On May 16, 2023, the Minnesota legislature passed SF 3035 (the “Bill”), banning nearly all post-termination non-compete agreements with employees and independent contractors. Although the Bill marks another state in the trend of jurisdictions passing laws limiting the use of employee non-competes, the Bill goes even further than most of the recent laws to join the ranks of California, Oklahoma, and North Dakota to ban practically all employee non-compete agreements. Some of the more notable provisions include:
- Banning non-compete agreements with all levels of employees and independent contractors, regardless of compensation or role, with only limited exceptions for non-competes entered into in connection with the sale of business or dissolution of a business;
- Requiring employers to use Minnesota law and forum;
- Allowing courts to award attorneys’ fees to plaintiffs who prove violations of the Bill; and
- Excluding nondisclosure and non-solicitation agreements from the Bill’s requirements.
Minnesota Governor Tim Waltz is expected to sign the Bill. Once signed, the Bill will apply to all non-compete agreements entered into on or after July 1, 2023, but it would not apply retroactively to non-competes entered into before then. Employers with employees and independent contractors in Minnesota should start preparing for compliance with the Bill, including reviewing their template employment agreements with non-competes and considering updating their existing policies and practices for preventing unfair competition.
Not Retroactive
The Bill expressly states that the limitations on non-competes are not retroactive. So, the Bill will not apply to non-compete agreements entered into prior to July 1, 2023, and those agreements will continue to be interpreted consistent with existing Minnesota precedent.
Covered Employers and Individuals
The Bill will cover nearly all non-competes between employers and their employees and independent contractors. The Bill 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.”
“Employee” is also defined broadly to include “any individual who performs services for an employer, including independent contractors.” The Bill defines independent contractors as anyone whose engagement “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.”
Unlike some of the other recent state non-compete laws that limit non-competes to employees under a certain compensation threshold, such as non-compete laws in Washington and the District of Columbia, the Bill does not distinguish between types of employees in its ban on non-competes. Rather, the Bill joins jurisdictions like California, banning non-competes with employees at all levels regardless of compensation, including highly paid C‑Suite executives. It also expressly covers non-competes with independent contractors, which have been absent from some of the non-compete legislation other jurisdictions have recently issued.
Covered Agreements
The Bill prohibits nearly all post-termination non-competes with employees and independent contractors. The Bill defines a “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 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.”
Non-Covered Agreements
The Bill contains the following two limited exceptions where non-competes are permitted:
- Non-competes entered into in connection with the sale of a business, where the agreement prohibits the seller from carrying on a similar business within a reasonable geographic area and for a reasonable length of time; 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.
The Bill also explicitly does not apply to the following types of restrictive covenants:
- Nondisclosure agreements or agreements designed to protect trade secrets or confidential information; and
- Non-solicitation agreements or agreements restricting the ability to use client or contact lists or solicit customers of the employer.
The Bill also only applies to non-compete restrictions that cover periods “after termination of employment.” So, employers can still have non-competes with employees or independent contractors during their employment or engagement.
Mandatory Minnesota Law and Venue Required
The Bill prohibits employers from trying to avoid these requirements by using another state’s law or forum. Specifically, the Bill 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. It will be an open question whether employers can use other states’ laws or forums that are not entered into as a condition of employment (e.g., for equity awards or bonus agreements). If employers try to use another choice of law or forum in covered agreements, the choice of law and forum will be voidable and the matter would be adjudicated in a Minnesota court under Minnesota law.
Remedies for Violations
The inclusion of an unenforceable non-compete would not automatically render the entire agreement with the offending provision unenforceable. Rather, the Bill states that it would not be “construed to render void or unenforceable any other provisions in a contract or agreement containing a void or unenforceable covenant.” The Bill also allows courts discretion to award an employee reasonable attorneys’ fees for trying to enforce his or her rights under the Bill. So, it will be important for employers to ensure they comply with the Bill since they could find themselves having to pay attorneys’ fees for agreements found to violate the Bill.
Practical Steps for Employers
Businesses with operations, employees, or independent contractors in Minnesota should review their non-compete practices and policies in light of the Bill. As an initial step, employers should review and, if needed, revise template employment agreements with non-competes to comply with the Bill, including by removing post-employment non-competes and updating choice of law and forum selection provisions for covered employees and independent contractors.
Because the Bill will ban post-employment non-competes with all levels of employees and independent contractors (regardless of role and compensation), employers should determine what agreements or policies they can adopt to protect themselves from unfair competition either before the Bill takes effect or without the use of non-competes. Some possible actions to consider include:
- Trying to get non-compete agreements in place with covered employees and independent contractors before the Bill takes effect.
- Updating confidential information policies and agreements, including reevaluating how employees are provided with access to the employer’s highly sensitive and confidential information. Because employers will lose their ability to have one of the most effective tools for preventing against unfair competition, employers should consider whether limiting the distribution of sensitive information to reduce possible exposure is advisable. Employers might also consider implementing systems that limit, control, and track access to company confidential information and trade secrets to mitigate the risk of misuse when covered employees and independent contractors go to work for competitors.
- Consider whether to revise customer and employee non-solicitation agreements and confidentiality provisions to ensure they provide meaningful protection of the employer’s trade secrets, intellectual property, goodwill, and customer and employee relationships.
The Bill also marks the latest state in a trend of jurisdictions across the United States cracking down on non-compete provisions. As we previously reported, we have seen a trend of legislatures and regulators seeking to ban or narrow the scope of non-compete agreements, and some courts are even signaling closer scrutiny of non-competes under existing precedent. The following are some of the more notable trends and developments:
- Several states, including Colorado and Illinois, have issued more comprehensive non-compete legislation, significantly limiting the use of non-competes with employees, and even more states have banned non-competes for low wage workers.
- The Federal Trade Commission (FTC) recently proposed a rule seeking to ban non-compete agreements with employees, even non-competes entered into before the rule becomes final, except in very limited circumstances. Whether the FTC will narrow the rule before it becomes final remains to be seen, but the FTC’s rule will almost certainly be subject to legal challenges once it becomes final. Regardless of the outcome of the FTC’s proposed rule, the FTC has pursued enforcement actions and entered into consent decrees with several companies requiring them to rescind non-compete agreements with their employees.
- Some state courts have also appeared to subject non-compete agreements to closer scrutiny, including Delaware Chancery Courts that have recently refused to enforce or blue pencil sale-of-business non-competes.
In light of these and other developments, businesses should continue to monitor changes in this area that may impact their non-compete strategies and practices with employees and independent contractors.