10,000 Lakes and .  .  .  No Noncompetitive?  Minnesota Passes Law Banning Non-Competes Effective July 1, 2023

10,000 Lakes and . . . No Noncompetitive? Minnesota Passes Law Banning Non-Competes Effective July 1, 2023

As expected, on May 24, 2023, Governor Tim Walz signed a new law banning noncompete agreement in Minnesota. The ban will be effective for such agreements entered on or after July 1, 2023.

By enacting the Omnibus Jobs, Economic Development, Labor and Industry appropriations bill (MN SF 30035), Minnesota becomes only the fourth state (along with California, Oklahoma and North Dakota) to ban noncompetitors.

The new law renders void and unenforceable all covenants not to compete entered by employees or independent contractors on or after July 1, 2023. The only exceptions are noncompetitive agreements relating to the sale or dissolution of a business. A “covenant not to compete” is defined as excluding non-disclosure and non-solicitation provisions, and the law states that no other provisions in an agreement containing a non-compete shall be affected. The law also prohibits employers from requiring employees to agree to clauses designing the choice of law and venue of any state other than Minnesota. Employees seeking to enforce the noncompete ban will be allowed to recover reasonable attorneys’ fees.

Employers with employees or independent contractors in Minnesota should take action to ensure that their agreements with such individuals comply with this new law, going forward from July 1.

For those interested, the relevant text of the new law is as follows:

Section 1. [181.988] COVENANTS NOT TO COMPETE VOID IN EMPLOYMENT
AGREEMENTS; SUBSTANTIVE PROTECTIONS OF MINNESOTA LAW APPLY.

Subdivisions 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 non-disclosure agreement or agreement
designed to protect trade secrets or confidential information. A covenant not to compete
does not include a non-solicitation 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 forms. 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 buyers 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 constructed 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; venues.

(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 advocate 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
any 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 DATES.

This section is effective July 1, 2023, and applies to contracts
and agreements entered into on or after that date.

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