H.F. No. 506, as introduced – 88th Legislative Session (2013-2014)

Many Minnesota employees and employers entered into a noncompete agreement as a condition of employment upon hiring a new employee. These agreements are designed to protect a business from the harm of training a new employee, granting that employee access to customer or vendor contacts, or otherwise providing the employee with sensitive company information, and then losing that employee who then uses his or her new knowledge to compete with the former employer. New legislation in Minnesota could preclude the application of restrictive covenants to almost every employee in the State. Legislation was introduced this week that proposes to limit the enforceability of noncompete agreements to three specific categories:

  1. One who sells a business’ goodwill and attempts to compete within a specified region;
  2. Partners who dissolve a partnership with an agreement to not carry on a similar business; and
  3. A member of an LLC who dissolves or terminates his or her interest in the LLC and attempts to carry on a similar business in a specified region.[1]

If passed, the effect this legislation may have on the vast majority of business in Minnesota will be profound. Many potential clients contact my office with the mindset that a noncompete agreement is unenforceable. Many former employees leave their jobs with a feeling of impunity and have no knowledge of the risks of joining a competing company. While it is true that Minnesota Courts look at noncompete agreements with disfavor as a restraint on trade and a limitation on a worker’s ability to earn a living,[2] these agreements are enforceable if they are:

  1. fairly bargained for,[3] and
  2. designed to protect an employer’s legitimate business interests (such as an employer’s goodwill, trade secrets, and confidential information).[4]

Even employees that understand that a noncompete agreement might be enforced often disregard the restrictions in their agreements—after all, litigation is a huge investment in time and money. But under current law, the employer can request an injunction as quickly as it can find a date on the Court’s calendar. An injunction maintains the status quo until a full decision can be made in the case.[5] In the context of a noncompete agreement, the status quo is that an employee is restricted from competing with his or her former employer until the lawsuit is resolved. This is a very powerful tool for an employer to use in that an employer can obtain a Court Order to enforce a noncompete agreement almost instantly. In determining whether to issue such an order, a Court will generally weigh five factors:

  1. the parties’ relationship;
  2. the relative harms experienced by the respective parties in granting or rejecting the injunction;
  3. the likelihood of the employer’s success in the underlying lawsuit;
  4. public policy considerations; and
  5. potential administrative burdens.[6]

If this new legislation is passed, it would make the likelihood of success on the merits of the claim virtually nonexistent. Therefore, the third factor a Court will weigh will almost always fall in favor of the employee and thus injunctions will rarely, if ever, be granted.

While this bill could mark the end of noncompete agreements in Minnesota, there is still hope for employers seeking to protect their businesses. The legislation appears to only apply to contracts “that prohibit a party to that contract from exercising a lawful profession, trade, or business.”[7] The silence with respect to nonsolicitation provisions or confidentiality clauses indicates that there are still ways in which an employer can protect its business. Employers are advised to follow this bill closely to understand the final implications. If passed, many employers might want to revisit and revise their agreements to preserve the protections they can and make sure that their agreements do not run afoul of this legislation and become void.

For more information on this proposed legislation and noncompetition, nonsolicitation, and confidentiality agreements, please contact our firm to speak to an attorney.

[1] https://www.revisor.mn.gov/bin/bldbill.php?bill=H0506.0.html&session=ls88

[2] Midwest Sports Marketing, Inc. v. Hillerich & Bradsby of Canada, Ltd., 552 N.W.2d 254, 265 (Minn.App.1996).

[3] Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161, 164 (Minn.App.1993).

[4] Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 456 (Minn.App.2001).

[5] Village of Blaine v. Indep. Sch. Dist. No. 12,121 N.W.2d 183, 187 (Minn. 1963).

[6] Dahlberg Bros., Inc. v. Ford Motor Co.,137 N.W.2d 314, 321-22 (Minn. 1965).

[7] https://www.revisor.mn.gov/bin/bldbill.php?bill=H0506.0.html&session=ls88