Last week we summarized Challenges for Minnesota Employers Due to Legalization of Marijuana. In this Legal Brief, we outline the recent changes in Minnesota’s law regarding non-competition agreements. Effective July 1, 2023, this legislation brings significant implications for employers and employees alike. It is significant to note that this law applies only to contracts made after July 1, 2023. Presumably then, existing contracts that contain covenants not to compete are valid and enforceable.
Let’s look at the highlights (or lowlights, depending on your perspective) of the new law.
Definition of Covenant Not to Compete
A “covenant not to compete” means an agreement between an employee and an employer that restricts the employee, after the termination of employment, from performing certain types of work. These restrictions may include working for another employer within a specified period, in a specific geographic area, or in a capacity like the employee’s previous role.
Exceptions to the Covenant Not to Compete
The law does not include certain agreements in its definition of covenant not to compete. These include (1) non-disclosure agreements, (2) provisions designed to protect trade secrets or confidential information, (3) non-solicitation agreements that limit the use of client or contact lists, (4) restrictions on use of client or contact lists, and (5) solicitation of customers. These items are specifically excluded from the scope of this legislation, consistent with case law that has developed over the years in this area.
Void and Unenforceable Covenants
Covenants not to compete contained in employment contracts are void and unenforceable. This means that employers cannot enforce non-compete agreements or restrict their former employees from engaging in competitive work.
Choice of Law and Venue
This new law also provides that employees who work primarily in Minnesota cannot be required to use the laws or courts of another state. In other words, interpretation of the employment agreement must be done under Minnesota law, and employees are entitled to litigate claims in Minnesota courts.
Exceptions to Void and Unenforceable Covenants
Despite the general prohibition, the law acknowledges two specific situations in which a covenant not to compete may be considered valid and enforceable:
1. Sale of a Business: If a business is being sold, the parties involved in the sale, including the seller, buyers, partners, members, or shareholders, may agree on a temporary and geographically limited covenant not to compete. This agreement can prohibit the seller from starting a similar business within a reasonable geographic area and for a reasonable duration.
2. Dissolution of a Business: In the event of a partnership, limited liability company, or corporation dissolution, the partners, members, or shareholders may agree that certain parties will not engage in a similar business within a reasonable geographic area where the business was conducted.
Importance of Contractual Provisions:
It’s worth noting that even if a covenant not to compete is void and unenforceable, other provisions within the contract or agreement remain valid and enforceable. Therefore, it’s crucial to carefully review and ensure the legality of all contractual provisions, particularly considering this new legislation and the proposed FTC ban on non-compete agreements, which we wrote about in January.
Effective Date and Applicability:
Minnesota’s new law on non-compete agreements applies to contracts made on or after July 1, 2023. That said, you may wish to consider modifying all employment contracts for consistency and employee retention concerns. Or there may be only specific categories of current agreements you wish to modify. It is vital for you, as a business owner, to update employment agreements and practices according to what is best for your specific business.
Understanding the implications of Minnesota’s ban on non-compete agreements is critical. Familiarize yourself with the law’s provisions, exceptions, and effective date, to ensure compliance and make informed decisions regarding your employment contracts. As always, consulting with legal professionals experienced in employment law can provide valuable guidance tailored to your specific circumstances.