Changing Practices in Response to Minnesota’s Noncompete Ban

Minnesota's legislature passed a slew of laws in the 2022-23 session. One that continues to generate a fair amount of buzz among employers is the ban of virtually all noncompete agreements entered into on or after July 1, 2023, except for those relating to the sale or dissolution of a business.

Although the new law is not retroactive - meaning that any noncompete agreements entered into between employers and employees before July 1, 2023, remain enforceable in Minnesota - it limits the tools an employer can use moving forward to protect its business interests.

This changing landscape has left many employers looking for ways to revamp their current restrictive covenant practices. Many employers are now focusing their attention on nonsolicitation agreements, not only because they are traditionally more likely to be enforced in Minnesota, but because the noncompete ban does not impact nonsolicitation agreements. Indeed, the new law includes language removing from its scope "a nonsolicitation agreement, or agreement restricting the ability to use client or contact lists, or solicit customers of the employer."

Even so, in reviewing and revising their nonsolicitation agreements, employers should be careful about implementing overbroad nonsolicitation provisions that serve as de facto noncompetition agreements. This is because the new noncompete law does not just apply to agreements that an employer has labeled "noncompetition agreements." It applies to any agreement that would "restrict the employee, after termination of the employment, from performing (1) work for another employer for a specified period; (2) work in a specified geographical area; or (3) work for another employer in a capacity that is similar to the employee's work for the employer that is a party to the agreement."

Employers are taking a significant risk if they include language in their nonsolicitation agreements that prohibits employees from accepting business from former customers or providing services to them. Interpreted through a risk-averse lens, these provisions restrict an employee's ability to perform work - in other words, a "de facto" noncompete. Although a risk-tolerant employer might argue that the employee has not in fact been barred from performing work, they just cannot perform this work, the law has always viewed restrictive covenants with disfavor.

Employers should be hesitant to assume that a court will err on their side, especially given the new noncompete law. Moreover, the risk to employers in taking this gamble can be substantial, as the law allows courts to award attorneys' fees to any employee who seeks to void unenforceable noncompetition or de facto noncompetition provisions.

Employers looking for loopholes can find some cautionary tales in other states that have banned noncompetes. In California, courts were quick to call provisions regarding inevitable disclosure (i.e., employees cannot be employed with any similar business because they will use confidential or trade secret information) an unlawful restriction on competition. An employer in North Dakota was left footing the bill for an employee's "garden leave" when it agreed to pay the employee to sit on the bench, even though the employee was ready to be thrown back in the game with another employer.

Similarly, employers on the hiring side of a nonsolicitation agreement may be looking to take advantage of the gray areas in the law. For example, employers could have customers confirm there was a no solicitation provision in a contract, if they were a customer of the former employer. Will this be dispositive? Probably not. Is it one of several tools that could be helpful to have in an employer's pocket? Absolutely.

Employers may be able to play up the confusion in Minnesota case law regarding the definition of solicitation. Poorly drafted nonsolicitation provisions may allow hiring employers to enforce hard boundaries on outbound communications and clear attempts to contact a former customer but allow inbound communications, the performance of services, or acceptance of business that follow customer-initiated contact.

Call to Action

For those reasons, employers implementing changes to their nonsolicitation provisions should follow four common-sense actions:

• Call it a nonsolicitation agreement. An employer looking to effectively use the carveouts in the new law will want to be able to show that they have incorporated the proper language.
• Describe the prohibited activity as a restriction on the employee's ability to "solicit customers." This is not the place to get cute with creative descriptions. Use the specific language in the law.
• Separately define the key terms in the agreement (solicitation, customers, etc.) to incorporate restrictions that have been approved by Minnesota courts. The law does not disturb previous court decisions regarding nonsolicitation agreements. Courts are likely to adhere to previously established precedent in deciding what nonsolicitation restrictions are permissible. Definitions should be drafted with care to avoid confusion and unenforceability.
• Bolster existing nonsolicitation provisions to a reasonable term. Restrictions of up to two years can be enforceable, but employers should consider a cap of 18 months or fewer to avoid claims of unreasonableness.

Nothing can replace the protection afforded by a noncompetition agreement, whether it's a true noncompete or a de facto one. However, drafted correctly, nonsolicitation agreements can be an effective tool for employers in protecting their business interests.

Melissa Hodge and Jade B. Jorgenson are attorneys with Fredrikson & Byron in Minneapolis. © 2023 Fredrikson & Byron. All rights reserved. Reprinted with permission via Lexology.