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Minnesota legislature bans new non-compete agreements

Effective July 1, 2023, Minn. Stat. §181.988 will render any new “covenant not to compete” void and unenforceable.

A “covenant not to compete” is defined in the new law as an agreement that restricts an employee, after termination from 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 similar to the employment with the current employer.

It is important to note that the definition of “employee” in the new law includes any individual who performs services for an employer, including independent contractors.

The new statute also prevents employers from trying to circumvent these restrictions by trying to invoke the law of another state or requiring employees who primarily reside and work in Minnesota to adjudicate disputes outside of Minnesota. However, if an agreement contains a void and unenforceable non-compete covenant, only the impermissible covenant of the agreement is void.

A court may award injunctive relief and reasonable attorneys’ fees to an employee who enforces rights under the new statute.

There are some exceptions to the scope of the new law, however. The new law does not prohibit nondisclosure agreements, agreements designed to protect trade secrets or confidential information, nonsolicitation agreements, or agreements restricting the ability to use client or contact lists, or solicit customers of the employer.

The new law also does not prohibit non-compete provisions agreed to as part of a sale of a business, or as part of an agreement between the owners of a business in anticipation of dissolution of the business, so long as the restrictions are for a reasonable length of time and within a reasonable geographic area.

Next Steps

Companies should review their current employment and independent contractor templates to make sure they will conform to the new law. Any non-compete provisions should be removed, and forum selection or choice of law provisions may need to be updated. Companies should also review any confidentiality and non-solicitation agreements and NDAs.

Companies may also wish to take the new law into consideration when deciding whether to try to enforce existing non-compete agreements. While the new law only applies to contracts entered into on or after July 1, courts have become increasingly skeptical of non-compete agreements in recent years, and the new law may cause courts to be even more skeptical of enforcing older non-compete agreements. It also remains to be seen how extensive courts will allow confidentiality and non-solicitation provisions to be under the new law. Any provision that “overreaches” or that has the practical effect of stopping a former employee from working (even if given another name) will likely be scrutinized closely by the courts.