Employee Mobility and Restrictive Covenants - Page 5 of 16

Minnesota Legislature Agrees to Complete Ban on Noncompetes

On May 11, 2023, the Minnesota Legislature agreed to a new law rendering void and unenforceable all future covenants not to compete, with limited exceptions for agreements entered into in connection with the sale or dissolution of a business. Following a final vote in the House and Senate, the law will be sent by Gov. Tim Walz for his signature. The law is written to take effect July 1, 2023, and to apply to contracts and agreements entered into on or after that date. With enactment, Minnesota will become the fourth state to impose a complete ban on employment-related noncompetes (joining California, Oklahoma and North Dakota).

The law prohibits any noncompete agreement with an employee or independent contractor that restricts the person from working for another business after termination of employment or independent contractor engagement regardless of a person’s income, with only two very limited carveouts for noncompetes agreed upon (1) during the sale of a business where the agreement prohibits the seller from carrying on a similar business within a reasonable geographical area for a reasonable period of time, or (2) in anticipation of the dissolution of a business where the dissolving partnership or entity agrees that all or any number of the partners, members, or shareholders will not carry on a similar business in a reasonable geographical area for a reasonable period of time. Subject to those limited exceptions, the law provides that any “covenant not to compete” contained in a contract is void and unenforceable. Importantly, a “covenant not to compete” does not include nondisclosure, confidentiality, trade secret, or non-solicitation agreements (including specifically those restricting the ability to use client or contact lists or restricting the solicitation of customers). Also, because “covenant not to compete” is defined in terms of prohibiting conduct “after termination of the employment,” the new law will not prohibit agreements that restrict an employee or independent contractor from working for another business while performing services for a business.

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Delaware Is Increasingly No Longer a Safe Bet for Restrictive Covenants and Default Choice of Law Provisions

Employers should be careful before defaulting to Delaware choice of law for restrictive covenant agreements. Historically, Delaware law presented a good option, particular for Delaware entities. However, a series of court decisions out of that state have severely limited the advantages of that approach.

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Non-Competes Will Continue to Be Under Attack in 2023

The U.S. Federal Trade Commission (FTC) recently issued a notice of proposed rulemaking that would dramatically change the playing field for employers who have post-employment non-compete agreements with employees or have a practice of requiring such agreements as a condition of employment. The FTC’s proposed rule is open for public comment until March 20, 2023. Whether the FTC’s proposed rule (once finalized) will survive legal challenges is a hotly debated topic among members of the legal community, many of whom believe that Congress did not clearly empower the FTC with the authority to enact such a broad rule, and therefore the rule will not survive given the U.S. Supreme Court’s 2022 decision in West Virginia v. EPA.

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FTC Seeks Feedback on Proposed Rule on Use of Non-Competition Agreements

The Federal Trade Commission announced that it will hold a virtual public forum on Thursday, February 16, 2023, to address its proposed rule on the use of non-competition agreements, as well as certain non-solicitation and non-disclosure agreements. The purpose of this forum is to examine the proposed rule and provide an avenue for individuals, including both employees and employers, to voice their opinions and discuss their experiences with non-compete agreements.

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FTC’s Proposed Rule Banning Employment-Based Non-competes

The Federal Trade Commission announced a proposed rule that would, if adopted, ban the use of employment-based non-competes and require employers to rescind existing non-competes. The FTC’s proposed rule would reshape large segments of the American economy and supplant numerous recently enacted state statutes restricting the permissible use of non-competes and other restrictive covenants. If the proposed rule becomes effective, employers will need to consider alternatives to protect customer and employee relationships, and confidential information.

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Top Noncompete Developments of 2022

2022 was a relatively quiet year in terms of noncompete developments. However, both state legislatures and courts continued to take steps to narrow the circumstances under which noncompetition and employee non-solicitation agreements may be enforced. As such, employers remain well advised to continue to: (1) be selective in identifying those categories of employees required to sign noncompete agreements; (2) rely on choice of law and venue provisions as allowed to maximize the chances of enforceability; (3) keep a keen eye on statutory developments; and (4) avoid no-poach agreements with other employers.

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