Minnesota courts are generally willing to enforce non-compete agreements to the extent that they are drafted to protect a legitimate employer interest and meet certain legal requirements. But that could change this year, either because of a proposed federal regulation and/or because of a possible change to state law.
FTC Proposed Rule
The Federal Trade Commission (FTC) has proposed a new federal regulation to ban non-compete agreements and rescind their applicability in existing employment contracts. The FTC will accept public comments on the proposed rule until March 10 (EDIT: this has been extended to April 19). Assuming the FTC then adopts a final rule, it would likely go into effect 180 days thereafter, though legal challenges may delay it.
The proposed rule would apply broadly to prohibit non-compete agreements between employers and their employees or independent contractors. Non-disclosure and non-solicitation agreements could also be somewhat limited to the extent that they are broad enough to prohibit an employee from working in the same field.
Employers would also be required to rescind non-compete provisions currently in effect. (Yes, Employers would have to tell their employees that they are no longer subject to their current non-competes - they would not be grandfathered in!)
The proposed rule provides an exception for non-compete provisions entered into by a substantial owner in the sale of the owner’s interest in a company. However, there are not exceptions for high level employees who aren’t significant owners. Accordingly, if enacted in its current form, the proposed rule would appear to have a profound impact on numerous industries where noncompetes with high level employees are ubiquitous.
On the other hand, this proposed rule may not apply to all industries. Section 5 of the Federal Trade Commission Act (which the FTC cites as the source of its power to create this proposed rule) does not apply to certain financial institutions, common carriers, air carriers, and persons and businesses subject to the Packers and Stockyards Act (e.g., meat packers, swine contractors, stockyard owners, market agencies, dealers, and live poultry dealers). It also appears that the proposed rule may not apply to "pure nonprofits" - which could arguably exclude many health care systems, hospitals, and other organizations. The FTC defines business as one "organized to carry on business for its own profit or that of its members." There is likely room for argument within that definition, and no doubt the extent of the applicability of the proposed rule will be a major issue in the inevitable lawsuits which will arise should this proposed rule be enacted.
Possible Minnesota Legislation
The FTC rule, if it goes into effect, would override current Minnesota law and invalidate numerous non-competes across the state. But even if the FTC somehow reverses course, it is possible that the Minnesota state government might choose to follow California, Illinois, and a handful of other states who have already banned or restricted the use of non-compete agreements.
In February of 2022, a committee of the Minnesota house voted to advance a bill which would have voided non-competes, albeit with exceptions. It did not become law in 2022, however now that the DFL controls the house, senate, and governor’s office, it would not be surprising to see this bill resurface in 2023. It does not appear to be the top of the legislative agenda here in the first few weeks (perhaps the FTC's proposed rule has made it a lower priority), but that could change.
The 2022 Minnesota bill had more exceptions as compared to the FTC’s proposed rule. Most notably, highly compensated employees could still be subject to non-competes. An employee would be highly compensated if they earn an annual salary equal to the median family income for a four-person family. Another exception would be if the employer agrees to continue to pay the employee at least 50% salary during the restricted period. There would also be exceptions for business owners who sell their business, as with the FTC rule.
What now?
Business owners should continue to monitor developments in this area and begin to prepare for the possibility that their current non-competes may be invalidated. It would be wise to review current employment agreements and discuss with legal counsel strategies for the retention of high-value employees should non-competes no longer be permitted. Long-term incentive plans such as phantom stock agreements could be considered to help incentivize employee retention, for example. To the extent new employment agreements (or contract extensions) are negotiated in the coming weeks or months, employers should consider whether it is worthwhile to pay significant consideration for a non-compete which could become invalid later this year.
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