New Law in Minnesota Voids Most Covenants Not to Compete
June 5, 2023 | Scott M. LepakThe Minnesota legislature is poised to pass a law that generally prohibits employers from entering into new covenants not to compete in Minnesota except in narrow instances. It is expected that the governor will sign the bill when it is presented to him. If signed, it will become effective the day following the governor’s signature and will apply to contracts and agreements entered into on or after that date.
Pursuant to this bill, a covenant not to compete is defined as an agreement between an employee and employer that restricts the employee, after termination of employment, from performing work:
- for another employer for a specified period of time;
- in a specified geographical area; or
- for another employer in a capacity that is similar to the employee’s work for the employer that is a party to the agreement.
These limitations are important given that the courts in Minnesota have generally refused to enforce covenants not to compete where there is not a specified time limit (i.e. it applies forever) or geographic limit (it applies across the entire planet).
This new law will broadly apply to employers who are individual(s), 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.
Employee is also broadly defined to include not only the traditional employee who performs services for an employer, but also independent contractors. Significantly independent contractors are defined as not only individuals but also 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.
Exceptions or instances where the new law does not apply:
- It does not cover existing covenants not to compete.
Existing covenants not to compete will be governed by existing law.
- It does not cover nondisclosure or confidentiality agreement.
A covenant not to compete does not include a nondisclosure agreement, or agreement
designed to protect trade secrets or confidential information. A covenant not to compete
does not include a nonsolicitation agreement, or agreement restricting the ability to use
client or contact lists, or solicit customers of the employer.
- It does not cover certain covenants not to compete that are limited and part of a buy/sell or dissolution agreement.
There is a limited exception that allows covenants not to compete in two instances:
(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 buyer 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.
There is also an important piece of the bill that generally prohibits a choice of law or venue other than Minnesota for employees who primarily reside and work in Minnesota. In other words, a covenant not to compete cannot be drafted and escape the requirements of this bill by simply noting that Texas law will apply.
The Senate version of the bill is at:
This bill (and law when the governor passes it) will require a new approach to the traditional covenant not to compete philosophy in protecting employer interests against competitions. This is particularly important given the significant mobility of employees. Please call Scott Lepak or the other lawyers at Barna, Guzy & Steffen, Ltd. to discuss impacts and strategies in this area.