Minnesota Joins Growing Number of States Banning Non-Competes with Employees

In January, the Federal Trade Commission (FTC) proposed a new rule that would ban non-compete agreements across the United States. While the FTC’s proposed rule (or an altered version of it after a lengthy and extended comment period) has yet to become law, state non-compete laws continue to impact how employers do business. Effective July 1, 2023, Minnesota will join a growing number of states, including California, North Dakota and Oklahoma, banning the use of non-competes in employment agreements.

Specifically, MN SF 3035 prohibits agreements that restrict an employee, after termination, 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 previous employer.

Notably, Minnesota’s new law does not prohibit non-disclosure agreements, non-solicitation agreements (both of customers and employees), or agreements designed to protect trade secrets or confidential information.

Some Covenants Not to Compete Still Enforceable

While Minnesota’s new law aims to protect employees’ interests in obtaining employment after termination, it also appears to prioritize fair business dealings in the sale and/or dissolution of a business. To do so, MN SF 3035 permits a covenant not to compete as valid and enforceable if:

1. the covenant not to compete is agreed upon during the sale of a business. The person selling the business and the partners, members, or shareholders, and the buyer of the business may agree on a temporary and geographically restricted covenant not to compete that will prohibit the seller of the business from carrying on a similar business within a reasonable geographic area and for a reasonable length of time; or
2. the covenant not to compete is agreed upon in anticipation of the dissolution of a business. The partners, members, or shareholders, upon or in anticipation of a dissolution of a partnership, limited liability company, or corporation may agree that all or any number of the parties will not carry on a similar business within a reasonable geographic area where the business has been transacted.

Other Notable Aspects of the Minnesota Law

• Although the bill uses the word “employee,” employers that conduct any work within the state should be aware that “employee” includes any individual who performs services for an employer, including independent contractors. As a result, companies should review their independent contractor agreements to ensure that they comply with the new Minnesota law. Furthermore, as the bill does not include a salary threshold, the state’s ban on non-competes in employment agreements will apply equally to executive and other C-suite employees.
• Notably, the law is not retroactive. Employers with previous agreements that do not conform to the new law do not need to revise, rescind, or amend any such non-competition agreements entered into prior to July 1, 2023.
• In addition, while employers must take this law seriously—as violation of the Minnesota law grants an employee access to injunctive relief, reasonable attorney fees, and “any other remedies available”—a provision that is found to constitute a non-compete will not sink an entire agreement. Only the provision containing a covenant not to compete will be deemed void and unenforceable.
• Lastly, the Minnesota law voids choice of law or venue provisions that select applicable law other than Minnesota or venue outside of the state, if the worker in question resides or works in Minnesota.

Conclusion

Even if you do not have employees in Minnesota, the implementation of the new law should be a reminder to multi-jurisdictional employers that they should be mindful of state-specific laws governing restrictive covenants when using non-competes, non-solicits, non-disclosure and/or anti-piracy agreements across their workforce.