|March 8, 2013|
Previously published on February 28, 2013
Many businesses in Minnesota execute non-compete agreements with their employees in order to protect their legitimate business interests. Non-compete agreements are also often key terms in vendor/supply arrangements, consulting agreements, franchise agreements, partnership agreements, limited liability company agreements, merger agreements and stock and asset purchase agreements. Minnesota courts generally have upheld non-compete agreements, so long as the restrictions are reasonable and the agreements were properly executed in exchange for adequate consideration. However, a recent bill introduced in the Minnesota legislature may change that precedent.
On February 11, 2013, Minnesota Representatives Joe Atkins (DFL, District 52B), chair of the Commerce and Consumer Protection Finance and Policy Committee, and Alice Hausman (DFL, District 66A), chair of the Capital Investments Committee, introduced legislation proposing to void non-compete agreements with very limited exceptions. The bill-H.F. No. 506-has been referred to the Labor, Workplace and Regulated Industries Committee. To date, a hearing on the bill has not been scheduled and a companion Senate bill has not been introduced.
Only a few states in the country have enacted laws that void non-compete agreements to the extent proposed by this bill. If enacted, this bill will significantly impact the enforceability of non-compete agreements under Minnesota law.
The Proposed Legislation
The bill proposes to void contracts, including employment agreements containing restrictive covenants, that prohibit parties from "exercising a lawful profession, trade, or business." The legislation includes three narrow exceptions subject to narrow geographic limitations: (1) when a business is sold (i.e., when the seller of a business agrees not to compete with the buyer), (2) when a partnership is dissolved (i.e., when a former partner agrees not to compete with her former partner), and (3) when a limited liability company is dissolved (i.e., when a former LLC member agrees not to compete with another former member).
The text of the H.F. No. 506 is:
Section 1. [325D.72] NONCOMPETE AGREEMENTS VOID.
A contract that prohibits a party to that contract from exercising a lawful profession, trade, or business is void with the following exceptions:
(1) a seller of a business' goodwill can agree to refrain from carrying on a similar business in a specified county, city, or part of one of them if the buyer carries on a like business in that area;
(2) partners dissolving a partnership can agree that one or more of them will not carry on a similar business in a specified county, city, or part of one of them where the partnership transacted business; and
(3) a member, when dissolving or terminating their interest in a limited liability company, can agree that the member will not carry on a similar business in a specified county, city, or part of one of them where the business has been transacted if another member or someone taking title to the business carries on a like business in that area.
EFFECTIVE DATE. This section is effective the day following final enactment.
The Proposed Legislation Suffers From Several Defects
The bill is vague and ambiguous. The bill contains several undefined, vague terms that could lead to confusion and disagreement over the scope of the bill's reach. For instance, the bill voids a contract that prohibits a party "from exercising a lawful profession, trade, or business." This phrase is undefined. Although the proposed statute is titled "Noncompete Agreements Void," it does not define "Noncompete Agreement." Such gaps make other restrictive covenants, such as non-solicitation provisions (provisions that prohibit an employee from soliciting a former employer's customers or other employees), susceptible to being voided, depending on how the language of the bill is interpreted.
Additionally, vague terms in the limited exceptions provisions such as "similar business" and "like business" will likely invite a significant amount of litigation. Also, even though the bill states that it will be "effective the day following enactment," it is unclear whether the bill would void existing contracts entered into prior to enactment or only those contracts entered into after the bill's effective date. Of course, it would be exceedingly unfair to retroactively invalidate restrictive covenants where substantial consideration has been paid in exchange for the covenant (such as in the sale of business context).
The bill is overbroad. The bill also appears to void the entire contact, not just certain provisions relating to the invalid restrictive covenant(s). Such a law could wreak havoc on thousands of contracts across the state, and could adversely impact employers and employees alike by voiding other key provisions contained in employment contracts (such as terms addressing non-disclosure of confidential information, assignment of intellectual property, compensation, duration of employment, or severance).
The bill's exceptions are narrow and outdated. The identified exceptions are excessively narrow and fail to recognize the fact that the overwhelming majority of major commercial activity is not conducted within "a specified county, city, or part of one of them." In a world where business is conducted across state and national boundaries, the proposed exceptions reflect a naïve view of Minnesota business. Even on the micro level, the exceptions are exceedingly narrow. The bill appears to prohibit a purchaser of a business on the county line from restricting the seller from setting up a competing business in an adjoining county.
The Proposed Legislation Would Be Bad For Business
The proposed legislation also would be bad for Minnesota business. If the bill is passed and restrictive covenants are largely eliminated from contracts, companies may take steps to avoid Minnesota law, or Minnesota altogether. Some companies may choose to employ key scientific and technical talent outside of Minnesota. Other companies may no longer choose Minnesota as the forum to resolve legal disputes surrounding employment contracts. Companies in highly competitive industries may choose to leave or significantly reduce their presence in Minnesota. And Minnesota businesses may find it difficult to find buyers or may be hesitant to purchase other Minnesota companies because of the limited scope of the identified exceptions to void contracts.