Minnesota Governor Signs Omnibus Bill with Near-Total Ban on Noncompete Agreements

On May 24, 2023, Minnesota Governor Tim Walz signed a groundbreaking omnibus bill – S.F. 3035 – that includes a near-total ban on noncompete agreements. Minnesota is now one of many states – including California, North Dakota, Oklahoma, and Colorado – that either ban noncompete provisions outright or limit their use. Notably, this legislation comes on the heels of the Federal Trade Commission’s January proposed rule of a similar nature.

The law goes into effect on July 1, 2023. Here’s what Minnesota employers and businesses need to know.

What types of provisions will be affected?

The legislation defines a “covenant not to compete” as:

An agreement between an employee and employer that restricts the employee, after termination of the employment, from performing:

1. 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.

An “employee” is defined as “any individual who performs services for an employer, including independent contractors.”

Contractual provisions regarding any of the above will be considered void and unenforceable. The ban applies to all employees, not just those who fall under a certain salary threshold (as is the case in some states, such as Illinois and Maine).

Importantly, the following types of agreements are not impacted by the law—and, thus, are still permissible under Minnesota law:

• Nondisclosure agreements: Agreements designed to protect trade secrets or confidential information are still enforceable.
• Nonsolicitation agreements: Agreements restricting the ability of former employees to solicit customers or employees of their former employer are still enforceable.
• Prior agreements: The law is not retroactive. The ban only applies to noncompete agreements entered into on or after the effective date of July 1, 2023. Existing agreements will not be impacted.

In addition to the exclusions, there are two exceptions to the ban on noncompetes. First, a noncompete may be enforceable against a seller when entered into in connection with the sale of a business. Second, if the covenant not to compete is agreed upon in anticipation of the dissolution of a business, the parties may agree that any number of the parties will not carry on a similar business within a reasonable geographic area where the business has been transacted.

What does this mean for Minnesota businesses?

The exclusions to the ban are notable. On its face, the new law appears to pose an overwhelming disadvantage to Minnesota employers. But, through thoughtfully drafted agreements, businesses will still be able to protect their business interests, including proprietary information, employees, and customers.

Questions? We’re Here to Help

Minnesota’s new ban on noncompete agreements will likely necessitate changes in business strategy and the drafting of restrictive covenants. The ideal place to start is meeting with your legal counsel to ensure that all agreements are compliant with Minnesota law, while maximizing the protection of your business.

Feel free to reach out to Christian Brandt for further information at 651.251.8327 or cbrandt@hkmlawgroup.com.