US non-compete agreement laws by state

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Overview

By: Adam Wright, General Counsel and VP of Legal Product, SixFifty

Both the federal and state governments continued the assault on non-compete agreements. Minnesota became the fourth state to completely ban non-compete agreements with employees. On July 1, 2023, Minnesota will join California, North Dakota, and Oklahoma in the small (but growing) group of states that impose a full ban. Minnesota’s law is the first total non-compete ban since Oklahoma banned them in 1890, more than 130 years ago! Hot on the heels of Minnesota, the New York State Assembly passed a non-compete ban on June 20, 2023. That bill is headed to Governor Hochul’s desk, which she is expected to sign. We’ll briefly dive into the details of these new laws.

Minnesota

Minnesota’s law applies to both employees and independent contractors and provides that “[a]ny covenant not to compete contained in a contract or agreement is void and unenforceable.” The law also makes sure that employers can’t get around the ban by providing that another state’s law will govern the non-compete. If the employee “primarily works and resides in Minnesota,” then Minnesota law must govern and any dispute must be heard in Minnesota courts. Notably, the ban doesn’t apply to nondisclosure agreements, non-solicitation agreements, “agreement[s]​ designed to protect trade secrets or confidential information,” or “agreement[s] restricting the ability to use​ client or contact lists, or solicit customers of the employer.​“ The law does allow for the use of non-competes used in connection with a sale of business. Employers will be relieved to know the law is not retroactive, so non-competes entered prior to July 1, 2023 are not affected.

New York

New York’s law, if signed by the governor, would take effect 30 days after her signature. Like the Minnesota ban, the law is not retroactive, so it doesn’t affect non-competes signed before the effective date. The law also doesn’t apply to an agreement that “prohibits disclosure of trade secrets, disclosure of confidential and proprietary client information, or solicitation of clients of the employer that the [employee] learned about during employment” (i.e., nondisclosure and customer non-solicitation agreements). Unlike the Minnesota ban, the New York law has no exception for non-competes entered in connection with the sale of a business. The law leaves a lot of questions unanswered. For example, it’s unclear whether the law bans employee non-solicitation provisions which prevent departing employees from encouraging others to leave with them. If the law is enacted, we are likely in for years of litigation to determine the contours of the law.

Federal

At the federal level, we continue to monitor the FTC’s proposed non-compete ban, which would ban employee non-competes nationwide. Bloomberg News recently reported that the FTC will not vote on the final version of the rule until April 2024, after the agency received almost 27,000 comments on the draft rule. While the rulemaking process continues, the FTC continues to bring enforcement actions against companies’ unfair use of non-competes. Businesses should be aware that overzealous use of non-competes comes with a real risk, even absent a federal rule banning them.

NLRB

The National Labor Relations Board (NLRB), a different federal agency, was not content to wait for the FTC’s final rule. On May 30, 2023, NLRB General Counsel Jennifer Abruzzo issued a memo saying that employers’ use of non-competes violates the National Labor Relations Act (NLRA). She argued that non-compete provisions violate the NLRA because they “could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.” Although this opinion isn’t a rule, it is effective immediately, and indicates the NLRB will increase its scrutiny of non-compete agreements, especially those with low- or middle-wage workers. Importantly, Ms. Abruzzo’s opinion will not affect non-competes with supervisory or managerial employees because they aren’t protected under the NLRA.

Apart from these monumental changes in non-compete law, we’re still monitoring 88 non-compete bills that are pending in 33 states. Stay tuned, as there will certainly be more updates coming in this area of the law.