The Land of 10,000 Lakes Joins Other States in Banning Non-Competes

*Cortney Buesgens

Effective July 1, 2023, Minnesota enacted one of the strictest non-compete laws in the nation, banning nearly all post-termination non-compete agreements with employees and independent contractors. The new law applies to all non-compete agreements entered into on or after July 1, 2023, but does not apply retroactively.¹

Specifically, Minnesota law renders any covenant not to compete within an agreement “void and unenforceable.”² It defines “covenant not to compete” as  “an agreement between an employee and employer that restricts the employee, after termination of the employment, from performing: (1) work for another employer for a specific period of time; (2) work in a specific 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.”³

Covered Individuals

            The law does not distinguish between types of employees in banning non-competes. In stark contrast, Washington and the District of Columbia only prohibit non-competes with employees or independent contractors under a certain compensation threshold.⁴ Minnesota joins jurisdictions like California, banning non-competes with employees at all levels regardless of compensation, even highly paid C-Suite executives.⁵

            Particularly, the law broadly defines “employer” to include “any individual, partnership, association, corporation, business, [or] trust” and includes any person “acting directly or indirectly in the interest[s] of an employer in relation to an employee.”⁶ “Employee” is also defined broadly to include “any individual who performs services for an employer, including independent contractors.”⁷ “Independent contractors” are defined as “any individual whose employment is governed by a contract” and is not reported to the IRS on a W-2, including any corporate entity if the employer requires an individual to form such entity “for purposes of entering into a contract for services as a condition of receiving compensation under an independent contractor agreement.”⁸

Exceptions

            The law contains the following two limited exceptions where non-competes are permitted, which include:

• Non-competes entered into in connection with the sale of a business, where the agreement “prohibit[s] the seller…from carrying on a similar business within a reasonable geographic area and for a reasonable length of time;”⁹ and
• Non-competes in anticipation of the dissolution of a business, where the applicable parties “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.”¹⁰

In addition, the non-compete law explicitly does not apply to nondisclosure agreements, non-solicitation agreements, and agreements designed to protect trade secrets.¹¹ Employers may continue to use those provisions in their employment agreements. The law also only applies to non-compete agreements that cover periods “after termination of employment,” so employers can still have non-competes with employees or independent contractors during their employment or contract.¹²

Mandatory Law and Venue

            The law prohibits employers from trying to avoid the non-compete requirements by using another state’s law or forum in employment agreements.¹³ It requires employers to use Minnesota law and forum for any agreements entered into as “a condition of employment” with employees who primarily reside and work in Minnesota.¹⁴ If employers try to use another choice of law or forum in non-compete agreements, the choice of law and forum will be voidable and the matter will be adjudicated in a Minnesota court under Minnesota law.¹⁵

Remedies 

            An unenforceable non-compete does not automatically render an entire employment agreement unenforceable. Rather, the law provides the agreement would not be “construed to render void or unenforceable any other provisions in a contract or agreement containing a void or unenforceable covenant.”¹⁶ Provisions that do not include covenants not to compete would still stand.

            The law also gives courts discretion in awarding an employee reasonable attorneys’ fees for trying to enforce his or her rights under the law.¹⁷ This gives employers a strong incentive to adhere to the requirements under the new law.

Concluding Thoughts

            In the coming months, employers should consult with legal counsel to review their employment agreements and revise them to comply with the non-compete law. Going forward, employers should structure new employment contracts and independent contractor agreements to eliminate non-compete provisions.

            Businesses should also continue to monitor developments in this area that may impact their employment practices and relationships. The Federal Trade Commission has proposed a new rule that would prohibit non-compete agreements nationwide.¹⁸ Unlike Minnesota, the FTC rule, if adopted, would be retroactive and would void all existing restrictive covenants nationwide, except for a few limited exceptions.¹⁹ Additionally, the National Labor Relations Board recently indicated that they intend to target non-compete agreements moving forward, as they believe most non-compete agreements infringe on Section 7 rights and employee mobility rights held by non-management employees under the National Labor Relations Act.²⁰

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* Cortney Buesgens, J.D. Candidate, University of St. Thomas School of Law Class of 2024. Senior Editor, University of St. Thomas Law Journal.

¹ 2023 Minn. Laws.

² Minn. Stat. § 181.988, subd. 2 (West 2023).

³ Id. at subd. 1.

⁴ Wash. Rev. Code §§ 49.62.020–0.30; D.C. Code § 24-175.

⁵ Cal. Bus. & Pro. Code § 16600.

⁶ Minn. Stat. § 181.988, subd. 1.

⁷ Id.

⁸ Id.

⁹ Id. at subd. 2(b).

¹⁰ Id.

¹¹ Id. at subd. 1.

¹² Minn. Stat. § 181.988, subd. 1.

¹³ Id. at subd. 3.

¹⁴ Id.

¹⁵ Id.

¹⁶ Id. at subd. 2(c).

¹⁷ Id. at subd. 2(d) .

¹⁸ FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, Fed. Trade Comm’n (Jan. 5, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.

¹⁹ Id.

²⁰ NLRB General Counsel Issues Memo on Non-competes Violating the National Labor Relations Act, Nat’l Lab. Rels. Bd. (May 30, 2023), https://www.nlrb.gov/news-outreach/news-story/nlrb-general-counsel-issues-memo-on-non-competes-violating-the-national.