Employers have long relied on restrictive covenants such as noncompete and nonsolicitation agreements to protect their business and market position. Historically, agreements such as noncompete agreements had to be limited in scope – including duration and geographic area – in order to be enforceable. And I previously wrote on this topic back in November 2022.
However, a new Minnesota law that went into effect in July 2023 now makes noncompete agreements largely unenforceable in the employment context. There are many nuances to this shift in Minnesota’s legal framework, and employers should ensure that they are in full compliance with the new law moving forward.
Nonsolicit Vs. Noncompete Agreements
Both noncompete and nonsolicitation agreements are restrictive covenants. They restrict individuals’ freedom to pursue employment and business opportunities, both during employment and for a certain time after.
Here’s a breakdown of these two types of agreements:
- Noncompete agreements prevent employees from entering into direct competition with their current or former employer.
- Nonsolicitation agreements prevent departing employees from soliciting clients, customers or other employees of their former employer.
Both promote the same overarching goal of protecting employers’ business interests.
Under the new Minnesota law, noncompete agreements entered after the law went into effect will not be enforceable if they limit former employees’ activities. This is true even for high-level employees such as managers and executives. Noncompetes will also be unenforceable for most independent contractors.
The law prevents Minnesota employers from structuring their contracts to apply the more permissive laws of other states.
Nonsolicitation And Related Agreements Remain Valid
Importantly, the law doesn’t impact the validity of nonsolicitation agreements. Employers can continue to protect their interests by safeguarding existing clients and customer lists. Confidentiality and nondisclosure agreements remain valid and enforceable.
Employers can also still utilize forfeiture agreements, in which employees agree to give up certain benefits or incentives if they engage in activities that compete with the employer.
A Key Exception To The Unenforceability To Noncompete Agreements
Noncompete agreements remain enforceable upon the sale or dissolution of an existing business, including asset and stock purchase agreements. Specifically, the buyers can restrict the sellers from competing with the business post-sale. However, the restriction must still be reasonable in terms of duration and geographic area.
Employers Risk Financial Penalties For Noncompliance
The new law gives employees the right to seek attorney fees in actions to enforce their rights with regard to invalid noncompete agreements. This aspect of the law is meant to deter employers from noncompliance.
Adapting to The New Legal Framework
In light of this substantial legal shift, employers will need to leverage other tools to protect their interests. Nondisclosure agreements, nonsolicitation agreements, and forfeiture agreements can be tailored to provide more robust protections. It will be key for employers to closely review such agreements to maximize their protections while maintaining compliance and to discuss the same with their legal counsel.
