How Minnesota’s New Ban on Non-Compete Agreements Could Affect the Construction Industry

Category | Briefing Papers

By Kylee Evans

Kylee is an associate of the firm’s Construction Law Department.  She can be reached at 612.359.7668 or KEvans@fwhtlaw.com.

Minnesota has recently passed a bill banning non-competition agreements (“non-competes”) within the state. The bill became effective in the state on July 1, 2023. Employers—particularly construction industry employers—should consider how the change may impact future construction contracts.

Non-Competes in Minnesota

Non-competes are agreements between an employer and employee, generally signed at the beginning of an employment contract, which restrict where, when, and how the employee may work in the future if they leave the company.^[1] Their goal is to prohibit direct or indirect competition between the employee’s future employer and the current company. After all, it can be frustrating to put in years of training for a specialized employee, just for them to take their training elsewhere to benefit a competitor. Non-competes are also used to protect certain trade secrets and proprietary information.

Non-competes are one of a few agreements which fall under the broad category of restrictive covenants. Restrictive covenants have three types. The most well-known are probably restrictions on future employment or a non-compete. The second are non-solicitation agreements, which can be broken down into two types: (1) agreements not to solicit (take) employees with you when you leave an employer; and (2) agreements not to solicit (take) customers with you when you leave an employer. And the final type is a non-disclosure or confidentiality agreements which prevent employees from divulging business and trade secrets to others. Non-disclosure agreements are considered the least restrictive on the worker’s ability to get future employment, and are thus upheld much more frequently. They also generally do not need to meet the same requirements as non-compete or non-solicitation agreements.

Non-competes are sometimes seen by the general public as a rare method for employers to restrict a specialized employee’s future prospects. However, their use is quite common, particularly in the construction field. This is because key players in the construction industry are highly trained and can be hard to replace. Consider, for example, a construction estimator. Estimators tend to be industry experts with experience and have access to competitive bidding information, pricing strategies, and other proprietary information. Many construction companies used non-competes to protect this proprietary information.

In most states, Minnesota included until recently, there are no state laws regulating non-compete agreements. Instead, their enforcement is left to the courts. Courts tend to disfavor non-competes because they can “restrain trade.”^[2] To enforce a non-compete in Minnesota, the agreement had to be reasonable.^[3] Reasonableness was determined under a balancing test which considered whether the restraint was no greater than necessary to protect the employer’s business.^[4] These restrictions mirror those found in courts across the nation.

However, even before Minnesota passed a ban on non-competes, the U.S. Justice Department and the Federal Trade Commission began their own crackdown on restrictive covenants. This came in response to President Biden’s Executive Order establishing a “whole-of-government effort to promote competition in the American economy,” which included directions for the FTC to increase enforcement against non-competes.^[5] In January, the FTC proposed a rule which would ban non-compete clauses completely across the nation through its powers under the Sherman Act.^[6] The Justice Department’s Antitrust Division, which had already increased its enforcement efforts in response to Biden’s Executive Order, offered support of the FTC’s proposed rule.^[7]

Details of Minnesota’s New Law

On May 16, 2023, Minnesota lawmakers passed a bill banning new non-compete agreements.^[8] The ban will apply to all employees, independent contractors, and even volunteers in the state, regardless of where the employer may reside. This means that even companies that are headquartered out of state will have to abide by Minnesota’s ban if it employs Minnesota residents. An employer may not attempt to contract around the law by putting in choice-of-law or choice-of-venue clauses which require the contract to adhere to another states’ laws or contract interpretation principles.

Notably, the law’s definition of non-compete agreement does not include non-solicitation, non-disclosure, or confidentiality agreements. Those kinds of agreements would consequently still be enforceable under current legal standards. Additionally, the law makes an exception for non-compete agreements that are made during the sale or dissolution of a business.

Minnesota’s law closely mirrors similar laws in California, Oklahoma, and North Dakota, as well as proposed bills in various states across the nation. Interestingly, California courts have created an exception under their law that allows a non-compete agreement where it is necessary to protect an employers’ trade secrets. However, even under this exception, employers rarely prevail. Minnesota courts may similarly make a judicial exception, but it likely will not offer sufficient relief. Instead, companies should look to the other exceptions in the statute, discussed below.

Potential Impact on the Construction Industry

According to a report conducted by the Economic Policy Institute, nearly half of all employers with more than 50 employees use some form of non-compete.^[9] Although many of those non-competes apply to executive-type positions, it has become more common for lower level positions to include non-competes in their standard employment agreement. The construction industry has adopted this practice for both high and low skilled workers in the past as well.^[10]

In the wake of Minnesota’s new law, construction companies may see an increase in litigation seeking to void any newly formed non-compete agreements. Although it seems obvious that such agreements will be invalid, in states that maintain a ban on non-compete agreements many employers continue to use them. This can lead to employees rejecting offers that contain non-competes. The failure to eliminate non-competes from standard employment agreement could expose the employer to the risk of paying an employee’s legal expenses if the employee later challenges the non-compete in court.

Without the tool of a non-compete, companies may have to turn to state and federal trade secret laws to protect their business secrets. Minnesota’s Uniform Trade Secrets Act allows companies to seek an injunction prohibiting “actual or threatened” misappropriation of a trade secret.^[11] The federal Defend Trade Secrets Act also allows a court to “issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret” in extraordinary circumstances.^[12] Although both acts can offer protection if the employer fears that a leak of its trade secret is imminent, the relief can be reactionary, rather than preventative.

As a preventative measure, companies could look to non-disclosure and non-solicitation agreements to protect proprietary information. Minnesota’s new laws exempt those kinds of agreements from the general ban. However, companies should be careful not to create an overly broad non-disclosure agreement. Cases in California highlight the effect that a ban on non-competes can have on even these exempted agreements. In 2020, the California Court of Appeals held that a company’s confidentiality agreement was too broad and essentially acted as a voidable non-compete.^[13] In that case, the company defined “confidential information” to include “all information that is usable in or that relates to the [applicable] industry.” The court held that such an overbroad definition would bar the employee from doing any work in his field. Companies should consider the breadth of their non-disclosure agreements to avoid similar issues in Minnesota.

Conclusion

Under Minnesota’s new law, companies are prohibited from creating new non-compete agreements. However, a company that fears the loss of important trade secrets or client contacts may still be able to protect those interests through the use of a non-solicitation agreements and non-disclosure agreements. Talk to an attorney to determine what kind of agreements might work best for your company.

Announcements

Fabyanske, Westra, Hart & Thomson, P.A. has been honored as a 2024 Best Lawyers “Best Law Firm” with a First Tier ranking in Minnesota in the practice areas of Banking and Finance, Construction, Litigation-Construction, Litigation-Real Estate and Real Estate Law.

Minneapolis attorney Rory Duggan, a shareholder in the firm’s Real Estate Law Department, has been selected as a Fellow of the American College of Mortgage Attorneys.

Congratulations to the Fabyanske, Westra, Hart & Thomson, P.A. attorneys who have been named 2023 Minnesota “Rising Stars”. They are Hugh Brown, Colin Bruns, Elise Radaj, and Leon Wells. “Rising Stars” are nominated by their peers and must be 40 years old or under, or have been practicing for 10 years or less. No more than 2.5 percent of the lawyers in the state are named to the list.
[1] 5 Things You Need To Know About Non-Compete Agreements, Thomson Reuters (Mar. 11, 2022), https://legal.thomsonreuters.com/en/insights/articles/the-basics-of-non-compete-agreements.

[2] Safety Ctr., Inc. v. Stier, 903 N.W.2d 896, 898 (Minn. Ct. App. 2017).

[3] Softchoice, Inc. v. Schmidt, 763 N.W.2d 660, 667 (Minn. Ct. App. 2009).

[4] Id.

[5] Fact Sheet: Executive Order on Promoting Competition in the American Economy, White House Briefing Room (July 9, 2021), https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy.

[6] Non-Compete Clause Rule, 88 Fed. Reg. 3482 (Jan. 19, 2023); FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, Fed. Trade Comm’n (Jan. 5, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.

[7] U.S. Dep’t Just. Antitrust Div., Comment Letter on Proposed Rule to Ban Non-Compete Clauses (Apr. 19, 2023), https://www.justice.gov/atr/page/file/1580551/download; see also Noam Scheiber, U.S. Moves to Bar Noncompete Agreements in Labor Contracts, N.Y. Times (Jan. 5, 2023), https://www.nytimes.com/2023/01/05/business/economy/ftc-noncompete.html.

[8] S.F. No. 3035, Art. 6, Sect. 1, at 66.12 (Minn. Conf. Rep. 2023), https://www.revisor.mn.gov/bills/text.php?number=SF3035&version=0&session=ls93.0&session_year=2023&session_number=0&type=ccr.

[9] Alexander J.S. Covin & Heidi Shierholz, Noncompete Agreements (Econ. Pol’y Inst. ed., 2019), https://files.epi.org/pdf/179414.pdf.

[10] Molly Gwin, Best Practices for Non-compete Agreements, Constr. Exec. (Jan. 12, 2018), http://www.constructionexec.com/article/best-practices-for-non-compete-agreements.

[11] Minn. Stat. § 325C.02(a).

[12] 18 U.S. § 1836(b)(2).

[13] Brown v. TGS Mgmt. Co., LLC, 57 Cal.App.5th 303, 316 (2020).