Overview
If you are an employee, employer, or independent contractor in Minnesota, 2023 brought a huge change in the law affecting you. The Minnesota Legislature passed a bill banning nearly all new noncompete agreements. It says that any noncompete provision contained in a contract formed on or after July 1, 2023, is void and unenforceable. But there are 2 exceptions:- when selling a business, there can be a noncompete agreement between the buyers and sellers and
- business owners can agree not to compete with each other as part of dissolving a business.
Banned Noncompete Agreements
Effective July 1, 2023, Minnesota’s law banning most new noncompete agreements goes into effect. The law, as SF 3035, was signed by Governor Walz on May 24, 2023.
The ban does not apply to
- employee noncompete agreements created before July 1, 2023,
- noncompete agreements between the buyers and sellers when selling or merging a company, and
- noncompete agreements between business owners when dissolving a company.
Also, the ban did not alter nonsolicitation agreement provisions and confidentiality agreement provisions, which remain legal and enforceable.
Ban on Independent Contractor Noncompete Agreements
The 2023 law is extremely broad. The ban was not limited to employment relationships. The law expressly included independent contractor relationships. As you might imagine, this raised a lot of questions about whether business-to-business noncompete agreements and fiduciary relationships were excluded. As explained below, they were not.
Exception for Business Owners Selling or Dissolving a Business
The law has an important exception for the sale of a business or business owners who sell their ownership in the company. In this context, a noncompete agreement is enforceable. Specifically, the law provides:
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.
Minn. Stat. § 181.988, subdiv. 2(b).
No Exception for Executives & Highly Paid Employees
Unlike other states, Minnesota’s new ban does not provide any exceptions for CEOs, executives, or senior leadership. For example, this means that Honeywell or 3M cannot hire a CEO with an agreement that the CEO will not compete for a period of time after leaving the corporation.
No Exception for Spokespersons or Highly Visibility Employees
Minnesota’s new ban does not provide any exceptions for news anchors, spokespersons, or other highly visible employees.
In the past, a television news station could require their key news anchors to sign a noncompete agreement that prevents the news anchor from going to a close competitor in the same geographic area. For example, KARE 11 might require Julie Nelson to agree she won’t work for WCCO TV for two years after leaving KARE 11. The noncompete agreement would only let Julie Nelson compete in another market, such as at TV station in Chicago or New York. But under the current law, such noncompetes are banned. That is, KARE 11 could not enter into a contract preventing a news anchor from going to another local news competitor.
No Exception for Business-to-Business Noncompete Agreements
Minnesota’s new ban does not provide any exceptions for contracts between corporations or other businesses, large or small.
By definition, parties to a contract are independent contractors unless the relationship is for employment. This means that the new law appears to apply to contracts with vendors, suppliers, brokers, and sales rep companies. But many of these companies, which include exclusive territories, rely on noncompete agreements every day. Noncompete agreements are often at the heart of contracts between companies contracting with each other (i.e. independent contractors).
No Exception for Fiduciary Duty Relationships
Minnesota’s new law has the potential to create a conflict with Minnesota fiduciary duty law. Aside from exceptions in the statute (listed above), Minnesota’s noncompete ban appears to expressly prohibit all noncompete agreements between business partners, partnerships, joint ventures, other principal-agent relationships, and complex business structures involving fiduciary duties. But such an interpretation would violate the preference Minnesota has for implied fiduciary duties, such as the duty of loyalty and duty not to compete in principal-agent relationships. This conflict has not been resolved by Minnesota Courts because the law is so new.
Below is the language of the new law restricting most noncompete agreements in Minnesota.
Minnesota Statutes section 181.988 (2023 Minnesota Senate Bill, SF 3035)
Minnesota Statutes section 181.988 will be amended to include the following:
Section 1. Covenants Not to Compete Void in Employment Agreements; Substantive Protections of Minnesota Law Apply.
Subd. 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 many 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.
Source: Minnesota Legislature
Permitted Noncompete Agreements
Overview of Noncompete Law Before the 2023 Ban on Noncompetes
A noncompete agreement may go by many names: noncompete clause (NCC), covenant not to compete (CNC), do not compete agreement, restrictive covenant, non-solicitation agreement, or whatever title an attorney gives it. Regardless of the title, the intent is the same: one party wants to prevent another party from competing. Whether a noncompete agreement is enforceable depends on a number of factors to be analyzed by an attorney. These factors include:
Independent Consideration
Was the restricted party (the one who cannot compete) paid independent consideration (compensation) for signing the noncompete agreement? In most circumstances, this consideration is financial compensation, but training and promotions can sometimes be sufficient.
Geographic Limitation
Is the geographic limitation in the noncompete agreement reasonable or too broad? This depends on the type of business. Local businesses are narrow, and international businesses are broad. The test is whether the restriction is reasonably limited to a legitimate business interest deserving protection. For example, a hair salon with most clients in a five-mile radius could not enforce a noncompete covering the entire United States.
Enforcement Period
How long is the noncompete agreement in force after the employment relationship is terminated? Two years or less is generally okay for employers, but longer is suspect. Ten years is generally permitted in the sale of a business. Before you ignore a noncompete agreement, you should consult with an attorney to analyze the contract. An attorney can give you a legal opinion regarding whether the noncompete is enforceable. The consequences of breaching a noncompete agreement may include a temporary restraining order preventing you from working in violation of the noncompete along with a lawsuit for monetary damages.
Are Employee Noncompete Agreements Enforceable in Minnesota?
Often, employers want to prevent an employee competing with the employer at another company. The employer has to offer something to the employee (this is called “consideration”). Usually, the consideration an employer gives is (1) the job offer to a new employee or (2) a payment to an existing employee. Payments of $500 are usually sufficient, but $1 is probably not. Sometimes, “ongoing employment” can be considered consideration (see #3 below). If there is no consideration, the noncompete agreement is not enforceable. If there is consideration, the next question is whether the geographic limitation is reasonably calculated to protect a legitimate interest of the employer or whether the geographic limitation is overly broad. This depends on the facts, looking at the business operations and market of the employer. The final question is whether the duration of the noncompete is reasonable. This also is done on a case by case basis. Generally, 2-3 years is reasonable. An attorney practicing in noncompete law should stay current on how courts handle each case, which provides a precedent for future cases. The courts weigh many factors, and this area of law continues to evolve, so experienced noncompete attorneys are often needed to determine whether a noncompete agreement is enforceable, and if so, to what extent.
What is Involved in Drafting a Noncompete Agreement that is Enforceable?
The laws involving noncompete agreements varies across the United States. A noncompete agreement that is enforceable in one state may not be enforceable in another. For this reason, understanding Minnesota law is important. Also, noncompete contract forms purchased on the internet may be inadequate for parties in Minnesota. When I draft a noncompete agreement, the process involves carefully applying relevant Minnesota law to ensure the contract remains enforceable. Properly written noncompete agreements are routinely enforced by courts in Minnesota. However, mistakes can void the agreement. For this reason, you should consult with an attorney if you need a noncompete agreement drafted.
Is ‘Ongoing Employment’ Sufficient ‘Consideration’ to Make a Noncompete Enforceable?
In some cases, an employee’s continued employment may be sufficient consideration even though the employee did not sign the noncompete when starting and was never paid money for signing it. Three 2008 Minnesota Court of Appeals cases upheld noncompete provisions under a variety of circumstances:
- Tenant Construction, Inc. v. Mason, 2008 WL 314515 (Minn. Ct. App., Feb 5, 2008) (unpublished).
- Sealock v. Petersen, 2008 WL 314146 (Minn. Ct. App., Feb 5, 2008) (unpublished).
- Witzke v. Mesabi Rehabilitation Services, Inc., 2008 WL 314535 (Minn. Ct. App., Feb 5, 2008) (unpublished).
Witzke is especially interesting because the court held that “continued employment” for a long duration after signing the noncompete will qualify as “consideration.” Previously, the general rule was that a noncompete must be accompanied by “independent consideration” (normally some sort of financial compensation) to be enforceable on a current employee. These cases supported an employer’s position that noncompete agreements are enforceable. In the end, whether a noncompete agreement is enforceable is often unclear because every situation is different. There is no clear line. For this reason, even most attorneys who are not experienced with noncompete agreements will defer to the analysis of an experienced noncompete lawyer. Thus, it goes without saying that, if you are not an attorney, you should consult with an experienced noncompete attorney to determine whether your contract is enforceable, and if so, to what extent.
Are Independent Contractor Noncompete Agreements Enforceable?
Noncompete agreements with independent contractors are generally enforceable. In fact, they are often more enforceable than noncompete agreements with employees because (1) courts view independent contractors as generally sophisticated businesses able to determine whether they want to be bound to an agreement and (2) the concerns over an “employee’s right to work” are not present in an independent contractor relationship. There was recently an important development in Minnesota law regarding noncompete agreements with independent contractors. The Minnesota Court of Appeals held that the doctrine of independent consideration (which generally requires independent payment to an employee for a noncompete agreement to be valid) did not apply to independent contractors. The case is Schmidt Towing, Inc. vs. Chris Frovik d/b/a FTR Towing and Recovery, 27-CV-09-6303 (Minn. Ct. App. Nov. 9, 2010). The Minnesota Court of Appeals did not say that noncompete agreements with independent contractors are always valid. Rather, the Court of Appeals directed the district court to examine the enforceability of the noncompete agreement using “the legal principles that generally govern noncompete agreements.”
Are Attorney, Doctor, Dentist, Accountant and Veterinarian Noncompete Agreements Enforceable?
Recently, I have represented a number of professionals who were bound to noncompete agreements. Here are the general principles for each profession.
Attorney Noncompete
The Minnesota Rules of Professional Conduct prohibits the enforcement of a noncompete against another attorney. The basis for this rule is that clients should have a right to pick their attorney, and a noncompete agreement among attorneys would violate the client’s right to choose a lawyer. Thus, Minnesota law does not permit noncompete agreements among attorneys.
Medical Physician Noncompete
No Minnesota law prohibits a noncompete agreement with an employee doctor. However, the American Medical Association (AMA) has an opinion “discouraging” noncompete agreements. Learn more about noncompete agreements for doctors and medical professionals.
Dentist Noncompete
The American Dental Association’s professional code provides for “freedom of choice” for patients to select their dentist “without any type of coercion.” However, Minnesota law generally does not restrict noncompete agreements with an employee dentist. For example, in 1985, the Minnesota Court of Appeals considered a dental noncompete agreement. In this case, the court held that a “noncompete covenant in an employment agreement will be enforced when necessary to protect the goodwill of the employer’s business” and the dental noncompete agreement was assignable. The court quoted the Minnesota Supreme Court to support its holding:
Enforcement of restrictive covenants against professional employees is based on the relationship that is created, as for example, between a doctor and his patients. Once this relationship is formed, it is beyond question that a doctor’s patients will seek his aid regardless of this doctor’s employment situation.
Saliterman v. Finney, 361 N.W.2d 175, 177-78 (Minn. Ct. App. 1985) (citing Walker Employment Service, Inc. v. Parkhurst, 219 N.W.2d 437, 441 (Minn. 1974)).
Accountant Noncompete
Minnesota law generally does not restrict noncompete agreements with an employee accountant or certified public accountant (CPA). Read a good law review article on whether noncompete agreements are permitted for attorneys, accountants, or physicians throughout the United States.
Veterinarian Noncompete
No Minnesota law prohibits a noncompete agreement with an employee veterinarian. However, the American Medical Association has an opinion “discouraging” noncompete agreements.
Are Noncompete Agreements in the Sale of a Business Enforceable?
Noncompete agreements involving the sale of a business are generally enforceable as long as they are reasonably calculated to protect the buyer of the business. Business sellers and buyers are considered “sophisticated parties,” so they are generally bound to the language of the agreements they enter. Of course, outrageous language that is not reasonably calculated to protect the interests of the buyer may be subject to the blue pencil doctrine, where the court limits to the agreement to the scope permitted under Minnesota law.
Can a Noncompete Clause be Enforced against Some Employees or Independent Contractors but Not Others? Isn’t Selective Enforcement Illegal or a Waiver of Rights?
Under some circumstances, a noncompete agreement may be enforced against one party even though it is not enforced against another. For example, if an employer did not enforce its contract against employee A, it can still enforce its contract against employee B under some circumstances.
One factor courts use to determine whether to enforce a noncompete agreement is whether the agreement protects a legitimate interest of the employer. Thus, if an employer did not enforce a noncompete agreement with employee A in the past, and employee B is in similar circumstances, the court could easily conclude the employer does not have a legitimate interest to protect for employee B. The counter-argument is that employee B’s position is substantially different from employee A, so while the employer had no interest in enforcing a agreement with employee A, the employer has a legitimate interest to protect with employee B.
While there is case law supporting the notion that the contractual doctrine of “waiver” can apply to multiple contracts with different parties, most agree waiver is only applicable to multiple contracts between the same parties. However, whether courts use “waiver” or “legitimate interest of the employer,” the outcome may be the same.
Thus, the key question is whether the employees who were allowed to violate their noncompete agreements in the past were similarly situated as it relates to the legitimate interests of the employer. This is a balancing test, weighed against the public policy concern that people have an opportunity to earn a living.
Where Can I read More about the Details of Minnesota Noncompete Law?
Other Minnesota attorneys have written good articles on Minnesota noncompete law including this legal explanation of Litigating Covenants Not to Compete, by William Christopher Penwell, and this site by my friend Craig W. Trepanier.
Is a Noncompete Clause that is Too Broad Void or Unenforceable?
To the extent that a court determines a noncompete agreement is too broad, it will be unenforceable. However, a court is permitted to use the “blue pencil doctrine,” which essentially enforces the agreement to the extent the law would permit. For example, if a noncompete agreement says it prohibits an employee from working worldwide, the court may “blue pencil” the contract to limit enforcement to only Minnesota.
Can an Employer Recover Attorney’s Fees for Suing an Employee who Violates a Noncompete Agreement?
In general, parties suing for breach of a noncompete agreement are not entitled to recover attorney’s fees unless one of the following conditions are present:
- the contract being breached states that the parties may recover attorney’s fees,
- a state or federal statute specifically states that parties may recover attorneys’ fees, or
- the employer is suing the employee’s new employer for interference with contract (a tort claim).
What Are the Pros and Cons of Requiring Employees to Sign a Noncompete Agreement?
Some potential pros of requiring employees to sign noncompete agreements include:
- Protecting the employer’s business interests: A noncompete agreement can prevent an employee from using their knowledge and expertise to directly compete with their former employer or disclose confidential information to competitors.
- Providing a deterrent for employee turnover: The threat of not being able to work in the same industry after leaving a job may discourage employees from quitting and seeking employment with a competitor.
- Potentially increasing the value of the business: If a business has a large number of employees who are bound by noncompete agreements, it may make the company more attractive to potential buyers.
On the other hand, there are also some potential cons to requiring employees to sign noncompete agreements, including:
- Limiting employee mobility and career opportunities: Noncompete agreements can restrict an employee’s ability to work in their chosen field, which can make it difficult for them to advance their career or find new employment after leaving their current job.
- Potentially lowering employee morale: Employees may feel frustrated or resentful if they feel like their ability to work in their chosen field is being limited by a noncompete agreement. This can lead to lower morale and potentially higher turnover rates.
- Potentially stifling innovation and competition: If too many employees in a particular industry are bound by noncompete agreements, it can limit the pool of talent and ideas available to competing companies, which can stifle innovation and competition.
Overall, whether requiring employees to sign noncompete agreements is a good idea will depend on the specific circumstances of the business and the industry in which it operates. Employers should carefully weigh the potential benefits and drawbacks before deciding whether to use noncompete agreements as part of their employment contracts.
For additional information, refer to Noncompete Agreements Now Illegal in Minnesota? Here’s What You Need to Know
Noncompete Agreements Now Illegal in Minnesota? Here’s What You Need to Know
Video Transcript
Are Noncompete Agreements Illegal in Minnesota?
Well, you may have heard in 2023, most noncompete agreements were banned by the Minnesota legislature if they are created after July 1st, 2023, and they relate to employment or independent contractors.
Minnesota is joining California, North Dakota, Oklahoma, and Washington, DC; at least, those are the states that I know of that have banned virtually all employment, noncompete agreements. This is huge for Minnesota. It is huge because, for years, people have relied on noncompete agreements as a way to entrust somebody with confidential information, knowing that they can’t use that to compete against an employer later. Whatever your position is on whether noncompetes should be illegal, that is kind of a side. They now are in Minnesota. There are some exceptions.
What Are the Exceptions?
Well, first, there is an exception for the sale of a business like business owners. There is an exception for merging and dissolving a business, but all of that has to do with the business owners. It is not related to the individual employees.
Now, one of the real concerning areas of this law is the fact that it applies to independent contractors. Well, what does that mean? Because if you think about it, any contract with another party makes the parties independent contractors unless they are employees. I think the legislature meant to apply this not just to employees but individuals who provide services for the business who are independent contractors, but by including all Minnesota independent contractors. There is no exception for big businesses who have contracts together.
I mean, look at it this way. If Apple and Google have a contract that they are going to engage in a particular effort together and that they will agree not to compete in that space, those are independent contractors, and if they are doing business in Minnesota, at least a significant amount of business, there is an argument that that applies to them. So the courts have yet to figure out what to do about this, and in my experience, lobbying the Minnesota legislature, it is quite common for legislation to get through initially and then get cleaned up in subsequent legislative sessions.
So it certainly is possible that in 2024 or 2025, you might have some clarity provided on these issues. And if you don’t, ultimately, it is going to be up to the Minnesota Supreme Court to decide what qualifies as an independent contractor, especially as it relates to large companies who agree not to compete with each other.
Will those agreements be enforceable, or are they banned? To learn more about this, we will have a link in the description below. So just to summarize, all Minnesota noncompete agreements started from July 1st, 2023, onward are banned in Minnesota. The ban applies to independent contractors according to the statute, and there are a couple of exceptions for essentially buyers and sellers of a business or business owners dissolving their company.
What Isn’t Included in the Minnesota Noncompete Ban?
Confidentiality agreements are still enforceable, and that means like a non-disclosure agreement where parties agree to keep something confidential. In other words, they have to keep it confidential, but they can still compete with that knowledge in their head. The second exception to the Minnesota noncompete agreement ban is non-solicitation agreements.
What Are Non-solicitation Agreements?
It is when parties agree not to solicit the employees or vendors, or customers of a company. So let’s say Emily works for a company and she signs a non-solicitation agreement that says for one year after leaving the company, she will not solicit the employees, clients, customers, patients, or other relationships of the company. And then Emily leaves, and she goes to another employer. Under that non-solicitation agreement, she would be prohibited from soliciting those relationships even though she could still compete in the marketplace. Because although noncompete agreements are banned, non-solicitation agreements remain enforceable.
Conclusion
All right, if you have any constructive feedback, please feel free to provide that. I am somewhat new to this, and I am working to provide value that is relevant to you as business owners and other listeners interested in entrepreneurial and business topics. It is my goal to demystify business law so that people have practical understanding and are empowered to run their business and avoid legal problems and hopefully experience a better business and a better life.
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About the Author: This article was written by attorney Aaron Hall. Aaron routinely represents employers and employees with noncompete agreement disputes and drafting noncompete agreements. An attorney is available to analyze noncompete agreements or represent parties seeking to understand their legal rights and options.
