As of today, California, North Dakota, and Oklahoma have been the only states to have a complete ban on employee noncompetes.1
But that is about to change.
Yesterday, Minnesota Governor Tim Walz signed an omnibus budget bill that includes a ban on all employee noncompetes that will take effect on July 1, 2023. The law will not affect preexisting noncompetes.
So, as of July 1, Minnesota will (I believe) be the first state to implement a ban in over 100 years. (California was 1872, North Dakota was 1865, Oklahoma was 1890, Montana was 1895, and Michigan was 1905, though, as noted in the footnote below, Montana and Michigan no longer have a ban.)
Importantly, Minnesota’s soon-to-be law expressly excludes nondisclosure agreements, nonsolicitation agreements, “agreement[s] designed to protect trade secrets or confidential information,” or “agreement[s] restricting the ability to use client or contact lists, or solicit customers of the employer.“ Like the other states with a ban, it also permits noncompetes to be used in connection the sale of a business. But it’s unclear how it will affect other agreements, such as no-service agreements, for example.
Is this a good idea? The Obama Administration didn’t think so when – after extensive research and analysis – they concluded that a ban was a bridge too far, and issued a Call to Action that suggested fairness and transparency changes. And, I don’t think so either. My many concerns – shared with lawyers around the country who practice in this area – are laid out in a letter available here: 100 Trade Secret Lawyers Can’t Be Wrong.
The saving grace of Minnesota pulling the trigger now is that, in time, it will provide an opportunity for the academic community to study the change and see what the actual consequences are (pro and con) without putting the entire country’s economy at risk, as the FTC’s proposed nation-wide ban would do.
In the meantime, get ready for July 1. Whether you’re a company headquartered in Minnesota or just doing business there, this article identifies some steps you may wish to consider.
In case you are looking for the relevant (full) text in the otherwise very long bill, here it is:
Section 1. [181.988] COVENANTS NOT TO COMPETE VOID IN EMPLOYMENT AGREEMENTS; SUBSTANTIVE PROTECTIONS OF MINNESOTA LAW APPLY.
Subdivision 1. Definitions. (a) “Covenant not to compete” means 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.
A covenant not to compete does not include a nondisclosure agreement, or agreement designed to protect trade secrets or confidential information. A covenant not to compete does not include a nonsolicitation agreement, or agreement restricting the ability to use client or contact lists, or solicit customers of the employer.
(b) “Employer” means any individual, partnership, association, corporation, business, trust, or any person or group of persons acting directly or indirectly in the interest of an employer in relation to an employee.
(c) “Employee” as used in this section means any individual who performs services for an employer, including independent contractors.
(d) “Independent contractor” means any individual whose employment is governed by a contract and whose compensation is not reported to the Internal Revenue Service on a W-2 form. For purposes of this section, independent contractor also includes any corporation, limited liability corporation, partnership, or other corporate entity when an employer requires an individual to form such an organization for purposes of entering into a contract for services as a condition of receiving compensation under an independent contractor agreement.
Subd. 2. Covenants not to compete void and unenforceable. (a) Any covenant not to compete contained in a contract or agreement is void and unenforceable.
(b) Notwithstanding paragraph (a), a covenant not to compete is valid and enforceable if:
(1) the covenant not to compete is agreed upon during the sale of a business. The person selling the business and the partners, members, or shareholders, and the buyer of the business may agree on a temporary and geographically restricted covenant not to compete that will prohibit the seller of the business from carrying on a similar business within a reasonable geographic area and for a reasonable length of time; or
(2) the covenant not to compete is agreed upon in anticipation of the dissolution of a business. The partners, members, or shareholders, upon or in anticipation of a dissolution of a partnership, limited liability company, or corporation may 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.
(c) Nothing in this subdivision shall be construed to render void or unenforceable any other provisions in a contract or agreement containing a void or unenforceable covenant not to compete.
(d) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing rights under this section reasonable attorney fees.
Subd. 3. Choice of law; venue. (a) An employer must not require an employee who primarily resides and works in Minnesota, as a condition of employment, to agree to a provision in an agreement or contract that would do either of the following:
(1) require the employee to adjudicate outside of Minnesota a claim arising in Minnesota; or
(2) deprive the employee of the substantive protection of Minnesota law with respect to a controversy arising in Minnesota.
(b) Any provision of a contract or agreement that violates paragraph (a) is voidable at any time by the employee and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in Minnesota and Minnesota law shall govern the dispute.
(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing rights under this section reasonable attorney fees.
(d) For purposes of this section, adjudication includes litigation and arbitration.
(e) This subdivision applies only to claims arising under this section.
EFFECTIVE DATE. This section is effective July 1, 2023, and applies to contracts and agreements entered into on or after that date.
*A huge thank you to Erika Hahn for all of her extraordinary help in tracking and monitoring all of the bills around the country, especially Minnesota’s! and thank you to Nicole Daly for finding confirmation that the bill was signed into law yesterday.
* * *
Resources to help
Because we know how hard it is to keep up with the ever-changing requirements around the country, we have created the following resources (available for free):
- 50-State Noncompete Law Chart, the first of its kind and regularly updated (downloadable PDF);
- Chart of Noncompete “Low-Wage” Thresholds and Criteria (downloadable);
- Notice requirements summary chart, providing details for each of the 8 states (plus D.C.) that has notice requirements related to noncompetes (downloadable PDF);
- “Changing Trade Secrets | Noncompete Laws” (dedicated blog page) now provides a current detailed summary of the changing landscape of trade secret laws and noncompete laws around the country, state by state and at the federal level;
- Trade secret and other legitimate business interest protection plan strategy and checklist; and
- Ten Minute Trade Secret Training Series, currently with three training videos and one “basics” video:
We also have a 50-State and Federal Trade Secret Law Chart, providing a comparison of the trade secrets laws nationally to the Uniform Trade Secrets Act (downloadable PDF).
We hope you find all of these resources useful.
_____
[1] Nebraska takes such a narrow view of permissible noncompetes that it can be interpreted as having a ban, but it does not. Other states like Montana and Michigan previously eliminated similar bans – and D.C. even flirted with one, but backed away at the 11th hour, preferring a wage threshold instead.