Minnesota expected to become fourth state to ban non-compete agreements

At a glance

• The Minnesota legislature recently passed an omnibus jobs and economic development bill, which, following Governor Tim Walz's signature, will enact a state-wide ban on non-compete agreements.
• While other states have passed partial bans, Minnesota will join California, Oklahoma, and North Dakota as just the fourth state to ban non-compete agreements for employees, regardless of their level of income.

Key features of the legislation 

The ban will be forward-looking

It will only apply to contracts and agreements made on or after 1 July 2023, and will not invalidate any agreements signed before that date.

The ban will apply to independent contractors as well as employees

It expressly includes independent contractors in the definition of “employee,” meaning employers will no longer be able to enter into non-compete agreements with Minnesota independent contractors.

The ban will restrict forum selection

It will anticipate and pre-empt clever drafting by prohibiting employers from requiring employees who primarily reside and work in Minnesota, to agree to adjudicate claims outside of Minnesota or agreeing to a different choice of law whether in litigation or arbitration. Due to the fact this rule only applies to agreements entered into “as a condition of employment,” it appears to be an open question whether employers can use other states’ law and forum in non-compete agreements with Minnesota employees that are not a condition of employment, such as the inclusion of a non-compete provision in an equity award.

The ban will include key carve-outs

It will not apply to non-compete provisions requiring the “seller” of a business from carrying on a similar business within a “reasonable” geographic area for a “reasonable” length of time. The law does not provide any threshold for how much equity a person must have sold in order to qualify as a “seller” under the law. The ban likewise will not apply to an agreement among partners, members, or shareholders of a business made in anticipation of the dissolution of that business.

Non-solicitation and non-disclosure restrictions remain permissible

A number of provisions that protect employers are expressly excluded from the scope of the ban, meaning that this new bill will not change the current Minnesota legal standards for customer and employee non-solicitation covenants, non-disclosure covenants, provisions providing for protection of trade secrets and confidential information, and restrictions on the use of client or contact lists.

The new law will also permit the recovery of attorney’s fees for any employee invoking this statute, providing further encouragement for employers to update their practices for future employment agreements.