Disclaimer: Please be aware that the information in this article may be outdated regarding the legality of noncompete agreements in Minnesota. For the most current information, please refer to our latest article here: Minnesota Legislature Bans Employee Noncompete Agreements.
This article provides general information and is not legal advice. Consult a qualified attorney for personalized guidance.
In early January, the Federal Trade Commission, following a 3 to 1 vote, published a proposed rule that would ban noncompete agreements between employers and their employees and independent contractors. The rule would require employers to rescind all current employee and independent contractor noncompete restrictions and inform employees and contractors that they are no longer bound by those provisions. Employers face the risk civil penalties of up to $50,000 per day if they are found to be in violation of the rule.
Noncompete Agreement Ban Could Face Legal Challenges
The FTC initially provided for 60 days of public comment, but not surprisingly, given the broad impact of this proposed rule across the entire economy, the public comment response has been dramatic and fierce. It came as no surprise that the FTC announced in March that it was extending the deadline to submit public comments until April 19. As of today, more than 25,000 comments have been received, with more than 12,000 posted to the FTC’s docket. In addition, in February, the sole dissenting Commissioner, Christine Wilson, announced her resignation from the Commission, citing FTC Chair Lina Khan’s “disregard for the rule of law and due process,” and citing this ban on noncompete is an example.
The proposed rule, if adopted as a final rule, will be challenged immediately. The US Chamber of Commerce has already announced its intention to sue the FTC on the grounds that the rule is an unconstitutional usurpation of Congressional authority. Many businesses undoubtedly will either join in that litigation or file their own lawsuits, and most legal authorities are of the mind that the rule will not survive constitutional attack.
Developments at the State Level
The proposed FTC rule may ultimately be of little import here in Minnesota if the Minnesota Senate gets its way. In an omnibus labor bill approved by the Senate and sent to the Minnesota House of Representatives for consideration includes a provision that would declare “any covenant not to compete in a contract or agreement void and unenforceable.” The only exceptions allowed would be covenants not to compete in connection with the sale of a business or in anticipation of the dissolution of a business. In effect, Minnesota would adopt the long-standing practice in California.
To date, although disfavored, properly drafted noncompete agreements have routinely been enforceable under Minnesota common law.
In addition, even if the was to ban noncompete sales in Minnesota, there also is movement to ban the use of noncompete agreements at the federal level. In February, a bipartisan bill, the Workforce Mobility Act of 2023, was introduced in the U.S. Senate which, for the most part, would ban employers’ use of noncompete agreements.
This is all part of a widespread movement in other states to ban or restrict noncompete agreements over the past two years. Colorado, Illinois, Nevada, Oregon, Washington, Maine, Massachusetts, and Washington DC are examples of jurisdictions that have imposed statutory restrictions on the enforceability of noncompete agreements in certain situations, often dependent upon the type of position or the wage level of the employee. These states join California, Oklahoma, and North Dakota, which have long deemed noncompete agreements as a form of unfair competition and have banned their use in most circumstances. So far this year, 25 bills addressing noncompete agreements have been introduced in 17 state legislatures.
Employers Face Tough Choices If Noncompete Ban Is Adopted
Right now, there is no need to take any drastic action to revise or rescind their noncompete agreements it. It will still take some time for the proposed FTC Rule to take effect and unless Congress intervenes with his own legislation, the FTC rule is sure to be challenged in court on separation of powers principles.
Even so, if the rule is finalized and adopted, employers face the risk of a fine of up to $50,000 per day that they are found to be in violation of the ban. Unlike the proposed Minnesota statute, which merely declares noncompete provisions void and unenforceable, the FTC rule would actually require employers to affirmatively rescind the offending noncompete agreements. This would place employers in the position of choosing between rescinding otherwise enforceable employee noncompete provisions or run the risk that a constitutional challenge will fail, leaving them vulnerable to a hefty fine.
Potential Lawsuits and Uncertainty Loom for Employers
In addition, one can only imagine the number of lawsuits that will be filed by employees whose employers do not rescind the provision by the deadline. Such lawsuits are sure to follow even if a federal court imposes a stay of enforcement of the rule pending judicial review, as was the case when OSHA adopted its Emergency Covid Rule requiring that employers mandate Covid vaccines or weekly testing for employees.
As the proposed noncompete agreement ban remains in limbo, employers must stay vigilant and keep an eye on developments at both the federal and state levels. While legal challenges and legislative efforts to ban noncompete agreements may pose challenges for employers, staying informed and complying with applicable laws will be key to avoiding potential legal risks and liabilities.
Businesses should consider seeking guidance from the experienced legal counsel at Avisen Legal to navigate the complex legal landscape surrounding noncompete agreements and ensure compliance with evolving legal requirements.