "covenants not to compete" that apply to an employee's conduct "after termination of the employment."
Since the new law only covers "covenants not to compete," it applies only to (1) "work for another employer for a specified period of time," (2) "work in a specified geographical area" and (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". Further, the law specifically excludes some other types of agreements: nondisclosure agreements and other agreements to protect trade secrets, as well as nonsolicitation agreements.
And since the law only covers work "after termination of the employment," it does not apply to agreements not to compete during employment. Minnesota's law allows garden leave arrangements, which means employees remain employees for a certain amount of time, during which they are paid but do not work, and cannot compete.
- Minnesota's new non-compete law grants fees to prevailing employees
This is one area where Minnesota is doing something different than California: employees who prevail in enforcing their rights under the new law can recover attorney's fees from the employer. This means greater risk and a changed playing field for employers who seek to protect their business interests.
- Under Minnesota's new non-compete law, an unenforceable non-compete doesn't void the entire contract
Even if a provision of an employment agreement is found unenforceable as a prohibited non-compete, only the prohibited non-compete is void-not the entire contract.
- Minnesota businesses should act quickly
Minnesota businesses need to act quickly for a couple of different reasons. The first is that they need to bring their current agreements and templates into compliance with the law in less than 30 days.
The second is that employers often protected their interests with non-compete agreements, and they can't do so anymore. So it is important for those employers to incorporate an approach that is more targeted to protecting those interests. This means comprehensive nondisclosure agreements and non-solicitation agreements.
The third is that the law is brand new and has not been construed by the judicial branch. In California, broadly drafted restrictions that are not covenants not to compete per se can operate as an effective non-compete. Minnesota employers should take heed not to overreach because of the risk that the courts will later determine that agreements the employer thought were exempted are so broad that they are construed as covenants not to compete.
The good news is that while most Minnesota law firms are as new to this law as you are, Bona Law and I have been helping businesses protect their interests and avoid the risks of California's similarly broad non-compete prohibition for the last decade. We're here to help Minnesota businesses now.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
