Sorting out the noncompete ban

Gov. Tim Walz on May 24 signed an omnibus jobs and economic development and labor funding bill that includes a ban on employer-employee noncompete agreements signed after July 1, 2023. Dan Prokott, a partner at Faegre Drinker, discussed the impact of this legislation for businesses with Minnesota Lawyer.

Twenty percent of states bar noncompetes for low-income, hourly workers. Minnesota’s law is more sweeping, banning most noncompete agreements. The new law restricts post-employment or post-engagement agreements that bar employees and independent contractors from working for a competitor, working in a specified geographic area, or working for another employer in a similar capacity for a period of time. The only exceptions are for noncompete provisions agreed upon during the sale or in anticipation of the dissolution of business.

Importantly, Minnesota’s law does not apply solely to low-earning employees, something that Prokott says is of concern for certain businesses. While much of the media coverage focused on the impact of noncompetes on low-income workers — such as delivery drivers for Jimmy John’s — Prokott asserts that there has been less focus on how noncompetes affect higher-level, more highly compensated employees.

“The majority of clients I work with who want noncompetes, it is not for low-income employees,” Prokott says. “It’s for people like high-level executives or high-earning, talented individuals or creators of product services, or intellectual property, that the biggest concerns arise about this.”

Even with noncompetes off the table, there are other ways that businesses can protect themselves. “The law specifically says that ‘covenant not to compete’ does not include certain types of agreements. So, it does not include nonsolicitation agreements, agreements designed to protect trade secrets or confidential information, agreements to restrict the use of client or contact lists or to solicit customers,” Prokott says.

“For employees who the primary concern is that they might solicit customers away from their prior employer, like salespeople or customer support people, nonsolicitation restrictions can still be put in place with those types of employees. The noncompete agreements that just prohibits them from working for another competitor — although that may not be allowed — an employer may be able to still get the same desired effect for certain types of employees by continuing to use a nonsolicitation, nondisclosure of confidential information, and trade secret agreement.

However, Prokott disagrees that the existence of these other mechanisms fully protect businesses. “For other types of employees, the inability to use a noncompete agreement could be much more significant,” Prokott maintains. “The types of employees could be executive level or senior leadership employees, or those employees that are involved in creating intellectual property for an employer — code, design — those sorts of things. For those types of employees, restricting them from soliciting customers really isn’t the concern.”

“Having a noncompete has been the most important, primary way to protect the company’s business, because a nonsolicit doesn’t get you far enough for that particular type of employee. They aren’t out there soliciting customers. They are out there running and creating businesses, or they have a value attached to their name, likeness, and image that now a direct competitor could take advantage of,” Prokott maintains. “You can debate whether that is good or bad, but it is a real effect of the law.”

“The former employer has invested, time, resources, and benefits to develop that person’s public image. Now, they may be able to use that for a directly competing business,” Prokott asserts.

Besides this concern, former employers may also worry that they no longer have control over confidential information or trade secrets. “Another concern is that they could misuse confidential information or trade secrets which, although that would still be prohibitable—you could still go after the employee for the confidential information or trade secrets—that former employer doesn’t have insight into what their former executive or creator if intellectual property is doing at the new employer,” Prokott avers. “There’s a real concern that the former employee could be misusing confidential information, using trade secrets, and the former employer just won’t know and isn’t really able to prevent that employee from working from the competitor as a result of the new law.”

Prokott has been busy providing guidance to clients questioning how the new law may affect their contracts. “Take a close look at your employment agreements,” Prokott advises. “Think about what modifications are appropriate to make in light of the new law.”

Prokott also says that it is important for businesses that have a presence in states other than Minnesota look at their agreements even more carefully. “There have been a number of other laws that have passed in other states, so I am encouraging my clients to look at whether they have employees in other states that have passed noncompete laws that have unique requirements like Massachusetts or Colorado, for example,” Prokott states. “Make sure you are thinking about the different versions of agreements, or different provisions in the template agreement, that may need to be included for different states. Think carefully about robust language around the protection of confidential information and trade secrets, about nonsolicitation, making sure the scope captures as much as it possibly can in light of the new law to protect the company’s legitimate business interests.”

“The other piece of the law that employers have to be aware of is the choice of law and venue limitations,” Prokott notes. The new law restricts contract provisions that require non-Minnesota laws or venues for disputes. “Clients need to be looking at that if they have Minnesota-based employees, the types of agreements they are having them sign, do they include non-Minnesota choice of law and venue provisions and do those need to be changed in light of the new law?”

While the landscape on noncompetes is changing at the state level, there is also movement at the federal level. In January, the FTC proposed a nationwide ban on noncompete agreements. Then, in May, the National Labor Relations Board General Counsel issued a memo on noncompetes, writing that most of these agreements violate United States labor law. “That’s not law, it’s a memo, and it hasn’t changed the National Labor Relations Act,” Prokott says. “But it is one more thing that employers need to consider with respect to entering into agreements with employees who are subject to the protections of the National Labor Relations Act.”