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Proposed Legislation Would Ban Non-Compete Agreements in Minnesota

March 2013

By: James B. Sherman, Esq.

A bill was recently introduced in the Minnesota legislature that would make non-competition agreements between employers and their employees unlawful and, therefore, unenforceable. The bill, House File 506 (HF 506), is sponsored by State Representatives Joe Atkins (District 52B) and Alice Hausman (District 66A). If passed in the legislature and signed into law by Governor Dayton, Minnesota would join only three other states, namely North Dakota, Oklahoma and California, that have declared by law that non-competition agreements between employers and employees are not worth the paper on which they are written.

Under the current legal landscape in Minnesota non-competition agreements and other restrictive covenants, while strictly scrutinized by the courts may nevertheless be found enforceable if they are: (1) used to protect a legitimate business interest; and (2) reasonably limited as to both geographic and temporal scope in terms of post-employment restrictions. Many employers consistently use non-competition agreements to protect important and valuable assets of their business, such as trade secrets and other proprietary business information developed over time and through substantial investment of resources. However, if HF 506 becomes law one fell swoop of the legislative pen could do away with an important part of how Minnesota employers can protect their investments in intellectual property, confidential information, etc. and safeguard them from falling into the hands of competitors.

This legislation could have some positive effects for Minnesota employers, however. As management-side attorneys we at Wessels Sherman are involved in drafting and enforcing non-compete agreements for our clients; but just as often we may wind up consulting with or defending an employer that has hired an employee with a non-compete agreement with his or her former employer. If these agreements essentially become outlawed in Minnesota, hiring employers may have fewer limitations or concerns over potentially violating a non-compete agreement the applicant may have had with a former employer.

This legislation is still in committee and therefore may be amended, or may not wind up as law at all. Even if passed it is important to note that in Minnesota - just as in other states that have banned non-compete agreements - employers might still be able to use and enforce restrictive covenants that do not go as far as barring competition. For example, agreements whereby an employee is prohibited from soliciting customers, vendors and/or co-workers might still be enforceable if they meet the narrowly tailored requirements of the current law developed through the courts. Similarly, agreements requiring employees to maintain confidentiality of protectable business information and not disclose it to others outside the business either during or following employment might not be affected by this legislation if it should become law. Finally, like other states, Minnesota already has a uniform trade secrets act on the books to protect employer trade secrets from being "misappropriated."

Drafting and enforcing non-competition agreements and other restrictive employment covenants has always been a tricky proposition in Minnesota and any other state. If non-competition agreements wind up being banned in Minnesota through a new law employers will have more reason than ever to work with knowledgeable legal counsel to determine best how to protect valuable business information, customers, etc. from unfair competition and theft by competitors. Competitors most likely will be less hesitant to go after employees of their competition if non-competition agreements are unenforceable. Things could get ugly.

Questions? For answers and advice on how best to prepare for the possibility that Minnesota will join the few other states to outlaw non-compete agreements, contact Wessels Sherman attorneys James Sherman at (952) 746-1700.