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Proposed Minnesota Legislation to Prohibit Most Non-Compete Covenants

On February 26, 2013 by Schnader in Labor and Employment

By Scott J. Wenner

Anti-not to compete legislation H.F. No. 506 was introduced in the Minnesota House of Representatives on February 11 that would, if enacted, broadly void “any contract that prohibits a party to that contract from exercising a lawful profession, trade, or business” except in three specific instances:

1.      The seller of the goodwill of a business may lawfully agree to refrain from engaging in a similar business within a specific geographic area in which the buyer carries on a like business;

2.     Partners in a dissolving partnership may agree not to carry on a similar business in the specific area in which the partnership did business; and

3.     LLC members who terminate their interest in the LLC may agree not to carry on a similar business in the specific area where the LLC transacted its business if a remaining member or purchaser will continue to carry on business activities there.

While it is far more succinct, the thrust of H.F. No. 506, including its narrow carve-outs, bears a strong resemblance to California Business & Professions Code §§16600, et seq., the foundation of that state’s long-standing – and strictest in the nation – prohibition of covenants not to compete. Indeed, California’s Business & Professions Code §§ 16601 and 16602 also contain carve-outs from the broad prohibition of non-competes for the sale of the goodwill of a business and termination/dissolution of partnerships and limited liability corporations.

Troubling Considerations

If California law is any guide, and it should be in view of the similarities it shares with H.F. No. 506, employers should be prepared for a far broader impact on the enforceability of their restrictive covenants than may appear from the face of this new bill. California courts, from the Supreme Court down, have expansively construed its Business & Professions Code sections to completely forbid enforcement of non-competes other than in the narrow circumstances expressly permitted. Even more significantly, however, the courts have dramatically curtailed the enforceability of covenants with employees not to solicit the employer’s customers and/or its employees after the employment terminates to relatively short periods and narrow territories, and only where the employer can establish a concrete basis for the necessity and scope of the protection to which the parties agreed.

The rationale for extending the attack against non-compete covenants to no-solicitation agreements protecting an employer’s customers and employees is the public policy, embodied in Business & Professions Code §§ 16600, et seq., against even narrow or partial restraints on an employee’s ability to practice his or her trade or profession. The California Supreme Court reaffirmed the breadth of the state’s public policy just a few years ago in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008).

It is not overstatement in view of the experience in California to suggest that H.F. No. 506, as written, could eliminate the enforceability, and therefore the use, of restrictive covenants in the employment setting except in the narrowest of forms, and only then where the employer can establish concretely a substantial level of risk presented by the specific employee against whom enforcement is sought, to its protectable trade secrets, confidential information and, perhaps, its goodwill.

Concern to National and Regional Employers

H.F. No. 506 is not just a concern for Minnesota companies. It easily could create headaches for employers that do business regionally or nationally, including in Minnesota. As for California operations, employee restrictive covenants used by larger companies that employ workers in Minnesota would require close review and, in most cases, substantial and careful revision for those employed in Minnesota, and perhaps certain others. Additional hurdles in rolling out new agreements for existing employees, including questions over adequacy of consideration for those new agreements, also would have to be surmounted.

In short, those with experience in overseeing multistate workforces will understand the difficulties that would be presented by having “another California” for which to plan and with which to comply and contend – at least in the very important design and enforcement of post-employment restrictive covenants.

Status and Other Details

H.F. No. 506, if enacted, would add a chapter 325D to the Minnesota Statutes and would be effective on the day following its final enactment. The bill was co-authored and introduced by Reps. Joe Atkins and Alice Housman, both of St. Paul and members of the Democratic-Farm-Labor majority in the House. After its first reading H.F. No. 506 was referred to the House Committee on Labor, Workplace and Regulated Industries. The Committee has not yet scheduled any activity on the bill.