Minnesota Governor Tim Walz is poised to sign an omnibus bill recently passed by the Minnesota state legislature, which includes provisions that would broadly ban non-competition agreements throughout Minnesota beginning on July 1, 2023. Once the bill is signed into law, Minnesota will become the fourth state in the country to have a similar ban on non-competition agreements, joining California, North Dakota and Oklahoma.
What types of agreements are included?
The bill’s prohibition covers all standard non-competition agreements that restrict an employee from working for a competitor or working in a certain region for a specified time. The bill defines “covenant not to compete” as an agreement that prohibits a former employee, after termination of employment, from:
- working in a specified geographic area;
- working for another employer for a specified period of time; or
- working for another employer in a similar area of work.
The bill also applies to any individual who performs services for an employer including both employees and independent contractors.
What types of agreements are excluded?
The new law will be broad in scope, but does provide two exceptions:
- The ban does not apply to non-competition agreements agreed upon during the sale of a business within a reasonable geographic area and during a reasonable length of time.
- The ban also does not apply to non-competition agreements agreed upon in anticipation of the dissolution of a business. This means that partners, members, or shareholders of a business can agree that all or any number of the parties will not carry on a similar business within a reasonable geographic area and for a reasonable length of time.
In addition to the above exceptions, the Legislature included language stating that this law will not apply to non-disclosure agreements, or agreements designed to protect trade secrets or confidential information. Covenants not to compete would not include non-solicitation agreements, which are broadly defined as agreements restricting the ability to use client or contact lists, or solicit customers of the employer. This means that there will still be ways that businesses can protect themselves against unfair competition from former employees. These provisions are likely to be the focus of future disputes between employers and employees/contractors. Employers should pay close attention to the language they use to protect their trade secrets and other critical business information.
What about forum selection clauses?
The bill bans the use of a state forum clause that would require an employee to agree to a different state as either (i) the forum of a dispute or (ii) as the choice of law as a “condition of employment.” As a result, employers will not be able to avoid Minnesota’s ban on non-competes by simply using a different forum for its Minnesota employees/contractors. In light of this, all employers should review their current contracts for forum clauses and also review template agreements that may currently provide for a different state’s forum (for Minnesota employees/contractors).
When does the law go into effect?
The law will apply to all agreements effective on or after July 1, 2023. The law will not be retroactive, which means current employment agreements that contain non-competition agreements will still be valid.
What are the consequences if an agreement with an employee contains a non-compete clause?
After July 1, 2023, any “covenant not to compete” entered into with an employee working in Minnesota will be void and unenforceable. However, the law will not invalidate the entire contract that contains a non-compete clause; only the impermissible clause will be invalidated. Nonetheless, employers should carefully review any employment agreements moving forward, because the bill explicitly provides that the employer may be liable for reasonable attorneys’ fees incurred by an employee who enforces their rights under the law.
Suggested next steps
- Review your existing non-competition agreements. These agreements are still in effect, but may be harder to enforce given the current state of the law in Minnesota. Also review the language of any non-disclosure, non-solicitation, and confidentiality agreements, as those provisions are likely to be on more solid footing before a court.
- Revisit your policies and procedures related to the protection of trade secret information, to ensure you have strong measures in place to protect valuable trade secret information.
- Review your template documents for employment and independent contractor agreements, and look to strengthen language in the non-disclosure, non-solicitation, and confidentiality provisions.
- Review template documents and change any forum selection clauses that require a non-Minnesota forum for Minnesota employees/contractors.
- Review your template documents to remove non-competition language and provisions for Minnesota employees and independent contractors.