Minnesota bans 'pervasive' noncompete agreements

Psychiatrist Nicole Welle was shut out of providing mental health services in her hometown of Fergus Falls.

Hairstylist Emily Olson was blocked from working in salons across much of the Twin Cities, sending her into a financial tailspin.

From doctors to bank tellers to Fortune 100 executives, Minnesota workers have found themselves locked in noncompete agreements. Now the state is banning the contracts, which lawmakers said have become pervasive.

"Never in my wildest dreams did I ever think that somebody else would monopolize my career," Olson said of her noncompete agreement, which she said salon employees often enter into unaware. "They have gotten so out of control."

New agreements are void and unenforceable starting Saturday, when Minnesota will join three other states where noncompete measures are not enforced. The change is not retroactive. It applies only to contracts entered into July 1 or after.

Almost 300,000 Minnesota workers have noncompete agreements, according to a new estimate from Federal Reserve officials, who said the real tally is likely higher as many people don't know they have a noncompete. The agreements often restrict people from doing similar work for another employer, force them to wait a certain amount of time before taking a job or prevent them from working in a certain geographic area.

"It's severely limiting the job opportunities for people in some of these professions," said Rep. Steve Elkins, DFL-Bloomington, who pushed for the law. "Clearly some of these are being used to just lock in employees and inhibit an employee's ability to negotiate for better working pay or better conditions."

In Minnesota, employers can still use nondisclosure agreements to protect their trade secrets or other confidential information. And the noncompete law doesn't impact nonsolicitation agreements, which companies use to prevent workers from soliciting their clients or customers if they move to another job. The law also contains exemptions around the sale or dissolution of a business. In those cases, business leaders would still be allowed to agree to block people from doing similar work within a certain geographic area.

Some lawyers and business groups are nonetheless concerned about the change.

The state should have altered administrative processes to help people with "egregious" noncompetes rather than instituting a ban, said John Reynolds, the Minnesota director for the National Federation of Independent Business. He said small business owners fear that amid labor shortages this change won't allow them to retain workers they have invested money to train.

There is a lot of abuse of the agreements, said Bill Pentelovitch, an attorney with Maslon LLP who said he has been involved in about 1,000 noncompete and trade secret cases. But he said state laws will now be insufficient to prevent scientists, engineers and others from taking information they used to develop products to a competitor when they switch jobs.

The Legislature needs to amend the new law or bolster the state's trade secrets act next session to make it easier for companies to seek an injunction to proactively protect trade secrets, Pentelovitch said.

"What noncompetes often do is they force you to make this decision to stay with your current employer or to take a career detour," Nunn said, which often leads to less growth in people's pay.

Olson and Cassandra Thompson, both hairstylists, said their income was negatively affected long-term by noncompete agreements limiting where they could work and who they could serve. They also worried about legal expenses if they purposefully or accidentally violated the measures.

"It is very stressful when you are not making the same money you were ... And you've got someone looming over you saying, 'I'm going to take you to court,'" Thompson said.

Minnesota lawmakers have considered banning noncompete agreements for years. Legislators previously contemplated applying the change only to middle or low-income workers. But Elkins said he heard from high earners who supported a ban for all incomes, including doctors, dentists, engineers and people in information technology.

Many patients won't follow their doctors if they have to drive 30 or more miles away, said Senate bill sponsor and physician Alice Mann, DFL-Edina. That fractures critical patient-physician relationships, she said.