Business forum: The time has come to eliminate noncompete contracts in Minnesota

  • Article by: MARSHALL H. TANICK
  • Updated: April 21, 2013 - 12:43 PM

The Legislature should eliminate most noncompete contracts in Minnesota and break the shackles on workers.

The time may have come to eliminate most noncompete contracts in Minnesota. A bill in the Legislature, introduced by a pair of DFL lawmakers, would abolish nearly all of these restrictive devices impeding or preventing employees from taking competitive positions with other employers.

Alas the bill will not be enacted during this session. It stalled in a House committee, which has no further hearings planned, and it lacks a companion piece in the Senate. But the measure may be revived in the future.

If the measure were enacted, Minnesota would join a few other states in severely limiting contractual impediments on an employee’s ability to obtain better jobs or leverage in negotiating better pay or working conditions at their current jobs.

California prohibits noncompete agreements and some states, such as neighboring Wisconsin, impose high standards before courts will allow these agreements.

But Minnesota courts generally enforce them if they are deemed “reasonable.” Enforceability depends upon a number of factors, including the duration, the scope, and the legitimate interests of the employer in protecting employees from joining competitors — especially employees who have close ties to a customer base or have access to trade secrets that would give a competitive advantage to another employer.

In recent years, courts in Minnesota have reduced some of the restrictions, limiting the duration for which noncompetes can be imposed to a time period necessary to find and train replacement personnel.

In one notable case in central Minnesota, the Court of Appeals sliced a one-year noncompete agreement for a pair of veterinarians to six months when they left a clinic to form their own competitive facility. The court reasoned that the one-year restriction was too long to bring replacement personnel up to speed. In another case, it refused to enforce a noncompete against a Minneapolis cardiologist because of the imprecise wording in the contractual documentation.

The proposed bill was strikingly simple: it would forbid any new noncompete agreements, except in connection with the sale of a business, termination of a partnership, or end of a limited liability company.

In these cases, noncompetes could be entered into only if limited to a specific county, city, or portion of a county or city. The most common type of noncompete contract, usually imposed by employers upon employees, would be forbidden under the measure.

Previous efforts to rein in noncompete contracts also have failed in the Legislature, usually due to opposition by business interests, based on a general abhorrence of government intrusion in employment relationships. However, businesses often find themselves gored when they try to hire talent from other enterprises and are impeded from doing so because of noncompetes.

During the Great Recession, when unemployment was high and job mobility limited, there were very few occasions to invoke restrictive noncompete agreements. But as the economy and employment prospects have improved, noncompete agreements are back in full bloom and are being used with greater frequency.

This is especially so in Minnesota, where high-tech operations, medical supply companies and a vast array of other businesses are increasingly relying upon them.

Appropriate or abusive?

When used appropriately, noncompetes can be beneficial, encouraging employers to invest time and resources in their employees without fear that they may leave for a competitor, or start their own business, and benefit from the investment, training, and business contacts they have obtained at their current place of employment.

But they also can be abused by management, preventing employees from exercising mobility and giving them less ability to negotiate better terms and conditions of employment at their current jobs.

Although the proposed bill prohibiting most noncompetes is off the table for now, it illuminates a growing problem. Noncompetes date back to the horse-and-buggy days of the late 19th century. With businesses competing globally, noncompete agreements can be more formidable and, for some employees, frightening. Even employers may fret when they run up against a noncompete clause when trying to lure an employee working for a competitor.

The proposed limitation on noncompetes may be stuck at the bottom of the legislative hopper this year. Yet it may be a harbinger of the future of noncompete contracts in Minnesota.

About the author: Marshall H. Tanick is an attorney with the Twin Cities law firm of Hellmuth & Johnson. He represents employers and employees in workplace matters. His e-mail is mtanick@hjlawfirm.com.
         

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