Minnesota’s Limitation on Non-Compete Agreements

On May 24, 2023, Minnesota Governor Tim Walz signed into law a bill banning nearly all post-termination non-compete agreements with employees and independent contractors. With the signing of the bill, Minnesota became the fourth state to statutorily restrict non-compete agreements with only narrow exceptions, joining California, Oklahoma, and North Dakota. Following the other states’ lead, the Minnesota law largely mirrors the proposed FTC non-compete agreement rule, though there are several key distinctions between the Minnesota law and the FTC’s proposed rule. (See our client alert for coverage of proposed FTC rule banning non-competes).

• Retroactivity: The law is effective as of July 1, 2023, and is expressly not retroactive, a distinction from the FTC’s proposed rule. Accordingly, the Minnesota law applies only to contracts entered into after that date.
• Applicable to Employees and Independent Contractors: The Minnesota law is broader in coverage than the FTC proposed rule, capturing both employees and independent contractors. Independent contractors include corporate entities that an employer may require an individual to form in order to receive a contract under an independent contractor agreement. Generally, the new law prohibits agreements between an employer and employee (including independent contractors) that restrict employees, upon termination, 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.
• Exceptions: Because the statute defines covenants not to compete in the post-employment context, employers can still enter into non-competes with employees or independent contractors during their employment or engagement. Otherwise, the new law allows non-competes entered into after July 1, 2023 in only two narrow circumstances: (1) the sale of a business where the seller is prohibited from carrying on a similar business within a reasonable geographic area and for a reasonable length of time; and (2) the dissolution of a business that prohibits the applicable parties from carrying on a similar business within a reasonable geographic area where the business has been transacted. The FTC’s proposed ban similarly contains an exception in the M&A context.
• Non-Covered Agreements: The Minnesota law expressly does not apply to nondisclosure, confidentiality, trade secret, or non-solicitation agreements, including agreements with employees restricting their ability to use client or contact lists or restricting the solicitation of customers after employment ends, while the FTC proposal applies to any such agreements that function as a non-compete.
• Choice of Law/Venue: The law prohibits an employer from requiring an employee who primarily resides and works in Minnesota, as a condition of employment, to agree to a provision that would require a claim or controversy arising in Minnesota: (1) to be adjudicated outside of Minnesota; or (2) that deprives the employee of the substantive protections of Minnesota law. This choice of law/venue restriction only applies to agreements entered into after July 1, 2023.
• Takeaway: Companies with operations, employees, or independent contractors in Minnesota should review, and if necessary revise, their internal policies with respect to non-competes. Since the rule is not retroactive, agreements that are already in effect as of July 1, 2023 need not be amended to conform with its new requirements.