Where Does Minnesota Stand on Noncompetes?
The FTC on Jan. 5 proposed a new rule that would ban noncompete agreements nationwide. DCStockPhotography / Shutterstock.com

Where Does Minnesota Stand on Noncompetes?

A Minnesota-based Maslon attorney weighs in on the Federal Trade Commission’s proposal to eliminate all noncompete clauses.

Last week, the Federal Trade Commission proposed a plan to ban noncompete clauses across the nation.

These clauses, which the FTC called “exploitative” practices, typically restrict employees’ ability to work with a competitor for a period after they leave a job. The agency estimates this sort of covenant affects one in five workers.

States like California, North Dakota, and Oklahoma already ban noncompete agreements. Other states restrict their use. So, where does Minnesota stand when it comes to these covenants?

While the state lacks a statute directly restricting noncompetes, the law does disfavor them. Melissa Muro LaMere, an employment and business litigation attorney with Minneapolis law firm Maslon LLP, said courts in Minnesota at both the federal and state level do a good job of enforcing noncompete to the extent necessary to protect legitimate business interests over confidential information and goodwill or relationships.

“It has always been inappropriate in Minnesota, to give (low-wage and frontline) employees noncompetes and it has always been inappropriate in Minnesota to enforce a noncompete against those employees,” she said. “And increasingly, we see that judges are not letting employers get away with it when they try to enforce noncompetes against those kinds of workers. So I think in Minnesota, we already have a really well-balanced body of law on non-competes.”

Melissa Muro LaMere
Melissa Muro LaMere, attorney with Maslon LLP

Traditionally, noncompete clauses were used in contracts for high-paid managers who were more likely to have access to trade secrets and confidential information. The proposal includes one exception for noncompetes between buyers and sellers of companies if the person owns at least 25% of the firm, according to the FTC’s plan. But, over the years, there has been a rise in noncompetes imposed on lower-wage workers. Many employment attorneys argue it’s wrong to prevent many categories of workers, such as fast-food employees, from switching employers through the use of this kind of covenant.

If the FTC votes to enact its plan, companies would no longer be allowed to use noncompetes and would have to rescind almost all covenants that currently exist. Muro LaMere told TCB this would have a major impact on the state as employers do often use these covenants to protect confidential information and customer and employee relationships.

“Any noncompetes that are currently in existence will be just wiped off the planet, and that’s going to be an enormous issue for employers to deal with as they figure out how to protect their confidential information in their relationship,” she said.

While Muro LaMere says there are regulatory improvements needed, she believes the FTC’s proposed ban “throws the baby out with the bathwater.”

But she said there is still room for further protection against unnecessary and restrictive noncompetes. It’s an issue that continues to be of interest in Minnesota, particularly by the DFL. With both chambers of the Legislature led by DFLers, movement is more likely at the state level, she said.

Indeed, a year ago, when the DFL controlled the Minnesota House but not the Senate, a House panel approved a bill to limit noncompete clauses, though it never became law.

“Whether it’s changing the enforceable scope of a noncompete or requiring increased disclosure requirements as some other states have done, we’re not really sure what that’s going to look like, but those of us who practice in that space do expect some movement there,” she said.

Regardless of state rules, all employers will have to adapt if this proposal goes into effect. The ban could mean companies have to place a greater emphasis on human resource practices, Muro LaMere said.

“Employers that have relied on noncompete to hold their employees hostage will no longer be able to rely on that tool to have a steady employee base,” she said. “They’re going to have to actually figure out how to fix problems with their culture or fix other problems with their employee retention so that they don’t see the kind of turnover that they’re afraid of.”

The FTC proposal does not apply to non-solicitation agreements, a different kind of restrictive covenant that prohibits former employees from attempting to recruit employees from their former company, Muro LaMere notes.

“I think the biggest thing that employers are going to have to do is ensure they have protections for their confidential information and customer and employee goodwill in the form of non-solicitation agreements,” she said.

There is no one size fits all solution to restricting restrictive covenants on the whole but there are a few key points that should be addressed, Muro Lamere said. Employers need to do a better job of differentiating between employees that actually have a hold on their confidential information and their relationships and ensuring that they’re only offering restrictive covenants to those employees. But she said she does believe there is room for reasonable legislation that clarifies the enforceable scope of restrictive covenants, reducing worker uncertainty of options within their industry. Lastly, case law needs to clearly define what is “reasonable” when it comes to noncompetes.

“The problem with noncompetes, in general, is that they are enforceable based on their reasonableness, and what is ‘reasonable’ can be really unclear,” Muro LaMere said. “[Employees] are not legal scholars; it’s not even clear to lawyers a lot of the time.”

Most noncompete practitioners Muro LaMere has spoken with do not expect the FTC proposal to pass as written, but there’s a reason this topic has gained as much buzz as it has. In her decade working with noncompetes, Muro LaMere has seen the bar for what is considered a “reasonable” restrictive covenant rise among judges. Noncompetes that were deemed reasonable a decade ago may no longer be upheld by a judge today.

“Even if the statutes have not changed, what a judge will enforce absolutely has changed,” she said.