Companies with Minnesota-based employees or independent contractors should engage counsel to reevaluate their current and prospective restrictive covenant agreements and exit procedures.

Minnesota is now the fourth state in the U.S. to ban noncompetition covenants in agreements between employers and employees, under a bill signed into law by Governor Tim Walz on May 24, 2023. Similar statutes already exist in California, Oklahoma and North Dakota.

When Does the Law Take Effect?

The law is effective immediately, but only applies to contracts and amendments entered into on or after July 1, 2023―i.e., the law does not apply to covenants not to compete entered into prior to July 1, 2023.

Who Is Covered by the Law?

The law applies to all employers and employees, defined to include any individual who performs services for an employer, including independent contractors.

Which Types of Agreements Are Covered?

The law applies to any "covenant not to compete," defined as an agreement between an employee and employer that restricts the employee, after termination of 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 a party to the agreement.

The definition of “covenant not to compete” specifically excludes a nondisclosure agreement, an agreement designed to protect trade secrets or confidential information, a nonsolicitation agreement or an agreement restricting the ability to use client or contact lists or solicit customers of the employer.

Are There Any Exceptions to the Law?

The law includes exceptions for covenants not to compete entered into in connection with the sale or dissolution of a business.

Can the Law Be Circumvented by Applying Another State’s Law Under Contract?

Can employers avoid application of the law by contracting for the law of a different state to apply, and/or by mandating that disputes be adjudicated in another state?

No, at least with respect to claims “arising in” Minnesota. The law provides that 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. Any provision of a contract or agreement that requires an employee to adjudicate outside of Minnesota a claim arising in the state is voidable at any time by the employee. If a provision is rendered void at the request of the employee, the law provides that “the matter shall be adjudicated in Minnesota and Minnesota law shall govern the dispute.”

What Are the Consequences If an Employer Violates the Law? 

The law provides that a covenant not to compete that does not fall within one of the statutory exceptions is “void and unenforceable.” The law further provides that, in addition to injunctive relief and any other available remedies, a court “may” award an employee who is enforcing rights under the law the employee’s reasonable attorney’s fees.

What This Means for Employers

Companies with Minnesota-based employees or independent contractors should engage counsel to reevaluate their current and prospective restrictive covenant agreements and exit procedures.

For More Information

If you have any questions about this Alert, please contact Lawrence H. Pockers, Shannon Hampton Sutherland, Bryan Shapiro, any of the attorneys in our Non-Compete and Trade Secrets Group, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.