Non-Compete Agreements: Growing Hostility and Suspicion

May 10, 2022

The field of employee non-compete agreements (“NCA”) is changing, broadly reflecting a growing concern about the adverse effects of NCAs on employee labor prospects and market competition. Employers must stay abreast of the legal status of NCAs in Minnesota as well as the general trends on NCAs throughout the nation to plan their employment contracts accordingly.

The Law of Non-Compete Agreements in Minnesota and the U.S.

NCAs are provisions in employment contracts or separation agreements in which the employee agrees not to compete with the employer or work for a competitor after termination of the employment relationship. Typically, the non-compete term begins upon employment and extends for a specific period of time after the employee’s separation. The NCA normally sets out the duration of the non-compete period, its geographic limitation, and the areas or fields in which the employee may not compete.

The enforceability of NCAs has historically been subject to state common law and contract law. In Minnesota, NCAs have traditionally been “looked upon with disfavor, cautiously considered, and carefully scrutinized” by courts, recognizing the employer’s economic advantage over employees and the potentially negative impact of NCAs on competition in the marketplace. Since NCAs are disfavored, such non-compete restrictions will be read narrowly by courts, and ambiguities will be construed against the employer that drafted the contract.

However, despite the policy factors weighing against the enforcement of NCAs, courts have long recognized that many NCAs are necessary to protect two legitimate business interests of the employer: the employer’s good will and confidential information such as trade secrets. In particular, the employer’s good will was originally at issue during the sale of a business – the new business owner expected to receive the business’s “good will,” which would be greatly diminished if the old business owner could poach back the business’s customers. Over time, this argument was applied to other scenarios, such as, upon separation, a physician being prohibited from practicing medicine within a certain number of miles of the city of his or her employer. Without the NCA, the employer’s patients would no-doubt follow the employee, robbing the employer of its hard earned good will in the community.

Because of these competing policy concerns, the enforceability of NCAs has historically been subject to multifactor tests created by state courts. Minnesota is no exception: under the Bennett test, Minnesota courts will consider whether the NCA strikes a reasonable balance between the legitimate business interests of the employer and employee’s right to work. In particular, if a legitimate business interest is found, the next question will be whether the NCA has imposed upon the employee “any greater restraint than is reasonably necessary to protect the employer’s business, regard being had to the nature and character of the employment, the time for which the restriction is imposed, and the territorial extent of the locality to which the prohibition extends.”

Some states take more hardline approaches. For instance, New York courts do not employ a balancing test, and will instead enforce all NCAs against the employee as long as the employee “has been afforded the choice between not competing (and thereby preserving some benefit) or competing (and thereby risking forfeiture of that benefit).” On the other end of the spectrum, a few states, such as California, have banned NCAs altogether.

Updates and Trends in Non-Compete Agreement Legislation

The biggest signal of waning NCA popularity comes from the Biden Administration. On July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy in which he accused “[p]owerful companies” of “requir[ing] workers to sign noncompete agreements that restrict their ability to change jobs.” He further ordered the FTC to consider exercising its statutory rule making authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” In a related Fact Sheet, the President clarified that his Executive Order was encouraging the FTC to “ban or limit non-compete agreements.” While the business community has voiced major opposition to this proposal and the FTC has yet to issue any new rulemaking, the President continues to push this agenda, stating as recently as January 24, 2022 that curtailing NCAs was a “priority” for his office.

Members of Congress have also introduced bills that would significantly prohibit the use of NCAs in many contexts, such as in the Workforce Mobility Act, introduced in February 2021. Among other things, the Workforce Mobility Act would restrict the use of NCAs to the sale of a business or the hiring of senior executives. It would also require employers to explicitly inform their employees of the limitations NCAs impose. The business community has also criticized this Act, particularly in its attempt to federalize an area of law traditionally reserved to the states.

However, states have been trending against NCAs in the recent years as well. In 2019, Maryland, Maine, New Hampshire, and Rhode Island all passed legislation prohibiting NCAs for low-wage workers and/or requiring a stronger notice to employees regarding these NCAs. In 2020, Virginia and Nevada banned most NCAs for low-wage employees. In 2021, Oregon amended its non-compete statute to erode the enforceability of NCAs, and Nevada further amended its laws to provide penalties for employers that attempted to enforce NCAs prohibited by earlier laws. Also in 2021, Illinois jumped on the bandwagon and banned NCAs for employees making less than $75,000 per year, and the District of Columbia simply banned NCAs outright in nearly all circumstances.

While Minnesota did not see such sweeping changes, two companion Bills have been introduced in Minnesota that would completely prohibit NCAsin certain contexts.

The first companion Bill – HF 1917 and SF 2130 – would unilaterally render “void and unenforceable” any NCA contained in a partnership or employment contract regarding any licensed physician. HF 1917 was introduced on March 4, 2021 and has been referred to the House Health Finance and Policy Committee. SF 2130 was introduced on March 17, 2021 and was has been referred to the Senate Health and Human Services Finance and Policy Committee. The Bill also appears to be a reintroduction of a Bill from the previous legislative session which was returned to the Committee at the adjournment of the regular session.

The second companion Bill – HF 3009 and SF 2837 – would also make any NCA between a child care provider and its employees “void and unenforceable.” HF 3009 and SF 2837 were introduced on February 3, 2022 and were referred to the House Labor, Industry, Veterans and Military Affairs Finance and Policy Committee and the Jobs and Economic Growth Finance and Policy Committee, respectively.

At this time, the House and Senate committees have not held hearings on either of these recent Bills, but their introduction broadly reflects the trend against NCAs throughout the United States.

Employer Takeaways

In addition to monitoring updates in non-compete law and legislation, employers should also take care to make sure that their NCAs are no broader than necessary and should not assume that courts will automatically enforce their NCAs. Accordingly, any NCAs should closely contemplate and narrowly tailor the nature and character of employment being restricted, the duration of the restriction, and the territorial extent to which the restriction applies. Furthermore, if applicable, NCAs should clearly state their purpose as protecting the employer’s good will or confidentiality of trade secrets.

Following the trends in other states, employers should also start factoring in the different wage levels of their employees when deciding whether an NCA would be appropriate.

Lastly, employers may still be able to protect their good will and trade secrets in other ways. For example, properly tailored customer non-solicitation agreements or employee nondisclosure agreements may be enforceable where NCAs are not. Employers should also use data security protection procedures, employee security training, and consistent enforcement of security and confidentiality policies to properly protect trade secrets and other confidential information.