Effective July 1, 2023, Minnesota will no longer allow covenants not to compete, with limited exceptions for the sale or dissolution of a business. The law is not retroactive, nor does it apply to nondisclosure agreements or client/customer nonsolicitation restrictions.

While noncompete provisions will be unenforceable, this will not render entire contracts invalid. Moreover, individuals enforcing their rights under the new law may recover reasonable attorneys’ fees. The law also sets out new restrictions on choice of law provisions.

Minnesota joins California, North Dakota and Oklahoma as states that ban noncompete agreements, with certain limited exceptions.

IN DEPTH

WHAT IS AND IS NOT PERMITTED IN MINNESOTA?

Minnesota’s law generally prohibits any agreement between an employee and employer that restricts the employee post-termination from performing work for another employer or working in a specified geographical area. The two exceptions to that general rule are for (1) a noncompete during a sale of business (with no threshold for the amount of equity that a seller must have) and (2) a noncompete in anticipation of the dissolution of a business. For both exceptions, the noncompete must be reasonable as to time, geography and type of prohibited business.

The law also makes clear that the following agreements remain valid:

• Nondisclosure agreements, or other agreements designed to protect trade secrets or confidential business information; and

• Nonsolicitation agreements, or restrictions on the use of client or contact lists or solicitation of customers.

CHOICE OF LAW

The law requires that Minnesota law must govern the enforceability of employment contracts. It prohibits employers from requiring employees primarily residing and working in Minnesota to enter agreements that would:

• Require them to litigate claims outside Minnesota that arise in the state; or

• Deprive employees of the substantive protection of Minnesota law for a controversy arising in the state.

Agreements containing prohibited choice of law or venue provisions are voidable by employees. Moreover, employees are entitled to attorneys’ fees, including for litigation or arbitration, for enforcing their rights related to the noncompete prohibition, choice of law and choice of venue.

EFFECTIVE DATE

The Minnesota law applies to agreements entered on or after July 1, 2023, and does not apply to agreements entered before that date.

Charles Carr, a summer associate, also contributed to this article.