Minnesota is close to enacting a near-total ban on the use of covenants not to compete. The Minnesota Legislature released a conference committee report on the bill (MN SF 3035), which reflects the bill’s likely final form, on May 16.
If passed, the proposal would take effect July 1 and apply to contracts and agreements entered into on or after that date. It would render void and unenforceable any noncompete agreement with an employee or independent contractor, unless the noncompete agreement was (1) agreed to by partners, members, or shareholders selling or dissolving a business and (2) restricts them from carrying on a similar business (3) within a reasonable geographic area and for a reasonable length of time.
The law only renders void and unenforceable the noncompete covenants, and the balance of an otherwise enforceable contract or agreement is not affected.
Significantly, the definition of noncompete expressly excludes nondisclosure agreements, agreements designed to protect trade secrets, agreements to protect confidential information, agreements restricting the ability to use client or contact lists, and nonsolicitation agreements.
Venue and Remedies
The proposed legislation contains choice-of-law and venue provisions prohibiting an employer from requiring an employee who primarily resides and works in Minnesota, as condition of employment, to agree to a provision that would require a claim or controversy arising in Minnesota: (1) to be adjudicated (including litigation and arbitration) outside of Minnesota; or (2) which deprives the employee of the substantive protections of Minnesota law.
In addition to injunctive relief and other remedies, the proposed legislation would allow a court to award reasonable attorneys’ fees to an employee who sues to enforce the employee’s rights under the law.
Minnesota employers should prepare for the legislation to go into effect. Noncompete agreements entered into before July 1, 2023, are not affected. Judges being asked to enforce a noncompete agreement entered into before July 1, 2023, can take into account the legislation’s prohibitions in their decisions.
Steven M. Phillips is an attorney with Jackson Lewis in Minneapolis. © 2023. All rights reserved. Reprinted with permission.