On February 11, 2013, Representatives Joe Atkins (District 52B) and Alice Hausman (District 66A) introduced Minnesota House Bill 506 (“Bill 506”). If passed, Bill 506 would significantly restrict the legality of non-compete agreements in the State of Minnesota.

Presently, although Minnesota courts view non-compete agreements as partial restraints of trade and construe them narrowly, courts will still enforce such agreements in many circumstances if they protect an employer’s legitimate business interests (such as confidential information, trade secrets, and customer goodwill) and are no broader than necessary.

Bill 506, however, would make non-compete agreements void in most circumstances and would radically alter the legal landscape between employers and employees in the State of Minnesota.

Text of Bill 506
The proposed legislation provides that:

A contract that prohibits a party to that contract from exercising a lawful profession, trade, or business is void with the following exceptions:

• 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;
• 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
• 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.

Bill 506 has been introduced to the House of Representatives. In order for it to become law, the Labor, Workforce and Regulated Industries Committee must issue a report on it, the House of Representatives and the Senate must vote to pass it, and the Governor must sign it into law. The deadline for the Committee to issue its report to keep the bill viable for this legislative session is March 15, 2013.

What Bill 506 Means for Minnesota Businesses and Employees
If passed, Bill 506 would severely limit the use of non-compete agreements in Minnesota. As the proposed legislation currently reads, non-compete agreements would only be allowed under three circumstances: the sale a business’ goodwill, the dissolution of a partnership, and the dissolution of a limited liability company. Even under those three circumstances, the geographic scope of the non-compete must be limited to a city or county.

Conspicuously absent from the list of exceptions is the most common form of non-compete agreements, those between employers and employees. Thus, employer-employee non-competes would be void under the current text of Bill 506.

The language of Bill 506 is unclear, however, whether non-solicitation agreements between employers and employees would also be prohibited. While the bill clearly outlaws agreements that prohibit a party “from exercising a lawful profession, trade, or business,” Bill 506 does not literally prohibit agreements that merely restrict employees from soliciting former customers or employees for a period of time following the termination of their employment. If the legislation progresses, it is possible that Bill 506 will be amended to provide greater certainty for both employers and employees regarding such non-solicitation provisions.

It is important to keep in mind that Bill 506 is in the initial stages of the legislative process and would represent a radical change from current Minnesota law regarding the legality of non-compete agreements. Thus, it is far from certain that the legislation will ever be passed. Further, it is likely that the language of the proposed legislation will be altered if and when it becomes law.

Laws of Surrounding States
North Dakota: Bill 506 uses almost identical language to North Dakota’s law on non-compete agreements (N.D. Code § 9-08-06). The North Dakota law only contains the first two exceptions of Bill 506, and does not include the exception for members of an LLC selling their interests.

South Dakota: In contrast, South Dakota’s law (S.D.C.L. 53-9-11) voiding non-compete agreements makes an exception for employees entering into these kinds of agreements with their employers (S.D.C.L. 53-9-8). Under South Dakota law, an employer may enter into an agreement with an employee that prohibits the employee from engaging in the same business or soliciting former customers for up to two years.
Wisconsin: The State of Wisconsin also has a statute that restricts the use of non-competes, but does not bar the use of non-competes entirely (Wis. Stat. § 103.465). Generally speaking, non-compete covenants in Wisconsin are “enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal.” Wis. Stat. § 103.465. The Wisconsin Supreme Court has applied a five-factor test to determine if a non-compete agreement is enforceable: “(1) [t]he agreement must be necessary for the protection of the employer or principal; (2) it must provide a reasonable time period; (3) it must cover a reasonable territory; (4) it must not be unreasonable as to the employee; and (5) it must not be unreasonable as to the general public.” Chuck Wagon Catering, Inc. v. Raduege, 277 N.W.2d 287, 292 (Wis. 1979).

Iowa: The State of Iowa does not have a statute pertaining to non-compete agreements. Courts in Iowa will generally enforce a non-compete agreement if it is “reasonably necessary for the protection of the employer’s business, and is not unreasonably restrictive of employee’s rights nor prejudicial to the public interest.” Ehlers v. Iowa Warehouse Co., 188 N.W.2d 368, 369 (Iowa 1971).

Tips for Minnesota Businesses and Employees
Minnesota businesses should keep a watchful eye on Bill 506. If it is passed in its present form, it will call into question the enforceability of existing non-compete agreements and make future non-compete agreements unenforceable in many circumstances.
Likewise, if Bill 506 passes, employees who are currently bound by non-compete agreements will have a basis for challenging the legal enforceability of such agreements.

At least as applied to existing non-compete agreements, Bill 506 may draw constitutional challenges from employers who may argue that the legislation represents an unconstitutional impairment of private contracts in violation of the U.S. and Minnesota constitutions.

Conclusion
Minnesota House Bill 506, if passed, will drastically reduce the number of non-compete agreements in the State of Minnesota. If you have any questions about the proposed legislation, or would like your current non-compete agreement reviewed by a Minnesota non-compete attorney, please contact one of the Minnesota non-compete lawyers of Trepanier MacGillis Battina P.A.
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About the Author:
Minneapolis employment attorney Craig W. Trepanier regularly represents Minnesota and Midwest employers and employees in their employment law matters including the use of non-competition, non-solicitation, and non-disclosure agreements. If you are wondering how this new bill may impact your non-compete agreement, please contact him at 612.455.0502 or craig@trepanierlaw.com. Trepanier MacGillis Battina P.A. is a Minneapolis employment law firm located in Minneapolis, Minnesota.