Proposed Legislation Threatens to Ban Most Non-Competes in Minnesota
A bill has been introduced in this session in the Minnesota Legislature that would make most non-compete agreements in Minnesota void, including those between employers and employees. The bill, HF 506, contains exceptions for certain business transactions, but even those exceptions are very limited. The proposed bill would be codified at Minn. Stat. § 325D.72 and provide as follows:
NONCOMPETE AGREEMENTS VOID.
A contract that prohibits a party to that contract from exercising a lawful profession, trade, or business is void with the following exceptions:
(1) a seller of a business’ goodwill can agree to refrain from carrying on a similar business in a specified county, city, or part of one of them if the buyer carries on a like business in that area;
(2) partners dissolving a partnership can agree that one or more of them will not carry on a similar business in a specified county, city, or part of one of them where the partnership transacted business; and
(3) a member, when dissolving or terminating their interest in a limited liability company, can agree that the member will not carry on a similar business in a specified county, city, or part of one of them where the business has been transacted if another member or someone taking title to the business carries on a like business in that area.
Under current law in Minnesota, while courts scrutinize non-compete agreements carefully, employers and employees can agree to reasonable restrictions on a departing employee’s ability to compete with the employer. To be enforceable, such agreements must be: (i) supported by consideration; (ii) reasonable as to time and geographic scope; and (iii) limited so as to be reasonably calculated to protect the employer’s legitimate business interests.
Many businesses in Minnesota rely on non-competes to protect their investments in research, confidential information, relationships, training, and goodwill, and to prevent departing employees from turning around and using those assets to compete against the company. HF 506, if passed, appears to ban that practice, although it is not entirely clear what the bill’s language concerning “exercising” a trade or business means.
The proposed bill’s exceptions for certain business transactions are extremely narrow. For example, they only allow a seller of a business to agree not to compete in a specified county or even smaller area. Presumably, an agreement prohibiting a seller from competing regionally or nationally would be void, even if the company does business regionally or nationally.
Takeaway: If passed, HF 506 would arguably prohibit employers from entering into non-competes with their employees and, potentially, make current non-competes void. Even in the sale-of-business context, the proposed legislation may restrict a buyer’s ability to protect newly acquired goodwill and relationships. Employers should keep a close eye on this bill. We are happy to discuss with you the potential effects on your business.